State's enterprise zones reward location, not job creation
By Aldo Svaldi
The Denver Post
Colorado's enterprise-zone program has granted the majority of its tax credits in recent years to natural-resource companies and utilities operating in rural areas.
That has critics asking whether the state is using its limited economic-development ammunition to reward activities that would have happened anyway.
"It doesn't seem to be terribly efficient to provide incentives to get people to drill where there is natural gas," said Rich Jones, director of policy and research at the Bell Policy Center, a public-policy group based in Denver. "You could provide them somewhere else."
The question is one of several that a recently convened task force will tackle as it studies the state's enterprise-zone program, per legislation that requires a review.
Colorado granted just shy of $100 million in enterprise-zone tax credits in fiscal year 2010 to more than 5,000 firms, according to a report from the Colorado Office of Economic Development and International Trade.
Of that amount, 28 percent went to oil and gas companies, which represented just 1.4 percent of the total number of firms participating.
Add in other mining companies and utilities, and more than half of Colorado's enterprise-zone tax credits awarded in fiscal 2010 went to fewer than 10 percent of certified participants in the program.
To receive credits, companies certify with the state and then complete a required activity, such as purchasing equipment, hiring and training employees, or renovating a vacant building.
Of the 16 companies receiving more than $1 million in state tax credits, 10 were in oil and gas, and one was in coal mining.
The largest award, $13.7 million, went to the Rockies Express Pipeline, which was built to connect the region's natural-gas production to more populated markets in Ohio and beyond.
"With low natural gas prices, many rural areas of Colorado need enterprise-zone credits to attract and maintain oil and gas development investment," said Doug Flanders, policy director at the Colorado Oil and Gas Association.
Despite a lack of new development activity in many parts of the state, oil and gas companies continue to maintain a presence, he said, adding that companies working in rural areas need a predictable and stable tax environment.
Supporters of the current system argue the state's enterprise-zone program isn't designed to favor one industry over another, or to promote job creation over capital investment.
The charter of the enterprise-zone program is to create "a business-friendly environment in economically distressed areas, with job creation and investment incentives," said Kevin Tilson, the program's manager.
"It primarily targets employers who are capital-intensive," he said.
About 80 percent of enterprise-zone credits in any given year are awarded for capital investments, one of 10 incentives the program offers.
Businesses receive a 3 percent tax credit against the value of equipment purchased. By contrast, employers get only $500 for each job they create, although that credit goes up to $2,500 in designated rural areas.
Capital investments can boost the property-tax base in depressed areas, helping out schools and local governments.
But they don't necessarily contribute to permanent jobs and sometimes do the opposite, said University of Colorado Boulder economics professor Jeffrey Zax.
Zax's research found that the state's enterprise-zone program appears to have resulted in larger businesses substituting capital for labor, especially in urban areas.
A Denver Post series that ran last year found that many companies received enterprise-zone tax credits even as they eliminated jobs.
State economic development officials admit they have struggled to find concrete ways to measure the program's effectiveness. Part of the difficulty is trying to prove a negative: What would have happened in disadvantaged areas if the enterprise-zone program didn't exist?
"How do you define the one metric that makes a difference?" Alice Kotrlik, the state's deputy economic development, asked the task force.
Enterprise zones cover about 70 percent of the state's territory. One way to reduce awards because of geographic coincidence would be to limit the program to more populated areas.
"But then you would cut out farmers," Tilson said.
Agricultural businesses represent 31 percent of the certified firms in Colorado enterprise zones. Despite that, they collected only 4 percent of the tax credits awarded in fiscal 2010.
With about 40 other states offering versions of enterprise zones, some economic development officials argue that the competitive and psychological benefits of the incentives need to be considered.
In recent years, Colorado businesses have claimed only about half of the enterprise- zone tax credits they received. Given that credits last for several years, the program is working to get a better measure of how long that "tail" of unused credits might stretch.
Often, business decisions can be highly emotional, and credits communicate a sense of support, said Tom Clark, chief executive of the Metro Denver Economic Development Corp.
Jones argues that economic incentives in disadvantaged areas should be used to improve the lives of the individuals living there.
That could be achieved by pouring more money into job training, boosting educational resources or offering lower-income residents of enterprise zones tax breaks that would likely be spent, he said.
"We should be looking at what we are getting for the money," Jones said.
Aldo Svaldi: 303-954-1410, email@example.com or twitter.com/aldosvaldi