Empowerment for Whom? the Impact of Community Renewal Tax Incentives On Minority and Immigrant Businesses in Poor Neighborhoods

Background and Purpose

This study estimated the impact of HUD's Empowerment Zone and Enterprise Community (EZ/EC) programs. Local governments won the first wave of 8 EZ and 65 ECs in 1994. Later HUD designated 15 urban EZs in 1998 and in the year 2001 designated 8 EZs and 40 Renewal Communities (RC). Round II EZs received economic development grants to improve poor neighborhoods in 1999 and tax credits to businesses to hire local workers in 2002. Round III EZs and RCs received tax credits only.

The social work literature on EZs has focused on organizational capacity building and empowering residents (eg Chaskin, 2003; O'Neal & O'Neal, 2003). Economists have analyzed the impact on the labor and housing markets (eg Busso & Kline, 2006; Ham et al., 2009; Neumark & Kolko, 2008). The entrepreneurship literature, however, argues that minorities and immigrants are more likely to start businesses in poor neighborhoods. Can tax incentives in poor neighborhoods increase jobs and new businesses, especially minority businesses?

Methods

The study design was a longitudinal quasi-experimental design with matching and cross over. The study participants were participating neighborhoods represented as census tracts (Treatment = 143; Control = 225). The sample frame was for maximum variation. Six participating jurisdictions in California were chosen because it is a high immigration state, and four in Tennessee, because it was a low immigration state. Outcome data were collected by Dun and Bradstreet and organized longitudinally into the National Establishment Time Series Database (NETS) by Walls & Associates from 1990 to 2007. Measures from NETS included jobs per tract/year, new business per tract/year and business failures per tract/year. Covariates were taken from the 1990 census because those data were used by HUD to select the RC/EZ areas. In regards to statistical analysis, this is the first in the literature to use Genetic Matching (Diamond and Sekhon, 2008) in R to find comparison tracts in the same state. Matches were analyzed longitudinally with adjusted interrupted time series analysis (Galster et al., 2004) using negative binomial regression to calculate relative percent change in jobs, business formation and business failure per tract per year in the treatment area post intervention.

Results

The biggest effect was a doubling of new businesses in tax credit areas during the intervention period holding other variables constant. For businesses with five or fewer employees, there was a a 25% increase in jobs, 23% increase in new businesses and 3% reduction in the rate of new business formation holding other variables constant. However, minority businesses in California in tax credit areas during the intervention period experienced a 15% reduction in job growth. On the other hand, in Tennessee, the number of minority businesses increased in wage credit areas during the intervention period.

Conclusions and Implications

In summary, tax credits can increase employment and entrepreneurship. However, additional outreach strategies are needed to reach immigrant and minority entrepreneurs because they appear to have cut jobs during the intervention period. Further research is needed to assess impacts in other participating states.