In the zone

How enterprise zones have promoted urban sprawl
in Northeast Ohio

A charitable person would put the saga of Ohio's enterprise zone program in the realm of unfortunate, unintended consequences. Others would say the results should have been predicted all along. But whether the results were intended or not, it's clear that enterprise zonesspecial areas in which tax incentives promote economic developmenthave been little help for economically depressed cities but a boon for prosperous suburbs.

In the following story, local free-lance writer William Henderson carefully compares the performance of urban and suburban zones in Northeast Ohio. The lesson of his story is this: it matters where economic development takes place. At the state level, development officials don't see much difference between a job in Solon and job in Cleveland. But there is a difference. If development strategies abandon our cities, unemployed people, and existing infrastructure, the entire region will be weakened in the long run. It's a matter of regional sustainability and social justice.

By William Henderson

Recently, a slightly reformed version of an existing Ohio law went into effecta law that, in Northeast Ohio, has had the exact opposite effect of its intended purpose.

The new law is the third renewal and revision of Ohio's "Urban jobs and enterprise zones" legislation. And in its brief history, it provides us with several hard-to-swallow lessons about business, government and the possible fate of our urban centers.

A product of the '80s

Initially enacted in 1982, the original legislation was, like many new laws, a product of the times. During the early '80s, Ohio was in the grips of a recession. Statewide unemployment hovered at 12 percent, and manufacturing centers such as Cleveland, Warren, and Toledo were hemorrhaging jobs. At the same time, the newly elected Reagan administration was dramatically cutting aid to central cities in an effort to reduce the federal deficit and finance new defense spending.

Faced with a deepening recession and dwindling financial resources, legislators in Columbus mobilized to pass legislation that could create jobs in areas of serious economic decline without committing additional state funds. According to literature produced by the Ohio Department of Development in 1982, "Enterprise zones may be defined as depressed areas in which governments provide special tax incentives and perhaps other incentives in order to promote job creation and economic development."

The special tax incentives were abatements of city and county property taxes that local legislatures could grant to businesses that located or created jobs in distressed areas. Although experts debate how much tax breaks influence corporate location decisions, enterprise zones did give local governments another economic development tool. Eligibility for the zones was based primarily on levels of unemployment, poverty, population decline, and abandoned structures.

When the original enterprise zone law expired at the end of 1987, there had been only modest statewide activity, with 128 total abatements. Most depressed cities found it difficult to give tax breaks to businesses when most of the abated taxes had to be foregone by local schools. When abatements were granted, they were often for investments in facilities already in enterprise zones and were meant to ensure a company's long-term presence.

A prominent example of this was the first phase of LTV Steel's renovations in Cleveland. According to state records, LTV received a 10-year, 100-percent abatement on $37 million worth of capital improvements. In the process, only six jobs were created, but 943 were retained [Editor's note: those jobs were retained only temporarily as LTV recently announced it was shutting down its Cleveland facility].

Diluted intent

When the enterprise zone legislation was renewed at end of 1987, rural and suburban lawmakers successfully diluted the distress criteria in order to qualify their own communities. Having "vacant or undeveloped land" now became equally as important as being on the federal list of "impacted cities." By 1989, any county with a population of less than 300,000 also qualified as a "rural enterprise zone" by suffering no hardship other than having undeveloped land. Under this criteria, all but seven of Ohio's 88 counties qualified.

Not surprisingly, enterprise zone activity surged dramatically. Today there are more than 200 enterprise zones in the state. In Northeast Ohio, growing and affluent communities such as Solon, Highland Heights, Twinsburg, and Avon Lake deftly qualified as enterprise zones and competed head-to-head for an industrial tax base with cities like Cleveland and Lorain. With improved access provided by recently constructed freeways and an abundance of "greenfield" building sites, the outlying suburbs were the predictable winners. And very quickly, enterprise zone activity began to mirror the business patterns of Greater Cleveland in general: companies were moving out of Cleveland and its inner-ring suburbs to the "edge cities" of outer Cuyahoga and bordering counties.

Western Reserve Zone

Of the suburban enterprise zones, probably the most vigorous in Northeast Ohio was the Western Reserve Zone. Located along I-480 in northern Summit County, this zone encompasses several communities, including Twinsburg, Twinsburg Township, Macedonia, and Hudson Township. According to demographers, this area is one of the most prosperous in the Cleveland-Akron metropolitan area. Yet, by carefully packaging its census tracts to exclude new developments, the Western Reserve Zone managed to qualify much of its undeveloped portions as "distressed."

According to Summit County documents, by early 1994 the Western Reserve Zone had made 92 agreements; of these, 32 were made with businesses relocating from Cleveland or Cuyahoga County. Although its population base was relatively smallonly 5,789 residentstotal new employment within the Western Reserve Zone exceeded 5,200 jobs. During the same period, the five enterprise zones in the City of Cleveland generated only 27 total agreements and 1,037 new jobs.

With growing evidence of intra-regional movement to high-growth areas, a committee of Summit County officials was formed to study the issue. Their 1991 report concluded that "... drastic changes need to be made ... in the enterprise zone program or that it needs to be entirely revoked. As long as the program exists in its present form, however, Summit County must continue to participate in it. Although there is a public policy loss to Ohio when abatement is used in intercounty (intra-state) competition for businesses, there is a gain for Summit County when it is successful in such competition."

Where the jobs went

When the enterprise zone law was set to expire at the end of 1992, a large coalition in the General Assembly attempted to reform it. In order to better study its effects, the law was renewed for the year 1993. Supporters including Governor George Voinovich and the Ohio Department of Development (ODOD) vigorously defended the law as a necessary tool to compete with neighboring states such as Indiana and Kentucky.

Yet, in spite of their position, the Ohio Department of Development never documented how many of the 1400-plus enterprise zone agreements attracted out-of-state businesses. Moreover, due to the poor reporting requirements of the old law, the Ohio Department of Development had no data on the extent or pattern of intra-state movement.

The last ODOD report on enterprise zones was actually done in early 1992. At that time, enterprise zones were credited with generating $13 billion dollars worth of investment and over 43,000 new jobs. Although the ODOD calculated these figures on a statewide basis, they never totalled them by regions or zones.

Using the statewide listing of enterprise zone agreements that accompanied the 1992 report, this writer separated out the data for the Cleveland-Akron area and discovered some startling trends:

The number of new jobs attributed to enterprise zones has been significantly overstated. In 1989, for example, a Maple Heights company moved to Aurora, receiving a 10-year, 90 percent abatement. Yet, according to state records, all of the 650 relocated employees were counted as jobs created. This pattern is repeated with companies that moved from Cuyahoga Heights to Solon, Beachwood to Hudson Township, Cleveland to Twinsburg, and many others.

The state's listing of jobs "retained" also masked intra-regional movement. A Valley View company that retained 312 employees actually moved them from Cleveland. Similar accounting was found with companies moving from Elyria to North Ridgeville, Painesville to Mentor, and Bedford to Solon, among others.

Although enterprise zones were intended to favor areas of declining population, the employment gains have generally been in high growth areas. Mentor's population increased 29 percent from 1970 to 1990 while it gained 1,222 enterprise zone jobs. During the same time period, Solon gained 2,446 jobs (37 percent of the total in Cuyahoga County) while experiencing a 60-percent jump in population. Likewise, Avon Lake grew by 24 percent and gained 1,300 new jobs.

The oldest enterprise zone in Northeast Ohio, and arguably the poorest, is Cleveland's zone #1 covering the Central, Hough, and Fairfax neighborhoods. Through the end of 1991, it had garnered no enterprise zone investment and created no jobs.

Draining the central cities

To date, Ohio's enterprise zone law has been a drain on the City of Cleveland. Although the city has managed to gain some new investment and jobs through the program, it has seen a much larger number of jobs and capital leave for suburban zones.

Moreover, when a large number of jobs are relocated to edge cities along the area's freeways, traffic patterns are dramatically changed and commuters have less incentive to live in Cleveland or its inner-ring suburbs. Census data already confirm this trend.

To the extent that Ohio enterprise zones provide incentives to employers to leave central cities, they are actually subsidizing urban sprawl. By spreading out the employment base and making regional transit more impractical and inefficient, the state is also increasing the need for more roads while the existing infrastructure deteriorates. The swath of urban decay is also widened as older cities and inner suburbs are unable to maintain services and schools due to eroding tax bases.

As a tool for state competition, enterprise zones have been a blunt instrument. Only a handful of Northeast Ohio's enterprise zones have attracted out-of-state employers. In the meantime, affluent communities have too often benefited at the expense of those that are actually "distressed."

Reforms with loopholes

The latest version of Ohio's enterprise zone law, passed in 1994, represents a compromise between supporters of the old law and its critics. Limits on abatements will drop from 100 to 75 percent. Abatements for retail stores will be sharply curtailed. Local school boards will also be granted some revenue from new income taxes and will be guaranteed input in the abatement decision process.

Nevertheless, the state's distress guidelines remain lenient and subject to gerrymandering. Areas that don't qualify as "distressed" can still qualify under a new type of limited enterprise zone that has no criteria at all. Under the new rules, a Cleveland company that has outgrown its facility can relocate to a limited enterprise zone by petitioning the director of the ODOD. Yet, room for expansion is one of the most common reasons why companies move to "greenfields." Once again, cities like Cleveland are being placed at a competitive disadvantage.

Ultimately, this siphoning of jobs and investment will weaken the region as a whole. Although many of us live in towns and suburbs, we all depend on the region's urban centers to sustain our quality of life. And we cannot escape the social and economic problems left behind in the cities by outmigration to the suburbs.

For everyone's benefit, then, our public policies must work with cities like Cleveland and Akron, not at their expense.

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Copyright 2002-2003

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Today there are more than 200 enterprise zones in the state. In Northeast Ohio, growing and affluent communities such as Solon, Highland Heights, Twinsburg, and Avon Lake deftly qualified as enterprise zones and competed head-to-head for an industrial tax base with cities like Cleveland and Lorain.

As a tool for state competition, enterprise zones have been a blunt instrument. Only a handful of Northeast Ohio's enterprise zones have attracted out-of-state employers. In the meantime, affluent communities have too often benefited at the expense of those that are actually "distressed."