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The GO Zone Won’t Go: Lessons for Gulf Opportunity Zones

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EXECUTIVE SUMMARY

On September 15, 2005, two weeks after Hurricane Katrina’s landfall on the Gulf Coast, President Bush proposed a new Gulf Opportunity Zone (GO Zone) to rebuild the economy of the devastated region. The President had first proposed the Opportunity Zones a year earlier, when he addressed the 2004 Republican Convention. These zones would offer lower tax rates, investment incentives and regulatory relief. This proposal can be compared to earlier efforts at job creation in underdeveloped areas. In 1993, President Clinton’s first "round" of Empowerment Zones (EZ) and Enterprise Communities (EC) combined flexible block grants for locally-determined services with tax incentives to encourage investment and hiring. Conservatives in Congress expanded the tax incentives while restricting the promised grants funding to the later rounds of EZ/ECs. Also, the Renewal Community (RC) initiative, championed by conservatives, offers tax breaks in the place of direct grants.

The successes and failures of the EZ/EC/RC initiatives can inform an analysis of the proposed "GO Zone." The chief conclusions of this report are that:

  • TAX INCENTIVES FOR RENEWAL COMMUNITIES ARE NOT COST-EFFICIENT: The RC wage credit created jobs for RC residents at an average cost of $34,911 (2004 dollars) and the commercial revitalization deduction created new jobs at an average cost of $85,853 (2004 dollars). Round I and Round II EZ workforce development programs generated jobs for EZ residents at an average cost of $2,831 (2004 dollars) and $5,315 (2004 dollars) respectively. Compared to the EZ workforce development programs, the RC tax incentives create jobs for RC residents at a higher cost to the federal government (Figure 1). Nonetheless, RC tax incentives like the commercial revitalization deduction (CRD) and the wage credit receive larger federal expenditures than the more cost-efficient EZ workforce development programs receive (Figure 2).
  • FUNDED EZ/EC PROGRAMS CREATED JOBS: The EZ/EC economic opportunity programs have generated over 290,000 job opportunities for EZ/EC residents.
  • TAX INCENTIVES FOR RENEWAL COMMUNITIES ARE NOT WIDELY USED: Despite the RC marketing efforts and outreach to businesses, the average take-up rates for the RC tax incentives range from 0 percent to 4 percent.
  • TAX INCENTIVES ALONE HAVE LIMITED VALUE: Many individuals and businesses in distressed communities have little if any federal tax liability. EZ administrators indicate that these tax incentives were not particularly helpful in stimulating new investment.
  • THERE IS A HIGH RISK OF TAX FRAUD: GAO reports indicate that the IRS does not collect the data necessary to verify that EZ/EC/RC tax incentives are not claimed by ineligible or out-of-area tax filers. Nor is the IRS tracking tax benefit amounts in the New York Liberty Zone. These tax policies present high risks for the Gulf Region.

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