Tax Costs and Employment Benefits of Enterprise Zones

Abstract

This article answers a challenge raised against traditional economic development policy; recent research has shown that such policies, far from being zero sum, have positive-sum effects. The article examines these questions: Are the local benefits of tax incentives greater than the costs? Specifically, are benefits greatest in high-unemployment areas because of low reservation wages? If so, do such policies produce net benefits for a region, even if they redistribute jobs? To answer these questions, reservation wages are estimated as a function of unemployment. Net benefits and costs from new and relocated jobs are compared. The results indicate that overall local benefits are greater than the local costs of providing tax incentives. However untargeted provision of incentives is not recommended, even in high-unemployment areas. The article provides an alternative approach toward traditional policies and demonstrates that such policies do produce net benefits for the locality adopting them.