Acton Institute Powerblog

Why “opportunity zones” are an opportunity to expand cronyism

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Bad policy is not transformed into good policy simply because it’s advocated by good people with good intentions. This should be obvious—especially to conservatives—yet it’s a lesson we continually have to relearn.

Consider, for example, the case of “opportunity zones.” As National Review reported, last month a bipartisan group of congressmen introduced a new bill called the Investing in Opportunity Act (IOA), which would will allow investors to temporarily delay paying capital-gains taxes on their investments if they choose to reinvest the money into “opportunity zones” or distressed communities across the country.

The bill’s primary function is to target private-sector investors, notes National Review, and give them a tax incentive to roll their assets into areas that most need money. “It’s designed so that private-sector folks can do what they do naturally in a way that helps the poor,” said Sen. Tim Scott (R-SC).

This is not a new idea, of course. President Obama proposed a similar plan and called them Promise Zones while Sen. Rand Paul proposed a similar plan called them Freedom Zones. But when they were first proposed they were called Enterprise Zones.

In the 1980s, then-congressman and self-described “bleeding-heart conservative” Jack Kemp became the first lawmaker to popularize enterprise zones, which he supported to foster entrepreneurship and job creation. Enterprise Zone policies attempt to incentivize businesses to locate within their borders—usually in blighted urban areas—by offering targeted benefits to particular industries and companies. These benefits come in many forms, including business tax credits for investments, property tax abatements, and reductions in the sales tax.

There’s a couple of problems with enterprise zones, though. There’s no evidence they work. And worse, they encourage and perpetuate cronyism.

As a 2014 paper by Christopher J. Coyne and Lotta Moberg of the Mercatus Center explains, “Despite good intentions, policymakers often overlook the unseen and unintended negative consequences of targeted-benefit policies.” One of these unintended negative consequences is increased cronyism, the practice of exchanging favors between powerful people in politics and business:

Policies that favor some people or companies over others are also vulnerable to distorted incentives. Those who can benefit from the government’s incentive schemes will engage in rentseeking in order to shape policies to benefit their own narrow interests. When such rent-seeking becomes prevalent, and firms can succeed by winning favorable status from the public sector, a system of cronyism develops whereby firms habitually serve political interests instead of satisfying private consumers, and whereby political competition replaces market competition. This incentivizes people to redirect their efforts from productive, positive-sum activities to unproductive and even negative-sum activities.

At The Foundry, Kenric Ward highlights some of the “dubious deals” from the study:

• As of 2013, Walmart had received at least 260 special state benefits worth more than $1.2 billion. For every 100 new Walmart jobs, an average of 50 existing jobs disappear as other retailers are crowded out.
• Apple got $370 million in state tax breaks for setting up in North Carolina. With just 50 jobs created, that’s $7.4 million per job.
• New York granted aluminum giant Alcoa free electricity for more than 30 years (estimated value: $5.6 billion). In return, Alcoa pledged to make a $600 million investment and promised not to fire more than 165 workers. Subsequently, New York raised taxes multiple times on its citizens.

“People respond slowly to labor-market demand, and it may take many years for rent-seeking to become professionalized,” say Coyne and Moberg. “Once it is in place, however, cronyism is hard to root out precisely because those involved in it have an incentive to perpetuate it.”

The example of enterprise/promise/freedom/opportunity zones provides an important public policy lesson: Even poverty-fighting conservatives aren’t immune from the law of unintended consequences when we try to circumvent the functions of the free market.

Joe Carter Joe Carter is a Senior Editor at the Acton Institute. Joe also serves as an editor at the The Gospel Coalition, a communications specialist for the Ethics and Religious Liberty Commission of the Southern Baptist Convention, and as an adjunct professor of journalism at Patrick Henry College. He is the editor of the NIV Lifehacks Bible and co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicator (Crossway).

Comments

  • Boonton

    Strictly speaking I’m not sure you can describe those examples as enterprise zones, which I would define as a blanket tax cut or other incentive for any business that sets up in a defined geographic area. For example, in NJ the Kearny area has a 3% sales tax versus the 7% statewide tax. That’s a plus for customers coming to the WalMart but it applies to all businesses there big or small.

    I agree there is a tension between helping people versus helping areas. Detroit, for example, has had a lot of people who’ve been helped….that is helped to move out to somewhere else. Detroit also has opted to strategically downsize, instead of letting buildings and houses rot on block after block, tear them down and turn it into empty green space. It’s easier to make a nice smaller city with those who remain rather than keep an oversized city going.

    Now let’s look at one of the examples you cited:

    • Apple got $370 million in state tax breaks for setting up in North Carolina. With just 50 jobs created, that’s $7.4 million per job.

    But it is a cost of $7.4M per job if Apple set up its plant in NC and would have paid those taxes anyway. But if Apple would have selected someplace else then NC wouldn’t be $7.4M per job richer, they would have been even poorer since zero jobs means zero taxes being paid, not less taxes per job.

    Your argument works if you can show that if NC said no to Apple, Apple’s place would have been taken by, say, 25 smaller companies who would have lacked Apple’s fame and influence and as a result would have just paid the normal tax rates anyway.