CRS Report on Renewal Communities and New Markets Initiative

                       CRS REPORT FOR CONGRESS

[1] On May 23, 2000, President CLinton and Speaker Dennis Hastert announced a bipartisan agreement on a renewal communities and new markets legislative initiative, which would provide tax credits and investment guarantees designed to draw equity capital into impoverished areas. The announcement came approximately six months after the President and Speaker pledged during a November 1999 joint appearance in Chicago to work together to craft an economic development proposal designed to assist areas whose economic fortunes have continued downward despite the nation's generally booming economy.

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

[3] The Republican part of the initiative would create 40 competitively selected "Renewal Communities" that would include: zero taxes on capital-gains for firms located in the areas; requirements that local communities lower tax rates, increase services, reduce red tape, and ease zoning; a wage credit for employers; and provisions permitting faith-based organizations to apply and receive federal assistance.

[4] The Administration's new markets part of the initiative includes: tax credits for people who invest in certain privately- managed investment funds and institutions; America's Private Investment Companies (APICs) to promote private investment in underserved communities; New Markets Venture Capital (NMVC) Firms to increase the availability of venture capital in distressed inner city and rural areas; and an expansion of the Empowerment Zone/Enterprise Communities (EZ/EC) program (nine more EZs and expanded benefits for all designated zones).

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

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

[7] Both the federal government's evolving role and approach in helping distressed urban communities -- as well as rural areas -- are exemplified by the Empowerment Zone/Enterprise Communities (EZ/EC) program. ¹ Enacted by the 103th Congress, the EZ/EC program differs from previous efforts in several key respects, including: a competition to determine designated areas; the autonomy given to EZs and ECs in decisionmaking; the promotion of so-called market-based economic development; and, its comprehensiveness.

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

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

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

SUMMARY OF RENEWAL COMMUNITIES/NEW MARKETS INITIATIVE.

[11] The renewal communities/new markets (RC/NM) legislative initiative combines elements favored by both congressional Republicans and the Administration. ² It incorporates components of earlier enterprise zone approaches and elements from the Empowerment Zone/Enterprise Communities program and from market-oriented investment programs.

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

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

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

     o Investors in eligible funds would receive a tax credit worth

     o APICs would be structurally similar to the existing SBA Small

     o NMVCs would target smaller firms with growth prospects, but

     o Wage credit equal to 20% on the first $15,000 of qualified

     o Zero rate on capital gains derived from businesses located in

     o The tax credit, which is administered by the states, currently

CONCLUDING OBSERVATIONS

[21] The idea behind the RC/NM initiative has been described as a merger of President Clinton's "New Markets Initiative" -- including a tax credit and other incentives designed to attract capital to low- income areas with a House Republican proposal called the "American Community Renewal Act (H.R. 815), which would provide tax and regulatory relief to economically distressed areas and help poor families set up subsidized savings accounts. ⁷ Instead of a merger, however, the bipartisan, anti-poverty package has been characterized as a juxtaposition: "We allow two different forms to see what we can learn over the next several years about what works best in attracting investment and job growth," said Gene Sperling. ⁸

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

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

     Although the economic development literature often discusses the

² In most instances, the order of the terms new markets and renewal communities in referring to the bipartisan proposal depends on the party affiliation of the speaker or writer. The choice in this report is arbitrary, and reflects that CRS is an agency of the legislative branch.

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

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

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

⁶ Currently, the District of Columbia is the only designated area in the EZ/EC program where a zero capital gains rate exists.

⁷ For example, see: David Nather. "Community Development Deal Still Stymied by Differences Over Philosophy of Poverty Relief," CQ Weekly, April 15, 2000, p. 896.

⁸ Transcript of White House Briefing by Gene Sperling.

⁹ Margaret G. Wilder and Barry M. Rubin. "Rhetoric versus Reality: A Review of Studies on State Enterprise Zone Programs," Journal of the American Planning Association, vol. 62, autumn 1996,p.475.