This paper estimates spillover effects from a spatially-targeted redevelopment program, the Federal Empowerment Zone (EZ), on neighboring and economically similar areas. EZs are a set of generous tax incentives and grants aimed at small, economically depressed areas of large U.S. cities. We find areas that border or are economically similar to EZ locations experience a decline in the number of establishments and employment compared to areas that border or are similar to rejected EZ applicants. We also demonstrate that using spillover prone areas to estimate program effects causes upward bias when the spillover is negative. We find that for many of our estimates, spillovers more than offset positive program effects, although there are instances when the net effect is small and positive.

This paper examines how offering tax incentives in a local area affects the entry of new business establishments. We use the federal Empowerment Zone (EZ) program as a natural experiment to test this relationship. Using instrumental variables estimation, we find that the EZ wage tax credit is responsible for attracting about 2.2 new establishments per 1,000 existing establishments, or a total of 20 new establishments in EZ areas. New establishment growth is strongest in the retail (about 40 new establishments) and service (about five new establishments) sectors, and offset by declines or slower growth in other industries.

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Abstract:This paper examines the potential for location-based employment tax incentives to have a differential effect on establishment location and employment across industry sectors. We model the differential effect of the location-based federal Empowerment Zone (EZ) wage tax credit on equilibrium labor and total cost savings across industry sectors. The model guides our empirical work, as we test the effect of the program across industry sectors. Our empirical analysis shows that location based-tax incentives have a positive effect on firm location in some of the industries our model predicts and a negative effect in industries that could be crowded out.

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