last modified: Friday, December 16, 2005 2:49 PM
Rebuilding New Orleans’ Battered Economy: Gulf Opportunity Zones
Geoffrey T. Dancik
In the wake of one of the most devastating natural disasters in American history, New Orleans faces a litany of challenges. While some have questioned whether this storm-ravaged city should be rebuilt, largely in part to its precarious location, there is little doubt that the Big Easy will reemerge from the Mississippi Delta. On September 17, 2005, President George W. Bush stood in the heart of New Orleans’ French Quarter and proclaimed that “this great city will rise again” through “one of the greatest reconstruction efforts that the world has ever seen” (Mieszkowski, 2005). At the heart of the President’s recovery strategy is the creation of a Gulf Opportunity Zone (GO Zone), a series of tax incentives and policy initiatives aimed at spurring economic development. The President’s proposal has, however, drawn sharp criticism from both sides of the political spectrum. By in large, the most contentious aspect of this plan is its striking similarity to the federal government’s much-maligned enterprise zones. While the Bush Administration has yet to publicly release the structural intricacies of GO Zones, the foundation of the program has clearly been laid out. Based on this information I’ll briefly examine the fundamental principals of this plan, as well as the potential implications on the City of New Orleans’ rebuilding efforts.
Prior to examining the structural composition of GO Zones and the potential implications of employing such a program, it is imperative to have no less than a basic understanding of the fundamental economic theory that these zones are based upon. The theory suggests that lessening the tax and regulatory burden stimulates economic activity, resulting in the upward mobility of income, capital investment, and job creation. The theory also assumes that market inefficiencies stymie economic growth and development. These barriers include:
Transportation: The area may have poor access to roads, rail, and other means to transport goods and services.
Access to capital: Bankers may be reluctant to loan money to businesses or individuals in the area. Some areas may have a wide pool of investors while others do not.
Available labor: There may be only a few workers with the skills an entrepreneur needs to set up a successful operation.
Environmental problems: Available sites may require incurring costly environmental cleanup cost. (Hirasuna, 2005: 4)
The theory further assumes that the tax and regulatory incentives will be “high enough to overcome the economic barriers or higher costs of zone locations” (Hirasuna, 2005: 4).
HISTORY OF ENTERPRISE ZONES
Through carefully crafted public policy and tax incentives enterprise zones came to the forefront in American economic development policy in 1981 with the introduction of the Urban Development and Enterprise Zone Act. While the Reagan Administration staunchly advocated the passage of this legislation, their efforts were unsuccessful. In the absence of a federal program states took matters into their own hands and established individual enterprise zone legislation. It wasn’t until 1993, “in response to a Clinton Administration proposal, [that] Congress passed a community empowerment zone program” (Hirasuna, 2005: 8).
HOW DO ENTERPRISE ZONES WORK?
Through carefully crafted public policy and tax incentives, enterprise zones are thought to facilitate the trickle-down effect. The crux of the Trickle-Down Theory is by encouraging business growth the ensuing profits will trickle-down through the economy, thereby benefiting a wide stratum of individuals by way of increased economic activity and a reduction in structural unemployment.
DO ENTERPRISE ZONES WORK?
Since their inception in 1981, 43 states have created in excess of 3600 enterprise zones (Cravatts, 2005). Despite the prevalence of these zones, the economic impact of enterprise zones is inconclusive. The primary difficulty that researchers face is delineating the amount of growth that occurs as a direct consequence of an enterprise zone from the growth that would have transpired in the absence of these incentives. Further complicating analysis is each zone is unique in how incentives and policies are structured, in addition to the strengths and weaknesses that are inherently present in each location. Therefore, all to often, enterprise zones are analyzed on an incompatible set of standards and measures. For these reasons, a community’s needs and objectives must be clearly defined and integrated into their stimulus program. Given a well-devised plan, I am inclined to believe that enterprise zones can be an effective means in spurring economic development.
GULF OPPORTUNITY ZONES
The underlying theory behind GO Zones undeniably parallels that of enterprise zones. GO Zones differ in that they aim to provide a comprehensive approach to mitigate market inefficiencies that stifle economic growth not only through tax incentives but also through thorough policy initiatives. While enterprise zones are also based on this fundamental premise, many have ignored or failed to adequately compensate for these barriers. The Bush Administration has sought to address these inefficiencies.
Hurricane Katrina devastated New Orleans’ transportation network, crippling its ability to transport goods and services and restricting the mobility of its inhabitants. The federal government has pledged to cover the majority of the costs of rebuilding this infrastructure. New Orleans should, however, be wary of rebuilding its transportation network, as it was pre-Katrina. The aftermath of Katrina brought to light what many of the city’s deeply segregated and impoverished communities already knew; they had no means to get around (“New Orleans After,” 2005: 4-6). Lacking access to automobiles and public transit, many of the residents were left to fend for themselves as the storm battered the city. The failure to incorporate these underserved areas as part of the city’s transportation plan would perpetuate the problems that have riddled these neighborhoods for decades: crime, poverty, unemployment, and isolation.
WORKER RECOVERY ACCOUNTS
The Bush Administration has proposed worker recovery accounts up to $5,000, which evacuees could use however they deem most appropriate --including job training, child care, and transportation. These accounts would be available to unemployed workers whose 26 weeks of unemployment benefits have expired. Through these accounts prospective workers would be given the flexibility to explore employment opportunities. “The accounts work as an incentive to find work quickly because the recipients would be able to keep any money remaining as a bonus, if they receive work in the first 13 weeks of starting to receive the benefits. Critics claim that the accounts provide a perverse incentive by encouraging workers to accept inferior jobs so they can collect their bonus rather than undergoing the job training that would eventually led to a better job” (“Summary of Bush,” 2005).
GO Zones would double to $200,000 the amount that companies can write off for investments in new equipment. It would also provide a 50 percent bonus depreciation and a zero percent capital gains tax. These incentives would expire in 2007. While the following incentives seem fitting when taking into account the scope of devastation and the probability of smaller business incurring greater uninsured losses, I say this with reservations. Will local companies have the tax liabilities in order to take advantage of these incentives; and will outside companies exploit this program? Perhaps the most troubling aspect is the Bush Administration does not plan to exclude the gaming industry from reaping these benefits (Weisman, 2005: A1). Consequently, national casino corporations would be able to significantly reduce their tax liability.
ACCESS TO CAPITAL
Small businesses, including minority owned enterprises, would be guaranteed loans. In the absence of such a program many businesses would be unable to secure loans desperately needed to reestablish their businesses.
WORK OPPORTUNITY TAX CREDIT
Through the work opportunity tax credit program employers would be provided with tax credits if they hire workers that resided in one of Katrina’s core disaster areas, thereby encouraging investment in the city’s pool of human capital.
The President’s proposal would also provide compensation to displaced families for enrollment in private and parochial schools. The federal government would also pay up to 90 percent of the instructional costs –up to $7,500 per child-- to attend public schools. With its educational infrastructure in shambles, access to quality educational opportunities for New Orleans’ children should be a chief concern of the city’s inhabitants. School vouchers is an equitable solution in promoting this agenda.URBAN HOMESTEADING
Under the plan, those chosen via a lottery would receive federal land in exchange for their work and their ability, either by securing a mortgage or getting the backing if a nonprofit organization (Weisman, 2005: 12). While intriguing in many respects, this plan will come close to satisfying the demand for low-income housing. Furthermore, it would likely recreate an area of concentrated poverty, carrying along with it may of the social problems that permeated the community pre-Katrina. Perhaps the administration would be better suited focusing on the single-family home ownership tax credit program. “The federal government would provide allocations of tax credits to affected states, which would then award the credits competitively to for-profit and no-profit developers to produce new or rehabilitated housing for low and moderate-income buyers” (“New Orleans After,” 2005).
The Bush Administration’s proposed Gulf Opportunity Zones can serve as a much-needed catalyst in redeveloping New Orleans’ shattered economy. While pundits of enterprise zones may denounce GO Zones, the harsh reality is that New Orleans’ future hinges on its ability to attract viable businesses in this period of uncertainty. Paramount to attracting businesses is fostering a healthy business climate, a place where people not only want to work but raise their families. Anthony Fontenot --a Ph.D. candidate at Princeton University’s School of Architecture and former instructor at Tulane University’s School of Architecture—articulates this message well: “If New Orleans is to prevail, it will not do so because of grand federal projects; it will do so by reinventing itself –out of necessity—with new forms of economic, urban and cultural grass-roots advancement and development in its own peculiar un –American way” (Fontenot, 2005). While the Bush Administration’s GO Zones fall short in addressing market inefficiencies and the deeply rooted social fragmentation of New Orleans, its economy cannot recover from the far-reaching devastation of Katrina without a comprehensive economic stimulus package that this program provides. GO Zones, while flawed, are a step in the right direction.
Andrews, Edmund. “Storm and Crisis: Rebuilding.” The New York Times. 6 Oct. 2005, late edition final, section A; column 1; pg. 35.
Cravatts, Richard L. “Mr. Bush’s Gulf Opportunity Zone: What It Take to Become a Magnet for Investment.” The American Daily. 11 Oct. 2005. Available: <www.americandaily.com/article/9649>. (14 Oct. 2005).
Beckman, Gail. “But Does it Work?” CRJ Daily. 23 Sept. 2005. Available: <http://www.cjrdaily.org/politics/but_does_it_work.php>. (14 Oct. 2005).
Berube, Alan and Bruce Katz. “Katrina’s Window: Confronting Concentrated Poverty Across America.” The Brooking Institution. 13 Oct. 2005. Available: <www.brookings.edu/metro/pubs/20051012_Concentratedpoverty.pdf>. (14 Oct. 2005).
Bumiller, Elizabeth. “Bush Pledges Federal Role in Rebuilding Gulf Coast.” TheNew York Times. 15 Sept. 2005, late ed., section A; column 6; pg. 1.
Butler, Stuart M. et al. “How to Turn the President’s Gulf Coast Pledge into Reality.” The Heritage Foundation. 16 Sept. 2005. Available: <www.heritage.org/Research/Governmentreform/wm848.cfm?renderforprint=1>. (14 Oct. 2005).
Campbell, Patricia. “HUD Can Save Businesses Millions in Taxes.” District of Columbia: U.S. Department of Housing and Urban Development. 23 Mar. 2004. Available: <www.hud.gov/local/la/news/ pr2004-03-23.cfm>. (14 Oct. 2005).
“Fact Sheet: President Bush Addresses the Nation on Recovery From Katrina.” The White House. 15 Sept. 2005. Available: <www.whitehouse.gov/ news/releases/2005/09/print/20050915~7.html>. (14 Oct. 2005).
Fontenot, Anthony and Page Rockwell. “How to rebuild New Orleans.” 30 Sept. 2005. Salon. Available: <www.whitehouse.gov/ news/releases/2005/09/print/20050915~7.html>. (14 Oct. 2005).
Hirasuna, Don and Joel Michael. Enterprise Zones: A Review of the EconomicTheory and Empirical Evidence. Policy Brief. St. Paul: Minnesota House of Representatives, Research Department. Jan. 2005: 1-19.
Mieszkowski, Katharine. “Bush’s Gulf Coast Band-Aid.” 1 Sept. 2005. Salon. Available: <www.salon.com/news/feature/2005/09/17/urban/print/html>. (14 Oct. 2005).
Murray, Brendan. “Bush’s Gulf Enterprise-Zone Plan Has Failed to Deliver Before.” 26 Sept. 2005. Bloomberg. Available: <bloomberg.com>. (14 Oct. 2005).
“New Orleans After the Storm: Lessons from the Past, a Plan for the Future.” The Brooking Institution. 13 Oct. 2005. Available: <www.brookings.edu /metro /pubs/20051012_NewOrleans.html>. (15 Oct. 2005).
“President Bush Proposes New ‘Opportunity Zones.”’ The White House. 2 Sept. 2004. Available: <www.whitehouse.gov/news/releases/2004/ 09/20040902~.html>. (14 Oct. 2005).
“Summary of Bush Proposals on Katrina recovery.” The Detroit News. 17 Sept. 2005. Available: <www.detnews.com>. (14 Oct. 2005).
“To Rebuild New Orleans.” Editorial. Los Angeles Times. 21 Sept. 2005. Available: <www.latimes.com/news/opinion/edictorials/laedkatrina 21spt21,0,4827052.story?coll=la-news-comment-editorials>. (14 Oct. 2005).
Walsh, Joan. “After the deluge, what next?” Salon. 28 Sept. 2005. Available: <www.salon.com/news/feature/2005/09/28/rebuilding_new_orleans/print.html>. (14 Oct. 2005).
Weisman, Jonathon. “Economists, Housing Experts Question Proposals.” The Washington Post. 16 Sept. 2005, final ed., section A; pg. 12.Weisman, Jonathon. “In Break With Tradition, Casinos May Get Tax Breaks,Too.” The Washington Post. 22 Sept. 2005, final edition, section A; pg. 1.
LINKS:The Heritage Foundation