Legislation opens new doors for economic renewal
Cities and counties have long realized that getting private investors interested in depressed areas is key to economic development initiatives. The federal government has acknowledged that fact through the establishment of empowerment zones and enterprise communities. Now, it has gone one step further.
Enacted last December, the Community Renewal and New Markets Act of 2000 provides a variety of tax incentives to bolster private investment in low-income, high-density neighborhoods. Hailed by proponents as a shot in the arm for struggling communities, the act is designed to aid both rural and urban neighborhoods.
The act is the conglomeration of the New Markets Initiative, proposed by the Clinton Administration, and the Renewal Communities plan, which was backed by Republicans. Additionally, it makes some changes to Empowerment Zone/Enterprise Community (EZ/EC) incentives.
“This is the most promising legislation for the economic revitalization of low-income communities in recent memory,” says Michael Rubinger, president and CEO of Local Initiatives Support Corp., a non-profit community development support organization based in New York. “The legislation reflects bipartisan confidence in the proven partnership among non-profit community organizations and the private sector as the most effective way to revitalize distressed communities.”
Attracting investors
At the heart of the Community Renewal and New Markets Act is the New Markets Tax Credit, which encourages private investment in community development entities (CDEs). Specifically, it seeks to boost business growth and employment in distressed areas — neighborhoods where investors might otherwise refuse to go.
The New Markets Tax Credit will be administered by the U.S. Treasury. The agency is allocating tax credits for $15 billion in investments over the next seven years: $1 billion this year; $1.5 billion in 2002 and 2003; $2 billion in 2004 and 2005; and $3.5 billion in 2006 and 2007.
Perhaps as soon as this spring, CDEs in distressed communities can apply to Treasury for the tax credit allocations. (Treasury will determine the qualification of CDE applicants.) Those that receive the credits will then have five years to attract private investors. CDEs will use the proceeds from the sales of the credits for community renewal projects (e.g., providing loans and investing in businesses and other CDEs), while the investors will be able to claim the tax credits on their federal income taxes.
The credit is worth approximately 30 cents for every dollar the investor puts into the CDE; it is based on the amount of the investment rather than on the cost of resulting development. The credit is claimed over seven years, starting when the equity investment is made and on each anniversary. Although Treasury will limit the use of New Markets Tax Credits with other federal tax credits, there will be no penalty for using them with federal grants or below-market loans.
The credits potentially can have an enormous impact on the neighborhoods that take advantage of them. And local governments — by helping resolve issues with transportation, workforce development, zoning, crime, land availability and physical infrastructure — will be important partners in making new businesses a reality.
“Building business is difficult in communities at rock bottom that have not begun any revitalization,” says Benson Roberts, LISC’s vice president for policy. “Businesses will want to see signs of community stability before they make a long-term commitment.”
Local government support is doubly important because of the level of risk assumed by the investor. Compared to the Low Income Housing Tax Credit, which is worth 70 to 91 percent of the investment, the New Markets credit is a modest subsidy. It will provide the necessary grease to make deals come together smoothly.
“This will not take a bad business and make it a good investment,” Roberts says. “This will make a difference in economic development deals that don’t quite work financially and bridge that gap.”
Boosting new business
In addition to the New Markets Tax Credit, the Community Renewal and New Markets Act provides distressed communities with other renewal tools. For example, the act will create nine new empowerment zones in seven urban areas and two rural communities, and it will create 40 Renewal Communities that will enjoy tax benefits similar to those of the empowerment zones.
Cities that have good track records working with the federal EZ/EC program are well positioned to take advantage of the Renewal Communities program. The legislation states that, when designating those communities (at least 12 of the 40 are to be in rural areas), priority will be given to existing enterprise communities and empowerment zones. However, the legislation bars communities from participating in both programs at once.
The EZ/EC and Renewal Communities benefits are similar. Under both programs, employers receive wage credits for each resident employed from the target community — 15 percent for the first $15,000 in wages through 2004, and 20 percent from 2005 through 2009. Both programs also offer increased expensing for small businesses, and they allow companies to expense environmental remediation costs.
There are some differences as well. For example, the capital gains exclusion in Renewal Communities is 100 percent for entities that have owned a business or business assets in the community for at least five years; the EZ/EC exclusion is 60 percent. Entities that revitalize commercial buildings in Renewal Communities are eligible for tax deductions, while renovation of such property in an EZ/EC qualifies the owner for tax-exempt bond financing.
Unlike an EZ/EC, Renewal Communities will not receive grant money. Furthermore, the program requires state and local governments to promote development in the target areas by easing zoning, permitting or other regulations that might restrict business.
In addition to creating the Renewal Communities, the legislation upgrades and standardizes EZ tax incentives, and it authorizes $200 million in discretionary investment for existing Round II Empowerment Zones. It also expands the Low Income Housing Tax Credit 40 percent.
It will be some time before the influence of the Community Renewal and New Markets Act is evident. However, Paul Kalomiris, legislative director for the Council for Urban Economic Development, based in Washington, D.C., is optimistic about its appeal. “There are a lot of strong tax credit and community development programs out there, but, if they are difficult to use in practice, they’ve lost their utility,” he says. “These tax credits are accessible to communities and businesses, and the regulation is not cumbersome.”
Sara Brazeal is an assistant communications officer for Local Initiatives Support Corp., and Jeffrey Finkle is the president and CEO of the Council for Urban Economic Development.