Why Enhanced Enterprise Zones Are A Bad Deal For Missouri Cities

Sometimes acronyms are designed to create a false impression. That is the case with Enhanced Enterprise Zones, or EEZs, which make it sound as if the task of an EEZ board in selecting worthy projects for stimulating a city’s economic development are dead E-A-S-Y. Nothing could be further from the truth.

Speaking as a professional economist, the likelihood that an EEZ board could outperform the marketplace in redirecting taxpayer money to selected enterprises is about as high as the chance that I could pick the Jack of diamonds from a pack of playing cards on my first try.

These reflections are prompted by what I have observed in following the sometimes heated debate about Columbia’s Enhanced Enterprise Zone. Some citizens are worried that the application of an EEZ in Columbia could lead to indiscriminate use of blighting and eminent domain confiscations. Others question whether EEZs work.

Let me tackle the second of those two issues first. Supporters treat the EEZ as a kind of free lunch for city economic development in conferring benefits on selected developers. But the benefit or subsidy has to come from somewhere. If the subsidy is a state tax credit then the resources are coming from all Missourians who pay taxes. Alternatively, in the case of property tax abatements, resources that would normally go to local schools or local services are redirected to benefit a particular company or developer.

Once we agree that the benefit or subsidy is a redirection of resources, the question becomes whether we can expect a better result from the proposed EEZ subsidy/investment than we would get through the ordinary working of the marketplace, with no subsidies.

The short answer to that question is “No.” On economic grounds, it is impossible to make a convincing case that EEZs work. No matter how well-intentioned and how smart the members of an EEZ board may be, the deck will always be stacked against them.

For one thing, the set of projects that they will be asked to consider will be too small. For another, the incentives are not lined up; the EEZ board does not have any skin in the game and therefore the careful vetting that occurs when people are spending their own money will be missing.

What then of the fears of eminent domain abuse?

I submit that Columbia officials are being truthful when they answer these concerns by saying that widespread eminent domain abuses are the farthest thing from their minds. I do not see the current group wielding power willy-nilly to drive residents from their homesteads just to make property available for some startup from California. However, once on the books, there are no restrictions on those in future city governments that see opportunities. Time inconsistency is what economists call this lack of a commitment by current government on future governments. And there is no way to impose anti-abuse conditions on these future city governments.

Thus, in order for a Columbia EEZ to be a net positive for the city’s economic development, the board members would have to be at the top of their game (channeling Warren Buffett and no Mamteks), there has to be a strong enough multiplier effect (from a discredited economic theory), and the future governments must be no less noble and forbearing than current government. If any one of those three conditions fail (and the odds are that all three will not be satisfied), then the EEZ is a bad economic deal for Columbia.

Of course, the same is true for other Missouri cities considering EEZs.

Joseph Haslag is chief economist at the Show-Me Institute, which promotes market solutions for Missouri public policy, and a professor of economics at the University of Missouri-Columbia.