Community Development

The Omnibus Budget Reconciliation Act of 1993 created the following three tax incentives to help revitalize deteriorating areas: (1) an employment credit, (2) a $20,000 increase in the expensing deduction for depreciable business property, and (3) a tax-exempt facility bond. The government's cost for these incentives is estimated at $2.5 billion over 10 years. This report discusses the extent to which businesses in empowerment zones used the program's three tax incentives, as well as three other tax incentives that are targeted to help businesses, including those in distressed areas--the work opportunity credit; the welfare-to-work credit; and an environmental cleanup tax deduction, known as the brownfields deduction. This report also discusses why, in some cases, the incentives were not used. GAO surveyed about 2,400 businesses in the nine original empowerment zones in Atlanta, Georgia; Baltimore, Maryland; Detroit, Michigan; Philadelphia, Pennsylvania/Camden, New Jersey; New York, New York; the Kentucky Highlands; the Mississippi Mid-Delta; and the Rio Grande Valley, Texas. GAO asked the businesses about their use of the employment tax credit and the increased expensing deduction for tax year 1997.

GAO noted that: (1) large urban businesses and rural businesses were more likely than small urban businesses to have used at least one of the three tax incentives available to businesses in the empowerment zones; (2) the employment credit was the most frequently used of the three tax incentives; (3) according to the survey's responses, 42 percent of the large urban businesses, an estimated 6 percent of the small urban businesses, and 32 percent of the rural businesses used the employment credit; (4) large urban businesses and rural businesses reported claiming $9.1 million for tax year 1997; (5) the majority of the businesses that used the employment credit reported that the credit was at least somewhat important to making decisions about hiring employees who live in the zones; (6) the businesses that reported they did not claim the employment credit cited a variety of reasons, which most frequently included that they did not qualify for the credit because their employees lived outside of the zone or they did not know about the credit; (7) in tax year 1997, the increased expensing deduction was used less than the employment credit; (8) about 9 percent of the large urban businesses, an estimated 4 percent of the small urban businesses, and 8 percent of the rural businesses used the increased expensing deduction; (9) of the businesses that used this deduction, 18 large urban businesses reported claiming $405,534 and 37 rural businesses reported claiming $480,081; (10) the businesses that reported they did not claim this deduction cited a variety of reasons; (11) few businesses have used the tax-exempt facility bonds; (12) 10 businesses reported receiving the proceeds from these tax-exempt facility bonds; (13) of the businesses that did not use these bonds, the predominant reason was that they did not know about them; and (14) most of the businesses did not use the work opportunity credit, the welfare-to-work credit, or the environmental cleanup tax deduction.