Community Development

Information on the Use of Empowerment Zone and Enterprise Community Tax Incentives Gao ID: RCED-98-203 June 30, 1998

The Empowerment Zone and Enterprise Community program, which is designed to help revitalize urban and rural communities, targets federal grants for social services and community redevelopment and provides three tax incentives to attract or retain businesses in distressed areas. These tax incentives include tax-exempt private activity enterprise zone facility bonds that make financing available to qualified businesses at lower rates than conventional financing, an employment and training credit, and a $20,000 increase in the expensing allowance for the depreciable business property of qualified businesses. During an October 1997 congressional hearing on the program, questions arose about how well these initiatives are working and whether the current law provides the right mix of tax incentives. This report examines the extent to which data exist to determine how the tax incentives have been used. To make this determination, GAO examined the availability of data from the Internal Revenue Service on each of the three tax incentives, as well as data from state officials on the use of the tax-exempt enterprise zone facility bonds.

GAO noted that: (1) reliable data for only one of the three tax incentives are currently available from IRS--the agency to which taxpayers report their use of the tax incentives; (2) specifically, IRS has reliable information on businesses' use of tax-exempt enterprise zone facility bonds during 1995, which GAO corroborated and updated through a survey of officials in the District of Columbia and the 43 states that contain empowerment zones and enterprise communities; (3) IRS' data indicate, and GAO's survey confirmed, that three tax-exempt enterprise zone facility bonds were issued in 1995, and the state officials GAO surveyed reported that five other such bonds were issued in the next 3 years--one in 1996, two in 1997, and two in 1998; (4) the eight bonds totalled $17.7 million; (5) IRS has not yet completed its computer processing and analysis of the original returns for bonds issued in 1996 and 1997; (6) because IRS' information on businesses' use of the other two tax incentives--the employment credit and the additional $20,000 expensing allowance for depreciable business property--is not reliable, according to Department of the Treasury and IRS officials, GAO was not able to determine how often these incentives were used; (7) for both incentives, the number of businesses and business owners that were included in IRS' samples for tax years 1994 through 1996 and that reported using these incentives was too small to project reliably to all empowerment zone businesses and owners that filed tax returns; (8) as a result, IRS started collecting data from all businesses and owners on their use of the empowerment zone employment credit, but problems with the quality of the corporation data for tax years 1994 through 1996 prevent the use of these data; (9) IRS plans to issue a directive to its responsible executives and managers on problems with the employment credit data and on steps to take in addressing these problems; (10) IRS also plans to conduct special studies of the credit using returns already filed; and (11) it does not, however, plan to make any changes in the way it collects information on the additional expensing allowance for depreciable business property because the tax forms on which the expensing is claimed are not computerized and the tax incentive is considered small.

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