In the zone: a look at Indiana's enterprise zones.

• Author: Landers, Jim

Over the past several decades, state and local governments have become more active in promoting economic development and Enterprise Zones (EZs) have become a common tool. (1) Forty-three states currently provide incentives for businesses to locate or expand in these distressed and blighted areas, which are often traditional downtown areas or old industrial and manufacturing areas that have gone through a protracted period of decline.

Typically, EZ incentives consist of tax instruments, such as property tax abatements, income tax deductions and credits for employment creation, capital investment and income creation in the EZs. At the present time, Indiana has twenty-five municipal EZs and three EZs located on closed military bases (see Figure 1).

[FIGURE 1 OMITTED]

EZ Designation

Indiana's Enterprise Zone (EZ) program was established in 1983 and allows EZs to be located in municipalities or on closed military bases.

The Indiana Economic Development Corporation (IEDC) administers the EZ Program and has the power to review and approve applications for proposed EZs, renew existing EZs, and monitor EZ operations and incentive use. EZs are designated based on demographic, socioeconomic, and geographic size criteria. The initial designation period for an EZ is ten years, with EZs eligible for two five-year renewals based on performance reviews by the IEDC Board. In addition, EZs that have operated for a full twenty-year period may be redesignated for a new term with an initial ten-year designation period by the IEDC Board. (2) The IEDC Board is currently authorized to designate two new municipal EZs each year until December 31, 2015. Table 1 shows Indiana EZs and the year each was initially designated.

EZ Incentives

The following describes the tax incentives, which serve as recruitment tools for the EZs. Note that the Employment Expense Credit and the Loan Interest Credit are applicable to three state taxes: income tax, financial institutions tax, and insurance premiums tax. The Investment Cost Credit, however, is only applicable to the state income tax.

Inventory Tax Credit: This credit eliminates the property tax on wholesale or retail merchandise being held for resale as well as finished goods maintained by a business in an EZ. Before 2004, it also eliminated property tax on work-in-process and raw materials incorporated in finished goods for shipment out of state. Such inventory was exempted from property tax statewide beginning in 2004. More importantly, the credit will be inoperative beginning in 2007, once the inventory tax is eliminated statewide through the 100 percent inventory deduction.

Investment Cost Credit: This is a state tax credit for equity investment in an EZ business. The credit is equal to a maximum of 30 percent of the price of the ownership interest purchased by the taxpayer. The allowable credit percentage, up to 30 percent, varies depending upon the type of investment, the type of business, and the number of jobs created by the investment.

Employment Expense Credit: This is a state tax credit for incremental wages paid by an EZ business to employees who are EZ residents. At least 90 percent of the employee's services must be directly related to the EZ business, and at least 50 percent of the employee's time must be spent working at the EZ business. The credit is equal to 10 percent of the additional wages paid to qualified employees during the year, up to $1,500 per qualified employee.

Loan Interest Credit: This is a state tax credit for interest income earned by a taxpayer from a loan that directly benefits an EZ business, increases EZ property values, or is used to rehabilitate, repair, or improve an EZ residence. The credit is equal to 5 percent of the loan interest received during the year.

Property Tax Investment

Deduction: This is a new deduction enacted during the 2005 legislative session, and it became effective July 1, 2005. It is a property tax deduction for the increased value of an EZ business property due to real and personal property investment by the business. The added valuation may be deducted for up to ten years. Qualified investment at an EZ location includes: (1) purchase of a building, new manufacturing or production equipment, or new computers and related office equipment; (2) costs associated with the repair, rehabilitation, or modernization of an existing building and related improvements; (3) onsite infrastructure improvements; (4) construction of a new building; and (5) costs associated with retooling existing machinery.

Gross Income Tax Exemption: Historically; this incentive was utilized more than any except for the Inventory Tax Credit, but it no longer exists.

Incentive Savings

Table 2 reports annual savings from these tax incentives as reported to the Indiana Department of Commerce (IDOC). Since 1995, the reported savings from the inventory Tax Credit averaged about $35.9 million per year. Next was the Gross Income Tax Exemption with annual savings averaging only about $1.3 million. During this period, the...