Summary

On May 23, 2000, President Clinton and Speaker Dennis Hastert announced a bipartisan agreement on a renewal communities and new markets legislative initiative which would provide tax credits and investment guarantees designed to draw equity capital into impoverished areas. Following two months of negotiations over the specific language of the initiative, H.R. 4923 was introduced on July 24, and passed by the House under suspension of the rules the following day (text: CR H6797-6841).

While some have depicted the new markets-renewal communities plan as one that combines various elements favored by the Administration and congressional Republicans, it may be more accurate to say the plan includes such elements. Months of negotiations did little to achieve compromise, except both sides agreed to go forward with a proposal that contains approaches they favor as well as ones they dislike. The proposal comprises two distinctly different plans which share the common goal of trying to help low-income and distressed communities.

The Republican part of the House initiative would create 40 competitively selected "Renewal Communities" that would offer: zero taxes on capital gains for firms located in the areas; requirements that local communities lower tax rates, increase services, reduce red tape, and ease zoning; a wage credit for employers; and provisions permitting faith-based organizations to apply and receive federal assistance. The Administration's new markets part of the initiative includes: tax credits for people who invest in certain privately-managed investment funds and institutions; America's Private Investment Companies (APICs) to promote private investment in underserved communities; New Markets Venture Capital (NMVC) Firms to increase the availability of venture capital in distressed inner city and rural areas; and an expansion of the Empowerment Zone/Enterprise Communities (EZ/EC) program (nine more EZs and expanded benefits for all designated zones).

Senate Finance Committee Chairman William Roth introduced his community renewal initiative (S. 3152) on October 3, following several recent attempts to get committee members to agree to limit amendments to his chairman's mark. ⁽¹⁾ The ten-year, $38.7 billion proposal contains key provisions not contained in the House-approved version as well as a number of provisions generally similar to those found in H.R. 4923. Two other community renewal bills, S. 2779 and S. 2936, were introduced on June 22 and July 26, respectively. It is anticipated that Finance Chairman Roth's bill (S. 3152) will not be brought up for Senate floor consideration. Rather, aides have said it is intended to help establish the Senate's position with regard to anticipated end-of-the-year negotiations between the white House and GOP leaders on a tax relief package that includes community renewal provisions. This report will be updated as required by legislative activity.

Background

During most of the nation's history, two key factors led to limited interaction between federal and municipal governments. First, citizen expectations-and hence, the policy responsibilities--of these entities have varied greatly. The federal government concerned itself with such national policies as defense and international affairs, while cities focused on providing local services. Second, there was no direct legal connection between them. Legally, cities-as with other units of local government-are creatures of the states. Thus, until the mid-20^th century, cities interacted almost exclusively with their states or other local governments, not with the federal government.

Beginning in the 1950s, however, the relationship between the federal government and cities changed dramatically. Particularly since the mid-1960s, the federal government has undertaken various initiatives designed to help distressed areas revive, e.g., the Economic Opportunity Act of 1964 (a centerpiece of the War on Poverty), Community Action Program, Model Cities, etc. In enacting these programs, Congress explicitly recognized that the national government had a role to play in what are ostensibly local economic development concerns.

Both the federal government's evolving role and approach in helping distressed urban communities-as well as rural areas-are exemplified by the Empowerment Zone/Enterprise Communities (EZ/EC) program. ⁽²⁾ Enacted by the 103^rd Congress, the EZ/EC program differs from previous efforts in several key respects, including: a competition to determine designated areas; the autonomy given to EZs and ECs in decision making; the promotion of so-called market-based economic development; and, its comprehensiveness.

Conceptually, the EZ/EC program had its genesis with enterprise zone programs initiated in the United Kingdom in the 1980s, and subsequently championed in this country by Jack Kemp, among others, while both a Member of the House of Representatives and as the Secretary of Housing and Urban Development during the Bush Administration. The concept originally emphasized various tax incentives and efforts to make it easier for private businesses to operate by eliminating such impediments as restrictive zoning laws and certain other governmental regulations.

The Administration proposed a New Markets Initiative in June 1999 containing many of the elements now incorporated in the current proposal. The Renewal Communities part of the proposal, on the other hand, has roots that run even deeper. Representative J. C. Watts introduced the forerunner of the current proposal in the 104^th Congress with "The Community Renewal Act of 1996." That legislation was much broader in scope, including several controversial provisions dealing with school vouchers, low-income educational opportunity scholarships, and family development accounts.

Some observers expect the proposed renewal communities/new markets initiative bill, still an un-numbered work in progress, to draw heavily on H.R. 2848, introduced by Representative Watts and H.R. 2170, introduced by Representative Charles B. Rangel. A Ways and Means Committee spokesman said on June 6 that congressional negotiators and the White House needed to iron out "minor differences" regarding the initiative before the committee could begin drafting the legislative language. He declined to detail specific areas of disagreement, but acknowledged that some of the difference centered on provisions dealing with low-income housing credits and phase-in dates.

Summary of Community Renewal and New Markets Act of 2000 (H.R. 4923)

The Community Renewal and New Markets Act of 2000 (H.R. 4923) combines elements favored by both congressional Republicans and the Administration. It incorporates components of earlier enterprise zone approaches and elements from the Empowerment Zone/Enterprise Communities program and from market oriented investment programs.

As was the case with the EZ/EC program, there will be competitions to choose the nine new empowerment zones and the 40 Renewal Communities, of which 32 would be urban and eight rural.

The RC/NM initiative is expected to cost the federal government $5 billion to $7 billion for the first five years, and $20 billion over the ten-year life of the program, according to Gene Sperling, director of the National Economic Council. ⁽³⁾

New Markets Tax Credit. The agreement between the President and the Speaker includes the former's New Markets Tax Credit, which the Administration hopes will spur $15 billion in new private equity investment for business growth in the nation's inner cities and isolated rural communities. According to Administration projections, the proposal will cost $1 billion over five years, and $4.5 billion over ten years.

• Investors in eligible funds would receive a tax credit worth more than 30% (in present value terms) of the amount invested. Investors would take a 5% credit for the first three years of investment, and 6% for the next four years.

• Eligible funds would be awarded to a wide range of entities, including community development banks and other community development financial institutions, venture funds, for-profit subsidiaries of community development corporations, America's Private Investment Companies and New Markets Venture Capital Firms (discussed below).

• The New Markets Tax Credit would be widely available on a competitive basis to eligible entities serving low- and moderate-income communities in census tracts with poverty rates of at least 20% or median family income which does not exceed 80% of the area income.

America's Private Investment Companies (APICs). APICs would be jointly designated by the Department of Housing and Urban Development (HUD) and the Small Business Administration (SBA). Under the legislative proposal each APIC would create investment funds with minimum private capital of $25 million ⁽⁴⁾ and would be eligible to then borrow twice that amount at government-guaranteed rates.

• APICs would be structurally similar to the existing SBA Small Business Investment Company (SBIC) program, and the Investment Funds of the Overseas Private Investment Corporation, but would generally include more capital than either of those.

• APICs would fund larger businesses, such as new back office operations ⁽⁵⁾ plant expansions, and conversions of old facilities into modern industrial "incubators" for smaller businesses. Currently, there are few, if any, sources of long term risk capital for these "landmark investments" in most poorer communities. This is intended to fill a perceived gap in the government's economic development toolbox.

• The agreement authorizes HUD to guarantee up to $1 billion in low cost loans, to be matched by $500 million in private investor contributions, to make a total of $1.5 billion available to invest in low- and moderate-income communities.

New Markets Venture Capital Firms (NMVC). This SBA-administered legislative proposal would create a new class of venture capital funds that target a lower rate of return (e.g., 10%) and provide more hands-on management assistance to their small business portfolio investments.

• NMVCs would target smaller firms with growth prospects, but without a sufficient equity base.

• NMVCs must have $5 million minimum in private equity and $1.5 million in cash or in-kind commitments raised from private sources to provide operating and management assistance. For investment capital, the SBA would provide up to $1.50 in low-cost loans for each $1 that private investors contribute. The SBA would also match privately raised operating assistance on a dollar-for-dollar basis.

• The agreement authorizes SBA to guarantee up to $150 million in loans to match $100 million in private equity, for a total of $250 million in investment capital. In addition, the agreement authorizes SBA to make $30 million in grants to match private commitments for operating assistance to NMVC portfolio companies.

Empowerment Zones. The agreement authorizes the designation of nine new Empowerment Zones (seven urban and two rural), bringing the total number to 40 EZs, and extends the duration of the EZ designation in all 40 EZs to the year 2009. ⁽⁶⁾ In all EZs, the following incentives would be available:

• Wage credit equal to 20% on the first $15,000 of qualified wages per employee, i.e., $3,000.

• Authority to issue tax exempt bonds to promote business development.

• Incentives for EZ business investment by permitting EZ businesses to deduct an additional $35,000 in capital expenditures.

• Zero rate on capital gains rolled over to another EZ business investment, and a 60% exclusion of capital gains derived from small business stock.

• The EZ provision also includes an extension through 2009 of the Empowerment Zone incentives for the District of Columbia.

• The costs of the EZ provisions, according to the Administration, would be $2 billion over five years and $4 billion over 10 years.

Creation of Renewal Communities. Renewal Communities (RCs) designations would be awarded to 40 competitively selected communities that meet certain criteria showing economic distress in the community. Renewal Communities would have the following incentives:

• Zero rate on capital gains derived from businesses located in the renewal communities. ⁽⁷⁾

• Wage credit equal to 15% on the first $10,000 of qualified wages per employee.

• Incentives for RC business investment by permitting RC businesses to deduct an additional $35,000 in capital expenditures.

• Commercial revitalization tax deduction to promote commercial development.

Low Income Housing Tax Credit. As an incentive to create more and better affordable rental housing for low-income individuals, a tax credit is available to owners of rental properties that are rented to low-income individuals who meet certain other requirements. One of the requirements is that owners must have received a credit allocation from the relevant state agency. The amount of low-income housing tax credits available in each state is currently limited by an annual volume limit of $1.25 per state resident. The agreement includes the President's proposal to expand the low income housing tax credit by 40%, from $1.25 per capita to $1.75 per capita, and to index the credit for inflation thereafter. The proposal would cost $1 billion over five years and $6 billion over 10 years, according to the Administration.

• The tax credit, which is administered by the states, currently helps to build 90,000 affordable housing units each year, but demand for the credits outstrips supply by three to one. The credit is designed to address the low-income housing shortage.

• The proposal would help create an additional 180,000 units of affordable housing over the next five years for low-income families.

The provisions included in this agreement will allow faith-based organizations to qualify for substance abuse prevention and treatments funds on the same basis as other non-profit organizations.

Summary of American Community Renewal and New Markets Empowerment Act (S. 2779)

On June 22, 2000, Senators Rick Santorum and Joseph Lieberman unveiled a community renewal bill (S. 2779), which expands on the bipartisan agreement between President Clinton and House Speaker Hastert. While both versions would provide tax breaks and other incentives to encourage renewal of economically distressed communities, and enhance educational and housing opportunities, S. 2779 differs in several significant respects, among which are the following:

• The establishment of Individual Development Accounts (IDAs), a new type of financial instrument. These special savings accounts are designed to encourage low- and moderate-income individuals and families to save and build wealth. IDAs would help savers to buy their own home, pay for college or training, or start a small business. The accounts would provide federal tax credits to financial institutions and others who make matching contributions to these funds. The Clinton-Hastert agreement has no similar provision.

• The creation of 50 renewal communities, as opposed to the 40 called for in the Clinton-Hastert plan. Other differences: each state would be entitled to a renewal community; there would be a zero capital gains tax rate on the sale of renewal community businesses or business assets held for more than five years; and the proposal would allow small businesses located in renewal communities to expense (deduct as a current business cost) up to $35,000 of eligible equipment. ⁽⁸⁾

• The enhancement of tax incentives to businesses for donating computer equipment to schools, libraries, seniors centers, and nonprofit vocational training centers in economically disadvantaged areas. (Note: Various provisions--including an increase in the tax credit to 50% of the fair market value--were contained in the New Millennium Classrooms legislation (S. 542). The Clinton-Hastert agreement has no similar provision.)

• Full Social Service Block Grant funding of the 20 Empowerment Zones included in Round II of the EZ/EC program. The Clinton-Hastert agreement would provide partial funding. ⁽⁹⁾

In addition, the S. 2779 would implement proposed increases in the low-income housing tax credits and private activity bond caps more rapidly than called for under the Clinton-Hastert agreement. The Senate bill would immediately increase the low-income housing tax credit annual volume limit to $1.75 per state resident, and adjust subsequent increases to inflation. Also, the tax-exempt private activity bond limit would be increased to $75 per resident in 2001.

Summary of Creating New Markets and Empowering America Act of 2000 (S. 2936)

On July 26, Senator Robb introduced S. 2936, a bill containing many of the key provisions found in the Clinton-Hastert bill and some contained in S. 2779 as well as several initiatives not found in either of the other bills. As with H.R. 4923, the legislation call for the creation of 40 Renewal Communities (as opposed to the 50 called for in S. 2779), and a number of tax provisions intended to expand and revitalize housing. More specifically, the bill includes a low-income housing tax credit, the creation of APICs (America's Private Investment Companies), and a provision increasing the private activity tax-exempt bond cap

Similarly, as do both S. 2779 and the House bill, S. 2936 would create a Round III for the Empowerment Zone/Enterprise Communities program consisting of nine new EZs (seven urban and two rural). There are, however, a couple of important differences from the other two bills. First, as with S. 2779 (and unlike H.R. 4923), it would provide full Social Service Block Grant funding for the 20 Round II EZs. Second, unlike either of the other bills, S. 2936 would establish a different criteria for the third round competition than was employed in the previous rounds for the rural EZs: "outmigration" would be added as a criteria to be considered when awarding the designations.

Major provisions unique to S. 2936 include:

• The creation of a Delta Regional Authority to, among other things, develop comprehensive and coordinated plans and programs, establish priorities, and approve grants for economic development of the Mississippi Delta region (parts of Arkansas, Illinois, Kentucky, Louisiana, Mississippi, Missouri, and Tennessee surrounding such Delta).

Assistance in the form of Trade-Affected Communities Relief. This provision mirros S. 2445, the Assistance in Development for Communities Act, or the "AID for Communities. Intended to assist communities in developing a plan to retool their economies and offer financial assistannce and tax incentives to help communities implement those plans. ⁽¹⁰⁾

• Authorization of a Home Ownership Tax Credit to facilitate low-income individuals purchase housing. Under this provision, each state would receive a 40 cents per capita allocation of tax credits to be auctioned off to mortgage lenders who would provide a second mortgage pool for low income lenders. ⁽¹¹⁾

Summary of Community Renewal and New Markets Act of 2000 (S. 3152)

Having been unsuccessful in getting members of the Senate Finance Committee to refrain from insisting on a host of amendments to his Chairman's mark, Senator William V. Roth on September 28 decided his $38.7 billion ten-year legislative package will sidestep panel action.

After three postponed markups since the week of September 18, Chairman Roth had hoped his fellow committee members would go along with his modified mark. At a September 27 executive session panel meeting, the Chairman presented members with his modified version which incorporated nearly half of the 73 proposed amendments. The tentative markup was postponed 24 hours as lawmakers considered their options. In the end, members were reluctant to give up their rights to offer amendments because--it is widely agreed--the Chairman's mark looked to be the committee's last tax cut vehicle of the 106^th Congress.

On September 28, having met with members before the rescheduled markup, Chairman Roth decided to cancel drafting action on the measure. On October 3, Sen. Roth introduced S. 3152 (text: CR S. 9704-9729) as a stand-alone bill that was placed directly on the Senate calendar. According to aides, the thinking is that the legislation will not be brought up for Senate floor consideration. Rather, S. 3152 is intended to establish the Senate's position with regard to anticipated end-of-the-year negotiations between the White House and GOP leaders on a tax relief package that includes community renewal provisions.

The Community Renewal and New Markets Act of 2000 closely tracks a number of the provisions in the House-passed package (H.R. 4923) of tax incentives designed to spur renewal of economically distressed urban and rural communities. At the same time, however, the Chairman's mark contains a number of tax breaks what were not included in the House measure.

Key provisions of Chairman Roth's proposal would:

• Provide for the designation of up to 30 renewal zones that would be eligible for a range of tax breaks, including zero capital gains tax rate for sales of qualifying assets. The new renewal communities would be designated by January 1, 2002, and the resulting tax credits would be available to all Empowerment Zones--the new ones as well as those already designated during Rounds I and II--between January 1, 2002, and December 31, 2009.

• Provide $85 million in grants to Round II Empowerment Zones for FY2001 ($5 million to each urban zone and $2 million to each rural zone).

• Provide $88 million ($250,000 each) in grants for FY2001 to the 88 Round I Enterprise Communities (excludes Round I communities which were subsequently upgraded to zone status under Round II).

• Create a new markets tax credit with allocation authority of $1 billion in 2002 and $1.5 billion from 2003 through 2006.

• Establish Individual Development Accounts which would provide financial institutions with a 90 percent tax credit for matching a maximum contribution of $300 per account; sunset Dec. 31, 2005.

• Increase the annual low-income housing tax credit fro $1.25 to $1.75 per capita, beginning in 2001. The credit would be modified so that small population states would be given a minimum of $2 million of the annual credit cap.

• Create a tax credit for renovating historic homes.

• Authorize the issuance of tax credit bonds for the National Railroad Passenger Corporation ("Amtrak").

• Create a broadband internet access tax credit.

• Expand the expensing of environmental remediation expenditures to all qualifying sites ("brownfields").

• Accelerate an increase in the private activity bond volume limits to $75 per resident of each state or $225 million, if greater, so that it would be fully effective in 2001, rather than phased in during 2003-2007.

Concluding Observations

The idea behind the RC/NM initiative has been described as a merger of President Clinton's "New Markets Initiative"--including a tax credit and other incentives designed to attract capital to low-income areas--with a House Republican proposal called the "American Community Renewal Act (H.R. 815), which would provide tax and regulatory relief to economically distressed areas and help poor families set up subsidized savings accounts. ⁽¹²⁾ Instead of a merger, however, the bipartisan, anti-poverty package has been characterized as a juxtaposition: "We allow two different forms to see what we can learn over the next several years about what works best in attracting investment and job growth," said Gene Sperling. ⁽¹³⁾

Indeed, if a renewal communities/new markets initiative is enacted, it may be possible in a few years to examine the results and draw conclusions about which incentives, programs, and approaches seem to work best. The phenomenon of moribund urban and rural areas, and the myriad economic and human problems associated with them, will present a public policy challenge for the foreseeable future. The need to learn what works best argues for systematic collection of data that will facilitate program evaluation.

On the other hand, history has shown that drawing conclusions about these types of economic development programs will not be easy. By the late 1980s, about three dozen states had created a variety of enterprise zone programs, yet even today there is little information about what works and what does not. The simple fact is that it is difficult to judge the success of economic development efforts. As one report notes:

Although the economic development literature often discusses the potential effects of enterprise zones, empirical research on, or analysis of zone programs is somewhat limited. The modest amount of empirical research is due to two basic constraints: (1) the lack of reliable quantitative data to evaluate zone performance, and (2) the difficulty of isolating the effects of zone designation and incentives from those of other economic development factors and initiatives.

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Compounding the difficulty of determining what works in the RC/NM initiative, should it come to pass, is one immutable fact: each empowerment zone or renewal community will be unique. They will differ in varying ways, including geographic and demographic characteristics, the nature of local governance, and unemployment and poverty rates-to name just a few.

Footnotes

1. ^(back)The technical explanation of S. 3152, the "Community Renewal and New Markets Act of 2000", prepared by the staff of the Joint Committee on Taxation is available at: http://www.house.gov/jct/

2. ^(back)For more information on the program, see: CRS Report RS20381 , Empowerment Zone/Enterprise Communities Program: Information on Rounds II & III, by Bruce K. Mulock.

3. ^(back)Transcript of White House Briefing by Gene Sperling, director of the National Economic Council, on New Markets Initiative Agreement. U.S. Newswire. Washington, May 23, 2000.

4. ^(back)Investors in APICs would be eligible for New Markets Tax Credits. In addition to APICs, other eligible funds include community development banks and other community development financial institutions, venture funds, for-profit subsidiaries of community development corporations, and New Markets Venture Capital Firms.

5. ^(back)Management and support tasks that can be performed away from a company's headquarters.

6. ^(back)Under the current law there are 31 EZs with various expiration dates and two sets of incentives. Designations expire as early as 2004, and in some zones the wage credit is not available, while in other zones the credit phases out over the final three years of designation. The proposal would unify the two sets of current zones into a single regime so that all zones would have the same incentives.

7. ^(back)Currently, the District of Columbia is the only designated area in the EZ/EC program where a zero capital gains rate exists.

8. ^(back)For more information on the subject of the federal tax code as it pertains to expensing, including economic effects, see: CRS Report 97-758, Expensing Allowance for Small Business Enterprises: Policy Issues for Congress, by Gary Guenther.

9. ^(back)The enabling legislation for the EZ/EC program (P.L. 96-103) provided each urban EZ with $100 million-and each rural EZ with $40 million-in SSBG funding over the 10-year life of the program. It provided each urban and rural EC with $3 million. Similar funding was not provided to Round II EZs under P.L. 105-34. They have received partial funding through the annual appropriations process.

10. ^(back)Communites would qualify if they have 300 (in a population of 100,00 or less) or 500 (in a population of 100,000 or more) workers certified the the Department of Labor as eligible for Trade Adjustment Assistance (TAA) benefits or NAFTA-TAA benefits after November 1, 1999.

11. ^(back)These second mortgages would either be a no-interest, 25-year balloon mortgage or a low-interest amortized loans that could be paid at the same time as the primary loan. They would be used to reduce an individual's monthly mortgage payment and would help home buyers qualify for a traditional first mortgage.

12. ^(back)For example, see: David Nather. "Community Development Deal Still Stymied by Differences Over Philosophy of Poverty Relief," CQ Weekly, April 15, 2000, p. 896.

13. ^(back)Transcript of White House Briefing by Gene Sperling.

14. ^(back)Margaret G. Wilder and Barry M. Rubin. "Rhetoric versus Reality: A Review of Studies on State Enterprise Zone Programs," Journal of the American Planning Association, vol. 62, autumn 1996, p. 475.

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