G.K. Chesterton famously remarked, “The Christian ideal has not been tried and found wanting. It has been found difficult; and left untried.” The same can be said of a more down-to-earth but still-radical idea: The late Jack Kemp’s antipoverty proposal for urban enterprise zones was found politically difficult and never tried.
Democrats and too many Republicans believe the urban myth that in 1993 Congress passed Kemp’s plan, which the Clinton administration enacted with disappointing results, thus demonstrating that the enterprise zone idea doesn’t work. But Kemp’s proposal was drastically different from what was carried out. The two versions share similar names but reflect divergent views about government’s role in promoting growth. Kemp’s strategy was to open up abandoned areas to all comers, with minimal government direction. Bill Clinton created a bureaucratic maze channeled toward big business urban renewal that discouraged potential local entrepreneurs.
Kemp’s congressional district, which he served from 1971 to 1989, included part of Buffalo, N.Y., and its suburbs, with a large Democratic blue-collar constituency who would not normally vote for a conservative Republican. He was sensitive to the fact that Buffalo suffered from the lack of jobs, business closings, and rising poverty levels that marked urban decline all over the Northeast and Rust Belt. In his 1979 book An American Renaissance, Kemp wrote that large federal grants and loan programs were not helping revitalize these aged metropolises: “Federal policies invariably stressed new construction rather than the maintenance and renewal of the existing stocks of social capital—housing, highways, railroads, and utilities—that were located predominantly in the older cities.” As a result, Washington was preempting an increasing share of the declining urban tax base. Businesses and residents moved out of the cities, leaving behind the poor together with unused buildings and empty lots. Local governments found themselves without a revenue base to restore blighted infrastructure or provide essential services.
Kemp saw that this cycle would never restore the cities’ vitality or, more important, uplift the poor and unemployed. So he called for government at all levels to provide “a tax and regulatory climate that is more favorable to business creation and expansion in the cities,” including easing the tax burden on job-creating investment. States and cities should make “a concerted effort to lessen any barriers to economic advancement,” by loosening building codes and zoning laws, occupational licensing, and paternalistic labor laws, and shifting property taxes to fall more heavily on land and less on property improvements.
While his book included many elements of the enterprise zone concept, Kemp’s proposal was ultimately inspired by the Thatcher government’s plan for Britain’s decaying urban areas. In 1980, Kemp, with Democratic cosponsor Robert Garcia of New York City, introduced the Urban Jobs and Enterprise Zone Act. It called for certain areas of high poverty, unemployment, and abandoned properties within older cities to be “green-lined.” (“Red-lined” was a bankers’ term for neighborhoods considered too great a financial risk for lending.) Within “green-lined” zones, the federal government would provide incentives to encourage job creation, new small enterprise investment, and existing business expansion. They included: a 90 percent reduction in Social Security payroll taxes for employers and workers under 21 and 50 percent for those 21 and older; halving the 28 percent capital gains tax rate; a 15 percent tax rate cut for in-zone businesses if half its employees lived in-zone; plus an accelerated depreciation schedule, simplified accounting method, and extended loss carry forward provision. For their part, local governments applying for enterprise zone designation had to agree to reduce their effective in-zone property tax rate by 5 percent for four years. Kemp insisted that the incentives were “targeted to smaller enterprises and individuals because 66 percent of new jobs created nationally, and 100 percent of net new jobs created in the Northeast, come from small businesses.”
These dramatic federal and local tax rate reductions looked on paper like revenue losers. But Kemp emphasized that there was little revenue-producing commercial activity in the proposal zones: Abandoned lots and burned-out buildings don’t bring in taxes. A key approach was to foster the creation or retention of small businesses employing local residents. Kemp wanted to avoid attracting existing businesses outside the zone and promoting massive urban clearance and redevelopment. That would merely replicate the Great Society’s urban renewal experiment that scattered the poor to other locations.
At a profound level, Kemp saw that economic growth entailed freedom to work, save, and invest without government micromanagement. In a 1980 blueprint introducing his bill, Kemp wrote:
Kemp introduced or cosponsored several enterprise zone bills during the 1980s. He tinkered with specific provisions to resolve objections and build majority support. During his term as HUD secretary, he continued to promote enterprise zones as an antipoverty measure but could not persuade the George H. W. Bush White House and Treasury Department, resistant to “voodoo” economics, to push for his proposal.
But groups representing minorities and the poor were listening to Kemp’s message. In an odd twist of fate, it was a Democratic-controlled Congress that authorized enterprise zones in 1993 as part of an omnibus budget reconciliation bill and the Democratic administration of Bill Clinton that established them. The Democratic program, however, amounted to a new big government plan to pick winners and losers. It created a structure of bureaucracy, varied and minimized its tax applications, and resorted to subsidies and grants to direct preferred outcomes.
The Kemp model was fairly simple. The Democrats’ version was divided into three different categories: empowerment zones, enterprise communities, and renewal communities. Distressed communities competed for a handful of available designations. A strategic development plan was required to marshal public and private resources to stimulate economic development and a broad network of stakeholders to implement it. The benefits available in these categories were different. The program included confusing sets of tax concessions, tax-free industrial development bonds, and zone academy bonds to finance educational arrangements. Kemp’s proposal allowed anyone to open a business in an enterprise zone and gain the tax and wage benefits. The Democrats’ program was too top-heavy and complex for local entrepreneurs-to-be. It was designed to attract big corporate entities with the money, management, and expert lawyers to negotiate the bureaucratic maze and deal with government micromanagers.
The results were mixed at best. The Government Accountability Office, charged with auditing the agencies’ conduct, criticized the lack of useful data gathered by HUD and other administrators, which made it difficult to measure the program’s effects. In an interim assessment report from 2001, HUD noted that large businesses were taking more advantage of in-zone tax credits than small ones. A 2010 GAO report had photos of in-zone projects including: construction of upscale hotels, a large supermarket, a bright new Toyota dealership, a new automobile plant, an aluminum extrusion factory owned by a global corporation, expanded grain storage facilities, and a headquarters building for a nationwide pizza chain. All utilized facility or commercial bond issues under EZ provisions. There were some more modest developments, such as strip malls housing small retail shops, a community computer education center, and a new medical clinic. But HUD and local officials expressly said these were complicated financial transactions requiring a lot of upfront money and projects big enough to justify the costs.
HUD claimed that in-zone resident job numbers increased between 1995 and 2000, but GAO reports later charged that the IRS, HUD, and other government agencies had never tracked accurate data on the use of tax credits and grants. GAO saw improvements in unemployment and poverty levels in some zones, but due to the lack of data it could not connect these improvements to the EZ program or determine what would have happened without it. Demographic changes in zoned cities and other older urban areas brought in affluent singles and young couples who gentrified neighborhoods but dispersed impoverished residents. In other words, local poverty rate declines were likely not caused by zone designations.
Large-scale urban slum clearance has been the left’s preferred approach since the Model Cities program of the 1960s. The enterprise zone program enacted in 1993 amounted to Urban Renewal 2.0. The name echoed Jack Kemp’s call for economic growth in decayed urban neighborhoods, but the Democratic program was a far cry from the retail and service stores employing the neighborhood poor that his plan urged. Morton Kondracke and Fred Barnes’s recent biography of Kemp recounts that he sharply distinguished his own proposal from the Clinton administration’s “weak imitation.” If the 1993 program did little to revitalize these neighborhoods, Kemp’s untried 1980 proposal clearly was not to blame. The Kemp urban strategy of free market opportunity was designed precisely to avoid the snares that doomed the Democrats’ corporate takeover model.
We learned some important lessons from the experience. Federalism is a complication. No one wants the federal government to coerce states and cities to deregulate or to reduce local taxes. In some states, local property tax rate concessions in designated areas violate state constitutions. Yet lower jurisdictions’ regulations and taxes need to be reformed, and this will require careful federal-local collaboration.
Massive economic redevelopment projects are entirely different from those making use of existing infrastructure for retail, manufacturing, or small commercial businesses. Enterprise zones should be open to all potential entrepreneurs. Federal and local administrators must not try to pick winners, approving favored projects while closing others out. Excepting dangerous or immoral activities, all proposed enterprises that meet reasonable health and safety codes should be allowed, given the abandoned nature of these neighborhoods.
Kemp at his most enthusiastic liked to say that America should be one big enterprise zone from sea to shining sea. Urban enterprise zones would be experimental, of course, demonstrating, one hopes, that the poor can succeed and small-scale enterprise can generate jobs and economic growth if their tax and regulatory burdens are lightened. The lessons learned could then be applied to the nation’s economy as a whole.
Poverty rates have climbed to levels not seen since the War on Poverty began half a century ago. Millions more men, women, and children are living below the poverty line than ever before. Bill Clinton’s version of enterprise zones failed. That doesn’t mean Jack Kemp’s version would.
Dennis Teti was a member of Jack Kemp’s congressional staff from 1983 to 1986 and worked on communications and policy initiatives when Kemp was secretary of the Department of Housing and Urban Development from 1989 to 1993.
