This paper uses administrative tax data to examine how employment tax credits affect employment and wage decisions of firms in the federal Empowerment Zones (EZs) and Renewal Communities (RCs).  The federal EZ and RC program provides an employment tax credit of $3,000 to firms in EZs and $1,500 to firms in RCs for each zone resident they employ who works primarily in the zone. This credit, along with other place-based tax abatement policies, is meant to encourage firms to locate and hire residents living in economically distressed areas. While existing literature (Ham et al., 2011; Busso et al. forthcoming) finds that zone designation improves local labor markets, these studies do not isolate the effects from specific tax abatement policies within a zone.

Our study contributes to the literature by being the first to our knowledge to establish a link between place-based employment tax credits and local labor market outcomes. The analysis uses cross-sectional tax return data filed by non-consolidated firms from the Internal Revenue Service’s Statistics of Income for tax years 1999 through 2009. Non-consolidated firms are firms that do not consist of a parent company and multiple subsidiaries such as a Walmart or Costco.  Compared to consolidated firms, non-consolidated firms are typically smaller in terms of assets, receipts, and wages and salaries paid to employees. For each firm, we mergeW-2 data to each corporate tax return to obtain a count of employees.  Results from this analysis will provide policymakers with explicit evidence on the efficacy of the employment tax credit and implications for the potential outcomes of other place-based policies.