Enterprise zones have been a pillar of the Republican antipoverty agenda for at least twelve years. But today enterprise zones (EZs) represent little more than government welfare by another name. As such, they symbolize a general Republican ideological decline from free-market conservatism to big-government welfarism.

Originally, the idea was to use freemarket forces, not subsidies, to mitigate inner-city poverty and integrate the inner-city poor into the labor pool. An area declared an EZ was to create a bottom-up entrepreneurial revolution by having no artificial barriers to economic opportunity.

According to Housing and Urban Development Secretary Jack Kemp, “the purpose behind enterprise zones is really very simple: stop doing things that destroy our cities, snuff out jobs, and smother the entrepreneurial spirit. Instead, foster an investment climate that will create new jobs and help produce hundreds, perhaps thousands, of new entrepreneurs and small business people.”

Besides Mr. Kemp, the other veteran enterprise zone advocate is Stuart Butler, director of domestic policy at the Heritage Foundation in Washington, D.C. Mr. Kemp and Mr. Butler disagree on who originated EZs. Mr. Butler credits the idea to Britain’s Sir Geoffrey Howe, who designed Margaret Thatcher’s antipoverty program for industrial cities. Mr. Kemp, however, says the EZ idea comes from his study of postwar history, when the U.S. spurred development in Puerto Rico through a tax-cutting (and subsidy) program called Operation Bootstrap. Mr. Kemp wants to replicate that program in poverty-stricken cities (though he made no mention of subsidies in the early days).

In 1979 Mr. Butler, then writing from London, dispatched the original EZ plan for America in an “International Briefing” published by the Heritage Foundation. It was a radical alternative to the Great Society programs. The EZ would eliminate planning controls (including zoning), abolish minimum wage laws and rent controls, require the selling of “all” city-owned land, and lower property taxes for incoming entrepreneurs. Most importantly, “no company entering a zone would be eligible for any subsidy, grant, or other form of government assistance whatsoever.”

It was a good plan, and it might have worked. It didn’t cost taxpayers a dime; none of the provisions of the early EZs were redistributive. There was even talk of making the entire country an EZ. The conservative movement universally adopted support for enterprise zones as an ideological litmus test.

But by 1981, when the idea reached the policy stage, the radical EZ plan had been watered down. What the Reagan administration and its associated think tanks supported instead was a version of the EZ concept that had little to do with the original Butler plan. It spoke only of large and diverse tax breaks and minor deregulation; every other provision was tossed out.

Ten years have passed, and despite the hopes of EZ supporters. Congress has not passed a federal EZ plan, except for a 1987 bill that gave HUD the power to declare that 100 targeted areas could receive federal dollars. Because this bill was passed under the discredited Pierce regime, Mr. Kemp has chosen not to act on it. But since 1981, lawmakers in 38 states have adopted some form of EZ legislation, mostly in hopes of benefiting from federal legislation that has yet to materialize. The existing EZ programs, so often praised and analyzed, are all run by the states.

Common to all state EZ plans are tax incentives and regulatory changes for economically depressed areas. Employers are allowed property tax abatements, tax credits for hiring new employees, extended tax write-offs for business losses, income tax credits, and sales tax breaks. The plans also promise to cut red tape that inhibits entrepreneurship. None mentions wage or rent controls or privatization.

Many conservatives have praised these various state plans and urged the federal government to cooperate with its own legislation. Mr. Kemp says, for example, that state-run EZs “have created 180,000 new jobs, retained nearly 68,000 jobs, and promoted more than $9 billion in new investment.”

Unfortunately, these numbers cannot be taken at face value. They gloss over the dirty little secret of today’s EZs. Besides tax breaks and deregulation, the typical EZ has a third plank: a promise of pro-business welfare. Though this has been completely overlooked in public debate, it amounts to redistribution from taxpayers to businesses.

Among the states offering huge grants to business for “job training” are Vermont, Connecticut, New York, New Jersey, Rhode Island, Pennsylvania, Illinois, Kansas, Arkansas, Louisiana, Alabama, Oregon, and Nevada. They force taxpayers to pay the salaries, in whole or in part, of new employees. In some cases, the state subsidizes employee insurance costs (New Jersey) and even offers free child care (Kansas). It’s easy to see how these subsidies will “reduce unemployment.”

Nearly all states with an EZ plan offer business loans at below-market interest rates. Some grant 15-year interest-free loans (Florida), and some offer a “guarantee” against business failure so that businesses can operate in the red indefinitely (Maryland). That’s a quick way to boost “investment.” Nearly all guarantee businesses “priority status” in receiving all available grants from state, local, and federal government. And most states offer outright grants to new businesses operating out of the ghetto, whether they start there or just move there. “Infrastructure assistance” is offered by many states to rebuild roads and housing, or even to finance construction of the building in which a business operates. (Massachusetts, Connecticut, Vermont, and Pennsylvania offer such support, and Indiana is especially generous.)

Many states offer rebates on any money spent on “pollution abatement” and “water supply projects.” Some, including Texas and New York, offer utility rates lower than regular businesses pay, and New York offers relocation funds. Oregon offers extended public education for employees and Tennessee promises guaranteed student loans inside the EZ. California even offers “marketing assistance.”

If we held a contest for the most stunning package of largess, the winner would be Maine. Its EZ program offers: the Maine Job Development Program Fund for “assistance to businesses”; grants of up to $1,250 “for each new full time quality job”; grants for infrastructure development (from the “Infrastructure Development Program”); planning, marketing, technical assistance, “and other types of capacity building”; “assistance for education, job training, work incentive programs and dependent care”; and a promise that the Finance Authority of Maine and the Maine State Housing Authority will “assist Zones.” A bureaucratic mess? Don’t worry: the “Opportunity Zone Service Delivery System” will “coordinate development resources and services, including the programs and services of the State Planning Office.”

This welfare component is not only a reversal of Stuart Butler’s original EZ plan; it completely changes the nature of EZs. Far from offering free-market incentives, they simply add another layer of the welfare muck that already covers the inner city. It is no longer enough to subsidize individuals; businesses have now joined the welfare line.

A study by Miles Friedman, executive director of the National Association of State Development Agencies, documents a recent explosion in the redistributionist component of EZs. The transfers, he says, address “an ever-wider range of business needs.” Business should “pay attention” to the growth in “diversity of incentives” beyond tax and regulatory changes because they can alter the “investment equation.”

Instead of creating a new class of inner-city entrepreneurs, EZs have attracted development fat cats with the promise of government spoils. In Evansville, Indiana, an EZ attracted a big retailer, T.J. Maxx, to set up a distribution center and warehouse. The company received tax breaks, but the city also spent four million dollars on upgrading water mains and setting up a firehouse in the area. In addition, the state built a daycare center for all employees. This program is considered “model” by National Journal magazine.

EZs are also used to keep companies from going out of business when the market dictates that they should. In 1985 Chrysler threatened to close a plant in Illinois that employed 4,200 workers. Then-Governor James Thompson declared it an EZ, with the traditional combination of tax breaks, job training funds, and revenue bonds. New Jersey uses EZs to keep businesses from defecting to New York, with even shopping malls benefiting. Just the threat of moving can help a business extract bribes from local officials in the name of creating an EZ.

The incentives also serve as useful tools in the bidding war to attract businesses to a new area. Parks Sausage Co., for example, opened a new thirteen million dollar plant in Baltimore after the city declared the company’s chosen site an EZ. To clinch the deal, the feds threw in a federal urban development action grant (UDAC) worth 2.3 million dollars. But moving businesses out of prosperous areas into the ghetto results in no net wealth gains for the larger community. Unlike regulatory and tax cuts, these outright transfers cost the taxpayer a bundle.

It’s not surprising that EZs create local economic boomlets. Old-fashioned redistribution can work temporary wonders. But how many jobs were lost for all the channeling of resources out of the productive economy to make these boomlets possible? How much of this “new investment” is subsidized by transfer payments and wouldn’t otherwise be undertaken? Moreover, the examples cited here probably don’t cover the full array of subsidies, but only what state governments admit to handing out in their official publications. Not included are the sweeteners that bureaucrats and politicians can add to the pot during the daily grind of politics.

To make matters worse, even the promised regulatory changes in state-run EZs have not panned out, despite what official propaganda-says. “In practice, there has been little, if any, elimination of red tape,” concludes Michael Allan Wolf (University of Richmond) in his 1990 study of EZs. Instead, EZ businesses are just given special consideration in cutting through: the city will assign a bureaucratic specialist to work with the company in racing through the, complex system of zoning and safety standards. But this doesn’t help the upstart business with no connections to the government.

As Stuart Butler says, these state programs are “not fundamentally different from traditional economic development policies of special tax breaks and assistance and earmarking of money.”

Jack Kemp’s office is working to pass new federal EZ legislation. The bill most favored by Mr. Kemp’s large EZ promotion staff is sponsored by Charles B. Rangel (D-NY). This is suspicious on its face, since Rangel is Mr. Welfare of the U.S. Congress.

Besides tax breaks, the Rangel bill forces state and local governments to dish out taxpayer money as a qualification for EZ status. “No nominated area shall be designated as an enterprise zone,” says the bill, “unless the State and local government” agree “in writing” to link tax benefits to “job training, transportation, education, day care, health care, and other social service support,” including “provisions of supporting public facilities and infrastructure improvements.”

This bill will only bolster the worst habit of state governments: spending tax dollars on favored interest groups. These subsidies are paid for by taxpayers outside the state by laundering them through various federal grant-giving agencies. But why should the government loot taxpayers so corporations can go on the public dole in the inner city? This will not create prosperity, only make a new class of people welfare-dependent.

If the original EZ program were restored, with its radical overhaul of labor law and rent control, its full privatization, and its strictures against welfare, it probably would deserve support—but only because it would serve as a metaphor for what the whole country ought to be like. As things are, why don’t conservatives drop their support of EZs? Many are simply no longer interested in fundamental reform. Instead, they are satisfied to make big government “work better.” “An enterprise zone creates a climate that could enhance the effectiveness of government programs,” says one conservative EZ advocate. It is a “base for other policies,” for example a “training program,” an outright grant, “or similar government project.”

Many other EZ supporters privately repudiate the program’s association with government spoils but would like to salvage the rest. However, under today’s egalitarian democratic political system, in which no one’s property is safe, it is impossible to isolate the decent parts of EZs from the corrupt parts. Far better to advocate a revolutionary approach that totally dismantles the democratic social welfare apparatus, and accept no compromise in the meantime.