Community Development
Federal Revitalization Programs Are Being Implemented, but Data on the Use of Tax Benefits Are Limited Gao ID: GAO-04-306 March 5, 2004Congress established the Empowerment Zone and Enterprise Community (EZ/EC) program in 1993 and the Renewal Community (RC) program in 2000 to provide assistance to the nation's distressed communities. To date, Congress has authorized three rounds of EZs, two rounds of ECs, and one round of RCs. The Community Renewal Tax Relief Act of 2000 mandated that GAO audit and report in 2004, 2007, and 2010 on the EZ/EC and RC programs and their effect on poverty, unemployment, and economic growth. This report describes (1) the features of the EZ/EC and RC programs, (2) the extent to which the programs have been implemented, and (3) the methods used and results found in evaluations of their effectiveness.
Both the EZ/EC and RC programs were designed to improve conditions in distressed American communities; however, the features of the programs have changed over time. Round I and II EZs and ECs received different combinations of grant funding and tax benefits, while Round III EZs and RCs received mainly tax benefits. To implement the programs, federal agencies have, among other things, designated participating communities and overseen the provision of program benefits. Since 1994, the Department of Housing and Urban Development (HUD) and the Department of Agriculture (USDA) have designated a total of 41 EZs and 115 ECs, and HUD has designated 40 RCs. Available data show that Round I and II EZs and ECs are continuing to access their grant funds and IRS data show that businesses are claiming some tax benefits. However, the Internal Revenue Service (IRS) does not collect data on other tax benefits and cannot always identify the communities in which they were used. Also, efforts by HUD to obtain these data by survey were limited to Round I designees, and EZ and RC officials have had difficulty obtaining such information directly from businesses. The lack of tax benefit data limits the ability of HUD and USDA to administer and evaluate the programs. The few evaluations that systematically collected and analyzed data on EZ/EC program effectiveness used a variety of research methods to study different aspects of the program. The most comprehensive of these studies--the HUD Interim Assessment--found that employment of Round I EZ residents had increased from 1995 to 2000, that larger businesses were more likely to use tax benefits than smaller businesses, and that resident participation in EZ or EC governance has been uneven, among other things.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-04-306, Community Development: Federal Revitalization Programs Are Being Implemented, but Data on the Use of Tax Benefits Are Limited
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Report to Congressional Committees:
United States General Accounting Office:
GAO:
March 2004:
Community Development:
Federal Revitalization Programs Are Being Implemented, but Data on the
Use of Tax Benefits Are Limited:
GAO-04-306:
GAO Highlights:
Highlights of GAO-04-306, a report to Congressional Committees
Why GAO Did This Study:
Congress established the Empowerment Zone and Enterprise Community
(EZ/EC) program in 1993 and the Renewal Community (RC) program in 2000
to provide assistance to the nation‘s distressed communities. To date,
Congress has authorized three rounds of EZs, two rounds of ECs, and one
round of RCs.
The Community Renewal Tax Relief Act of 2000 mandated that GAO audit
and report in 2004, 2007, and 2010 on the EZ/EC and RC programs and
their effect on poverty, unemployment, and economic growth. This report
describes (1) the features of the EZ/EC and RC programs, (2) the extent
to which the programs have been implemented, and (3) the methods used
and results found in evaluations of their effectiveness.
What GAO Found:
Both the EZ/EC and RC programs were designed to improve conditions in
distressed American communities; however, the features of the programs
have changed over time. Round I and II EZs and ECs received different
combinations of grant funding and tax benefits, while Round III EZs and
RCs received mainly tax benefits. To implement the programs, federal
agencies have, among other things, designated participating communities
and overseen the provision of program benefits. Since 1994, HUD and
USDA have designated a total of 41 EZs and 115 ECs, and HUD has
designated 40 RCs. Available data show that Round I and II EZs and ECs
are continuing to access their grant funds and IRS data show that
businesses are claiming some tax benefits. However, IRS does not
collect data on other tax benefits and cannot always identify the
communities in which they were used. Also, efforts by HUD to obtain
these data by survey were limited to Round I designees, and EZ and RC
officials have had difficulty obtaining such information directly from
businesses. The lack of tax benefit data limits the ability of HUD and
USDA to administer and evaluate the programs.
The few evaluations that systematically collected and analyzed data on
EZ/EC program effectiveness used a variety of research methods to study
different aspects of the program. The most comprehensive of these
studies”the HUD Interim Assessment”found that employment of Round I EZ
residents had increased from 1995 to 2000, that larger businesses were
more likely to use tax benefits than smaller businesses, and that
resident participation in EZ or EC governance has been uneven, among
other things.
What GAO Recommends:
To facilitate the administration, audit, and evaluation of the EZ/EC
and RC programs, we recommend that HUD, USDA, and IRS collaborate to
(1) identify the data needed to assess the use of the tax benefits; (2)
determine the cost-effectiveness of collecting these data; (3) document
the findings of their analysis; and, if necessary, (4) seek the
authority to collect the data, if a cost-effective means is available.
HUD and IRS agreed with our recommendation, and USDA said such data
could have marginal utility.
www.gao.gov/cgi-bin/getrpt?GAO-04-306.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact William Shear, (202)
512-8678, ShearW@gao.gov.
[End of section]
Contents:
Letter:
Background:
Results in Brief:
EZ/EC and RC Programs Share Similar Goals and Objectives, but Features
Vary:
The EZ/EC and RC Programs Are Well Under Way, but Data on the Use of
Some Benefits Are Limited:
Among the Few EZ/EC Evaluations That Have Been Conducted, Research
Methods and Results Have Varied:
Conclusions:
Recommendation:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: List of Designated Communities:
Appendix III: Federal Benefits Available to EZs, ECs, and RCs at the
Time of Designation and as of September 30, 2003:
Appendix IV: Other Tax Benefits Available to Businesses Serving
Distressed Communities and Low-Income Individuals:
Appendix V: Other Benefits Available to Certain Designees:
Appendix VI: Summary of Evaluations of the EZ/EC Program:
Appendix VII: Comments from the Department of Housing and Urban
Development:
Appendix VIII: Comments from the Internal Revenue Service:
Appendix IX: Comments from the U.S. Department of Agriculture:
Appendix X: Comments from the Department of Health and Human Services:
Appendix XI: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
Bibliography:
Related GAO Products:
Tables:
Table 1: Summary of Legislation Authorizing the EZ/EC and RC Programs:
Table 2: Some Eligibility Requirements Differ among Rounds of the EZ/EC
Program and between the EZ/EC and RC Programs:
Table 3: Social Services Block Grant Funds Authorized for Round I EZs
and ECs:
Table 4: Economic Development Initiative Grants for Supplemental
Empowerment Zones and Enhanced Enterprise Communities:
Table 5: HUD Appropriations for Round II Urban Designees, Fiscal Years
1999-2003 (Dollars in thousands):
Table 6: USDA Allocation of Appropriations for Round II Rural
Designees, Fiscal Years 1999-2003 (Dollars in thousands):
Table 7: Federal Tax Benefits Specifically Available to Businesses
Operating in EZs, ECs, and RCs:
Table 8: Number of EZ/EC and RC Nominations and Designations:
Table 9: Amount of Grant Funds Awarded and Drawn Down, as of September
30, 2003 (Dollars in thousands):
Table 10: Limitations with Data on EZ, EC, and RC Tax Benefits:
Table 11: Variation in Census Statistics for EZs, ECs, and RCs:
Table 12: Confidence Intervals for EZ Employment Credit Estimates:
Table 13: List of Designated Communities:
Table 14: Summary of Benefits Provided to EZs, ECs, and RCs at the Time
of Designation and as of September 30, 2003:
Table 15: Other Tax Benefits Available to Businesses Serving Distressed
Communities and Low-Income Individuals:
Table 16: Section 108 Loan Guarantees for Supplemental Empowerment
Zones and Enhanced Enterprise Communities:
Table 17: Amount of Section 108 Loan Guarantees Awarded and Used as of
September 30, 2003 (Dollars in thousands):
Figures:
Figure 1: Timeline of Events in the Selection of EZ/EC and RC Program
Participants:
Figure 2: Geographic Distribution of Designees By Round:
Figure 3: Geographic Location of All Designated Communities as of
September 30, 2003:
Figure 4: Variation in Average Characteristics of EZs, ECs, and RCs
(Based on 1990 census data):
Figure 5: Corporate Returns with EZ Employment Credit:
Figure 6: Individual Returns with EZ Employment Credit:
Figure 7: Number and Amount of Enterprise Zone, D.C. Enterprise Zone,
and EZ Facility Bonds Issued 1995 through 2001:
Abbreviations:
EC: Enterprise Community:
EZ: Empowerment Zone:
HHS: Department of Health and Human Services:
HUD: Department of Housing and Urban Development:
IRS: Internal Revenue Service:
RC: Renewal Community:
USDA: U.S. Department of Agriculture:
United States General Accounting Office:
Washington, DC 20548:
March 5, 2004:
The Honorable Charles E. Grassley:
Chairman:
The Honorable Max S. Baucus:
Ranking Minority Member:
Committee on Finance:
United States Senate:
The Honorable William M. Thomas:
Chairman:
The Honorable Charles B. Rangel:
Ranking Minority Member:
Committee on Ways and Means:
House of Representatives:
For decades the nation has faced the challenge of revitalizing its
distressed urban and rural communities. To help such communities, the
federal government provides assistance in the form of grants, tax
benefits, loans, and loan guarantees involving more than 100 programs
and billions of dollars. Within the past 11 years, Congress has created
two new programs to help distressed communities--the Empowerment Zone
and Enterprise Community (EZ/EC) program and the Renewal Community (RC)
program. When it was enacted in 1993, the EZ/EC program provided grants
to public and private entities for social services and community
redevelopment and tax benefits to local businesses to attract or retain
jobs and businesses in distressed communities. More recently, this
program has provided mainly tax benefits. Since its enactment in 2000,
the RC program has focused on providing tax benefits to businesses in
designated communities to attract or retain jobs and businesses.
The Community Renewal Tax Relief Act of 2000, which created the RC
program, also mandated that we audit and report in 2004, 2007, and 2010
on the EZ/EC and RC programs and their effect on poverty, unemployment,
and economic growth. This report is the first in a series examining
these programs. Specifically, this report describes (1) the features of
the EZ/EC and RC programs, (2) the extent to which the programs have
been implemented, and (3) the methods used and the results found in
evaluations of the programs' effectiveness, especially in terms of
poverty, unemployment, and economic growth in the participating
communities.
To determine the features of each program, we reviewed statutes,
regulations, and program documentation and interviewed agency
personnel. To describe the implementation of these programs, we
reviewed program documentation, financial data, and taxpayer data and
interviewed agency personnel, community officials, and experts. To
describe the methods used in and the results of evaluations, we
identified relevant research by conducting several literature searches
and interviewing agency personnel and community development experts.
Our descriptions include analyses of data that have been and could be
used to administer and evaluate the programs. However, we did not
evaluate the effectiveness of the programs or their implementation in
this report. We conducted our work between April 2003 and February 2004
in accordance with generally accepted government auditing standards.
Appendix I provides additional details on our scope and methodology.
Background:
The EZ/EC and RC programs target federal grant monies to public and
private entities, tax benefits to businesses, or both in order to
improve conditions in competitively selected, economically distressed
communities. To be considered for these programs, areas must be
nominated by one or more local governments and the state or states in
which they are located.[Footnote 1] Areas on Indian reservations must
be nominated by the reservation's governing body.
Congress authorized the EZ/EC and RC programs under four separate acts
of legislation (see table 1). To date, Congress has authorized the
designation of three rounds of EZs, two rounds of ECs, and one round of
RCs. See appendix II for a list of all designated communities.
Table 1: Summary of Legislation Authorizing the EZ/EC and RC Programs:
Program: Round I EZ/EC;
Title: Omnibus Budget Reconciliation Act of 1993;
Summary:
* Established the EZ/EC program and its package of grants and tax
benefits;
* Authorized six urban and three rural Round I EZs;
* Authorized 65 urban and 30 rural Round I ECs;
* Established the eligibility requirements and selection criteria for
EZ/ECs.
Program: Round II EZ/EC;
Title: Taxpayer Relief Act of 1997;
Summary:
* Authorized 5 rural and 15 urban Round II EZs;
* Authorized two additional Round I EZs;
* Changed the eligibility requirements for EZ/ ECs;
* Created the Washington, D.C. Enterprise Zone.[A].
Program: Round II EZ/EC;
Title: Omnibus Consolidated and Emergency Supplemental Appropriations
Act of 1999;
Summary:
* Authorized up to 20 additional rural ECs.
Program: Round III EZ and RC;
Title: Community Renewal Tax Relief Act of 2000;
Summary:
* Authorized two rural and seven urban Round III EZ designations;
* Established the RC program and its package of tax benefits;
* Authorized designation of 40 RCs, with 12 designations reserved for
rural areas. Designation valid until December 31, 2009;
* Made some additional tax benefits available to EZs;
* Extended Round I and II EZ designations through December 31, 2009.
[B].
Source: GAO summary of P.L. 103-66, P.L. 105-34, P.L. 105-277, and P.L.
106-554.
[A] The D.C. Enterprise Zone received a set of tax benefits that are
similar to those of EZ/ECs, but are unique to this designation.
[B] The designation for all Round I ECs will expire as previously
scheduled on December 31, 2004.
[End of table]
The Omnibus Budget Reconciliation Act of 1993 authorized the number of
EZ/EC designations to be awarded in the first round of the program, as
well as the benefits that the designated communities would receive. The
legislation authorized the special use of $1 billion in Social Services
Block Grant funds for the EZ/EC program.[Footnote 2] It also
established three tax benefits for businesses in the designated
communities: (1) a tax credit for wages paid to employees who both live
and work in an EZ, (2) an increased expensing deduction for depreciable
property, and (3) tax-exempt bonds.[Footnote 3]
At the same time that the Department of Housing and Urban Development
(HUD) and the U.S. Department of Agriculture (USDA) announced the Round
I designations, HUD created two additional designations--Supplemental
Empowerment Zones and Enhanced Enterprise Communities. Unlike EZs or
ECs, these designations were not legislatively mandated. Rather, they
were awarded to communities that had been nominated for but did not
receive EZ designations.[Footnote 4] HUD designated two communities as
Supplemental Empowerment Zones and four communities as Enhanced
Enterprise Communities. HUD provided these communities with certain
grants and loan guarantees, which can be used for activities eligible
under the Community Development Block Grant program.
The second round of EZ/EC designations and the benefits those designees
would receive were authorized by two acts of legislation--the Taxpayer
Relief Act of 1997 and the Omnibus Consolidated and Emergency
Supplemental Appropriations Act of 1999. However, neither act
authorized block grant funding for Round II EZs and ECs. Instead, Round
II EZs and ECs received annual appropriations through HUD and USDA
appropriations bills each year from 1999 to 2004.
The Community Renewal Tax Relief Act of 2000 enhanced the tax benefits
available to businesses in newly designated EZs and made these new tax
benefits available to EZs that had been designated in previous rounds,
but not to ECs. The legislation also did not make any appropriations or
grant funds available to Round III EZs or to RCs. However, in January
2004, the Consolidated Appropriations Act of 2004 appropriated a total
of $994,100 to Round III rural EZs. This legislation did not make any
funding available to Round III urban EZs or RCs.
Four federal agencies are responsible for administering the programs:
* HUD oversees the EZ/EC program in urban areas, administers the grants
to Round II urban EZs, and oversees the RC program in both urban and
rural areas.
* USDA oversees the EZ/EC program in rural areas and administers the
grants to Round II rural EZ/ECs and Round III EZs.
* The Department of Health and Human Services (HHS) administers the
Social Services Block Grant funds to communities designated in Round I
of the EZ/EC program.[Footnote 5]
* The Internal Revenue Service (IRS) is responsible for administering
the tax benefits available under the EZ/EC and RC programs.
Results in Brief:
Although the EZ/EC and RC programs have similar goals and objectives,
we found that the features differed among the EZ/EC rounds and between
the EZ/EC and RC programs. First, administrative features varied under
the different EZ/EC rounds and between the EZ/EC and RC programs. For
example, an interagency Community Empowerment Board consisting of high
ranking federal officials existed to facilitate interagency
coordination in Rounds I and II of the EZ/EC program, but not in Round
III, and a smaller Advisory Council appointed by the HUD Secretary and
consisting of individuals from nonprofit and for-profit organizations
advises HUD on the RC program. Second, eligibility requirements often
differed among rounds and between the programs. For example, the
poverty level required for eligibility decreased between EZ/EC rounds
and between the EZ/EC program and the RC program. Third, the
participants for the two programs were selected differently. For
instance, EZ/EC nominees were judged on the effectiveness of their
strategic plans and assurances that these plans would be carried out,
while RC nominees were selected on the basis of the communities'
poverty, unemployment, and income statistics. Finally, the benefits
available to designees varied both by round and by program. EZs and ECs
in the first two rounds of designation received different combinations
of benefits, including grant funding and tax benefits, while Round III
EZs and RCs received mainly tax benefits.
To implement the EZ/EC and RC programs at the national level, the
federal agencies involved have carried out selection procedures;
designated participating communities; provided program benefits,
outreach, and technical assistance; and monitored community
performance. Since 1994, over the course of three rounds HUD has
designated 31 urban EZs and 65 urban ECs, and USDA has designated 10
rural EZs and 50 rural ECs.[Footnote 6] In 2002, HUD also designated 40
RCs--28 urban and 12 rural. In addition, several federal agencies have
provided grant funding, tax benefits, and other program benefits. Data
from HHS indicate that the 104 Round I EZ/EC designees have drawn down
about 70 percent of their $1 billion in Social Services Block Grant
funds, while HUD and USDA data show that the 40 Round II designees have
drawn down about 40 percent of their $434 million in grant funds. IRS
data showed that taxpayers claimed an estimated $251 million in EZ
Employment Credits between 1995 and 2001. Over that same period of
time, state and local governments issued about $315 million in tax-
exempt facility bonds for the benefit of businesses in EZs and Round I
ECs. However, IRS does not have data on the use of other benefits, such
as the increased expensing deduction, the Commercial Revitalization
Deduction, or the Nonrecognition of Gain on the Sale of EZ Assets. In
addition, IRS does not collect data that would enable it to link the
use of data for the employment credit to specific designated
communities. Senior IRS officials indicated that they do not collect
this information because, among other things, these tax benefits are
not considered high risk since the amount claimed is small, compared
with revenues collected from other tax provisions. The lack of data on
the use of the tax benefits available to businesses in designated
communities limits the ability of (1) HUD and USDA to administer the
programs; (2) designated communities to attract additional resources;
and (3) HUD, USDA, and others to audit or evaluate the
programs.[Footnote 7] We found that federal agencies had provided
outreach and technical assistance to applicants and designees through
training, conferences, written guidance, and Web sites. HUD and USDA
have also established oversight procedures for participating
communities that include online reporting systems to collect
performance data. But recent GAO, HUD Inspector General (IG), and USDA
IG reports have raised concerns about EZ/EC program oversight and the
reliability of program performance data.
The few evaluations that systematically collected and analyzed data on
EZ/EC program effectiveness used a number of research methods and
reported results that varied, depending upon the aspect of the program
studied.[Footnote 8] None of the evaluations we reviewed assessed the
effect of the program on poverty, although one assessed its effect on
resident employment and three assessed its effect on aspects of
economic growth in the designated communities. Those evaluations that
have been conducted used a variety of research methods--including
statistical analyses, surveys, and document reviews--to carry out their
research. In some cases, the data available to researchers affected the
methods they chose. For example, the most comprehensive of these
evaluations--the HUD Interim Assessment--included a survey of
businesses as a way to partly address a lack of data on the use of tax
benefits.[Footnote 9] The HUD Interim Assessment found, among other
things, that employment of Round I EZ residents had increased from 1995
to 2000, that larger businesses were more likely to use tax benefits
than smaller businesses, and that resident participation in EZ or EC
governance had been uneven. As with all evaluations of community
development programs, these evaluations were also subject to some
limitations. In particular, the researchers faced challenges
demonstrating what would have happened in the communities in the
absence of the program.
This report contains a recommendation to facilitate the administration,
audit, and evaluation of the EZ/EC and RC programs. We recommend that
HUD, USDA, and IRS collaborate to (1) identify the data needed to
assess the use of the tax benefits and the various means of collecting
such data; (2) determine the cost-effectiveness of collecting these
data, including the potential impact on taxpayers and other program
participants; (3) document the findings of their analysis; and, if
necessary, (4) seek the authority to collect the data, if a cost-
effective means is available.
EZ/EC and RC Programs Share Similar Goals and Objectives, but Features
Vary:
Although the EZ/EC and RC programs have similar goals and objectives,
several features of the programs vary within the EZ/EC program by round
and between the EZ/EC and RC programs. The EZ/EC and RC programs share
the goal of improving conditions in distressed communities by reducing
unemployment and fostering investment in designated areas. However,
certain administrative mechanisms, eligibility requirements, selection
criteria, and benefits vary among EZ/EC rounds and between the EZ/EC
and RC programs.
EZ/EC and RC Programs Have Similar Goals and Objectives:
Although the legislation that created the EZ/EC and RC programs does
not explicitly state the goals for these programs, HUD's and USDA's
performance plans suggest that the goals of the programs are similar.
According to HUD's Annual Performance Plan for Fiscal Year 2004, the
EZ/EC and RC programs are contained within its strategic goal to
strengthen communities. Similarly, in its Fiscal Year 2004 Annual
Performance Plan and Revised Plan for Fiscal Year 2003, USDA includes
the EZ/EC program under the strategic goal to "support increased
economic opportunities and improved quality of life in rural America.":
HUD's and USDA's implementing regulations for the EZ/EC program include
a statement of their "objective and purpose," each of which generally
states that the EZ/EC program is intended to reduce unemployment and
promote the revitalization of economically distressed areas. HUD's
regulations implementing the RC program do not have an objective and
purpose statement; however, HUD's guidance states that the RC program
is intended "to foster investment in the designated areas, which are
some of the most severely distressed and development-resistant areas in
the Nation."[Footnote 10] Further, HUD program officials have stated
that they regard the RC program as pursuing the same objective and
purpose as the EZ/EC program, but relying on different methods.
EZ/EC Program Rounds I and II and the RC Program Received
Administrative Assistance:
Certain features designed to help in the administration of the EZ/EC
and RC programs varied by round in the EZ/EC program and between the
EZ/EC and RC programs. To facilitate federal interagency coordination
in the EZ/EC program, a 26-member Community Empowerment Board was
established in 1993, with the U.S. Vice President as its chair and
cabinet secretaries and other high-ranking federal officials as
members. The board's function was to consult in the designation of
Round I and II EZs and ECs and coordinate the various federal agency
resources that EZs and ECs would use to implement their strategic
plans. For example, the Community Empowerment Board encouraged other
agencies to provide preference points to EZs and ECs in selection
competitions for other federal programs. The Community Empowerment
Board was disbanded prior to Round III of the EZ program.
In 2000, the legislation creating the RC program established a seven-
member Advisory Council on Community Renewal to advise the HUD
Secretary on the selection of designees and the operation of the RC
program. Unlike the Community Empowerment Board, the Advisory Council
does not have federal interagency membership. Instead, the members of
the Advisory Council include individuals from nonprofit and for-profit
organizations who are appointed by the HUD Secretary. The legislation
that created it required the Advisory Council to hold hearings "as
appropriate," obtain data from federal agencies, and submit a report
containing a detailed statement of the council's findings and
conclusions and any recommendations to the HUD Secretary by September
30, 2003. HUD officials expect an interim report from the Advisory
Council to be released sometime in February 2004 and the final report
in October 2004.
The EZ/EC and RC Programs Have Had Different Eligibility Requirements:
Communities nominated for EZ/EC or RC designations have been required
to meet certain eligibility requirements based largely on the
socioeconomic characteristics of the residents living in the nominated
areas. Specifically, nominated census tracts have been required to meet
statutory or regulatory requirements for (1) poverty in each census
tract, (2) overall unemployment, (3) total population, (4) total area
in square miles (in the case of the EZ/EC program), and (5) general
distress.[Footnote 11] In most cases, these requirements were based on
1990 census data. The levels required for eligibility differed by
round, by program, and between urban and rural nominees. For example,
the statutory requirements for poverty differed between Round I and
subsequent rounds of the EZ/EC program, and between the EZ/EC program
and the RC program. In the absence of statutory guidelines, HUD and
USDA regulations defined other eligibility requirements differently
(see table 2). For example, the requirements for unemployment differed
between urban and rural nominees and between the EZ/EC program and the
RC program.[Footnote 12] The population requirements also differed
between urban and rural nominees and by program. Finally, communities
nominated for the EZ/EC program were required to meet area
requirements, while RC nominees were not. [Footnote 13]
Table 2: Some Eligibility Requirements Differ among Rounds of the EZ/EC
Program and between the EZ/EC and RC Programs:
Minimum required poverty level in nominated census tracts[A];
Urban EZ/ EC: Round I: 35% in 50% of tracts and 25% in 90% of tracts
and 20% in all tracts[B];
Urban EZ/EC: Rounds II and III: 25% in 90% of tracts and 20% in all
tracts[B];
Rural EZ/EC: Round I: 35% in 50% of tracts and 25% in 90% of tracts and
20% in all tracts[B];
Rural EZ/ EC: Rounds II and III: 25% in 90% of tracts and 20% in all
tracts[B];
RC: 20% in all tracts[C].
Minimum required unemployment rate;
Urban EZ/EC: Round I: 6.3%[A,D];
Urban EZ/EC: Rounds II and III: 6.3%[A,D];
Rural EZ/EC: Round I: No minimum specified; could be demonstrated by
several different indicators;
RC: 9.45%[A,E].
Required population[A];
Urban EZ/EC: Round I: Maximum: 200,000 or the greater of 50,000 or 10%
of the population of the most populous city within the nominated area;
Minimum: None;
Rural EZ/EC: Round I: Maximum: 30,000; Minimum: None;
Rural EZ/EC: Rounds II and III: Maximum: 30,000; Minimum: None;
RC: Maximum: 200,000 Minimum: 4,000 if any portion is within a metro
area, 1,000 otherwise[F].
Maximum required area[A];
Urban EZ/EC: Round I: 20 square miles[G];
Urban EZ/EC: Rounds II and III: 20 square miles, with up to 3
developable sites[G,H];
Rural EZ/EC: Round I: 1,000 square miles[G];
Rural EZ/EC: Rounds II and III: 1,000 square miles, with up to 3
developable sites[G,H];
RC: None[I].
Source: GAO summary of P.L. 103-66, P.L. 105-34, P.L. 106-554, 24
C.F.R. 597, 24 C.F.R. 598, 24 C.F.R. 599, and 7 C.F.R. 25.
[A] Based on 1990 census data.
[B] In all rounds of the EZ/EC program, communities were not able to
include census tracts containing central business districts in the
nominated area unless those areas have a poverty level of 35 percent or
greater. The authorizing legislation also established special
requirements for nominated census tracts with low or no population.
[C] In urban areas, at least 70 percent of households must have incomes
below 80 percent of local median.
[D] The 1990 national average unemployment rate was 6.3 percent.
Evidence of especially severe economic conditions could also be used to
meet the unemployment test.
[E] This number is 1.5 times the 1990 national unemployment rate.
[F] No population restriction exists if nominated area is entirely
within an Indian reservation.
[G] Nominated communities may include up to three noncontiguous
parcels.
[H] A developable site is a parcel of land in a nominated area that may
be developed for commercial or industrial purposes. The developable
site can be no more than 2,000 acres and can be noncontiguous to other
nominated areas.
[I] Although the legislation did not impose any maximum area
requirements for the RC program, it did stipulate that the area
boundary be continuous.
[End of table]
Nominated communities were also required to show conditions of general
distress. Because the legislation did not define the term "general
distress," HUD and USDA each provided communities with lists of
potential indicators containing criteria that could be used to meet
this requirement. HUD provided Round I urban EZs and ECs with a list of
six indicators and communities in Rounds II and III of the EZ/EC
program and the RC program with a list of 17 indicators.[Footnote 14]
USDA provided Round I, II, and III rural EZs and ECs with a list of 14
indicators.[Footnote 15] For example, USDA's Round I list included
indicators not included in HUD's Round I list, such as a below-average
or declining per capita income, earnings per worker, per capita
property tax base, and average years of school completed. USDA, in
turn, did not include homelessness as an indicator of general distress,
while HUD included homelessness.
As a part of the EZ/EC eligibility requirements, nominated communities
were also required to submit a strategic plan. The strategic plan had
to follow the four key principles of the EZ/EC program, which were
established by HUD and USDA in their regulations:
* Economic opportunity--including job creation within the community;
supporting entrepreneurship; small business expansion; and job
training, job readiness, and job support services.
* Sustainable community development--advancing the creation of livable
and vibrant communities through comprehensive approaches that
coordinate economic, physical, environmental, community, and human
development.
* Community-based partnerships--involving the participation of all
segments of the community, including the political leadership,
community groups, the private and nonprofit sectors, and individual
citizens.
* Strategic vision for change--coordinating a response to community
needs in a comprehensive fashion and setting goals and performance
measures.
HUD's and USDA's regulations implemented legislative requirements
regarding community participation in the development of their strategic
plans. Nominees were to obtain community input to identify their
communities' needs and to develop plans for addressing them according
to the four principles. Nominees were also required to describe the
role citizens would play in the implementation of the plans.
To be eligible for the RC program, nominees were required to submit a
"course of action," in which they committed to carry out four of six
specific legislatively mandated activities:
* A reduction of tax rates or fees applying within the RC;
* An increase in the level of efficiency of local services within the
RC;
* Certain crime reduction strategies;
* Actions to reduce, remove, simplify, or streamline governmental
requirements applying within the RC;
* Involvement in economic development activities by private entities,
organizations, neighborhood organizations, and community groups; and:
* The gift or sale at below fair-market value of surplus real property
in the RC held by state or local governments to neighborhood
organizations, community development corporations, or private
companies.
In addition, communities nominated for RC designation had to certify
that they would meet four of five legislatively specified economic
growth promotion requirements, such as repealing or reducing some
occupational licensing requirements, zoning restrictions, permit
requirements, or franchise and other business restrictions. The
designees were also responsible for submitting plans within 6 months of
designation for promoting the use of the tax benefits and for carrying
out other state and local commitments. RCs were required to certify
that they had solicited community input but not that community
representatives had been involved in developing the course of action.
EZ/EC and RC Selection Criteria Differ:
The selection criteria contained in the authorizing legislation for the
EZ/EC and RC programs differed substantially. For the EZ/EC program,
HUD and USDA were required to rank nominees based on the effectiveness
of their strategic plans, the nominees' assurances that the plans would
be implemented, and additional criteria specified by the respective
Secretary.[Footnote 16] In Round I of the EZ/EC program, the
legislation also reserved designation for nominees with certain
characteristics.[Footnote 17] In contrast, the RC selection process did
not require a review of the effectiveness of the planning documents,
such as the course of action, that communities submitted to meet
eligibility requirements. Instead, the legislation authorizing the
program required HUD to select the highest average ranking nominees
based on poverty, unemployment, and, in urban areas, income statistics.
HUD was also required to consider the extent of crime in the area and
whether the nominated area contained any tracts that were identified in
one of our reports as being distressed.[Footnote 18] For the first 20
designations, HUD was to give preference to existing EZs and ECs that
had been nominated and met the eligibility requirements for designation
as an RC; the remaining designations went to the next-highest scorers.
EZ, EC, and RC Benefits Differed by Round and by Program:
As discussed earlier, the authorizing legislation provided EZ/EC and RC
program participants with grants, tax benefits, or both. Over the
course of the three rounds of the EZ/EC program, however, the amount of
the grants available to EZs declined, and the number of tax benefits
increased. In Rounds I and II, ECs received much smaller grant benefits
than EZs. Businesses in Round I ECs were eligible for one tax benefit;
however, businesses in Round II ECs were not eligible for any tax
benefits. RCs did not receive grants, but businesses operating in RCs
were eligible to receive tax benefits. In addition, HUD and USDA
provided designated communities with other benefits. For example, HUD
and USDA provided Round II EZ/ECs with grant funds from their annual
appropriations. See appendix III for a table summarizing the benefits
provided to the designated communities.
Grants Were Available to Round I and II EZs/ECs and to Some Rural Round
III EZs:
Congress appropriated a total of $1 billion in Social Services Block
Grants for the benefit of Round I EZs and ECs (see table 3). These
funds were to be used to (1) prevent, reduce, or eliminate dependency;
(2) achieve or maintain self-sufficiency; and (3) prevent neglect,
abuse, or exploitation of children and adults. In addition, the
legislation required that the funds be used to benefit EZ/EC residents
and in accordance with designees' strategic plans. Like other Social
Services Block Grant funds, those allotted for the EZ/EC program were
granted to the states, which were given fiscal responsibility for them.
The legislation authorizing the EZ/EC program requires that the states
obligate these grants for specific EZ or EC community-based
organizations in accordance with state laws and procedures and within 2
years of the date that HHS awarded the funds. These block grant funds
remain available to finance qualified projects until December 21, 2004,
after which time the grants are subject to state close-out procedures,
and all amounts reported as unspent must be returned to the federal
government.[Footnote 19]
Table 3: Social Services Block Grant Funds Authorized for Round I EZs
and ECs:
Designation: Round I urban EZs;
Total amount of block grants authorized: $600 million;
Amount per designee: $100 million.
Designation: Round I rural EZs;
Total amount of block grants authorized: $120 million;
Amount per designee: $40 million.
Designation: Round I ECs (urban and rural);
Total amount of block grants authorized: $280 million;
Amount per designee: $2.95 million.
Total;
Total amount of block grants authorized: $1 billion.
Source: P.L. 103-66 and GAO analysis.
[End of table]
As stated previously, HUD created the Supplemental Empowerment Zone and
Enhanced Enterprise Community designations at the same time as the
Round I EZ/EC designations. HUD awarded $300 million in Economic
Development Initiative grants to the two Supplemental Empowerment Zones
and four Enhanced Enterprise Communities (see table 4).[Footnote 20]
These grants were designed to enhance the feasibility of certain
economic development or revitalization projects by paying for certain
project costs or providing additional security for loans that finance
such projects. The government entities were required to use these
grants in accordance with the community's strategic plan and Community
Development Block Grant regulations.
Table 4: Economic Development Initiative Grants for Supplemental
Empowerment Zones and Enhanced Enterprise Communities:
Supplemental Empowerment Zones;
Local government entity: Los Angeles, Calif. (city);
Amount in allocated Economic Development Initiative grants: $100
million;
Supplemental Empowerment Zones;
Local government entity: Los Angeles, Calif. (county);
Amount in allocated Economic Development Initiative grants: $25
million.
Supplemental Empowerment Zones;
Local government entity: Cleveland, Oh;
Amount in allocated Economic Development Initiative grants: $87
million.
Enhanced Enterprise Communities;
Local government entity: Boston, Mass;
Amount in allocated Economic Development Initiative grants: $22
million.
Enhanced Enterprise Communities;
Local government entity: Oakland, Calif;
Amount in allocated Economic Development Initiative grants: $22
million.
Enhanced Enterprise Communities;
Local government entity: Houston, Tex;
Amount in allocated Economic Development Initiative grants: $22
million.
Enhanced Enterprise Communities;
Local government entity: Kansas City, Mo;
Amount in allocated Economic Development Initiative grants: $14.2
million.
Enhanced Enterprise Communities;
Local government entity: Kansas City, Kans;
Amount in allocated Economic Development Initiative grants: $7.8
million.
Total;
Amount in allocated Economic Development Initiative grants: $300
million.
Source: HUD.
[End of table]
Initially, the administration planned to provide the Round II EZ
designees with the same level of funding as Round I designees. Instead,
Round II EZ/EC designees received funding through annual appropriations
for HUD and USDA in fiscal years 1999 through 2003 (see tables 5 and
6).[Footnote 21] According to HUD's annual appropriations legislation,
program grants for Round II urban designees are to be used in
conjunction with economic development activities consistent with
designees' strategic plans.[Footnote 22] The USDA appropriations
language did not impose these requirements on Round II rural designees;
however, in March 2002, USDA issued regulations limiting the allowable
uses of Round II grants to those for Round I EZ/EC Social Services
Block Grants. Unlike Round I funds, which pass through a state agency,
Round II EZs and ECs access their grants directly from HUD or USDA. In
most cases, these funds are available to communities until
expended.[Footnote 23]
Table 5: HUD Appropriations for Round II Urban Designees, Fiscal Years
1999-2003 (Dollars in thousands):
Fiscal year: 1999;
Total appropriations to Round II urban EZs: $45,000;
Appropriations per EZ: $3,000.
Fiscal year: 2000;
Total appropriations to Round II urban EZs: $55,000;
Appropriations per EZ: $3,667.
Fiscal year: 2001[A,B];
Total appropriations to Round II urban EZs: $184,593;
Appropriations per EZ: $12,306.
Fiscal year: 2002;
Total appropriations to Round II urban EZs: $45,000;
Appropriations per EZ: $3,000.
Fiscal year: 2003[B];
Total appropriations to Round II urban EZs: $29,805;
Appropriations per EZ: $1,987.
Total;
Total appropriations to Round II urban EZs: $359,398;
Appropriations per EZ: $23,960.
Source: P.L. 105-277, P.L. 106-74, P.L. 106-377, P.L. 106-554, P.L.107-
73, P.L. 108-7, and GAO analysis.
[A] In fiscal year 2001, funds were appropriated in two separate pieces
of legislation.
[B] Appropriations in these years were affected by rescissions.
[End of table]
Table 6: USDA Allocation of Appropriations for Round II Rural
Designees, Fiscal Years 1999-2003 (Dollars in thousands):
Fiscal year: 1999;
Total allocations to Round II rural EZs[A]: $10,000;
Allocation per EZ: $2,000;
Total allocations to Round II rural ECs[A]: $5,000;
Allocation per EC: $250.
Fiscal year: 2000;
Total allocations to Round II rural EZs[A]: $10,000;
Allocation per EZ: $2,000;
Total allocations to Round II rural ECs[A]: $5,000;
Allocation per EC: $250.
Fiscal year: 2001[B];
Total allocations to Round II rural EZs[A]: $9,978;
Allocation per EZ: $1,996;
Total allocations to Round II rural ECs[A]: $4,989;
Allocation per EC: $249.
Fiscal year: 2002;
Total allocations to Round II rural EZs[A]: $9,978;
Allocation per EZ: $1,996;
Total allocations to Round II rural ECs[A]: $4,989;
Allocation per EC: $249.
Fiscal year: 2003[B];
Total allocations to Round II rural EZs[A]: $9,913;
Allocation per EZ: $1,983;
Total allocations to Round II rural ECs[A]: $4,957;
Allocation per EC: $248.
Total;
Total allocations to Round II rural EZs[A]: $49,869;
Allocation per EZ: $9,975;
Total allocations to Round II rural ECs[A]: $24,935;
Allocation per EC: $1,247.
Source: P.L. 105-277, P.L. 106-74, P.L. 106-377, P.L. 106-554, P.L.
107-73, P.L. 108-7, and GAO analysis.
[A] Only the fiscal year 1999 bill distinguished between appropriations
to the rural EZs and rural ECs. For other years, Congress appropriated
funds for the rural EZ/EC program, and USDA allocated the
appropriations between the EZs and ECs.
[B] Appropriations in these years were affected by rescissions.
[End of table]
As of September 30, 2003, no direct funding was available for Round III
EZs or RCs. However, the Consolidated Appropriations Act of 2004
appropriated $994,100 for Round III rural EZs.[Footnote 24] It did not
appropriate funding for Round III urban EZs or any RCs.
Tax Benefits Have Increased Since the EZ/EC Program Began:
Businesses operating in or employing residents of EZs and RCs are
eligible for a number of federal tax benefits designed to encourage
business investment (see table 7). Businesses operating in ECs are
generally ineligible for the tax benefits, although state and local
governments can issue tax-exempt bonds for businesses in Round I ECs.
Since the initial legislation authorizing the EZ/EC program, the number
of federal tax benefits has grown.[Footnote 25] For example, businesses
operating in Round I EZs were originally eligible for three tax
benefits: (1) a credit for wages paid to employees who both live and
work in an EZ, (2) an increased expensing deduction for depreciable
property, and (3) tax-exempt bonds.[Footnote 26] By 2002, businesses
operating in EZs were eligible for several additional tax benefits,
including capital gains exclusions, and more generous tax-exempt bond
and expensing provisions. In addition to some of the same tax benefits
available in EZs, businesses operating in RCs were also eligible for a
deduction on commercial property and a different type of capital gains
exclusion. These benefits are generally available until 2009, when the
EZ and RC designations expire.
Table 7: Federal Tax Benefits Specifically Available to Businesses
Operating in EZs, ECs, and RCs:
Tax benefit: EZ Employment Credit;
Effective year: 1994[A];
Expiration year: 2009;
Applicable zones: EZs;
Provisions: Businesses can claim a 20-percent credit on the first
$15,000 paid in wages to EZ residents who perform substantially all of
their work in the EZ.
Tax benefit: Increased Section 179 Deduction;
Effective year: 1994;
Expiration year: 2009;
Applicable zones: EZs and RCs;
Provisions: Qualified businesses can deduct $35,000 more than the
maximum allowable deduction under section 179 of the Internal Revenue
Code for certain qualifying property in the year the property was
placed in service.[B].
Tax benefit: Enterprise Zone Facility Bonds;
Effective year: 1994;
Expiration year: 2009[C];
Applicable zones: EZs and Round I ECs;
Provisions: State and local governments can issue tax-exempt bonds to
provide loans to qualified businesses to finance certain property. A
business cannot receive more than $3 million in bond proceeds for
activities in any EZ or Round I EC or more than $20 million for
activities in all EZs and Round I ECs nationwide. These bonds are also
subject to state volume caps, which limit the amount of tax-exempt debt
that state and local government entities can issue.
Tax benefit: EZ Facility Bonds;
Effective year: 1998[D];
Expiration year: 2009;
Applicable zones: EZs[E];
Provisions: State and local governments can issue tax-exempt bonds to
provide loans to qualified businesses to finance certain property.[F]
State and local government entities can issue up to $60 million for
each rural EZ, $130 million for each urban EZ with a population of less
than 100,000, and $230 million for each urban EZ with a population
greater than or equal to 100,000. These bonds are not subject to state
volume caps.
Tax benefit: Nonrecognition of Gains on the Sale of EZ Assets;
Effective year: 2000[G];
Expiration year: 2009;
Applicable zones: EZs;
Provisions: Taxpayers that incur capital gains on the sale of qualified
assets may elect to postpone those gains from tax liability if they
purchase a replacement asset within 60 days.
Tax benefit: Partial Exclusion of Gain on the Sale of EZ Stock;
Effective year: 2000[H];
Expiration year: 2009;
Applicable zones: EZs;
Provisions: Taxpayers that hold stock for more than 5 years in
corporations with assets under $50 million incur a tax liability on
only 40 percent of their capital gains, provided the company offering
the stock is a qualified zone business.
Tax benefit: RC Employment Credit;
Effective year: 2002;
Expiration year: 2009;
Applicable zones: RCs;
Provisions: Businesses can claim a 15-percent credit on the first
$10,000 paid in wages to RC residents who perform substantially all of
their work in the RC.
Tax benefit: Commercial Revitalization Deduction;
Effective year: 2002;
Expiration year: 2009;
Applicable zones: RCs;
Provisions: Businesses that receive an allocation from an agency
authorized by the state for costs associated with new construction or
renovation of nonresidential commercial property can either deduct half
of the qualifying expense for the year in which a building is placed in
service or amortize all of the expenses over a 10-year period.
Tax benefit: Zero Percent Capital Gains Rate for RC Assets;
Effective year: 2002[I];
Expiration year: 2009;
Applicable zones: RCs;
Provisions: Investments in qualified RC businesses purchased after 2001
and before 2010 and held for more than 5 years are not subject to tax
liability on capital gains.
Source: GAO summary of HUD and IRS publications; P.L. 103-66, P.L. 105-
34, P.L. 105-277, and P.L. 106-554.
[A] Businesses in Round II EZs did not become eligible until 2002.
[B] The term "placed in service" indicates the year in which the
business began using the property for which it is claiming the
deduction. Between 1994 and 2001, businesses could deduct $20,000 more
than the maximum allowable section 179 deduction.
[C] State and local governments can issue these bonds for the benefit
of EZs through 2009. However, these bonds can be issued for the benefit
of Round I ECs only through 2004.
[D] State and local governments could issue these bonds for qualified
EZs beginning in December 1998, the month of Round II designation.
However, no EZ Facility Bonds were issued until 1999.
[E] Businesses in Round I EZs did not become eligible until 2002.
[F] Purchasers of tax-exempt bonds incur no federal tax liability on
interest income.
[G] Taxpayers have to purchase the asset after December 21, 2000, and
before 2010 and hold it for more than a year to be eligible for this
benefit.
[H] Taxpayers have to make the investment after December 21, 2000, and
before 2010 and hold it for more than 5 years to be eligible for this
benefit.
[I] Taxpayers have to make the investment after 2001 and before 2010
and hold it for more than 5 years to be eligible for this benefit.
[End of table]
Taxpayers Can Claim Other Benefits Not Specific to Federal
Designations:
Taxpayers operating businesses in or employing residents of EZs, ECs,
or RCs can also claim other tax benefits not specific to the federal
designations. Some federal tax benefits are aimed at businesses that
operate or invest in a distressed community or that employ or provide
housing for low-income persons. For example, certain banks, insurance
companies, and corporations that lend money may purchase Qualified Zone
Academy Bonds, which raise funds for public schools located in low-
income areas, such as those located in EZs or ECs. Purchasers of these
bonds receive a tax credit in lieu of interest payments. (See app. IV
for examples of federal tax benefits aimed at distressed communities
and low-income individuals.) In addition to the federal tax benefits,
businesses operating in federally designated EZs, ECs, and RCs may also
be eligible for tax benefits from the state when a federal designation
overlaps with a state-designated Enterprise Zone. While the specific
tax benefits provided to businesses operating in state Enterprise Zones
vary from state to state, they can include credits on state taxes
against withholdings, property tax reductions, and sales tax
exemptions.
Other Benefits Were Also Available to Certain Designees:
In addition to grant monies and tax benefits, certain designees have
also been eligible for other benefits. In Round I of the EZ/EC program,
HUD and USDA guidance invited nominees to request, as an addendum to
their applications, waivers from federal programmatic, statutory, or
regulatory requirements to facilitate their ability to conduct
revitalization efforts. Also, communities designated by HUD as
Supplemental Empowerment Zones or Enhanced Enterprise Communities were
provided with a total of $653 million in Section 108 Loan Guarantees to
provide security for loans that finance economic development and
revitalization projects.[Footnote 27] Finally, HUD and USDA expect EZs,
ECs, and RCs to use their designations to attract additional
investment. In some cases, EZ, EC, and RC designees were provided with
a competitive priority in other federal programs to help them meet this
expectation. Appendix V provides details on these benefits.
The EZ/EC and RC Programs Are Well Under Way, but Data on the Use of
Some Benefits Are Limited:
To date, the federal agencies have selected three rounds of EZs, two
rounds of ECs, and one round of RCs; provided program benefits,
outreach, and technical assistance; and established oversight
procedures. Available data indicate that community organizations and
businesses are using the program benefits; however, certain limitations
with tax benefit data will, among other things, make it difficult to
audit or evaluate the programs and limit the ability of designated
communities to report on their activities.
HUD and USDA Have Selected Communities for the EZ/EC and RC Programs:
HUD and USDA have implemented three rounds of selection for the EZ/EC
program, and HUD has implemented one round of selection for the RC
program. Following the authorizing legislation for each round, HUD and
USDA released interim rules for designation and formally invited
community nominations through a notice inviting applications or notice
of funding availability. Figure 1 shows a timeline of the selection
process for each of the programs.
Figure 1: Timeline of Events in the Selection of EZ/EC and RC Program
Participants:
[See PDF for image]
[End of figure]
The implementation of the selection process varied by round of the EZ/
EC program and between the EZ/EC and RC programs. In Round I of the EZ/
EC program, HUD and USDA used several interagency review teams to rank
nominees based on their strategic plans' effectiveness and alignment
with the program's four principles. As a part of their review of
nominees for Rounds II and III of the EZ/EC program, the interagency
review teams assigned point values based on the quality of various
characteristics of the nominees' strategic plans. In Rounds I and II,
nominees that had applied for an EZ designation but had not been chosen
were added to the list of eligible nominations for EC
designations.[Footnote 28] For the RC program, HUD used a statistical
formula that was based on the eligibility criteria to identify the
eligible nominees with the highest scores. Figure 2 shows the
geographic locations of the designated communities by round.
Figure 2: Geographic Distribution of Designees By Round:
[See PDF for image]
[End of figure]
Communities that had received designations in prior rounds of the EZ/EC
program were permitted to apply for subsequent rounds. Within the EZ/EC
program, communities that had received EC designations in Rounds I and
II were permitted to apply for EZ status in subsequent rounds.[Footnote
29] If an EC was chosen to receive an EZ designation, it maintained
both designations, along with the associated benefits. The five Round I
ECs that also received Enhanced Enterprise Community or Supplemental
Empowerment Zone designations maintained their EC status as well. In
addition, ECs and EZs were encouraged to apply for RC designations.
However, in contrast to the EZ program, the authorizing legislation for
the RC program required that the communities forfeit prior designations
when they received RC designation.[Footnote 30] Table 8 provides more
information on the number of nominations, communities selected in each
round, and the number of designations retained as of September 30,
2003. Figure 3 shows the geographic locations of the designated
communities by designation status as of September 30, 2003.
Table 8: Number of EZ/EC and RC Nominations and Designations:
Urban; Round I EZ;
Number of communities nominated[A]: 74[B];
Number of nominations selected for designation: 8[C];
Number of designations as of September 30, 2003: 7[C,D].
Urban; Round I EC;
Number of communities nominated[A]: 219;
Number of nominations selected for designation: 65;
Number of designations as of September 30, 2003: 49[D].
Urban; Round I Supplemental Empowerment Zones;
Number of communities nominated[A]: Not applicable;
Number of nominations selected for designation: 2;
Number of designations as of September 30, 2003: 2.
Urban; Round I Enhanced Enterprise Communities;
Number of communities nominated[A]: Not applicable;
Number of nominations selected for designation: 4;
Number of designations as of September 30, 2003: 4.
Urban; Round II EZ;
Number of communities nominated[A]: 119;
Number of nominations selected for designation: 15;
Number of designations as of September 30, 2003: 15.
Urban; Enterprise Zone;
Number of communities nominated[A]: Not applicable[E];
Number of nominations selected for designation: 1;
Number of designations as of September 30, 2003: 1.
Urban; Round III EZ;
Number of communities nominated[A]: 36;
Number of nominations selected for designation: 8[F];
Number of designations as of September 30, 2003: 8.
Urban; RC;
Number of communities nominated[A]: 62;
Number of nominations selected for designation: 28;
Number of designations as of September 30, 2003: 28.
Rural; Round I EZ;
Number of communities nominated[A]: 88[B];
Number of nominations selected for designation: 3;
Number of designations as of September 30, 2003: 3.
Rural; Round I EC;
Number of communities nominated[A]: 139;
Number of nominations selected for designation: 30;
Number of designations as of September 30, 2003: 28[D].
Rural; Round II EZ;
Number of communities nominated[A]: 160;
Number of nominations selected for designation: 5;
Number of designations as of September 30, 2003: 5.
Rural; Round II EC;
Number of communities nominated[A]: Not applicable[G];
Number of nominations selected for designation: 20;
Number of designations as of September 30, 2003: 20.
Rural; Round III EZ;
Number of nominations selected for designation: 2;
Number of designations as of September 30, 2003: 2.
Rural; RC;
Number of communities nominated[A]: 41;
Number of nominations selected for designation: 12;
Number of designations as of September 30, 2003: 12.
Total;
Number of communities nominated[A]: 993;
Number of nominations selected for designation: 203;
Number of designations as of September 30, 2003: 184[H].
Source: HUD and USDA program documents.
[A] Communities not selected in earlier rounds could apply for
subsequent rounds.
[B] Nominations for Round I EZs that did not receive an EZ designation
were added to the list of eligible nominations for ECs. Some ECs that
were designated had originally been nominated for EZ designation.
[C] Six urban communities originally received EZ status in Round I, and
the two Supplemental Empowerment Zones were later given full Round I EZ
status.
[D] One urban Round I EZ and 16 urban and 2 rural Round I ECs lost
their prior EZ or EC designations when part or all of the former
community area received RC designation.
[E] The Washington, D.C. Enterprise Zone designation was awarded
directly by the Taxpayer Relief Act of 1997.
[F] The legislation authorizing the third round of the EZ program
authorized seven urban EZs. When the Atlanta EZ became an RC, HUD used
its statutory authority to designate an additional Round III EZ.
[G] Selection of ECs made out of the pool of 160 nominations for Round
II rural EZ designation.
[H] This figure represents the number of designations that are
maintained as of September 30, 2003. Because communities did not lose
prior designations when they subsequently received EZ, Supplemental
Empowerment Zone, Enhanced Enterprise Community, or Enterprise Zone
designations, 19 communities are counted more than once in this total.
[End of table]
Figure 3: Geographic Location of All Designated Communities as of
September 30, 2003:
[See PDF for image]
[End of figure]
The average characteristics of the designated geographic areas in the
three rounds of the EZ/EC program and the RC program had slightly
different poverty and unemployment levels, but their average
population, area, and population density statistics differed more
greatly. As noted earlier, with some exceptions, nominees were directed
to use 1990 census data to qualify for poverty, unemployment,
population, and area criteria; however, the levels required for
eligibility varied among rounds of the EZ/EC program and between the
EZ/EC program and RC program. According to 1990 census data, a total of
about 8 million people lived in EZs, ECs, and RCs. Among urban EZs,
each round had somewhat lower average percentages of poverty, but
similar percentages of unemployed.[Footnote 31] The poverty and
unemployment rates of rural EZs were relatively constant, although
unemployment was higher in Round I. ECs did not vary greatly between
rounds in terms of poverty and unemployment. The RCs' average
percentages in poverty and unemployed are comparable to those of EZ
designees in rounds II or III. However, the average population of the
rural communities designated as RCs was much higher than that of rural
EZs or ECs, and the average population for urban communities was
highest in Round I EZs and in RCs. The average area of the communities
varied among the rounds and between the two programs. The population
density for urban communities remained much higher than that of rural
communities, with urban communities ranging from about 4,000 persons
per square mile to over 10,000 persons per square mile and rural
communities ranging from less than 10 persons per square mile to about
45 persons per square mile. Figure 4 shows the average characteristics
of the communities by designation, round, and urban or rural location.
Figure 4: Variation in Average Characteristics of EZs, ECs, and RCs
(Based on 1990 census data):
[See PDF for image]
Note: All poverty and unemployment percentage estimates have 95 percent
confidence intervals of plus or minus 1.2 percentage points or less.
See appendix I for the confidence intervals for each estimate. Round I
EZ averages include the Supplemental Empowerment Zone data, and Round I
EC averages include the Enhanced Enterprise Community data.
[A] Percent based on individuals for whom poverty status has been
determined.
[B] Percent based on individuals 16 years of age and older.
[C] The actual area of these communities could be smaller, because
areas nominated for Round II and III rural EZ/ECs were not required to
adhere to census tract boundaries if they were wholly within an Indian
reservation and could exclude land owned by federal, state, or local
governments from their calculation of the maximum area requirement.
[End of figure]
Designees Are Drawing Down Grant Funds:
As of September 30, 2003, (1) state agencies had drawn down about 71
percent of the Social Services Block Grants authorized for the EZ/EC
program, (2) the eight local government entities that received Economic
Development Initiative grants as part of the Supplemental Empowerment
Zone and Enhanced Enterprise Community designations had drawn down
about 55 percent of the $300 million in Economic Development Initiative
funds that HUD had awarded, and (3) Round II EZs and ECs had drawn down
42 percent in HUD and USDA program grants appropriated between fiscal
years 1999 and 2003 (see table 9).[Footnote 32]
Table 9: Amount of Grant Funds Awarded and Drawn Down, as of September
30, 2003 (Dollars in thousands):
Round I; Urban EZs;
Type of funds awarded: Social Services Block Grants;
Amount awarded: $600,000;
Amount drawn down: $362,737;
% Drawn down: 60.5%.
Round I; Rural EZs;
Type of funds awarded: Social Services Block Grants;
Amount awarded: $120,00;
Amount drawn down: $95,521;
% Drawn down: 79.6%.
Round I; Urban ECs;
Type of funds awarded: Social Services Block Grants;
Amount awarded: $191,579;
Amount drawn down: $172,663;
% Drawn down: 90.1%.
Round I; Rural ECs;
Type of funds awarded: Social Services Block Grants;
Amount awarded: $88,421;
Amount drawn down: $80,575;
% Drawn down: 91.1%.
Round I; Total;
Amount awarded: $1,000,000;
Amount drawn down: $711,496;
% Drawn down: 71.1%.
Round I; Supplemental Empowerment Zones[A];
Type of funds awarded: Economic Development Initiative Grants;
Amount awarded: $212,000;
Amount drawn down: $122,267;
% Drawn down: 57.7%.
Round I; Enhanced Enterprise Communities[B];
Type of funds awarded: Economic Development Initiative Grants;
Amount awarded: $88,000;
Amount drawn down: $41,613;
% Drawn down: 47.3%.
Round I: Total;
Amount awarded: $300,000;
Amount drawn down: $163,880;
% Drawn down: 54.6%.
Round II; Urban EZs;
Type of funds awarded: HUD Appropriations;
Amount awarded: $359,398;
Amount drawn down: $155,293;
% Drawn down: 43.2%.
Round II; Rural EZs;
Type of funds awarded: USDA Appropriations;
Amount awarded: $49,869;
Amount drawn down: $18,169;
% Drawn down: 36.4%.
Round II; Rural ECs;
Type of funds awarded: USDA Appropriations;
Amount awarded: $24,935;
Amount drawn down: $9,084;
% Drawn down: 36.4%.
Total;
Amount awarded: $434,202;
Amount drawn down: $182,546;
% Drawn down: 42.0%.
Source: GAO analysis of HUD, USDA, and HHS data.
[A] Three government entities received these grants as part of the
Supplemental Empowerment Zone designations.
[B] Five government entities received these grants as part of Enhanced
Enterprise Community designations. Only one local government entity,
Kansas City, Kansas, has drawn down all of its awarded Economic
Development Initiative funds.
[End of table]
Little Information Is Available on the Use of Some EZ-and RC-Specific
Tax Benefits:
IRS maintains two principal sources of tax data. The first is an
electronic master file system, which includes a business master file
and an individual master file, each of which contains selected line-
item data from business and individual tax filings. In addition, IRS's
Statistics of Income Division maintains a second set of data files that
are generally based on a sample of tax returns.[Footnote 33] IRS
maintains selected information on the EZ/EC and RC programs' tax
benefits in the master file data sets for tax years 1996 through 2002
and the Statistics of Income data set for tax years 1994 through
2001.[Footnote 34] In addition, the contractor preparing the HUD
Interim Assessment performed a survey of businesses to determine their
use of tax incentives, but these findings are limited to Round I
designees.[Footnote 35]
IRS Collects Some Data on the EZ and RC Employment Credit, but
Limitations Exist:
Currently, IRS can report on the use of the EZ Employment Credit at the
national level. The most readily available IRS data from the Statistics
of Income Division indicate that taxpayers are making some use of this
credit. Nationally, corporations and individuals claimed an estimated
total of $251 million in EZ Employment Credits between 1995 and 2001
(see figs. 5 and 6).[Footnote 36]
Figure 5: Corporate Returns with EZ Employment Credit:
[See PDF for image]
Note: This figure includes employment credits claimed in the D.C.
Enterprise Zone. However, data do not include credits claimed against
the Alternative Minimum Tax or credits claimed by regulated investment
companies, real estate investment trusts, or S corporations. Data from
1995 through 1997 and for 2001 are estimates based on a sample of tax
returns. The 95 percent confidence intervals for these estimates can be
large, sometimes exceeding +/-50 percent. See appendix I for these
values. 1998 through 2000 data are based on the population of returns.
[End of figure]
Figure 6: Individual Returns with EZ Employment Credit:
[See PDF for image]
Note: This figure includes employment credits claimed in the D.C.
Enterprise Zone. However, data do not include credits claimed against
the Alternative Minimum Tax. Data from individual tax returns are based
on a sample. The 95 percent confidence intervals for these estimates
can be large, sometimes exceeding +/-50 percent. See appendix I for
these values.
[End of figure]
Businesses were able to begin claiming the RC Employment Credit in
2002, using the same form they use to claim the EZ Employment Credit.
IRS will be able to report on taxpayers' use of the RC Employment
Credit when some data becomes available in mid-2004.[Footnote 37]
However, because the same line is used to record the amount claimed for
both the RC Employment Credit and the EZ Employment Credit, IRS will
not be able to distinguish between the amount claimed for RC Employment
Credits and the amount claimed in EZ Employment Credits.
In addition, according to IRS officials, the agency cannot reliably
link businesses claiming the employment credit with specific EZs or RCs
due to two factors. First, according to IRS officials the addresses
business owners list on tax forms do not necessarily correspond with
the location of their business operations, but may be a residence or
the address where the business is incorporated. Second, the IRS form
used to claim the EZ and RC Employment Credits does not require the
taxpayer to identify the EZ(s) or RC(s) where the business operations
eligible for the credit are located.
To identify the amount of employment credits claimed by businesses in
specific EZs or RCs, taxpayers would have to identify the EZs or RCs
where they had business operations. One way to collect this information
would be for IRS to amend its form to request additional information.
Senior IRS officials cited several reasons why amending its tax forms
is not a high priority for the agency. First, they said that IRS's role
is to administer tax laws, and that collecting more comprehensive data
on the use of these benefits does not help the agency to acheive this
objective. Second, the officials indicated that requesting taxpayers to
provide more information would add to taxpayer burden and IRS workload.
Third, IRS officials told us that they allocate their resources based
on the potential effect of abuse on federal revenue and noted that
these tax benefits are not considered high risk, since the amount
claimed is small compared with revenues collected from other tax
provisions or the amount of potential losses from abusive tax schemes.
National Use of Tax-Exempt Bonds Has Grown:
Between 1995 and 2001, state and local governments issued a total of 36
different series of tax-exempt bonds with an aggregate issue price of
$315 million explicitly for the benefit of businesses operating in EZs
and Round I ECs, as well as the D.C. Enterprise Zone.[Footnote 38]
Figure 7 shows the number and aggregate issue price of tax-exempt bonds
issued for the benefit of businesses operating in these communities
between fiscal years 1995 and 2001.[Footnote 39] The dramatic increase
in the amount of bonds issued since 1999 can be attributed to the
issuance of EZ Facility Bonds, which are not subject to state volume
caps and can be issued for generally larger amounts than the original
Enterprise Zone Facility Bonds, and the issuance of D.C. Enterprise
Zone Facility Bonds.
Figure 7: Number and Amount of Enterprise Zone, D.C. Enterprise Zone,
and EZ Facility Bonds Issued 1995 through 2001:
[See PDF for image]
Note: These figures include bonds issued to refund previously issued
debt. These figures represent the issue price of these bonds, not the
actual savings to businesses in EZs or ECs. These bonds were issued to
provide loans to businesses at a lower interest rate than through
conventional financing arrangements. Bond purchasers are willing to
accept a lower interest rate because the interest income is not subject
to federal income taxes. The actual savings to businesses in EZs or ECs
are the lower interest rates at which they repay their loans.
[End of figure]
Amount of Other Tax Benefits Claimed by EZs and RCs Is Unknown:
IRS cannot report on the extent to which businesses operating in an EZ
or RC are claiming the increased expensing deduction, the Commercial
Revitalization Deduction, or the Nonrecognition of Gain on the Sale of
EZ Assets, because taxpayers do not report these benefits as separate
items on their returns. In addition, two benefits, the Zero Percent
Capital Gains Rate for RC Assets and the Partial Exclusion of Gain on
the Sale of EZ Stock cannot be claimed until 2007 and 2005,
respectively. Table 10 provides a summary of the data available on all
nine tax benefits.
Table 10: Limitations with Data on EZ, EC, and RC Tax Benefits:
Tax benefit: EZ Employment Credit;
Does IRS have national level data? Yes[A];
Can IRS reliably link data to a designated community? No[E].
Tax benefit: RC Employment Credit;
Does IRS have national level data? Yes[B];
Can IRS reliably link data to a designated community? No[E].
Tax benefit: Enterprise Zone Facility Bonds;
Does IRS have national level data? Yes;
Can IRS reliably link data to a designated community? No[F].
Tax benefit: EZ Facility Bonds;
Does IRS have national level data? Yes;
Can IRS reliably link data to a designated community? No[F].
Tax benefit: Increased Section 179 Deduction;
Does IRS have national level data? No;
Can IRS reliably link data to a designated community? Not applicable.
Tax benefit: Commercial Revitalization Deduction;
Does IRS have national level data? No;
Can IRS reliably link data to a designated community? Not applicable.
Tax benefit: Zero Percent Capital Gains Rate for RC Assets;
Does IRS have national level data? No[C];
Can IRS reliably link data to a designated community? Not applicable.
Tax benefit: Nonrecognition of Gains on the Sale of EZ Assets;
Does IRS have national level data? No;
Can IRS reliably link data to a designated community? Not applicable.
Tax benefit: Partial Exclusion of Gain on the Sale of EZ Stock;
Does IRS have national level data? No[D];
Can IRS reliably link data to a designated community? Not applicable.
Source: GAO analysis.
[A] Some Statistics of Income data are based on statistical samples and
may not accurately represent the population of filers. For tax years
after 2001, IRS data cannot distinguish between this benefit and the RC
Employment Credit.
[B] The first Statistics of Income data will become available in 2004
when the 2002 individual return data become available. However, IRS
will not be able to distinguish between taxpayers claiming this credit
and the EZ Employment Credit.
[C] This benefit cannot be claimed until 2007.
[D] This benefit cannot be claimed until 2005.
[E] Taxpayers do not identify the EZ or RC where the business
operations are located.
[F] IRS collects data on tax-exempt bonds issued by state and local
governments. However, if a city or state government entity with more
than one EZ/EC located in its jurisdiction issues these bonds, IRS data
cannot identify which EZ or EC benefited from the bond issue.
[End of table]
Lack of Data Limits Ability to Determine Use of Tax Benefits in
Individual EZs and RCs:
The lack of data on the use of some of the tax benefits available to
businesses in EZs and RCs limits the ability of HUD and USDA to
administer the programs. For example, HUD requires EZs and RCs to
report on the extent to which businesses are using certain tax
benefits, such as the EZ or RC Employment Credit, to demonstrate
progress in meeting program outputs. However, EZ and RC officials have
had difficulty in obtaining tax information directly from businesses.
As a result, the lack of data on the use of these benefits limits the
ability of the designated communities to comply with this requirement.
Also, the lack of data on these tax benefits limits the ability of EZs
and RCs to use their designations to attract additional resources,
which is a program expectation. For example, according to tax and
community development specialists, the inability to report on the
extent to which some existing tax benefits are being used limits the
ability of EZs and RCs to demonstrate the effectiveness of their
revitalization programs. Moreover, the lack of data on these benefits
limits the ability of HUD, USDA, or others to audit or evaluate the
programs[Footnote 40].:
Some Businesses Face Obstacles in Using the Tax Benefits:
Although available data show that businesses are using some tax
benefits in EZs, ECs, or RCs, we found that some businesses might face
obstacles in using the tax benefits. In 1999, we reported that
businesses cited several reasons for not taking advantage of the tax
benefits, including not knowing about them, finding them too
complicated, not qualifying for them, and not having federal tax
liability.[Footnote 41] During our current audit work, research results
showed and tax experts expressed similar concerns. For example, a HUD-
sponsored report noted that in 2000 many businesses did not know about
the tax benefits available to them.[Footnote 42] In addition, one tax
expert noted that businesses must make several complicated calculations
about their business activities to determine whether they satisfy the
requirements for using the tax benefits. IRS officials suggested that
the complexities of the tax code and changes in it over time might
prevent smaller businesses from taking advantage of the EZ or RC
benefits, because smaller businesses may not have access to tax
professionals.[Footnote 43] Also, one tax expert noted that some
businesses, such as farms with assets greater than $500,000, do not
qualify for the tax benefits. Moreover, businesses can only claim the
tax credits against their reported profits. Since small companies and
start-up businesses may not have federal tax liabilities, they may not
be able to claim the EZ or RC credits to the same degree as larger or
more profitable businesses.
Participating Federal Agencies Have Conducted Outreach and Provided
Technical Assistance:
HUD, USDA, IRS, and HHS have provided outreach for the EZ/EC and RC
programs through conferences, training, and other resources. HUD and
USDA have sponsored conferences to educate nominated and designated
communities on a variety of subjects. HHS has provided information on
its EZ/EC Web site and has participated in HUD and USDA conferences.
Both IRS and HUD have made efforts to educate businesses about the tax
benefits available to them through educational workshops. HUD sponsors
satellite broadcasts on a semiannual basis on issues pertaining to
performance, tax benefits, availability of funds, regulatory changes,
and other issues. To aid in the designees' outreach to businesses, HUD
has provided communities with lists of local businesses.
The agencies have also provided technical assistance through a variety
of means, including Web sites, published guidance, and desk officers.
HUD, USDA, and HHS each have Web sites dedicated to the programs that
include links to resources, such as relevant audit guidance, best
practices from designated communities, and online training materials.
HUD also provides an EZ/EC/RC address locator on its Web site that
enables taxpayers to determine whether businesses or employees are
located within a zone and therefore eligible for tax benefits. USDA
worked with HUD to ensure that their rural EZs and ECs were included in
this tool. In addition, HUD, IRS, USDA, and HHS have provided guidance
to designated zones, community groups, and businesses about available
benefits.[Footnote 44] HUD and USDA have also prepared application
guides that explain the application process and benefits of
designation. HUD and USDA have each published strategic planning
guidebooks to help communities through the required strategic planning
process, as well as guidebooks on program implementation and
benchmarking.[Footnote 45] HUD and USDA also have a group of desk and
field officers available to respond to community inquiries about the
program.
Participating Federal Agencies Have Developed Oversight Procedures:
HUD and USDA are responsible for overseeing the progress of the urban
and rural EZs and ECs, and HUD is responsible for overseeing the
progress of the RCs.[Footnote 46] The legislated role of HUD and USDA
in both the EZ/EC and RC programs is to ensure that a community (1)
does not modify the boundaries of the designated area and (2) is
complying with or making progress toward the benchmarks of the EZ's or
EC's strategic plan or, in the case of HUD, the RC's course of action
and economic growth promotion requirements. HUD or USDA can revoke a
community's designation if either of these two provisions is not met.
To implement their oversight responsibility for the EZ/EC program, HUD
and USDA rely on Memorandums of Agreement, benchmark tracking, and
annual progress reports. The Memorandum of Agreement that is signed by
the state and local governments and HUD or USDA states the
responsibilities of the parties for compliance with federal
requirements.[Footnote 47] HUD and USDA require designees to report
annually on the steps they have taken in conjunction with their
strategic plans. RC designees do not sign Memorandums of Agreement but
do have to certify that they will take certain actions as part of the
course of action and economic growth promotion requirements submitted
with the application.
HUD and USDA make determinations as to the progress of the EZs or ECs
in implementing their strategic plans and, when necessary, send warning
letters to the designated communities based on data reported in the
performance management systems. In 1997, HUD issued warning letters to
five EZs and ECs. These warning letters ultimately did not result in
any de-designations. As of late 2003, USDA has not sent warning letters
to any rural EZs or ECs.
HUD and USDA Have Set Up Systems for Reporting Performance Data:
Beginning with the Round II designations in 1998, HUD and USDA began
using Internet-based performance management systems--the Performance
Management System and the Benchmark Management System, respectively--to
track the communities' performance. These systems allow each community
to enter baseline and benchmark data on funding and results. Although
designated communities update the systems constantly, an annual
reporting deadline exists to provide a firm date at which a community
should have all of its information up to date.
HUD's Round III EZ and RC annual reporting requirements are less
stringent than those of prior rounds. Since Round III urban EZs and RCs
do not receive grant funds, HUD officials do not expect Round III EZs
to have as many projects as Round II EZs to include in their annual
reporting. The RCs use a much simpler report template that includes
sections on required goals and actions, economic growth promotion
requirements, tax incentive utilization, and other accomplishments. HUD
officials have also said that the use of tax benefits in the Round III
EZ and RC programs makes it difficult to design and execute a way of
tracking the programs. HUD is exploring the idea of developing a data
collection method on the use of the tax benefits. This data collection
effort would require approval from the Office of Management and Budget.
HUD officials noted that one concern in developing a data collection
procedure is that potentially the additional paperwork burden could
discourage businesses from using the benefits. USDA has the same
reporting requirements for Round III EZs as it does for Rounds I and
II.
To assess the reliability of the performance data, field staff from HUD
and USDA verify some of the community-reported data in the performance
management systems. As part of its oversight role, HUD also provides
field offices with a grant monitoring checklist, that requires
determining whether (1) the documentation matches the information in
the performance management system, (2) spending is reasonable in
relation to progress, (3) the program and funds serve eligible
purposes, (4) the activity took place within the EZ, (5) the resident
benefit data are accurate, and (6) the EZ has appropriate accounting
records and procedures. USDA state field staff check the reliability of
the data entered by communities, and headquarters staff check for
inconsistencies and outliers. In addition, every 2 years USDA has a
"Management Control Review," in which headquarters staff verify the
accuracy of the state-level reviews.
Recent Audits Have Raised Some Concerns About EZ/EC Program Oversight
and Data Reliability:
In our previous reports, we found weaknesses in program oversight. In
1996, we reported that HUD and the EZs had not yet (1) described
measurable outcomes for the program's key principles or (2) indicated
how the outputs anticipated from one or more benchmarks would help to
achieve those outcomes.[Footnote 48] A HUD official reported that the
agency implemented its Internet-based performance measurement system in
response to a recommendation contained in our report. In 1997, we
reported that rural EZ/ECs were not consistently reporting their
progress to USDA and that USDA's EZ/EC state coordinators were not
providing systematic reporting on the progress of rural EZ/
ECs.[Footnote 49] In response, USDA officials told us that they
addressed this deficiency by adopting a nationwide community
development field training program.
Both HUD's and USDA's IGs have raised concerns about the accuracy of
the performance management systems and the adequacy of EZ/EC program
oversight. For example, in a 2003 audit the HUD IG found that some
Round II activities were benefiting people who did not live in the
zones. They also found that 76 percent of the activities in the
performance management system selected for their audit contained
inaccurate data.[Footnote 50] HUD noted in response that it had
developed revised monitoring procedures and that it was developing
regulations to clarify the requirements for resident benefits. During
audits it conducted in 1999 and 2001, USDA's IG found that data
pertaining to a Round I rural EZ and a Round II rural EC were not
accurate or had not been updated as required. In response to the 2001
audit, USDA officials stated that the agency would initiate immediate
actions to increase training efforts to community personnel in the
areas of reporting, using the performance management system,
maintaining proper accountability, and preparing annual budgetary
reports. In another 2001 audit, which focused on one EZ, the USDA IG
found that USDA staff had not looked at the performance and progress of
any EZ-funded projects and provided little oversight of how the EZ used
program funds. In addition, the audit noted that one funded project was
located outside of the EZ and did not serve the required number of EZ
residents. In response to the audit, USDA stated that the EZ tracking
system would be amended to ensure that residents within the EZ were
benefiting from EZ services but that the EZ was authorized to waive the
resident benefit requirement if the project was deemed important to the
community. USDA officials informed us that limited resources prevented
the agency from performing a 100-percent verification of data contained
in the performance management system.
Among the Few EZ/EC Evaluations That Have Been Conducted, Research
Methods and Results Have Varied:
The few evaluations that have systematically collected and analyzed
data on the effectiveness of the EZ/EC program involved a variety of
research methods and reported results that varied depending upon the
aspect of the program studied.[Footnote 51] In some cases, the methods
researchers used depended on the data available to them. The most
comprehensive of these evaluations--the HUD Interim Assessment--found,
among other things, that employment of Round I EZ residents had
increased from 1995 to 2000, that larger businesses were more likely to
use tax benefits than smaller businesses, and that resident
participation in EZ or EC governance had been uneven.[Footnote 52] As
with all evaluations of community development programs, these
evaluations were also subject to some limitations. In particular, the
researchers faced challenges demonstrating what would have happened in
the communities in the absence of the program.[Footnote 53]
Relatively Few Evaluations Have Been Conducted on the EZ/EC Program:
Although 10 years have passed since the first round of communities were
designated, we found only 11 evaluations that systematically collected
and analyzed data on EZ/EC program effectiveness.[Footnote 54] We found
that none of these evaluations had assessed the effect of the EZ/EC
program on poverty, one had assessed the effects of the EZ/EC program
on resident employment, and three had assessed the effects of the EZ/EC
program on aspects of economic growth in the distressed communities.
Further, most of the evaluations examined the first few years of
implementation by Round I designees. We found only one evaluation that
assessed the effectiveness of Round II EZ/EC designees and no
evaluations of the Round III EZs. In addition, we found that nine
evaluations had assessed the implementation of the EZ/EC program's
community participation and governance processes. Only the HUD Interim
Assessment attempted to assess on a national scale the effect of the
early stages of Round I EZ/EC implementation on unemployment and
aspects of economic growth. Although USDA, IRS, and HHS each published
studies of some aspect of the Round I EZ/EC designees, we did not find
that these agencies had sponsored or conducted a comparable evaluation.
A summary of the 11 evaluations we reviewed, listing the purpose and
scope, primary research methods and data sources, major findings, and
major limitations, appears in appendix VI.
A Variety of Methods Have Been Used to Evaluate EZs and ECs:
Quantitative research methods were generally used to assess the
effectiveness of the EZ/EC program in increasing employment and
promoting economic growth, while qualitative research methods were
generally used to determine the program's effectiveness in
incorporating community participation and developing governance
structures.[Footnote 55] Statistical analysis of survey data and
existing data (e.g., census data) were the most common research methods
used to assess the effect of the EZ/EC program on employment and
economic growth. Document reviews, interviews, and comparative analysis
were the most frequent type of methods used to examine site governance
structures and community participation. When multiple program
objectives were evaluated, researchers generally used both quantitative
and qualitative methods. For example, the HUD Interim Assessment used
multiple methods and analytical approaches, such as regression
analysis, surveys, and document reviews, to assess the effectiveness of
the federal EZ/EC program in the first 5 years after the first round of
EZ/EC designation.[Footnote 56]
In some instances, neither qualitative nor quantitative data were
available, requiring researchers to collect original data. For example,
because IRS data on tax benefits cannot be reliably linked to
individual designated communities, some researchers were required to
collect data on tax usage through qualitative methods. According to a
HUD official, the HUD Interim Assessment relied on commercial data and
surveys to collect information on the use of the EZ Employment Credit,
because existing IRS data could not be attributed to individual EZs. He
added that without the ability to attribute the credits to particular
EZs, researchers cannot establish the connection between the
businesses' use of the employment credit and observable changes in the
EZ communities. Some evaluations, such as the HUD Interim Assessment
and our 1998 report, also used surveys of business owners to assess
their attitudes toward the tax benefits and to gauge the potential
influence of the tax benefits on businesses.[Footnote 57] To collect
qualitative information on the strategic planning process or community
participation, researchers reviewed documents and conducted
interviews. Lastly, several evaluations reported results from agency
performance data on the EZ/EC program; however, both the HUD IG and
USDA IG reported concerns about the reliability of these data.
Early Evaluations Reported A Variety of Findings:
The HUD Interim Assessment found that resident employment within five
of the six Round I EZs had generally increased between 1995 and
2000.[Footnote 58] Researchers also found that the employment of
residents of four of the six EZs had grown faster than in similar
neighborhoods. In addition, these researchers found that EZ residents
owned an increasing number of the EZ businesses and that these
businesses were more likely to hire other EZ residents.
Several evaluations reported factors that affected economic
growth.[Footnote 59] For example, the HUD Interim Assessment found that
a variety of factors influenced the success of businesses (one measure
of economic growth) in a designated community, with the central
location of zones in their metropolitan areas cited as a positive
influence and crime and poor public safety cited as the worst problems.
In addition, GAO and the HUD Interim Assessment found that larger
businesses were more likely to use available tax benefits than smaller
businesses.
Results of some evaluations concluded that citizen participation and
influence were greatest during the planning phase of the EZ/EC
initiative and tapered off as the initiative moved into the
implementation phase.[Footnote 60] Researchers suggested that the
decline in citizen participation might have occurred for several
reasons, including a lack of federal supervision during implementation,
the difficulty of implementing projects in reasonable time frames, and
the technical nature of implementation activities, such as benchmarking
reports.[Footnote 61] Two evaluations concluded that citizen
participation in the EZ/EC program was higher than participation in
similar types of federal initiatives.[Footnote 62] However, the HUD
Interim Assessment found that local attention to resident participation
in zone governance has been uneven.
Evaluations of EZs and ECs Were Subject to Some Limitations:
The findings of these evaluations provide valuable descriptions of the
early progress of Round I EZ/ECs. However, because of the difficulty of
proving what would have happened in the absence of the program, these
evaluations cannot be used to conclude that the program actually caused
the observed changes. For example, the evaluations found that resident
employment levels had increased, but it is possible that factors other
than EZ/EC designation and the program benefits influenced employment
levels. Although the HUD Interim Assessment attempted to control for
these other factors by comparing EZ/EC employment to employment in both
adjacent and nonadjacent comparison neighborhoods, the authors could
not say conclusively what the employment levels in the zones might have
been if these areas had not been designated as EZs or ECs. If, for
example, the communities selected for the EZ/EC program were those with
the most potential for development from among the eligible areas within
a city, it is possible that these analyses overstated the program
effects.
Many evaluations were unable to make generalizations about all EZ/ECs
because their conclusions were limited to the specific communities that
they studied. For example, the large number of EC sites makes it
relatively difficult to fully investigate the effectiveness of programs
in all sites. Authors of the HUD Interim Assessment and others have
noted that creating an evaluation of the EZ/EC program and its four
principles is difficult, because the program is based on the idea that
effective community revitalization occurs when the strategy is tailored
to the local site.[Footnote 63] This type of program requires an
evaluation design, such as a case study, that is able to capture
changes that result from each site's specific strategic plan, but
generalizing the results of such evaluations to a larger population may
not be possible. For example, the diverse nature of the Round I EZ/ECs-
-in which each EZ/EC may differ in terms of objective, size of the
targeted areas, type of designation, governance structure, projects
used, and strategies for implementation--made it difficult for
researchers to generate general conclusions for the early stages of
Round I implementation.
Conclusions:
HUD, USDA, HHS, and IRS have implemented the EZ/EC and RC programs. As
part of the implementation, HUD and USDA expect designated communities
to report on how program benefits are being used, both directly and as
a method of attracting additional resources. However, because of the
limited amount of data on the use of EZ and RC tax benefits--which the
Joint Committee on Taxation estimates will reduce federal tax revenue
by about $11 billion between 2001 and 2010--EZs and RCs cannot reliably
report on their use by local businesses. In addition, Congress has
requested that we audit and evaluate the programs. Acquiring additional
data that can attribute the use of the tax benefits to particular EZs
and RCs would provide information to facilitate an audit of these
programs. Also, additional tax data would be necessary to evaluate
certain aspects of the programs, such as the use of the tax benefits.
While it is difficult to isolate the effects of these programs on
improving conditions in distressed communities, without the ability to
attribute the tax benefits to particular EZs and RCs, researchers
cannot begin to establish the connection between the businesses' use of
the tax benefits and observable changes in the communities. Such data
could potentially come from a variety of sources, including IRS forms,
surveys of businesses, or commercial databases.
Recommendation:
To facilitate the administration, audit, and evaluation of the EZ/EC
and RC programs, we recommend that HUD, USDA, and IRS collaborate to
(1) identify the data needed to assess the use of the tax benefits and
the various means of collecting such data; (2) determine the cost-
effectiveness of collecting these data, including the potential impact
on taxpayers and other program participants; (3) document the findings
of their analysis; and, if necessary, (4) seek the authority to collect
the data, if a cost-effective means is available.
Agency Comments:
We provided copies of a draft of this report for review and comment to
HUD, IRS, USDA, and HHS. These agencies' written replies are reproduced
in appendixes VII through X, respectively. HUD and IRS agreed with the
report's descriptions of the EZ/EC and RC programs as well as the
recommendation. HUD generally agreed with our descriptions of the
features of the EZ/EC and RC programs, and the status of their
implementation at the national level. IRS stated that the data they
provided us on the tax benefits available to businesses operating in
EZs, ECs, and RCs were accurately reflected in our report. USDA raised
several concerns about our discussion of the EZ/EC program. In
particular, the Acting Under Secretary for Rural Development stated
that our focus on grants and tax incentives neglected the broader
purpose of empowering impoverished communities to plan for and achieve
their own goals through "holistic means." HHS's Administration for
Children and Families had no comments. HUD, IRS, and USDA also provided
technical comments, which we have incorporated into this report where
appropriate.
According to HUD's Deputy Assistant Secretary for Economic Development,
HUD agrees with the report's recommendation that HUD, USDA, and IRS
collaborate to examine options for collecting data on the use of tax
benefits available to businesses operating in EZs, ECs, and RCs. He
noted that HUD concurs with the report's findings, including the
finding that data on the use of the tax benefits is limited at this
time, and added that HUD is currently developing a strategy to use
available federal agency resources to develop the data needed to assess
the use of the EZ/EC and RC tax incentives. In addition, he noted that
IRS had assisted HUD in answering technical questions and participating
in HUD training conferences and workshops. He stated that HUD would
continue its efforts to work with IRS to gather the data needed to
measure businesses' use of tax benefits in designated communities. In
response to findings from its Office of Inspector General, HUD's Deputy
Assistant Secretary indicated that HUD was taking action to improve
program oversight, including developing guidance on eligible uses of EZ
funds and instructions for reporting on the progress of EZ activities.
The Commissioner of Internal Revenue agreed with our recommendation to
work with HUD and USDA to identify the data needed to assess the use of
the tax benefits and the costs of collecting that data.
The Acting Under Secretary of Rural Development for USDA raised a
number of concerns with our discussion of the EZ/EC program. While he
indicated that USDA welcomed the opportunity to collaborate with IRS
and HUD, he raised concerns that responding to the report's
recommendation could stretch the agency's already scarce resources to
produce data of possibly marginal utility and potentially invade
taxpayers' privacy. We believe that the lack of data on the usage of
EZ/EC tax benefits limits the ability of USDA and HUD to administer the
EZ/EC program, and limits the ability of these agencies and others to
evaluate such programs. We stated in our report that data on the use of
the tax benefits could come from a variety of sources, such as IRS
forms, surveys of businesses, or commercial databases. As a result,
collecting such information may not necessarily have a significant
impact on USDA's resources. Moreover, the recommendation calls for HUD,
USDA, and IRS to determine the cost effectiveness of collecting these
data. Any data that are collected on the use of the tax benefits should
be done according to IRS rules for protecting taxpayer privacy.
In his letter, the Acting Under Secretary also stated that our report
addresses only two program tools (grants and tax incentives) and, by
doing so, neglects the broader purpose behind the program of
"empowering impoverished communities to plan for and achieve their own
goals through holistic means." To the contrary, the report describes a
variety of program features including, but not limited to, grant and
tax benefits. In particular, the report discusses the programs' stated
goals and objectives and the key principles nominated communities were
required to include in their strategic plans, including the need for
community-based partnerships that involve all segments of the
community. However, because the report is largely descriptive, it does
not examine the extent to which the objectives and purposes of the EZ/
EC program have been met.
In addition, the USDA Acting Under Secretary indicated that our
statement that the lack of data on tax benefits is a limiting factor in
communities' ability to attract additional resources presumes that
these data are the only tool that designated communities have to
attract additional resources. We agree with the Acting Under
Secretary's statement that such data are not the only means that
communities can use to attract additional resources. However,
representatives of EZs and RCs we spoke with stated that their ability
to attract additional resources was limited by not being able to report
on the extent to which the programs' tax benefits were being used in
their communities.
The Acting Under Secretary also raised concerns about our description
of the agency's online performance management system. Our purpose in
discussing the system was to describe the efforts USDA has made to
oversee the EZ/EC program. We described the purpose of the system and
the steps USDA takes to verify data contained in it. We also reported
the findings of the USDA IG audits concerning the system and actions
USDA officials reported that the agency had taken in response to the
audits. We did not use data from the system in our report, nor did we
evaluate the reliability of the data contained in it.
Finally, the Acting Under Secretary also noted that our report did not
include all federal programs that provided benefits to communities
designated in the EZ/EC program, such as the AmeriCorps program
benefits that Round I rural EZs and ECs received in the first two years
of the program. As we reported in appendix V, we found that several
federal programs offered preferences to applicants located in EZs, ECs,
and RCs. However, the extent to which these applicants have taken
advantage of these preferences is not known.
We are sending copies of this report to the Secretary of Housing and
Urban Development, the Secretary of Treasury, the Commissioner of the
Internal Revenue Service, the Secretary of Agriculture, the Secretary
of Health and Human Services, and other interested Members of Congress.
We will make copies of this report available to others upon request. In
addition, this report will be available at no charge on the GAO Web
site at http: //www.gao.gov.
Please call me on (202) 512-8678 if you or your staff have any
questions about this report. Key contributors to this report are listed
in appendix XI.
Signed by:
William Shear:
Director, Financial Markets and Community Investment:
[End of section]
Appendix I: Scope and Methodology:
The objectives of this study were to describe (1) the features of the
Empowerment Zone and Enterprise Community (EZ/EC) program and Renewal
Community (RC) program; (2) the extent to which the programs have been
implemented; and (3) the methods that have been used and the results
that have been found in evaluations of the programs' effectiveness,
especially on poverty, unemployment, and economic growth in the
participating communities. While our descriptions included analyses of
the data that have been and could be used to address these three
topics, we did not evaluate the effectiveness of the programs or their
implementation in this report. We addressed the activities of federal
programs in both rural and urban areas in all three rounds of the EZ/EC
program and the RC program.
To describe the features of each round of the program, we relied on a
review of congressional legislation related to the EZ/EC and RC
programs; the Department of Housing and Urban Development (HUD), the
U.S. Department of Agriculture (USDA), and the Department of Health and
Human Services (HHS) regulations; and HUD, USDA, the Internal Revenue
Service (IRS), and HHS publications. To supplement our understanding of
these documents, we interviewed a number of program officials at these
agencies. We put the available program data and descriptions into data
matrices and spreadsheets in order to summarize, compare, and contrast
the features of the program in each of the rounds.
To describe the implementation of the programs at the national level,
we relied on reviews of legislation, regulations, program publications,
Web sites, and existing Inspector General (IG) studies and interviews
with program officials and other area experts. We analyzed 1990 census
data to report on some characteristics of the designated communities.
We also obtained and analyzed data from HUD, USDA, HHS, and IRS on the
utilization of grants, tax benefits, and loan guarantees. To assess the
data's reliability, we searched for missing data and values outside an
expected range and assessed the relationship of data elements to each
other. As appropriate, we analyzed a sample of some financial data to
confirm their reliability by comparing the agencies' financial data
with original source documents. We interviewed knowledgeable agency
officials from IGs' offices, divisions of payment management, and
program offices regarding the work they had done to assess the data's
integrity and the results of that work. We determined that the data
were sufficiently reliable for use in this report. This report does not
include data from HUD's or USDA's performance management systems.
To determine the average characteristics of designated communities, we
used data from the 1990 census. Because census estimates of poverty and
unemployment rates for EZs, ECs, and RCs are estimates based on
probability samples, each estimate is based on just one of a large
number of samples that could have been drawn. Since each sample could
have produced different estimates, we express our confidence in the
precision of our particular sample's results as a 95 percent confidence
interval. For example, the estimated poverty rate is 45.23 percent for
urban Round I EZ communities, and the 95 percent confidence interval
for this estimate ranges from 44.86 to 45.59 percent. This is the
interval that would contain the actual population value for 95 percent
of the samples that could have been drawn. As a result, we are 95
percent confident that each of the confidence intervals in this report
will include the true values in the study population. All poverty and
unemployment percentage estimates have 95 percent confidence intervals
of plus or minus 1.2 percentage points or less, as summarized in table
11.
Table 11: Variation in Census Statistics for EZs, ECs, and RCs:
Description: Percent in poverty;
Communities: Round I EZ: Urban;
Estimate: 45.23%;
95 percent confidence interval: From: 44.86%;
95 percent confidence interval: To: 45.59%.
Description: Percent in poverty;
Communities: Round I EZ: Rural;
Estimate: 44.75%;
95 percent confidence interval: From: 43.70%;
95 percent confidence interval: To: 45.80%.
Description: Percent in poverty;
Communities: Round II EZ: Urban;
Estimate: 42.84%;
95 percent confidence interval: From: 42.42%;
95 percent confidence interval: To: 43.27%.
Description: Percent in poverty;
Communities: Round II EZ: Rural;
Estimate: 35.60%;
95 percent confidence interval: From: 34.57%;
95 percent confidence interval: To: 36.64%.
Description: Percent in poverty;
Communities: Round III EZ: Urban;
Estimate: 42.92%;
95 percent confidence interval: From: 42.37%;
95 percent confidence interval: To: 43.48%.
Description: Percent in poverty;
Communities: Round III EZ: Rural;
Estimate: 31.02%;
95 percent confidence interval: From: 29.83%;
95 percent confidence interval: To: 32.20%.
Description: Percent in poverty;
Communities: Round I EC: Urban;
Estimate: 41.12%;
95 percent confidence interval: From: 40.92%;
95 percent confidence interval: To: 41.33%.
Description: Percent in poverty;
Communities: Round I EC: Rural;
Estimate: 35.79%;
95 percent confidence interval: From: 35.40%;
95 percent confidence interval: To: 36.17%.
Description: Percent in poverty;
Communities: Round II EC: Rural;
Estimate: 37.67%;
95 percent confidence interval: From: 37.15%;
95 percent confidence interval: To: 38.20%.
Description: Percent in poverty;
Communities: RC: Urban;
Estimate: 41.33%;
95 percent confidence interval: From: 41.10%;
95 percent confidence interval: To: 41.57%.
Description: Percent in poverty;
Communities: RC: Rural;
Estimate: 38.23%;
95 percent confidence interval: From: 37.89%;
95 percent confidence interval: To: 38.57%.
Description: Percent unemployed;
Communities: Round I EZ: Urban;
Estimate: 20.75%;
95 percent confidence interval: From: 20.37%;
95 percent confidence interval: To: 21.12%.
Description: Percent unemployed;
Communities: Round I EZ: Rural;
Estimate: 13.05%;
95 percent confidence interval: From: 12.22%;
95 percent confidence interval: To: 13.88%.
Description: Percent unemployed;
Communities: Round II EZ: Urban;
Estimate: 15.40%;
95 percent confidence interval: From: 15.04%;
95 percent confidence interval: To: 15.76%.
Description: Percent unemployed;
Communities: Round II EZ: Rural;
Estimate: 12.26%;
95 percent confidence interval: From: 11.46%;
95 percent confidence interval: To: 13.07%.
Description: Percent unemployed;
Communities: Round III EZ: Urban;
Estimate: 15.36%;
95 percent confidence interval: From: 14.87%;
95 percent confidence interval: To: 15.84%.
Description: Percent unemployed;
Communities: Round III EZ: Rural;
Estimate: 13.37%;
95 percent confidence interval: From: 12.41%;
95 percent confidence interval: To: 14.33%.
Description: Percent unemployed;
Communities: Round I EC: Urban;
Estimate: 15.73%;
95 percent confidence interval: From: 15.55%;
95 percent confidence interval: To: 15.91%.
Description: Percent unemployed;
Communities: Round I EC: Rural;
Estimate: 13.12%;
95 percent confidence interval: From: 12.80%;
95 percent confidence interval: To: 13.43%.
Description: Percent unemployed;
Communities: Round II EC: Rural;
Estimate: 15.39%;
95 percent confidence interval: From: 14.94%;
95 percent confidence interval: To: 15.84%.
Description: Percent unemployed;
Communities: RC: Urban;
Estimate: 18.62%;
95 percent confidence interval: From: 18.39%;
95 percent confidence interval: To: 18.84%.
Description: Percent unemployed;
Communities: RC: Rural;
Estimate: 13.57%;
95 percent confidence interval: From: 13.29%;
95 percent confidence interval: To: 13.85%.
Source: GAO analysis of HUD, USDA, and Census data.
[End of table]
In addition to sampling errors, census data (both sampled and 100
percent data) are subject to nonsampling errors, which may occur during
the operations used to collect and process census data. Examples of
nonsampling errors are not enumerating every housing unit or person in
the sample, failing to obtain all required information from a
respondent, obtaining incorrect information, and recording information
incorrectly. Operations such as field review of enumerators' work,
clerical handling of questionnaires, and electronic processing of
questionnaires also may introduce nonsampling errors in the data. The
Census Bureau discusses sources of nonsampling errors and attempts to
control them in detail.
To address businesses' use of the EZ Employment Credit, we obtained
information from IRS's Statistics of Income databases of corporate and
individual tax returns for 1995 through 2001. Although there were some
data available for 1994, we excluded it from our analysis because the
sample was based on a small number of returns in this year and yielded
unreliable confidence intervals. All reported individual return
statistics and the corporate return statistics for years 1995 to 1997
and 2001 are estimates based on probability samples. Using IRS's
Statistics of Income Division sampling weights, we estimated confidence
intervals for the estimated number and amount of total credits. These
estimates and their confidence intervals are summarized in table 12.
Table 12: Confidence Intervals for EZ Employment Credit Estimates:
Description: Corporate returns;
Number of returns claiming the EZ Employment Credit;
Year: 1995;
Estimate: 193;
95 percent confidence interval: From: 88;
95 percent confidence interval: To: 366.
Description: Corporate returns;
Number of returns claiming the EZ Employment Credit;
Year: 1996;
Estimate: 464;
95 percent confidence interval: From: 176;
95 percent confidence interval: To: 989.
Description: Corporate returns;
Number of returns claiming the EZ Employment Credit;
Year: 1997;
Estimate: 630;
95 percent confidence interval: From: 409;
95 percent confidence interval: To: 927.
Description: Corporate returns;
Number of returns claiming the EZ Employment Credit;
Year: 1998;
Estimate: 402;
95 percent confidence interval: From: [A];
95 percent confidence interval: To: [A].
Description: Corporate returns;
Number of returns claiming the EZ Employment Credit;
Year: 1999;
Estimate: 420;
95 percent confidence interval: From: [A];
95 percent confidence interval: To: [A].
Description: Corporate returns;
Number of returns claiming the EZ Employment Credit;
Year: 2000;
Estimate: 479;
95 percent confidence interval: From: [A];
95 percent confidence interval: To: [A].
Description: Corporate returns;
Number of returns claiming the EZ Employment Credit;
Year: 2001;
Estimate: 559;
95 percent confidence interval: From: 555;
95 percent confidence interval: To: 562.
Description: Corporate returns;
Amount claimed in EZ Employment Credit;
Year: 1995;
Estimate: $7,409,228;
95 percent confidence interval: From: $3,574,947;
95 percent confidence interval: To: $11,243,510.
Description: Corporate returns;
Amount claimed in EZ Employment Credit;
Year: 1996;
Estimate: $9,382,387;
95 percent confidence interval: From: $6,612,327;
95 percent confidence interval: To: $12,152,448.
Description: Corporate returns;
Amount claimed in EZ Employment Credit;
Year: 1997;
Estimate: $13,222,819;
95 percent confidence interval: From: $10,432,042;
95 percent confidence interval: To: $16,013,595.
Description: Corporate returns;
Amount claimed in EZ Employment Credit;
Year: 1998;
Estimate: $19,117,527;
95 percent confidence interval: From: [A];
95 percent confidence interval: To: [A].
Description: Corporate returns;
Amount claimed in EZ Employment Credit;
Year: 1999;
Estimate: $21,645,271;
95 percent confidence interval: From: [A];
95 percent confidence interval: To: [A].
Description: Corporate returns;
Amount claimed in EZ Employment Credit;
Year: 2000;
Estimate: $23,527,478;
95 percent confidence interval: From: [A];
95 percent confidence interval: To: [A].
Description: Corporate returns;
Amount claimed in EZ Employment Credit;
Year: 2001;
Estimate: $23,401,274;
95 percent confidence interval: From: $23,037,765;
95 percent confidence interval: To: $23,764,782.
Description: Individual returns;
Number of returns claiming the EZ Employment Credit;
Year: 1995;
Estimate: 239;
95 percent confidence interval: From: 126;
95 percent confidence interval: To: 412.
Description: Individual returns;
Number of returns claiming the EZ Employment Credit;
Year: 1996;
Estimate: 460;
95 percent confidence interval: From: 176;
95 percent confidence interval: To: 975.
Description: Individual returns;
Number of returns claiming the EZ Employment Credit;
Year: 1997;
Estimate: 686;
95 percent confidence interval: From: 291;
95 percent confidence interval: To: 1,368.
Description: Individual returns;
Number of returns claiming the EZ Employment Credit;
Year: 1998;
Estimate: 3,100;
95 percent confidence interval: From: 1,904;
95 percent confidence interval: To: 4,698.
Description: Individual returns;
Number of returns claiming the EZ Employment Credit;
Year: 1999;
Estimate: 4,752;
95 percent confidence interval: From: 3,571;
95 percent confidence interval: To: 6,199.
Description: Individual returns;
Number of returns claiming the EZ Employment Credit;
Year: 2000;
Estimate: 5,074;
95 percent confidence interval: From: 3,744;
95 percent confidence interval: To: 6,722.
Description: Individual returns;
Number of returns claiming the EZ Employment Credit;
Year: 2001;
Estimate: 6,745;
95 percent confidence interval: From: 5,199;
95 percent confidence interval: To: 8,606.
Description: Individual returns;
Amount claimed in EZ Employment Credit;
Year: 1995;
Estimate: $8,497,429;
95 percent confidence interval: From: $3,142,915;
95 percent confidence interval: To: $13,851,942.
Description: Individual returns;
Amount claimed in EZ Employment Credit;
Year: 1996;
Estimate: $10,810,233;
95 percent confidence interval: From: $1,901,366;
95 percent confidence interval: To: $19,719,099.
Description: Individual returns;
Amount claimed in EZ Employment Credit;
Year: 1997;
Estimate: $19,090,668;
95 percent confidence interval: From: $5,670,794;
95 percent confidence interval: To: $32,510,542.
Description: Individual returns;
Amount claimed in EZ Employment Credit;
Year: 1998;
Estimate: $22,088,019;
95 percent confidence interval: From: $10,360,890;
95 percent confidence interval: To: $33,815,148.
Description: Individual returns;
Amount claimed in EZ Employment Credit;
Year: 1999;
Estimate: $26,728,435;
95 percent confidence interval: From: $14,596,766;
95 percent confidence interval: To: $38,860,105.
Description: Individual returns;
Amount claimed in EZ Employment Credit;
Year: 2000;
Estimate: $21,948,244;
95 percent confidence interval: From: $12,826,922;
95 percent confidence interval: To: $31,069,565.
Description: Individual returns;
Amount claimed in EZ Employment Credit;
Year: 2001;
Estimate: $24,274,141;
95 percent confidence interval: From: $17,115,109;
95 percent confidence interval: To: $31,433,173.
Source: GAO analysis of IRS data.
[A] These data do not require confidence intervals because the total
amounts are based on the population of tax returns.
[End of table]
To identify the methods that have been used and the results that have
been found in assessments of the effectiveness of the EZ/EC and RC
programs, we conducted searches of the literature and interviewed
agency personnel and community development experts. We reviewed more
than 1,100 article and report abstracts to identify outcomes-focused
evaluations of the federal EZ/EC and RC programs. We included
evaluations that met the following criteria: (1) they focused on the
federal EZ/EC or RC program; (2) they were research evaluations that
systematically collected and analyzed empirical data (as opposed to
reports of Best Practices/Lessons Learned or policy discussions of the
program); and either (3) they evaluated the program in terms of its
effect on poverty, unemployment, and/or economic growth consistent with
our congressional mandate; or (4) they evaluated the program's
effectiveness in any of the other program goal areas. The remaining 11
evaluations, on which we focused our work, were program evaluations or
described the process of implementation that affected how the program
operated.
We conducted our work in Washington, D.C., from April 2003 through
February 2004 in accordance with generally accepted government auditing
standards.
[End of section]
Appendix II: List of Designated Communities:
To date, Congress has authorized the designation of three rounds of
EZs, two rounds of ECs, and one round of RCs. In addition, at the same
time that HUD and USDA announced the Round I designations, HUD created
two additional designations--Supplemental Empowerment Zones and
Enhanced Enterprise Communities. See table 13 for a complete list of
designated communities.
Table 13: List of Designated Communities:
Round I Urban EZs (6):
Atlanta, Georgia[A];
Baltimore, Maryland;
Chicago, Illinois;
Detroit, Michigan;
New York, New York;
Philadelphia, Pennsylvania/Camden, New Jersey.
Round I Rural EZs (3):
Kentucky Highlands, Kentucky;
Mid-Delta, Mississippi;
Rio Grande Valley, Texas.
Round I Urban ECs (65):
Akron, Ohio;
Albany, Georgia; Albany/Schenectady[A]/Troy, New York;
Albuquerque, New Mexico;
Birmingham, Alabama;
Boston, Massachusetts;
Bridgeport, Connecticut;
Buffalo, New York[A];
Burlington, Vermont[A];
Charleston, South Carolina[A];
Charlotte, North Carolina;
Cleveland, Ohio;
Columbus, Ohio;
Dallas, Texas;
Denver, Colorado;
Des Moines, Iowa;
East St. Louis, Illinois;
El Paso, Texas;
Flint, Michigan;
Harrisburg, Pennsylvania;
Houston, Texas;
Huntington, West Virginia;
Indianapolis, Indiana;
Jackson, Mississippi;
Kansas City, Missouri/Kansas City, Kansas;
Las Vegas, Nevada;
Little Rock/Pulaski, Arkansas;
Los Angeles, California[A];
Louisville, Kentucky;
Lowell, Massachusetts;
Manchester, New Hampshire;
Memphis, Tennessee[A];
Miami/Dade County, Florida;
Milwaukee, Wisconsin[A];
Minneapolis, Minnesota;
Muskegon, Michigan;
Nashville/Davidson, Tennessee;
New Haven, Connecticut;
New Orleans, Louisiana[A];
Newark, New Jersey[A];
Newburgh/Kingston, New York;
Norfolk, Virginia;
Oakland, California;
Ogden, Utah;
Oklahoma City, Oklahoma;
Omaha, Nebraska;
Ouachita Parish, Louisiana[A];
Phoenix, Arizona;
Pittsburgh, Pennsylvania;
Portland, Oregon;
Providence, Rhode Island;
Rochester, New York[A];
San Antonio, Texas;
San Diego, California[A];
San Francisco, California[A];
Seattle, Washington;
Springfield, Illinois;
Springfield, Massachusetts;
St. Louis, Missouri;
St. Paul, Minnesota;
Tacoma, Washington[A];
Tampa, Florida;
Waco, Texas;
Washington, District of Columbia;
Wilmington, Delaware;
Round I Supplemental Empowerment Zones (2):
Cleveland, Ohio[B, C];
Los Angeles, California[C];
Round I Enhanced Enterprise Communities (4):
Boston, Massachusetts[B];
Houston, Texas[B];
Kansas City, Missouri/Kansas City, Kansas[B];
Oakland, California[B].
Round I Rural ECs (30):
Accomack and Northampton County, Virginia;
Arizona Border Region, Arizona;
Beadle/Spink Counties, South Dakota;
Central Appalachia, West Virginia;
Central Savannah River Area, Georgia;
Chambers County, Alabama;
City of East Prairie, Missouri;
City of Lock Haven, Pennsylvania;
City of Watsonville, California;
Crisp/Dooly County, Georgia;
East Arkansas, Arkansas;
Fayette/Haywood County, Tennessee;
Greater Portsmouth, Ohio;
Greene- Sumter, Alabama[A];
The Halifax/Edgecombe/Wilson Empowerment Alliance, North Carolina;
Imperial County, California;
Jackson County, Florida;
Josephine County, Oregon;
La Jicarita, New Mexico;
Lake County, Michigan;
Lower Yakima County, Washington;
Macon Ridge, Louisiana[A];
McDowell County, West Virginia;
Mississippi County, Arkansas;
North Delta Mississippi, Mississippi;
Northeast Louisiana Delta, Louisiana;
Robeson County, North Carolina;
Scott, Tennessee/McCreary, Kentucky;
Southeast Oklahoma, Oklahoma;
Williamsburg- Lake City, South Carolina.
Round II Urban EZs (15):
Boston, Massachusetts;
Cincinnati, Ohio;
Columbia/Sumter, South Carolina;
Columbus, Ohio;
Cumberland County, New Jersey;
El Paso, Texas;
Gary/Hammond/East Chicago, Indiana;
Ironton, Ohio/Huntington, West Virginia;
Knoxville, Tennessee;
Miami/Dade County, Florida;
Minneapolis, Minnesota;
New Haven, Connecticut;
Norfolk/Portsmouth, Virginia;
Santa Ana, California;
St. Louis, Missouri/East St. Louis, Illinois.
Round II Rural EZs (5):
Desert Communities, California;
Griggs- Steele, North Dakota;
Oglala Sioux Tribe, South Dakota;
Southernmost Illinois Delta, Illinois;
Southwest Georgia United, Georgia.
Round II Rural ECs (20):
Allendale ALIVE, South Carolina;
Bowling Green, Kentucky;
City of Deming, New Mexico;
Clare County, Michigan;
Clinch- Powell, Tennessee;
Empower Lewiston, Maine;
Empowerment Alliance of Southwest Florida, Florida;
Fayette, Pennsylvania;
Five Star, Washington;
Fort Peck Assiniboine & Sioux Tribe, Montana;
Four Corners, Arizona;
FUTURO Communities, Texas;
Huron-Tule, California[A];
Metlakatla Indian Community, Alaska;
Molokai, Hawaii;
Northwoods NiiJii, Wisconsin;
Town of Austin, Indiana;
Tri-County Indian Nations, Oklahoma;
Upper Kanawha, West Virginia;
Wichita County, Kansas.
Round III Urban EZs (8):
Fresno, California;
Jacksonville, Florida;
Oklahoma City, Oklahoma;
Pulaski County, Arkansas;
San Antonio, Texas;
Syracuse, New York;
Tucson, Arizona;
Yonkers, New York.
Round III Rural EZs (2):
Aroostook County, Maine;
FUTURO, Texas.
Urban RCs (28):
Atlanta, Georgia;
Buffalo- Lackawanna, New York;
Camden, New Jersey;
Charleston, South Carolina;
Chattanooga, Tennessee;
Chicago, Illinois;
Corpus Christi, Texas;
Detroit, Michigan;
Flint, Michigan;
Hamilton, Ohio;
Lawrence, Massachusetts;
Los Angeles, California;
Lowell, Massachusetts;
Memphis, Tennessee;
Milwaukee, Wisconsin;
Mobile, Alabama;
New Orleans, Louisiana;
Newark, New Jersey;
Niagara Falls, New York;
Ouachita Parish, Louisiana;
Philadelphia, Pennsylvania;
Rochester, New York;
San Diego, California;
San Francisco, California;
Schenectady, New York;
Tacoma, Washington;
Yakima, Washington;
Youngstown, Ohio.
Rural RCs (12):
Burlington, Vermont;
Central Louisiana, Louisiana;
Eastern Kentucky, Kentucky;
El Paso County, Texas;
Greene- Sumter, Alabama;
Jamestown, New York;
Northern Louisiana, Louisiana;
Orange Cove, California;
Parlier, California;
Southern Alabama, Alabama;
Turtle Mountain Band of Chippewa, North Dakota;
West-Central Mississippi, Mississippi;
Source: HUD and USDA.
[A] Later received RC designation.
[B] During Round I, these communities were also designated as Round I
ECs.
[C] These communities received Round I EZ status on January 1, 2000.
[End of table]
[End of section]
Appendix III: Federal Benefits Available to EZs, ECs, and RCs at the
Time of Designation and as of September 30, 2003:
The authorizing legislation for the EZ/EC and RC programs provided
participants with grant and/or tax benefits. A prominent feature of the
EZ/EC program--the Social Services Block Grant--was only offered to
Round I EZ and EC participants. However, Round II EZs and ECs received
grant funds from HUD's and USDA's annual appropriations. In addition,
the number of tax benefits increased over the course of the three
rounds of the EZ/EC program and was the main benefit available to RCs.
(See table 14.):
Table 14: Summary of Benefits Provided to EZs, ECs, and RCs at the Time
of Designation and as of September 30, 2003:
Round I EZs; 1994;
At time of designation:
* EZ/EC Social Services Block Grants;
* EZ Employment Credit;
* Increased Section 179 Deduction;
* Enterprise Zone Facility Bonds;
* Regulatory waivers[A];
* Preference points for other federal programs;
* Earmarked grants and loans;
As of September 30, 2003[B]:
* EZ/EC Social Services Block Grants;
* EZ Employment Credit;
* Increased Section 179 Deduction;
* Enterprise Zone Facility Bonds;
* EZ Facility Bonds;
* Nonrecognition of Gains on the Sale of EZ Assets;
* Partial Exclusion of Gain on the Sale of EZ Stock;
* Preference points for other federal programs;
* Earmarked grants and loans.
Round I ECs; 1994;
At time of designation:
* EZ/EC Social Services Block Grants;
* Enterprise Zone Facility Bonds;
* Regulatory waivers[A];
* Preference points for other federal programs;
* Earmarked grants and loans;
* Economic Development Initiative Grants (Supplemental Empowerment
Zones and Enhanced Enterprise Communities);
* Section 108 Loan Guarantees (Supplemental Empowerment Zones and
Enhanced Enterprise Communities)[C];
As of September 30, 2003[B]:
* EZ/ EC Social Services Block Grants;
* Enterprise Zone Facility Bonds;
* Preference points for other federal programs;
* Earmarked grants and loans;
* Economic Development Initiative Grants (Supplemental Empowerment
Zones and Enhanced Enterprise Communities);
* Section 108 Loan Guarantees (Supplemental Empowerment Zones and
Enhanced Enterprise Communities).
Round II EZs; 1998;
At time of designation:
* Increased Section 179 Deduction;
* Enterprise Zone Facility Bonds;
* EZ Facility Bonds;
* Preference points for other federal programs;
* Earmarked grants and loans;
As of September 30, 2003[B]:
* Annual Appropriations, Fiscal Years 1999-2004;
* EZ Employment Credit;
* Increased Section 179 Deduction;
* Enterprise Zone Facility Bonds;
* EZ Facility Bonds;
* Nonrecognition of Gains on the Sale of EZ Assets;
* Partial Exclusion of Gain on the Sale of EZ Stock;
* Preference points for other federal programs;
* Earmarked grants and loans.
Round II ECs; 1998;
At time of designation:
* Preference points for other federal programs;
* Earmarked grants and loans;
As of September 30, 2003[B]:
* Annual Appropriations, Fiscal Years 1999-2004;
* Preference points for other federal programs;
* Earmarked grants and loans.
Round III EZs; 2002;
At time of designation:
* EZ Employment Credit;
* Increased Section 179 Deduction;
* Enterprise Zone Facility Bonds;
* EZ Facility Bonds;
* Nonrecognition of Gains on the Sale of EZ Assets;
* Partial Exclusion of Gain on the Sale of EZ Stock;
* Preference points for other federal programs;
* Earmarked grants and loans;
As of September 30, 2003[B]:
* EZ Employment Credit;
* Increased Section 179 Deduction;
* Enterprise Zone Facility Bonds;
* EZ Facility Bonds;
* Nonrecognition of Gains on the Sale of EZ Assets;
* Partial Exclusion of Gain on the Sale of EZ Stock;
* Preference points for other federal programs;
* Earmarked grants and loans;
* Annual Appropriations, Fiscal Year 2004 (rural only).
RCs; 2002;
At time of designation:
* Increased Section 179 Deduction;
* RC Employment Credit;
* Commercial Revitalization Deduction;
* Zero Percent Capital Gains Rate for RC Assets;
* Preference points for other federal programs;
As of September 30, 2003[B]:
* Increased Section 179 Deduction;
* RC Employment Credit;
* Commercial Revitalization Deduction;
* Zero Percent Capital Gains Rate for RC Assets;
* Preference points for other federal programs.
Source: GAO summary of HUD and USDA program documents.
[A] Following Round I, the EZ/EC program de-emphasized the waiver
feature, but communities could still request waivers on a more informal
basis.
[B] Some new benefits provided to later rounds of designation were also
provided to earlier designees. Thus, in some instances, the number of
benefits as of September 30, 2003, exceeds the number of benefits for
which a community was originally eligible.
[C] According to a HUD official, these Section 108 Loan Guarantees were
awarded between May and July, 1995.
[End of table]
[End of section]
Appendix IV: Other Tax Benefits Available to Businesses Serving
Distressed Communities and Low-Income Individuals:
In addition to federal tax benefits that have been specifically
available for businesses in EZs, ECs, and RCs, taxpayers who engage in
business in these communities are typically eligible for other federal
tax benefits not specifically designed for such communities. These
benefits include tax credits and deductions intended to encourage
taxpayers to invest in distressed communities, employ low-income
people, and provide housing for low-income people. (Table 15 provides a
list of other federal tax benefits intended to assist distressed
communities.):
Table 15: Other Tax Benefits Available to Businesses Serving Distressed
Communities and Low-Income Individuals:
Tax benefit: Low Income Housing Tax Credit;
Effective year: 1987;
Expiration year: none;
Provisions: Owners of newly constructed or renovated rental housing who
set aside a specified percentage or units for low-income persons for a
minimum of 15 years are eligible for a tax credit over a 10-year
period. The taxpayer must receive an allocation of these credits from a
state agency to qualify.
Tax benefit: Indian Employment Credit;
Effective year: 1994;
Expiration year: 2004;
Provisions: Businesses that hire certain individuals who live on or
near an Indian reservation may be eligible for a credit of 20 percent
on certain wages and benefits paid to qualified employees.
Tax benefit: Depreciation of Property Used on Indian Reservations;
Effective year: 1994;
Expiration year: 2004;
Provisions: Businesses can use shorter recovery periods to depreciate
certain qualified property that is used predominantly in the active
conduct of a trade or business on an Indian reservation.
Tax benefit: Work Opportunity Tax Credit;
Effective year: 1996;
Expiration year: 2003[A];
Provisions: Businesses can claim up to $2,400 in tax credits for first-
year wages paid to targeted employees, such as ex-felons, food stamp
recipients, and employees between 18 and 24 who live in an EZ, EC or
RC.
Tax benefit: Environmental Cleanup Cost Deduction;
Effective year: 1997;
Expiration year: 2003;
Provisions: Businesses that clean up certain sites contaminated with
hazardous substances can deduct their cleanup costs in the year that
the businesses incur those costs. Businesses may deduct these costs in
1 year instead of taking depreciation deductions over a specified
period of time.
Tax benefit: Welfare-to-Work Tax Credit;
Effective year: 1998;
Expiration year: 2003[A];
Provisions: Businesses can claim credits for wages paid to long-term
family assistance recipients in the first 2 years of employment. The
allowable credit limit is $3,500 for wages paid in the first year and
$5,000 for wages paid in the second.
Tax benefit: Qualified Zone Academy Bonds;
Effective year: 1998;
Expiration year: 2003[B];
Provisions: State and local governments can issue bonds at a zero-
percent interest rate to finance certain public school programs, such
as building renovation, teacher training, and educational materials and
equipment. Certain businesses, such as banks and insurance companies,
that purchase these bonds are eligible for tax credits equal to the
market taxable interest rate in lieu of interest payments. Schools that
benefit from these bonds must be located in an EZ or EC, or have at
least 35 percent of their students eligible for free or reduced cost
lunches.
Tax benefit: New Markets Tax Credit;
Effective year: 2001;
Expiration year: 2007[C];
Provisions: Investors in qualified Community Development Entities can
claim tax credits over a 7-year period. The credit is 5 percent in the
first 3 years of the investment, and 6 percent for the remaining 4
years, for a total of 39 percent. The Community Development Entitity
must receive an allocation of credits through the Treasury Department
for investors to be eligible.
Source: GAO summary of HUD and IRS publications; P.L. 99-514, P.L. 103-
66, P.L. 104-188, P.L. 105-34, P.L. 106-554, and P.L. 107-147.
[A] Expires for individuals who begin work after December 31, 2003.
[B] No new credits are authorized after 2003. However, unused credits
may be carried forward through 2006.
[C] Congress authorized $15 billion in New Markets Tax Credits and
provided a schedule limiting the amount of allocations for each
calendar year beginning in 2001 through 2007. Congress also allowed for
a carryover of unused credits to the next calendar year, increasing the
amount of credits available by that amount; however, no amount may be
carried to any calendar year after 2014.
[End of table]
[End of section]
Appendix V: Other Benefits Available to Certain Designees:
In addition to grants and federal tax benefits, EZs, ECs, and RCs were
eligible to seek waivers from federal programmatic, statutory, or
regulatory requirements to facilitate their revitalization efforts.
However, nominees made limited use of the waiver initiative and,
although still available to designees, it is no longer considered a
primary feature. Also, communities designated by HUD as Supplemental
Empowerment Zones or Enhanced Enterprise Communities were provided with
Section 108 Loan Guarantees to provide security for loans that finance
economic development and revitalization projects. Finally, in some
cases, EZs, ECs, and RCs received a preference in receiving assistance
under a variety of federal programs. However, the extent to which
communities have received these preferences is unknown.
Round I EZs and ECs Made Limited Use of the Waiver Initiative:
In Round I of the EZ/EC program, both HUD and USDA guidance invited
nominees to request, as an addendum to their applications, waivers from
federal programmatic, statutory, or regulatory requirements to
facilitate their ability to conduct revitalization efforts. This
feature was not established in the EZ/EC program legislation or
regulations; rather, it was an administrative initiative. In response
to a request, HUD and USDA would offer to work with the communities to
seek statutory authority for broader flexibility of federal programs.
For example, nominees could ask for exemptions, increased
flexibilities, or changes in eligibility requirements for other federal
programs.
Available data indicate that Round I designees made limited use of the
available waivers from programmatic and regulatory requirements to
facilitate their ability to conduct revitalization efforts. Program
officials said that many of the nominees requested waivers of statutory
requirements, which HUD and USDA could not provide. The HUD Interim
Assessment examined 244 waiver requests made by 18 urban Round I EZ/
ECs. The HUD Interim Assessment found that the most commonly requested
waivers included requests such as exemption from Davis-Bacon Act
requirements; flexibility in using block grant funds; and changes in
eligibility for federal programs, such as Aid to Families with
Dependent Children, Food Stamps, and Medicaid. The report found that
federal agencies fully or partially approved 5 percent of the requests
and denied 33 percent of the requests either because the agencies
lacked the authority to grant them or for other reasons. In addition,
21 percent of the waiver requests asked for flexibilities that already
existed, and the remaining requests either required more information or
the agency reached some other disposition. Although USDA officials did
not quantify the disposition of waiver requests through an independent
study, a USDA official estimated that fewer than 10 waiver requests had
been approved annually.
Because of the Round I experience, both HUD and USDA de-emphasized the
waiver initiative. In the application materials for HUD Round II and
III, and for the RCs, no mention is made of encouraging requests for
waivers. In the USDA Round II application materials, the waiver request
initiative is retained, but in the Round III application, no mention is
made of the opportunity for nominees to request waivers. HUD and USDA
officials told us that designees could still request waivers, but that
there was no longer a formal initiative such as was used in Round I.
HUD Designees Have Begun to Use Loan Guarantees:
After HUD designated the Supplemental Empowerment Zones and Enhanced
Enterprise Communities in Round I, the agency provided them with a
total of $653 million in Section 108 Loan Guarantees (See table
16).[Footnote 64] Like the Economic Development Initiative Grants also
offered to these designees, these loan guarantees are to provide
security for loans that finance economic development and revitalization
projects. A Section 108 loan guarantee allows local governments to
obtain loans for economic development projects that (1) benefit low and
moderate income families; (2) prevent or eliminate slums or blight; or
(3) meet other urgent community development needs. These loans are
secured by a community's current and future Community Development Block
Grant allocations for up to five years and carry the full faith and
credit of the U.S. government in the event of a default. This benefit
allows a local government entity to reduce its borrowing costs. The
local government entities can also provide additional security for
their section 108 loan repayments or enhance the feasibility of certain
projects by paying directly for certain project expenses with its
Economic Development Initiative grants.
Table 16: Section 108 Loan Guarantees for Supplemental Empowerment
Zones and Enhanced Enterprise Communities:
Supplemental Empowerment Zones; Local government entity: Los Angeles,
Calif. (City);
Amount in allocated Section 108 Loan Guarantees: $300 million.
Supplemental Empowerment Zones; Local government entity: Los Angeles,
Calif. (County);
Amount in allocated Section 108 Loan Guarantees: $25 million.
Supplemental Empowerment Zones; Local government entity: Cleveland,
Ohio;
Amount in allocated Section 108 Loan Guarantees: $87 million.
Enhanced Enterprise Communities; Local government entity: Boston, Mass;
Amount in allocated Section 108 Loan Guarantees: $22 million.
Enhanced Enterprise Communities; Local government entity: Oakland,
Calif;
Amount in allocated Section 108 Loan Guarantees: $22 million.
Enhanced Enterprise Communities; Local government entity: Houston, Tex;
Amount in allocated Section 108 Loan Guarantees: $175 million.
Enhanced Enterprise Communities; Local government entity: Kansas City,
Mo;
Amount in allocated Section 108 Loan Guarantees: $14.2 million.
Enhanced Enterprise Communities; Local government entity: Kansas City,
Kans;
Amount in allocated Section 108 Loan Guarantees: $7.8 million.
Total;
Amount in allocated Section 108 Loan Guarantees: $653 million.
Source: HUD.
[End of table]
As of September 30, 2003, the eight local government entities that
received Section 108 Loan Guarantees as part of the Supplemental
Empowerment Zone and Enhanced Enterprise Community designations had
used about 36 percent of the loan guarantees that HUD awarded (see
table 17).
Table 17: Amount of Section 108 Loan Guarantees Awarded and Used as of
September 30, 2003 (Dollars in thousands):
Supplemental Empowerment Zones;
Amount awarded: $241,000;
Amount used: $86,560;
% Drawn down: 35.9%.
Enhanced Enterprise Communities;
Amount awarded: $412,000;
Amount used: $151,741;
% Drawn down: 36.8%.
Total;
Amount awarded: $653,000;
Amount used: $238,301;
% Drawn down: 36.5%.
Source: GAO analysis of HUD data.
[End of table]
Designees' Use of Competitive Preferences Is Unknown:
HUD and USDA expect EZs, ECs, and RCs to use their designations to
attract additional investment. Businesses and community organizations
in these communities can seek grants and loans from for-profit
corporations, nonprofit entities, foundations, state and local
governments, and other federal agencies. For example, a bank might help
capitalize a community lending institution or a private foundation
might contribute to a recreational facility for youths. In some cases,
organizations or individuals operating or residing in EZs, ECs, or RCs
receive competitive priority for federal grants, loans, or technical
assistance based solely on their EZ, EC, or RC designations. HUD and
USDA officials said that during Round I of the EZ/EC program the
Community Empowerment Board encouraged federal agencies to provide
preferences to applicants from EZs or ECs in competition for federal
funds. For example, communities designated as federal EZs, ECs, or RCs
could receive a competitive preference for the Environmental Protection
Agency's 2003 National Brownfields Assessment, Revolving Loan Fund, and
Cleanup Grants.[Footnote 65] In addition, in 2003, the U.S. Department
of Education's Teacher Quality Enhancement Grants program provided a
competitive priority to applicants who proposed to carry out activities
in EZs or ECs.[Footnote 66] In addition, Congress has regularly
earmarked federal funds, such as grants for low-income housing repair
or direct loans for rural development projects, to projects located in
EZs and ECs.
The extent to which EZs, ECs, and RCs have taken advantage of
competitive preferences is not known. Although HUD and USDA maintain
data in their performance management systems on EZs', ECs', and RCs',
use of other sources of funding, these systems do not differentiate
whether the funding source included a preference for applicants located
in EZs, ECs, or RCs. However, officials from HUD and USDA told us that
their perception was that many federal agencies that provided
competitive preferences to applicants located in EZ/ECs in Round I no
longer offer these preferences. For example, one HUD official told us
that the Department of Justice's Weed and Seed program, which provides
assistance to communities for reducing crime and drug abuse and
bringing in human services, no longer offers bonus points to applicants
located in EZs, ECs, or RCs. One HUD official noted that the number of
preferences offered might have decreased because the Community
Empowerment Board disbanded.
[End of section]
Appendix VI: Summary of Evaluations of the EZ/EC Program:
Author/Title: Aigner, Stephen M., Cornelia B. Flora, and Juan M.
Hernandez; "The Premise and Promise of Citizenship and Civil Society
for Renewing Democracies and Empowering Sustainable Communities;"
Sociological Inquiry 71, no. 4 (2001): 493-507;
Purpose and scope:
* To investigate the usefulness of several concepts (e.g., empowerment
paradigm, citizen participation, and inclusion, civil society) in local
sites' ability to leverage dollars for sustainable development;
* 33 Round I rural EZ/ECs;
Primary methods and data used:
* Collected data through existing data sources (e.g., educational and
banking administrations) and USDA performance management system data;
* Performed descriptive statistical analysis;
Major findings:
* As the percent of individual citizens involved on a governing board
increased, so did the number of women board members (in this study,
women served as a proxy for how "inclusive" boards were in representing
diverse groups);
* Findings related to dollars leveraged relied heavily on the USDA
performance management system data;
Major limitations:
* The study findings are not generalizable outside of the sample
studied;
* Reviews by USDA's Inspector General stated that they had little
confidence in the accuracy of the performance data. Therefore, such
findings are not reported here;
Author/Title: Chaskin, Robert J. and Clark M. Peters; Governance in
Empowerment Zone Communities: A Preliminary Examination of Governance
in Fifteen Empowerment Zone Communities; Chicago, IL: University of
Chicago, Chapin Hall Center for Children, 1997;
Purpose and scope:
* To examine the engagement of local actors in a process of planning
and governance, and their place within the broader governance structure
in the EZ/EC program;
* Round I urban, rural, EZs, ECs, Supplemental Empowerment Zones, and
Enhanced Enterprise Communities;
Primary methods and data used:
* Collected data through open-ended interviews and document reviews;
* Prepared case studies;
Major findings:
* Community participation in governance structures was greater during
the planning phase than during the implementation phase, because of
difficulties of implementing projects in reasonable time frames;
Major limitations:
* The study examined only the first year of the functioning of the Ezs.
Author/Title: Community Partnership Center; Rural Empowerment Zones/
Enterprise Communities: Lessons from the Learning Initiative. Findings
and Recommendations of the Community Partnership Center EZ/EC Learning
Initiative; Knoxville, TN: Community Partnership Center, University of
Tennessee, 1998;
Purpose and scope:
* To assess, primarily from the perspective of local residents, how
effectively the EZ/EC Program is carrying out the key principles;
* Round I rural EZ and ECs;
Primary methods and data used:
* Collected data through participant observation of Learning Initiative
Team workshops and document reviews of 1996 Annual Reports and
executive summaries;
Major findings:
* All but one of the rural sites had made progress on at least some of
their benchmark activities;
* Citizen participation was identified as the most important aspect of
the EZ/EC Program; however, recruiting and sustaining citizen
participation over the long term is an on-going challenge in rural
communities;
* Sustained community participation seems to be influenced by the
capacity of existing community-based organizations;
* Effective EZ/EC boards are those that represent low-income
communities and lessen the role of typical political players;
Major limitations:
* Findings are not generalizable to other EZ/EC rural or urban sites;
* Annual report and executive summary data were self-reported and were
not independently verified. A lack of consistency across sites was
observed;
Author/Title: Gittell, Marilyn, Kathe Newman, and Francois Pierre-
Louis; Empowerment Zones: An Opportunity Missed: A Six City Comparative
Study; New York, NY: The City University of New York, The Howard
Samuels State Management and Policy Center, 2001;
Purpose and scope:
* To determine the extent to which the EZ program achieved its goal of
increased citizen participation through community organization;
* Round I urban EZs;
Primary methods and data used:
* Collected data through open-ended interviews and document reviews;
* Prepared case studies;
Major findings:
* Although the EZ program was specifically designed to support the
participation of local groups, that process was enforced only in the
initial planning phase of the program;
* During the implementation of the EZ program in designated cities,
federal supervision diminished and local elites asserted their control;
Major limitations:
* Time frames of the study are not completely clear;
Author/Title: Gittell, Marilyn, and others; "Expanding Civic
Opportunity: Urban Empowerment Zones;" Urban Affairs Review 33, no. 4
(1998): 530-58;
Purpose and scope:
* To assess the degree to which the participation of community-based
organizations in the EZ strategic planning process has expanded
community capacity;
* Round I urban EZs;
Primary methods and data used:
* Collected data through open-ended interviews and document reviews;
* Prepared case studies;
Major findings:
* Community groups were underrepresented in EZ governance structures;
* One year into the EZ process, there was little evidence that the
program had contributed significantly to the development of community
capacity;
Major limitations:
* The study examined only the first year of the functioning of the EZs;
Author/Title: Hebert, Scott, and others; Interim Assessment of the
Empowerment Zones and Enterprise Communities (EZ/EC) Program: A
Progress Report; Prepared for the U.S. Department of Housing and Urban
Development Washington, D.C.: November 2001;
Purpose and scope:
* To present an initial assessment of how the four EZ/EC principles
have been interpreted and implemented and how the application of these
principles may be contributing to the revitalization of the targeted
communities[A];
* Round I urban EZ/ECs;
Primary methods and data used:
* Acquired commercially provided employment data;
* Performed longitudinal analysis of employment data during the 5 years
before and the 5 years after designation;
* Collected data on business employment levels and attitudes toward the
tax incentives through a telephone survey of zone businesses;
* Performed multiple regression models on survey data to determine
whether use of the zone's financial incentives was associated with
change in resident employment;
* Collected data using document reviews, open-ended interviewing, and
comparative analysis to determine site resident participation in
program governance, reinvention of government, and diversity of
partnerships;
* Used agency performance management system data;
* Performed descriptive statistical analysis on performance data to
examine the programs and activities that sites used to address physical
and human development;
Major findings:
* Between 1995 and 2000, employment of EZ residents grew faster in
zones than in demographically similar neighborhoods in four of the six
cities and in the six-city total;
* Larger business establishments reported using tax incentives more
frequently than smaller businesses;
* Many small businesses were not aware of the tax incentives;
* The number of business establishments owned by zone residents
increased;
* Both zone-resident owned businesses and small businesses located in
zones were more likely to hire local zone residents;
* There was a significant relationship between use of the EZ Wage Tax
Credit and Section 179 Expensing Provision and the percentage change in
the number of residents employed;
* Local attention to building the capacity of zone residents to
participate in zone governance has been extremely uneven;
* Residents and community-based organization representatives combined
constitute typically 50 percent of board memberships;
* Program partnerships took many forms from temporary, loosely-
organized associations, to long-term formalized alliances;
* Reported findings on program activities relied entirely on the HUD
performance management system data;
Major limitations:
* It is not possible to determine whether zone designation caused
employment rates to increase or whether rates increased for other
reasons, such as general economic conditions or local initiatives;
* Because of the low response rate, survey responses might be biased
toward firms that favor the EZ;
* Because the survey found that most small zone businesses were unaware
of financial incentives, it is not plausible that these businesses
could have been motivated by the financial incentives of which they
were not aware;
* Findings regarding ECs are based on a nonprobability sample and
cannot be generalized to ECs that were not studied;
* Particular cases in the analysis are identified as successes or
failures, but the criteria for determining success or failure are not
specified;
* Zone governance was difficult to monitor;
* Reviews by HUD's Inspector General stated that they had little
confidence in the accuracy of the performance data. Therefore, such
findings are not reported here;
Author/Title: Nathan, Richard P., and others; Investing in a New
Future: Special Report on Community Development Financing in Selected
Empowerment Zone/Enterprise Community Sites; Albany, NY: The Nelson A.
Rockefeller Institute of Government, 1997;
Purpose and scope:
* To compare commercial and residential lending activities and
characteristics of these lending activities with respect to the
Metropolitan Statistical Areas where the sites are located;
* 18 Round I urban EZs, ECs, Supplemental Empowerment Zones, and
Enhanced Enterprise Communities;
* To determine the character of community input and governance in EZ/
EC-funded community development activities;
Primary methods and data used:
* Used loan data constructed by aggregating 1995 Home Mortgage
Disclosure Act census tract-level data into 18 EZ/EC geographic areas;
* Conducted and analysis of residential lending activities;
* Used Small Business Administration data on commercial loans, which
were constructed by apportioning and summing all the zip-code level
data into 18 EZ/ECs and their respective geographical areas;
* Conducted and analysis of commercial lending activities;
* Collected data through document reviews;
* Prepared case studies;
Major findings:
* Home loans, measured as the loan activities per 1000 dwellings, were
almost half as prevalent in the 18 EZs/ECs as in their corresponding
Metropolitan Statistical Areas;
* Citizens in most communities were able to play a moderate to
substantial role in the governance of their community's EZ/ EC
Initiative;
* In all 18 study cities, citizens had some opportunity to advise local
EZ/EC governing bodies and community development finance entities;
* In 11 of the study cities, including all six EZs, citizens were
provided with some means of citizen participation and involvement in
the governance of various community development initiatives;
* There were few instances in which zone residents and stakeholders
actually controlled the allocation of EZ/EC resources;
Major limitations:
* No discussion of Home Mortgage Disclosure Act reliability was
included in the report; however, GAO work has found these data to be
sufficiently reliable for similar purposes.[B];
* Report findings on commercial lending relied on Small Business
Administration data, for which there is no knowledge about the
reliability of the data. Therefore, such findings are not reported
here;
* The researchers did not control for other factors influencing the
differences in lending activities in the 18 EZ/ECs when comparing with
corresponding Metropolitan Statistical Areas;
* Findings regarding ECs are based on a nonprobability sample and
cannot be generalized to ECs that were not studied;
* Because the study covered only the years 1994-1997, insufficient time
had passed when the study was published to draw definitive conclusions;
Author/Title: Nathan, Richard P., and others; Empowerment Zone
Initiative: Building a Community Plan for Strategic Change. Findings
from the First Round Assessment of the Empowerment Zone/Enterprise
Community Initiative; Albany, NY: The Nelson A. Rockefeller Institute
of Government, 1997;
Purpose and scope:
* To summarize community participation in the strategic planning,
governance, and benchmarking processes for the beginning of the
program;
* 18 Round I urban EZs, ECs, Supplemental Empowerment Zones, and
Enhanced Enterprise Communities;
Primary methods and data used:
* Collected data through document reviews of site descriptions of the
strategic planning;
* Performed a comparative analysis of types of program strategies
across sites;
Major findings:
* The strategic planning process often began as a city-government
process and evolved into a more community-directed process headed by
steering committees of 20 to 100 members;
* The most common governance structure was at least moderately
integrated into the city government and used one central structure to
oversee the Initiative;
* Cities with considerable community control over plan development
tended to have an existing citizen participation structure that could
be used as a foundation to initiate planning efforts;
* Citizen influence was greatest in determining site strategies and
program activities;
* Citizen participation decreased as the initiative moved from planning
to implementation;
* Citizen participation was reported to be higher in the EZ/EC
Initiative than in other similar federal initiatives;
* Most cities did not have grassroots participation;
* Community participation was greater in the early phases of the
benchmarking process;
Major limitations:
* Findings regarding ECs are based on a nonprobability sample and
cannot be generalized to ECs that were not studied;
* Local sites provided self-reported data to the authors, which were
not independently verified.
Author/Title: Reid, J. Norman and Karen Savoie Murray; "Empowering
Rural Communities: A Perspective at the Five-Year Point;" Paper
presented at the annual meeting of the Rural Sociological Society,
Washington, D.C., August 2000;
Purpose and scope:
* To make a preliminary exploration of performance data on program
implementation;
* Round I and Round II rural EZ/ECs;
Primary methods and data used:
* Collected data through document reviews and site visits;
* Used USDA performance data;
* Performed descriptive statistical analysis of data;
Major findings:
* Reported findings relied heavily on the USDA performance management
system data;
Major limitations:
* Reviews by USDA's Inspector General stated that they had little
confidence in the accuracy of the performance data. Therefore, such
findings are not reported here;
Author/Title: U.S. General Accounting Office; Community Development:
Businesses' Use of Empowerment Zone Tax Incentives; GAO/RCED-99-253,
(Washington, D.C.: September 30, 1999);
Purpose and scope:
* To examine the extent to which businesses used the program's three
initial tax incentives and other tax incentives, and determine reasons
why in some cases the incentives were not used;
* Round I urban and rural EZs;
Primary methods and data used:
* Surveyed 2,380 businesses located in nine federal designated EZs.
Surveys were mailed to 513 large businesses and 744 small businesses in
urban EZs, and 1,123 to businesses in rural EZs;
* Analyzed the results of the surveys;
Major findings:
* The employment credit was the most frequently used tax incentive,
especially by the larger businesses;
* Businesses that used the employment credit cited it as somewhat
important in their hiring decisions;
* The most frequently cited reason for not using the credit was that
their employees lived out of the zones or that they did not know about
the credit;
Major limitations:
* Because more than half of the large urban businesses and rural
businesses did not respond to the surveys, the survey results only
reflect actual usage of the incentives;
* The estimates based on the surveys might be imprecise because of the
sampling error associated with estimate.
Author/Title: Fahui Wang and Joseph A. Van Loo; "Citizen Participation
in the North Delta Mississippi Community Development Block Grants,
Empowerment Zones and Enterprise Communities;" Planning Practice and
Research 13, no. 4 (1998): 443-51;
Purpose and scope:
* To examine citizen participation in the EC catchment area compared
with the community development block grant catchment area;
* North Delta Mississippi EC;
Primary methods and data used:
* Collected data through participant observation and document reviews.
Major findings:
* Citizen participation outreach efforts were more extensive in the EC
program than in the community development block grant program;
* Citizen involvement was more extensive and more meaningful (i.e.,
participation in strategic planning and decision making) in the EC
program than in the community development block grant program;
* Major limitations:
* The findings are specific to this EC site and cannot be generalized
to ECs that were not studied;
* The authors could not determine to what extent citizen participants
in each program were representative of the larger population living in
the target areas, and therefore, to what extent key factors, such as
socioeconomic status, might have influenced citizen participation.
[A] The four key principles of the EZ/EC program are strategic vision,
economic opportunity, community-based partnerships, and sustainable
community development.
[B] U.S. General Accounting Office, Public Housing: HOPE VI Resident
Issues and Changes in Neighborhoods Surrounding Grant Sites, GAO-04-
109, (Washington, D.C.: November 2003).
[End of table]
[End of section]
Appendix VII: Comments from the Department of Housing and Urban
Development:
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, DC 20410-7000:
OFFICE OF COMMUNITY PLANNING AND DEVELOPMENT:
FEB 17 2004:
Mr. Charles Wilson
Assistant Director
Financial Markets and Community Investment Team
U.S. General Accounting Office:
441 G Street, NW
Washington, DC 20548-0001:
Dear Mr. Wilson:
The purpose of this letter is to provide our comments to the General
Accounting Office's (GAO) draft report, GAO-04-306 entitled "Community
Development Federal Revitalization Programs Are Being Implemented, but
Data on the Use of Tax Benefits Are Limited that was transmitted to us
on February 3, 2004.
The Office of Community Planning and Development (CPD) concurs with the
findings of GAO that the Empowerment Zone/Enterprise Community (EZ/EC)
and Renewal Community (RC) programs are well under way, yet qualitative
benefit data, from which an analysis may be
ascertained, are limited at this time. HUD agrees that the benefit of
the tax incentives authorized by the Community Renewal Tax Relief Act
of 2000 is still unknown.
The following considerations should be added to the GAO report when it
is issued to Congress and the public:
1. HUD's Office of Community Renewal (OCR), which administers the EZ
and RC program, is developing a strategy to use available federal
agency resources to develop the data needed to assess current
utilization of the tax incentives by the 329,000 businesses in the HUD
designated RCs and EZs. This effort will include reaching out to OCR's
counterparts in the Office of Policy Development and Research in HUD,
the Department of Agriculture (USDA), and the Internal Revenue Service
(IRS).
2. To respond to findings and recommendations of HUD's Office of
Inspector General (OIG) and as part of CPD's ongoing effort to improve
the quality of information on the programs we administer, OCR has
developed the following:
* A proposed rule on resident benefit and eligible uses of Round II EZ
funds, to be published in the Federal Register this spring;
* A Round 11 EZ Desk Officer guidebook with instructions for reporting
on the progress assessments in the on-line Performance Measurement
System (PERMS);
* Policy and guidance on third-party contracts as it relates to Round 11
EZs;
* Improved and refined financial procedures and controls on the Round II
EZ funds drawdown system (LOCCS); and:
* Improved risk assessment and monitoring guidance, which is provided to
both grantees and HUD field offices.
3. The Internal Revenue Service (IRS) has assisted CPD/OCR in answering
technical questions on the RC and EZ tax incentives and participated in
HUD's training conferences and workshops along with other events to
educate community leaders, accountants, and businesses on the tax
incentives. We will continue in our efforts to work with IRS in
compiling the necessary data to measure the tax benefits that have been
realized.
4. The progress assessments using information from PERMS are pursuant to
statutory requirements for HUD to determine if the EZ/ECs and RCs are
making adequate progress in implementing their strategic plans and tax
incentive utilization plans. The procedures to verify the data in PERMS
and perform the progress assessments are different from the procedures
that CPD follows when we monitor grants, including the HUD EZ grants,
because the purpose of grant monitoring is for funds control and to
enforce other federal legal requirements.
5. Based on the HUD OIG's 2003 audit recommendations, OCR is taking
steps to improve data accuracy in PERMS, as noted above.
If you have any questions concerning the above comments, please call
Ms. Pamela Glekas Spring, Director, Office of Community Renewal, on
(202) 708-6339.
Sincerely,
Signed by:
Donald P. Mains:
Deputy Assistant Secretary for Economic Development:
[End of section]
Appendix VIII: Comments from the Internal Revenue Service:
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224:
COMMISSIONER:
February 19, 2004:
Mr. William Shear:
Director, Financial Markets and Community Investment
United States General Accounting Office:
441 G Street, NW
Washington, DC 20548:
Dear Mr. Shear:
The Internal Revenue Service reviewed your draft report, Federal
Revitalization Programs are Being Implemented, but Data on the Use of
Tax Benefits are Limited (GAO-04-306). The Statistics of Income Division
provided data on the available tax benefits to the General Accounting
Office and these data are accurately reflected in the draft report.
We concur with the recommendation that the IRS work with the Department
of Housing and Urban Development and the Department of Agriculture to
identify the data needed to assess the use of the tax benefits of
revitalization programs and estimate the cost of collecting these data.
The Service will also consult with Treasury's Office of Tax Policy to
see if the recommendation's benefits would outweigh its costs
(including the increased taxpayer burden to collect the data).
Thank you for the opportunity to comment on this draft report. If you
have any questions, or would like to discuss this response in more
detail, please contact Floyd Williams, Director of Legislative Affairs,
at (202) 622-4725.
Sincerely,
Signed for:
Mark W. Everson:
[End of section]
Appendix IX: Comments from the U.S. Department of Agriculture:
DEPARTMENT OF AGRICULTURE
OFFICE OF THE SECRETARY
WASHINGTON, D.C. 20250:
FEB 17 2004:
TO: William Shear:
Director, Financial Markets and Community Investment:
United States General Accounting Office:
FROM: Gilbert G. Gonzalez
Acting Under Secretary
Rural Development:
THROUGH: Sherie Hinton Henry
Deputy Administrator for Operations and Management Division:
Signed by Gilbert G. Gonzales and Sherie Hinton Henry:
SUBJECT: Community Development: Federal Revitalization Programs Are
Being Implemented, but Data on the Use of Tax Benefits Are Limited,
Audit Number GAO-04-306:
Thank you for providing the United States Department of Agriculture
(USDA) and Rural Development with your draft report, "Community
Development: Federal Revitalization Programs are Being Implemented, but
Data on the Use of Tax Benefits are Limited." I would like to offer the
following comments for your consideration, and ask that a copy of this
response be included in your final report.
The Renewal Community (RC) program is entirely under the purview of the
United States Department of Housing and Urban Development (HUD). This
response is, therefore, limited to the portion dealing with the
Empowerment Zone and Enterprise Community (EZ/EC) program.
The GAO report addresses only two program tools (grants and tax
incentives) and focuses primarily on the latter. In so doing, it
neglects the broader purpose behind the EZ/EC program: empowering
impoverished communities to plan for and achieve their own goals
through holistic means. This type of community development is designed
to employ many actors and use a wide array of tools. Tax incentives
were simply one of those tools that communities could choose to use to
help draw businesses into Zones and to prompt businesses to hire Zone
residents.
The report concludes on pages 32 and 43 that a lack of data on the use
of tax incentives limits the ability of the communities to attract
additional resources. This conclusion assumes that the only way
communities can successfully leverage their resources is by using the
tool upon which the report primarily focuses. The data generated from
the communities themselves show that the EZ/ECs, on average, leveraged
every program dollar with 16 other dollars brought in from other
sources.
Those data are generated from Rural Development's Benchmark Management
System (BMS). The BMS is an online reporting system that collects EZ/EC
performance data submitted by the communities themselves. The report
notes, however, that the USDA Inspector General's office has raised
concerns about the reliability of those data, suggesting the
reliability of BMS data is wholly dependent upon the communities
themselves. In reality, the BMS information is monitored and verified
by Rural Development staff in our State Offices and at the National
Office. Moreover, the statements regarding the BMS do not accurately
reflect its appropriate use or utility. BMS is employed not as an audit
or accounting tool of the EZ/EC program but as a management instrument
and, as such, does an effective job at capturing the successes and
trend lines for the program.
On page 19, the report briefly outlines some of the other benefits that
accrued to "certain designees." This short list is focused on grants,
loans, or ways to further facilitate grants or loans. The report does
not mention that for the first two years of the program, USDA funded an
effective AmeriCorps program within EZ/EC and Champion communities.
This resource provided community capacity-building early in the rural
EZ/EC program. The AmeriCorps members reached out to the disadvantaged
and disenfranchised in communities. Their work provided much of the
backbone of continuing citizen participation in the program. USDA's
AmeriCorps members were largely responsible for local program
penetration into rural neighborhoods, which is where the projects
outlined in the strategic plan had to come to fruition. The report
passed over this and other human-to-human aspects of the program in
favor of more typical quantitative measurements, such as how many grant
dollars were distributed.
The report's conclusions and recommendations on page 43 focus on only a
small portion of the overall EZ/EC program. Furthermore, even though
USDA would welcome the opportunity to further collaborate with its
Federal partners in the Internal Revenue Service (IRS) and HUD, we are
concerned about suggestions that would stretch USDA's already scarce
resources to produce data of possibly marginal utility. There is also
real concern about taking steps that could invade taxpayers' privacy.
There are also a few technical details that need correction or further
explanation:
* Page 9, first paragraph - The Community Empowerment Board was indeed
disbanded prior to Round III of the EZ program, but no explanation is
included as to why this occurred.
* Page 13, Footnote 14 - The text leads the reader to the conclusion
that the Secretary of Agriculture unilaterally decided that
outmigration should be a selection criteria. In fact, the legislation
authorizing Round 11 provided this opportunity.
* Page 15, Footnote 18 - This same appropriations legislation also
provided $1 million for the two rural Round III Zones.
* Page 16, Table 6 - The allocations per EZ in 2000 was $2,000,000 and
in 2002 was $1,996,000.
* Page 26, Figure 4 - The average area of the Round Il rural Empowerment
Zones is incorrect. The correct figure is 725.2.
* Page 36, second paragraph - Round III rural EZ reporting requirements
are exactly the same as the other EZ/EC communities, not less
stringent.
* Page 37, second paragraph - The statement "In 1997 we reported that
EZ/EC were not consistently reporting their progress to USDA, and
USDA's EZ/EC state coordinators did not provide systematic reporting on
the progress of rural EZ/EC" is accurate. It fails, however, to mention
that we addressed this deficiency by adopting a nationwide community
development field training program. In addition, there is no mention of
the newly adopted Rural Development Field Structure Consistency Plan
that has devolved many EZ/EC administration duties to our State
Offices.
Thank you for this opportunity to comment on the report. If you have
any questions, please contact John M. Purcell, Director, Financial
Management Division, at (202) 692-0080.
[End of section]
Appendix X: Comments from the Department of Health and Human Services:
DEPARTMENT OF HEALTH AND HUMAN SERVICES:
ADMINISTRATION FOR CHILDREN AND FAMILIES
Office of the Assistant Secretary, Suite 600
370 L'Enfant Promenade, S.W.
Washington, D.C. 20447:
DATE: FEB 18 2004
TO: William Shear:
Director, Financial Markets and Community Investment:
FROM: Wade F. Horn, Ph.D. Assistant Secretary for Children and
Families:
Signed by Wade F. Horn:
SUBJECT: GAO Draft Report, "Community Development: Federal
Revitalization Programs Are Being Implemented, but Data on the Use of
Tax Benefits Are Limited," (GAO-04-306):
The Administration for Children and Families' Office of Community
Services has no comments on the above-referenced report.
If you have any questions, please contact Robert Mott, Deputy Director,
Office of Community Services, at (202) 401-5291.
Attachment:
COMMENTS OF THE ADMINISTRATION FOR CHILDREN AND FAMILIES ON THE GENERAL
ACCOUNTING OFFICE'S DRAFT REPORT, "COMMUNITY DEVELOPMENT: FEDERAL
REVITALIZATION PROGRAMS ARE BEING IMPLEMENTED, BUT DATA ON THE USE OF
TAX BENEFITS ARE LIMITED," (GAO-04-306):
The Administration for Children and Families' (ACF) Office of Community
Services (OCS) appreciates the opportunity to comment on this draft
report.
GAO Recommendations:
To facilitate the administration, audit, and evaluation of the
Empowerment Zone and Enterprise Zone programs and Renewable Communities
programs, we recommend that the Department of Housing and Urban
Development, the United States Department of Agriculture, and the
Internal Revenue Service collaborate to (1) identify the data needed to
assess the use of the tax benefits and the various means of collecting
such data; (2) determine the cost-effectiveness of collecting these
data, including the potential impact on taxpayers and other program
participants; (3) document the findings of their analysis; and, if
necessary (4) seek the authority to collect the data, if a cost-
effective means is available.
ACF Comments:
ACF's OCS has reviewed this draft report and has no comments at this
time.
[End of section]
Appendix XI: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
William Shear (202) 512-8678 Charles Wilson, Jr. (202) 512-6891:
Acknowledgments:
In addition to those individuals named above, Jonathan Altshul, Susan
Baker, Daniel Blair, Mark Braza, Emily Chalmers, Patricia Farrell
Donahue, David Dornisch, DuEwa Kamara, Terence Lam, Alison Martin,
Grant Mallie, John McGrail, John Mingus, Marc Molino, Gretchen Maier
Pattison, Minette Richardson, and Michael Simon made key contributions
to this report.
[End of section]
Bibliography:
Aigner, Stephen M., Cornelia B. Flora, and Juan M. Hernandez. "The
Premise and Promise of Citizenship and Civil Society for Renewing
Democracies and Empowering Sustainable Communities." Sociological
Inquiry 71, no. 4 (2001): 493-507.
Chaskin, Robert J. and Clark M. Peters. Governance in Empowerment Zone
Communities: A Preliminary Examination of Governance in Fifteen
Empowerment Zone Communities. (Chicago, IL: University of Chicago,
Chapin Hall Center for Children, 1997).
Community Partnership Center. Rural Empowerment Zones/Enterprise
Communities: Lessons from the Learning Initiative. Findings and
Recommendations of the Community Partnership Center EZ/EC Learning
Initiative. (Knoxville, TN: Community Partnership Center, University of
Tennessee, 1998).
Gittell, Marilyn, and others. "Expanding Civic Opportunity: Urban
Empowerment Zones." Urban Affairs Review 33 no. 4 (1998): 530-58.
Gittell, Marilyn, Kathe Newman, and Francois Pierre-Louis. Empowerment
Zones: An Opportunity Missed: A Six City Comparative Study. (New York,
NY: The City University of New York, The Howard Samuels State
Management and Policy Center, 2001).
Hebert, Scott and others. Interim Assessment of the Empowerment Zones
and Enterprise Communities (EZ/EC) Program: A Progress Report, prepared
for the U.S. Department of Housing and Urban Development. (Washington,
D.C.: November 2001).
Nathan, Richard P. and others. Investing in a New Future: Special
Report on Community Development Financing in Selected Empowerment Zone/
Enterprise Community Sites. (Albany, NY: The Nelson A. Rockefeller
Institute of Government, 1997).
----Empowerment Zone Initiative: Building a Community Plan for
Strategic Change: Findings from the First Round of Assessment. (Albany,
NY: State University of New York, The Nelson A. Rockefeller Institute
of Government, 1997).
Reid, J. Norman and Karen Savoie Murray. "Empowering Rural Communities:
A Perspective at the Five-Year Point." Paper presented at the annual
meeting of the Rural Sociological Society, Washington, D.C., August
2000.
U.S. General Accounting Office. Community Development: Businesses' Use
of Empowerment Zone Tax Incentives. GAO/RCED-99-253. (Washington, D.C.:
September 30, 1999).
Wang, Fahui, and Joseph A. Van Loo. "Citizen Participation in the North
Delta Mississippi Community Development Block Grants, Empowerment Zones
and Enterprise Communities." Planning Practice and Research 13, no. 4
(1998): 443-51.
[End of section]
Related GAO Products:
Community Development: Businesses' Use of Empowerment Zone Tax
Incentives. GAO/RCED-99-253 (Washington, D.C.: September 1999).
Community Development: Progress on Economic Development Activities
Varies Among the Empowerment Zones. GAO/RCED-99-29 (Washington, D.C.:
November 1998).
Community Development: Information on the Use of Empowerment Zone and
Enterprise Community Tax Incentives. GAO/RCED-98-203 (Washington,
D.C.: June 1998).
Community Development: Identification of Economically Distressed
Areas. GAO/RCED-98-158R (Washington, D.C.: May 1998).
Economic Development Activities: Overview of Eight Federal Programs.
GAO/RCED-97-193 (Washington, D.C.: August 1997).
Rural Development: New Approach to Empowering Communities Needs
Refinement. GAO/RCED-97-75 (Washington, D.C.: March 1997).
Community Development: Status of Urban Empowerment Zones. GAO/RCED-97-
21. (Washington, D.C.: December 1996).
(250131)
FOOTNOTES:
[1] An area can also meet this nomination requirement if it is nominated
by an economic development corporation chartered by the state.
[2] Social Services Block Grant funds, administered by the Department
of Health and Human Services (HHS), have been available to state
governments since 1981 to address the social service needs of their
residents.
[3] Businesses in Round I ECs are eligible only for the tax-exempt bond
benefit.
[4] One Supplemental Empowerment Zone and all four Enhanced Enterprise
Communities had also received Round I EC designations.
[5] HHS does not participate in the administration of Rounds II and III
of the EZ/EC program or in the RC program, because Congress only
authorized these grants in Round I of the EZ/EC program.
[6] At the same time as Round I EZ/EC designations, HUD also designated
two Supplemental Empowerment Zones and four Enhanced Enterprise
Communities.
[7] HUD and USDA expect EZs, ECs, and RCs to use their designations to
attract additional investment.
[8] None of the evaluations we reviewed analyzed the RC program.
[9] Scott Hebert and others, Interim Assessment of the Empowerment
Zones and Enterprise Communities (EZ/EC) Program: A Progress Report,
prepared for U.S. Department of Housing and Urban Development
(Washington, D.C.: November 2001).
[10] U.S. Department of Housing and Urban Development, "Renewal
Communities: Urban and Rural Application Guide" (Washington, D.C.:
2001).
[11] In Rounds II and III of the EZ/EC program, nominated communities
located in Alaska or Hawaii could also use income criteria instead of
criteria for poverty, size, and general distress.
[12] In the EZ/EC program, the legislation required that the nominated
area have "pervasive" unemployment, but did not define this term. In
its regulations, HUD defined unemployment as not less than the national
average rate of unemployment in the 1990 census. In contrast, USDA
specified that unemployment could be demonstrated by a combination of
information on the unemployed, underemployed, discouraged workers,
plant or military base closings, or "other relevant unemployment
indicators," but did not specify the required level of unemployment. In
Rounds II and III, the legislation also allowed nominees in rural areas
to use outmigration criteria as an alternative to poverty criteria.
[13] Also, while Round I EZ/EC nominees could not include any area on
an Indian reservation, nominees for other rounds of the EZ/EC program
and for the RC program could.
[14] 24 C.F.R. 597.102(c), 24 C.F.R. 598.110(c), 24 C.F.R.
599.105(e)(2)(iii).
[15] 7 C.F.R. 25.102(c).
[16] The secretarial criteria used by HUD and USDA differed in each
round of the EZ/EC program. For example, in Round I, HUD included
geographic diversity. USDA also considered the diversity within and
among the nominated areas in Round I, but did not limit it to the
geographic diversity used in HUD regulations. In Round II, HUD removed
the secretarial criteria used for Round I.
[17] It specified that one urban EZ be designated in an area where the
most populous city had a population of 500,000 or less and that one
urban EZ be designated in an area that included two states and had a
combined population of 50,000 or less.
[18] U.S. General Accounting Office, Community Development:
Identification of Economically Distressed Areas, RCED-98-158R
(Washington, D.C.: May 12, 1998).
[19] According to an HHS official, HHS is currently establishing
policies for granting extensions to EZs and ECs with unspent Social
Services Block Grant funds.
[20] HUD awarded separate Economic Development Initiative grants to
overlapping or adjacent government entities in the city and county of
Los Angeles, California, and in Kansas City, Missouri and Kansas City,
Kansas. As a result, HUD awarded Economic Development Initiative grants
to eight government entities.
[21] The data in this report are as of September 30, 2003. However, in
January 2004, the Consolidated Appropriations Act of 2004 appropriated
an additional $14.9 million for Round II urban EZs and $11.6 million
for Round II rural EZs and ECs.
[22] According to HUD officials, HUD is currently developing
regulations that would clarify "economic development activities." In
lieu of an explicit rule, HUD has advised Round II urban EZs that
acceptable economic development activities include job creation and
training, entrepreneurial activities, small business expansion, and job
support services such as affordable child care and transportation
services that would help zone residents gain employment in jobs that
offer upward mobility.
[23] However, fiscal year 2003 appropriations for Round II urban EZs
will remain available only until September 30, 2005.
[24] P.L. 108-199. We did not include these funds in our analysis
because the data in this report are as of September 30, 2003.
[25] In 1993, the Joint Committee on Taxation estimated that the tax
benefits available to businesses in Round I communities would result in
a $2.5 billion reduction in tax revenues between 1994 and 1998. In
2000, this committee estimated that the EZ and RC tax benefits
contained in the Community Renewal Tax Relief Act of 2000 would reduce
tax revenues by a total of about $3.9 billion between 2001 and 2005,
and about $10.9 billion between 2001 and 2010.
[26] A deduction for depreciable property reduces a taxpayer's taxable
income for assets that could be used for over 1 year.
[27] A Section 108 Loan Guarantee allows local governments to obtain
loans for economic development projects that (1) benefit low and
moderate income families, (2) prevent or eliminate slums or blight, or
(3) meet other urgent community development needs.
[28] Rural nominees that did not receive EZ or EC status from USDA were
offered Champion Community status. Champion communities are eligible
for technical assistance from USDA and preferences for other government
programs. There are currently 118 Champion Communities.
[29] Enhanced Enterprise Communities were also permitted to apply for
EZ status. One Enhanced Enterprise Community, Boston, Mass., received
an EZ designation.
[30] One exception occurred, in which an EC dissociated itself from the
part of its area that had applied for RC status prior to that area
receiving designation.
[31] Census poverty and unemployment data are estimates based on a
sample of the population. All poverty and unemployment percentage
estimates have 95 percent confidence intervals of plus or minus 1.2
percentage points or less. See appendix I for details.
[32] A "draw down" occurs when a grantee accesses awarded funds.
[33] While IRS's Statistics of Income Division maintains data on the
use of the EZ Employment Credit for all corporate tax returns from 1998
through 2000, it maintains sampled data on this tax credit from
individual returns from 1995 through 2001 and from corporate returns
from 1995 through 1997 and for 2001.
[34] Because it is not possible to compute a reliable estimate for 1994
returns, we are reporting only on the years from 1995 through 2001.
[35] See Hebert and others, Interim Assessment.
[36] With the exception of 1998 through 2000 corporate data, this
number is based on sampled data. We calculated the 95 percent
confidence interval for the total EZ Employment Credits claimed at
between $224 million and $278 million. The 95 percent confidence
intervals for all estimates are included in appendix I.
[37] The 2002 data from individual taxpayers will be available in mid-
2004. The 2002 data from corporate taxpayers will be available in 2005.
[38] D.C. Enterprise Zone Facility Bonds are subject to a $15 million
per borrower limit and are subject to the state volume cap. These bonds
became available in 1998.
[39] This figure includes bonds issued to refund previously issued
debt.
[40] Even if these data were available, federal officials raised
concerns regarding whether IRS could legally disclose taxpayer data to
EZ or RC representatives. Under section 6103 of the Internal Revenue
Code, IRS cannot release taxpayer information to unauthorized persons.
Taxpayer information is generally defined as information that would
reveal a taxpayer's identity or financial position.
[41] U.S. General Accounting Office, Community Development: Businesses'
Use of Empowerment Zone Tax Incentives, GAO/RCED-99-253 (Washington,
D.C.: September 1999). Our report was based on a survey of businesses
operating in the original nine Round I EZs to determine the extent to
which they took advantage of tax benefits available at that time.
[42] See Hebert and others, Interim Assessment.
[43] HUD recommends that businesses contact a tax attorney or certified
public accountant before claiming these benefits.
[44] IRS is currently preparing guidance for professional tax
preparers.
[45] As used by HUD and USDA, "benchmarking" refers to specific tasks
and timetables necessary to implement the strategic plan.
[46] HHS administers the use of Round I EZ/EC Social Services Block
Grants. As set out in its regulations covering block grants, HHS
provides maximum fiscal and administrative discretion to the states and
relies fully on state laws and procedures.
[47] HHS also signs grant agreements with the recipients of Round I
block grant funds.
[48] U.S. General Accounting Office, Community Development: Status of
Urban Empowerment Zones, GAO/RCED-97-21 (Washington, D.C.: December 20,
1996).
[49] U.S. General Accounting Office, Rural Development: New Approach to
Empowering Communities Needs Refinement, GAO/RCED-97-75 (Washington,
D.C.: March 31, 1997).
[50] HUD IG's sample was not randomly selected, but was based on the
projects' reported expenditures.
[51] None of the evaluations we reviewed analyzed the RC program.
[52] See Hebert and others, Interim Assessment.
[53] This research challenge is often referred to as testing for the
counterfactual.
[54] We reviewed more than 1,100 article and report abstracts to
identify outcomes-focused evaluations of the federal EZ/EC and RC
programs. We included evaluations that met the following criteria: (1)
they focused on the federal EZ/EC or RC program; (2) they were research
evaluations that systematically collected and analyzed empirical data
(as opposed to reports of Best Practices/Lessons Learned or policy
discussions of the program); and either (3) they evaluated the program
in terms of its effect on poverty, unemployment, and/or economic growth
consistent with our congressional mandate; or (4) they evaluated the
program's effectiveness in any of the other program goal areas.
[55] Quantitative methods are methods of analysis that use data in the
form of numbers. Qualitative methods analyze data in the form of words.
[56] Regression analysis is a method for determining the association
between a dependent variable and one or more independent variables.
[57] Hebert and others, Interim Assessment; GAO/RCED-99-253.
[58] Hebert and others, Interim Assessment.
[59] Hebert and others, Interim Assessment; GAO/RCED-99-253; Richard P.
Nathan and others, Investing in a New Future: Special Report on
Community Development Financing in Selected Empowerment Zone/
Enterprise Community Sites (Albany, NY: The Nelson A. Rockefeller
Institute of Government, 1997).
[60] Robert J. Chaskin and Clark M. Peters, Governance in Empowerment
Zone Communities: A Preliminary Examination of Governance in Fifteen
Empowerment Zone Communities (Chicago, IL: University of Chicago,
Chapin Hall Center for Children, 1997); Marilyn Gittell, Kathe Newman,
and Francois Pierre-Louis, Empowerment Zones: An Opportunity Missed: A
Six City Comparative Study (New York, NY: The City University of New
York, The Howard Samuels State Management and Policy Center, 2001);
Nathan, and others, Empowerment Zone Initiative: Building a Community
Plan for Strategic Change (Albany, NY: The Nelson A. Rockefeller
Institute of Government, 1997).
[61] Gittell, Newman, Pierre-Louis, Empowerment Zones; Chaskin and
Peters, Governance in Empowerment Zone Communities; Nathan and others,
Empowerment Zone Initiative.
[62] Nathan and others, Empowerment Zone Initiative; Fahui Wang and
Joseph A. Van Loo, "Citizen Participation in the North Delta
Mississippi Community Development Block Grants, Empowerment Zones and
Enterprise Communities," Planning Practice and Research 13, no. 4
(1998), pp. 443-51.
[63] Hebert and others, Interim Assessment; N. T. Jenkins and M. I. J.
Bennett, "Toward an Empowerment Zone Evaluation," Economic Development
Quarterly 13, no. 1(1999), pp. 23-28.
[64] HUD awarded separate Section 108 Loan Guarantees to overlapping or
adjacent government entities in the city and county of Los Angeles,
California, and in Kansas City, Missouri and Kansas City, Kansas.
[65] This program is intended to help recipients clean up brownfield
sites.
[66] This program provides grants to promote improvements in the
quality of new teachers with the ultimate goal of increasing student
achievement in the nation's classrooms.
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