Weekly SSRN Tax Article Review And Roundup: Eyal-Cohen Reviews Layser's The Unknown Consequences Of Place-Based Tax Incentives

This week, Mirit Eyal-Cohen (Alabama; Google Scholar) reviews Michelle D. Layser (San Diego; Google Scholar), The Unknown Consequences of Place-Based Tax Incentives, 56 Loy. L.A. L. Rev. __ (2023):

I like history, and I like tax. So it’s always fun to review articles that combine them both and utilize tax history to inform us about important lessons from the past. This essay briefly utilizes this methodology in the context of urban poverty tax incentives. While tax scholars such as Ellen April have long warned against the use of economic incentives to solve inner-city poverty and promote low-income neighborhood investment, such large zone-based tax benefits have proliferated substantially despite tangible evidence that they indeed revitalize distressed neighborhoods and improve the position of low-income communities. Economic mobility has long been linked to the local environment and neighborhoods in which people grow up. Yet, despite their popularity, we know little about how place-based tax incentives affect communities. Existing economic studies on the enterprise zone, opportunity zone, and new market tax benefits have not produced meaningful evidence of beneficial effects on poverty or the labor market. Current location-based tax incentives are limited as they subsidize a wide range of activities without a clear link to anti-poverty efforts.

This essay begins by reviewing the history of place-based tax incentives. It points out that economic frameworks have dominated the discourse due to neoliberal urban policies from the 1970s that peaked during the Reagan Administration in the 1980s, relying on market dynamics such as private property rights, limited government, free markets, and free trade. The dominant assumption was that economic growth would trickle down to the average person. Thus, developing place-based tax incentives such as enterprise zones was seen as having the potential to increase the welfare of residents in these areas. The new "enterprise zones" were first formed in 1980 in Great Britain during the Thatcher Administration as regions where businesses would be relieved from taxes and government regulations and be provided with only minimal social service provisions to revitalize abandoned and unpopulated industrial areas.

The U.S. enterprise zone concept differed from that of the British as it did not focus on job creation or anti-poverty goals. Conservative economists introduced business zones in 1979 as a radical new approach to inner city revitalization that focused on tax and regulatory incentives to stimulate new jobs, especially in the service sector. The idea was favored by supply-side Republican legislators who introduced such legislation in Congress in 1980. Soon after, the Enterprise Zone concept drew bipartisan support. Some concerns involving a lack of empirical support for the strategy and opposition from businesses that feared no net gain to the national economy stalled the passage of the legislation at the federal level. All the while, enterprise zone proposals gained state-level support and were enacted in 38 states by the early 1990s. The enactment of the Low-Income Housing Tax Credit in 1986 helped pave the road for federal place-based tax incentives by shifting the responsibility for providing affordable housing from HUD to the IRS through direct subsidies to developers who produce affordable housing. Such a credit today is the largest federal subsidy for new construction of affordable housing annually, costing the government about $10.9 billion.

Clinton reinstated enterprise zone legislation in 1993, creating nine large empowerment zones and 95 "enterprise communities." The law provided a 20% credit for the first $15,000 wage to employees working and living in designated areas. This policy, though, moved away from free-market rhetoric that emphasized private market urban revival toward a liberal place-based policy that nudges businesses to create jobs to help reduce poverty. The New Markets Tax Credit enacted in 2000 added significant benefits in order to encourage investment in low-income communities by competitively subsidizing the activities of community development entities (CDEs), financial institutions that specialize in lending to borrowers in low-income communities, under the supervision of the Community Development Financial Institution Fund (CFFI Fund) at Treasury. These tax credit allocations (which amounted to $5 billion in 2023) have funded real estate building and renovation, small company finance, and nonprofit growth. Community developers have raised concerns about New Markets Tax Credit compliance, arguing it hinders development, project pipelines, and the potential for real impact.

In 2017, the TCJA added the Opportunity Zones tax preference, which provides capital gain tax relief to investors in Opportunity Zone funds that invest in low-income neighborhoods. As opposed to enterprise zones, the opportunity zone preference was designed to subsidize upstream investors by using tax deferrals and exemptions instead of tax credits. Moreover, like the first enterprise zone regulations, the Opportunity Zones legislation favors market deregulation. Alas, as was mentioned here, such laws raised concerns about tax abuse, gentrification, and displacement without benefiting low-income communities.

After this brief historical account, the essay cites many economic studies that claim that enterprise zones, empowerment zones, new market tax credits, and opportunity zones improve poverty, unemployment, and income in low-income communities. However, the essay argues, such conventional statistics fail to capture some of the impacts associated with place-based tax incentives and the heterogeneity across tax incentives and jurisdictions. Moreover, the studies do address the manner in which place-based tax incentives affect neighborhoods and their low-income residents. Aggregate statistics simply do not tell us whether the investors hired workers from the community and whether the neighborhood became safer, cleaner, healthier, with better access, etc. There are potentially sample size issues as the place-based tax preferences are relatively small compared to the geographies that get financing and even smaller compared to the eligible areas. The New Markets Tax Credit funding is competitive, and only $5 billion is approved annually spread across 31,680 eligible census tracts nationwide. Thus, the essay raises doubts in light of the small scale of the New Markets Tax Credit program that such economist studies correctly identified significant changes in income or poverty level.

As an alternative, the essay points out other research methodologies and frameworks that may be useful for further study of place-based tax incentives and shed more light on the incidence of place-based tax incentives. Such frameworks include welfare economics and non-economic frameworks such as social science theories about community networks and neighborhood change from disciplines such as geography and urban planning, sociology, and law. For instance, some studies that utilize welfare economics frameworks (evaluating policies that improve the well-being of society as a whole) can analyze place-based tax incentives by constructing a model to evaluate fairness and efficiency trade-offs in light of worker and firm mobility.

Another example involves stratification economics, which is used to study intergroup differences in income and wealth such as race and gender. Stratification economics stresses intergroup inequality and asserts that social relationships explain market relationships; thus, the dynamics of society explain how the economy works. Place-based tax incentives have not been explored, but they should be using this paradigm. Other useful fields, such as urban planning and geography, are interdisciplinary fields related to architecture and civil engineering that study the various aspects of cities, focusing on location, space, and patterns observed in urban areas. Urban researchers have produced a significant body of research about processes of neighborhood change such as gentrification (the influx of new investments with higher income and education), which can be relevant to understanding the consequences of place-based tax incentives. Using such methodologically qualitative methods is beneficial in investigating how place-based tax incentives relate to neighborhoods while incorporating notions of distributive justice and equality. Yet rather than wait passively for such developments to occur across the academy, the essay calls on legal scholars to actively engage with non-legal scholars through interdisciplinary scholarship to enhance legal analyses of place-based tax incentives. Aside from stratification economics, critical tax theory can also inform the analysis of place-based tax incentives. Urban and poverty law experts may examine place-based tax incentives as community development and anti-poverty initiatives.

Lastly, the essay proposes incorporating relevant constituents such as members of minorities, poverty researchers, and other market players with nontraditional backgrounds that are uniquely positioned to critique the design and administration of place-based tax incentives. Few studies have asked individuals how tax-subsidized investment has affected them or what their communities need. Qualitative research methodologies that incorporate interviews with low-income community members might help us understand how laws affect communities. "Participatory law scholarship" written with laypeople would give low-income communities affected by place-based tax incentives a voice and illuminate their experiences.

Overall, the essay’s main contribution lies in calling on legal academics to open research avenues within and outside of law and normal economic frameworks and to utilize qualitative methodologies in order to better understand how place-based incentives affect communities, people, and structural inequalities. If the author endeavors to turn this essay into a book or a symposium, it would also be beneficial to incorporate more in-depth historiographical research that includes perspectives from the media, professionals, and institutions, even before the idea of place-based incentives was put on the table and subsequently through its development. My own research has shown that inquiries from the past are extremely valuable in providing those much-needed multidisciplinary and critical lessons on the impact of tax expenditures on the communities of taxpayers.

Here's the rest of this week's SSRN Tax Roundup:

• James Alm (Tulane), Jay A. Soled (Rutgers), & Kathleen DeLaney Thomas (UNC), Multibillion-Dollar Tax Questions, St. L. J. (forthcoming 2023).
• Ahmed Altawyan (Saudi Electronic University), Challenges in Applying Saudi Arabian Tax Treaties: Digitalization, Withholding Tax, and Permanent Establishment of Non-Residents
  51 Intertax 1 (2023).
• Reuven S. Avi-Yonah (Michigan), Why 15%? Justifying the Global Corporate Minimum Tax (Apr. 2023).
• Eric D. Chason (William & Mary), Crypto Assets and the Problem of Tax Classifications, 100 U. L. Rev. (2023).
• Wei Cui (University of British Columbia), The Chinese Enterprise Income Tax in Reuven Avi-Yonah (Ed.), Research Handbook on Corporate Taxation (forthcoming 2023)
• Lorraine Eden (Texas A&M), Taxing Multinationals: Three Lenses on International Tax Cooperation (Comments on UN Resolution 77/244, Promotion of Inclusive and Effective International Tax Governance at the United Nations) (Apr. 2023).  
• Mascia Ferrari (Italy), Francesco Reggiani (Zurich), Shivaram Rajgopal(Columbia Business School) and Stephen F. O'Byrne (Shareholder Value Advisors, Inc.), Competitive Target Pay Practices for CEO Compensation (Apr. 2023).
• Albert Feuer (Law Offices of Albert Feuer), An Opportunity to Redesign the SECURE Act 2.0, 51 Tax Mgmt. Comp. Plan. J. (2023).
• Clare Huntington (Fordham), Pragmatic Family Law, 136 Harvard L. Rev. 1501 (2023).
• Bradley W. Joondeph (Santa Clara), State Taxes and 'Pike Balancing', L. J. (forthcoming 2023).
• Yuha Jung (Kentucky- Art Administration), Does the Lack of Diversity in Nonprofit Museums Make Them Undeserving of Tax-Exempt Status?: Perspectives from Critical Race, Commons, and Systems Theories (Apr. 2023).
• Michelle D. Layser (San Diego), Tax (Dis)Conformity, Reverse Federalism, and Social Justice Reform, 53 Seton Hall L. Rev. __ (2022).
• Michelle D. Layser (San Diego) and Andrew Greenlee (Illinois-Champaign), Structural Inequality and the New Markets Tax Credit, Duke L. J. (forthcoming 2023).
• Lisa Marriott (Victoria University) and Jessica C. Lai (Victoria University), Tax Evasion and Benefit Fraud: A Study of the Use of Techniques of Neutralization, Deviant Behavior (2023).
• Noam Noked (Chinese University), Designing Domestic Minimum Taxes in Response to the Global Minimum Tax, 50 Intertax 678 (2022).
• Noam Noked(Chinese University of Hong Kong) and Zachary Marcone (Chinese University of Hong Kong), Closing the 'Shell Bank' Loophole, 64 Va. J. Int’l L. (forthcoming 2023).
• Vincent Ooi (Singapore), Formulating General Principles in a Difficult Area: Justice Phang and Revenue Law, in Pursuing Justice and Justice Alone – The Heart and Humanity of Andrew Phang’s Jurisprudence 423-447 (2022).
• Katerina Pantazatou (Luxembourg), A Never-Ending Battle Between Privacy and Transparency: The Case of Registers of Beneficial Ownership Before the CJEU, EC Tax Rev. (forthcoming 2023).
• Ashiqullah Pardisi (Independent), Accounting, Ethics and Public Policy: An Annotated Bibliography 2017-2021(Apr. 2023).
• William B. P. Robson (C.D. Howe Institute), Don Drummond (Queen's University) & Alexandre Laurin (C.D. Howe Institute), Getting Serious: A Shadow Federal Budget for 2022 (Apr. 2023).