Baltimore's Failed Special Economic Zone

Crisis and Leviathan

 National guards patrolling after LA riots - 1992  

National guards patrolling after LA riots - 1992
 

In May 1992, LA burned. 1100 buildings were destroyed costing more than $1.5 billion. The riots killed 55 people, and injured more than 2000 more. National guard, infantry, and marines patrolled the smoldering streets.

When Bill Clinton took office, the country was in a state of panic. As a presidential candidate, during the riots he had berated the Republicans for not taking enough action to restore the crumbling inner cities. Now in office, he realized that if he did not take serious action, his political tenure was at risk.

Legislative Solutions

Clinton’s staff devised an economic recovery plan for the inner cities known as the “empowerment zones program.” The plan was an ill-fated attempt to copy the United Kingdom’s successful attempts at creating Special Economic Zones.

The Omnibus Budget Reconciliation Act of 1993 established the creation of the Empowerment Zones (EZs). The Department of Housing and Urban Development (HUD) first held a contest to see which urban communities would benefit most from the zones.

Baltimore was one of the cities targeted for the zones, and stands as good example of what happened in most empowerment zones.

The Empowerment Zones can be understood as a blend between Keynesian Economic Policy and Special Economic Zones.

Each zone had a regionalized tax credit. In Baltimore, the program was managed by the Empower Baltimore Management Corporation (EBMC), a 501(c)3 which had the goal of alleviating poverty.

Employers in the Baltimore EZ received a $3000 tax break per Baltimore resident that they employed. If the resident was under 39, then the tax credit was raised to $35,000. Businesses also did not have to pay any capital gains taxes in the EZs on any assets they owned for more than 5 years. Building projects in the EZs could receive up to $10 million in tax credits.

In addition to the generous tax breaks, the legislation also created numerous government programs to reduce long-term poverty.

For example, the Federal Government still issues low interest loans to businesses in the EZs. The legislation also gave state and local governments the authorization to issue untaxed bonds to businesses in the zones.

There are also a number of other key policies that are part of the empowerment zone program. An EZ’s local government is also eligible for the Social Services Block Grant, which, in the short term, grants money to the local government’s social services so that they can reduce the amount of long term dependants. Finally, the EZs were given priority in Federal Assistance programs.

In addition to the Federal efforts, the Baltimore city government took many extra measures using their own funding. They established multiple Village Centers, overhauled the local education system, and refurbished old infrastructure.

All of the efforts would prove to be in vain.

A Hero in the Chaos

Former Democratic Baltimore mayor Kurt Schmoke is responsible for getting Baltimore EZ status. He was the mayor of Baltimore from 1987 until 1999. Before running as mayor, he was the Dean of the Howard University School of Law.

He graduated from Yale University in 1967. During his time at Yale, he became notorious for stopping a riot. In 1969, several Connecticut Black Panthers were charged for kidnapping and murdering a former member that they believed was an FBI informant. Their 1970 trial was highly controversial, and triggered student protests at Yale. Schmoke, who was at the time both leader of the Black Student Alliance and Secretary of the class, decided to lead negotiations between the radical student protesters and the campus administration. Tensions were defused, and everyone left satisfied. He eventually became a Rhodes Scholar and graduated Harvard’s graduate law program in 1976.

Despite being a Democrat, Schmoke very vocally supported school voucher programs. He also was an early and vocal opponent of the war on drugs in the late 1980s.

When one of the managers of the EZ was caught forging a signature in 1996 on a document outlining his own salary, Schmoke responded promptly firing the manager and issuing a public apology. His handling of the situation was praised by the media.

Baltimore’s Poisoned Gift

A 1994 HUD press release states that the program is an effort “to restore economic opportunity to America’s distressed neighborhoods and enable communities to take responsibility for their own futures. […] The federal government, working across agency lines and in a new partnership with state and local government and the private sector, will provide distressed communities with the tools they need and the flexibility they desire, in the form of block grants, tax breaks, and waivers.”

In the case of Baltimore, the push for a EZ began in 1993 when HUD announced the contest in which winning polities would receive EZ status. After Baltimore Kurt Mayor Schmoke heard about the contest, he created a team to plan the city’s EZ. This team drew members from the Baltimore Development Corporation, as well as other city agencies. They established zone boundaries as well as specific city level provisions for the zone.

In March of 1994, Schmoke announced the EZ program at a rally attended by more than 400 people. He invited members of the community to take an active role in shaping policy and was met by roaring applause. He also established an Advisory Council composed of 84 members of the public. The council had no real authority, but met regularly with Mayor Schmoke to discuss Baltimore’s policies. This council helped leverage community support.

Schmoke urged the zone’s board to make hasty decisions, arguing that the EZs would become a campaign issue for Bill Clinton in 1996. Although there was no widespread national media coverage of Baltimore’s EZ, this was enough to pressure the board into acting fast.

Most of the EZs faced significant, local bureaucratic, and PR struggles. Due to Mayor Schmoke’s determination and diplomatic abilities, Baltimore was uniquely able to avoid these pitfalls. He constantly mediated between stakeholders and the local community, and took great care to balance the needs of both parties. According to the Howard Samuels State Management and Policy Center’s study, the leaders of various local organizations reported having perfect communication with the mayor. The head of the Empower Baltimore Management Corporation (EBMC) was a member of the mayor’s cabinet, and could access the mayor at any time. Schmoke was even able to convince the Department of Planning to rewrite plans they had been working on since the 1960s in favor of EZs.

For the most part, the general public wasn’t aware of the existence of the EZ. Although there was no resulting opposition, this greatly reduced the effectiveness of the community programs and tax incentives.

The zones enjoyed widespread support among the financial and academic communities. Several organizations such as American Express and Morgan State University gave extensive, free advice to the zone’s administrators.

Slow Results and Economic Decay

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There have been several studies to determine the economic outcome of the Empowerment Zones.

In 2006 Matias Busso from the University of Michigan and Patrick Kline from Yale published a study “Do Local Economic Development Programs Work?” In the study they analyzed the impact of the initial zones from 1994 until 2000.

Busso and Kline found that the zones cost the government at least $2.5 billion in tax revenue. Despite the loss of revenue, they concluded “We find that neighborhoods receiving EZ designation experienced substantial improvements in the labor market outcome of zone residents and moderate increases in housing values and rents.” “Employment rates, for example, seem to have increased even among high school dropouts. However, given the high rates of turnover in the EZ neighborhoods we cannot determine whether the benefits were captured by pre-existing residents or new arrivals with similar demographic characteristics.”

Some critics have argued that although there was noticeable growth in the EZs, there was also comparable growth outside the EZs during the same period of time. Many businesses were not aware of the EZ’s tax write offs. Busso and Kline write: “A 1997 survey of zone businesses conducted by HUD found that most firms were unaware of the existence of the EZ program, that only 11% claimed to be using the wage tax credit, and only 4% claimed to be using the Section 179 deductions.”

Matias Busso also co-authored “Results of the Federal Urban Empowerment Zone Program” with Jesse Gregory, an economics professor at the University of Wisconsin-Madison. They conclude that “the Empowerment Zone program appears to have successfully transferred income to a small spatially concentrated labor force. We caution, however, that our study provides only a short-run evaluation of the Empowerment Zone program. Administrative data indicate that participation in the Empowerment Zone tax credit program increased only gradually over time and it took many years for some economic outcomes to respond.”

In 2001 the Howard Samuels State Management and Policy Center published a six city comparative study of the EZs. They found that the zones were completely ineffective: “Our findings suggest the EZ program has fallen far short of its stated goals." He continues: "In fact, little changed in any of the cities or Zones with regard to the major goals set forth in the legislation and the regulations outlined by HUD.”

In 1995, City Journal ran Mitchell Moss’ story about the Empowerment Zones. He opens by writing that “the centerpiece of the Clinton administration’s urban policy – the empowerment zone program – is about to self destruct. […] For it to succeed in sparking an economic renaissance, the program would have to focus on encouraging private-sector job creation. Instead, current plans for the zone look like an enormous safety net for social services, not a launching pad for renewing the base of these low-income neighborhoods.”

In 1995, local Baltimore activists protested the zone, arguing that it was non-democratic. Activist Leonard Jackson said: “The process must reflect a true perception of neighborhood needs from those who live there.”

Conflicts arose around the Harlem Park neighborhood of the EZ. Christian neighborhood board members began quarrelling with members of the Nation of Islam. The conflict began when the Christians opposed the opening of an Islamic community center in the neighborhood. This conflict remained unresolved, and no decision was ever taken.

Writing about Chicago’s EZ, Bowdeya Tweh writes: “More than a decade after its launch, program critics say the $25.6 million in federal funds spent has had a muted impact on the cities and residents living in them.” Even the director of Chicago’s empowerment zone said “The result of the zone has been underwhelming.”

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