FROM THE OFFICE OF PUBLIC AFFAIRS

I am pleased to have the opportunity this afternoon to discuss with you the Administration's program of tax incentives designed to foster the revitalization of economically disadvantaged American communities. I would like to begin by acknowledging the efforts of the Chair, the Speaker, other Members of Congress from both parties, and the panelists this afternoon, all of whom have sought to provide assistance to America's economically distressed communities.

Despite the unprecedented prosperity that is evident in so many places in the United States, not all communities have fully shared in this affluence. In some communities, good jobs are still scarce, new construction is a rarity, and infrastructure, including schools, shows its age. The Administration believes that, in this period of great prosperity, no American communities should be left behind. Accordingly, we are dedicated to insuring that the residents of inner cities and less affluent rural communities, just like those Americans living in the Silicon Valley or along the Dulles Corridor, have full access to the opportunities which symbolize the promise of the new economy.

The Administration's budget proposals include almost $17 billion in new tax incentives over ten years to ensure that we satisfy this commitment. We view tax policy as one, but by no means the only, tool at our disposal in achieving this important goal. To be most effective, tax measures must be integrated into a broader program designed to foster community development. Thus, in conjunction with targeted tax incentives, the Administration has proposed major initiatives on the appropriations side to insure that all communities have access to the tools that will be critical to success in the new economy. For example, the Administration has proposed to expand the Community Development Financial Institutions Fund to bolster the capacity of specialized, locally-based financial institutions serving economically disadvantaged areas, and has launched BusinessLINC to provide smaller firms in these communities the know-how and business opportunities enjoyed by their larger counterparts. Other initiatives in the President's FY2001 budget would fund community technology centers train teachers in the use of computer and internet technology, and encourage private-public partnerships to provide basic banking services to individuals and businesses in economically-disadvantaged areas.

Investment, by both the private and public sectors, is the key to economic development. Only with investment by the public sector in infrastructure and the private sector in businesses can real economic opportunity be created. Since 1993, the Administration, together with Congress, has sought to direct both types of investment to disadvantaged communities through the designation of Empowerment Zones and Enterprise Communities. Since 1993, 125 communities have been selected on the basis of their comprehensive strategic revitalization plans to receive special tax incentives and other resources.

The Omnibus Budget Reconciliation Act of 1993 authorized a demonstration project under which nine Empowerment Zones, six in urban areas and the remainder in rural areas, were designated through a competitive application process. State and local governments nominated distressed geographic areas, which were selected based on the strength of their strategic plans for economic and social revitalization. The incentives available in the Empowerment Zones designated under the 1993 Act remain available through the end of 2004.

By virtue of this designation, businesses located in these zones became eligible for a number of tax incentives specifically designed to encourage new businesses and business growth in these areas of acute need. These include a wage credit, preferential tax treatment for certain depreciable property, and special tax-exempt bond financing.

The wage credit provides a 20 percent subsidy on the first $15,000 of annual wages paid to residents of Empowerment Zones by businesses located in these communities. By lowering the cost of labor, the wage credit encourages new businesses to locate in zones, and encourages those businesses already there to expand, providing good jobs and opportunities for self-sufficiency for zone residents.

Further incentives are intended to encourage investment machines, computers and other tangible business property. Empowerment Zone businesses are allowed to expense the cost of property up to an additional $20,000 above the amounts generally available under Section 179 of the Internal Revenue Code, rather than depreciate such property over time. This additional expensing lowers the cost of the capital investment necessary to support the creation of high-paying jobs in the new economy.

Finally, the original legislation permitted the issuance of a new class of tax-exempt private activity bonds to provide subsidized financing to projects in Empowerment Zones. By lowering the cost of capital, tax-exempt financing makes projects that would not otherwise be undertaken by the private sector economically viable, leading to the creation of new jobs in disadvantaged areas.

The landmark 1993 legislation also made these zones eligible for a variety of programs administered by other agencies, including the Department of Housing and Urban Development and the Small Business Administration. These programs complement the tax incentives, and contribute further to the revitalization of these economically disadvantaged communities.

The Empowerment Zone legislation has been expanded during recent years. The Taxpayer Relief Act of 1997 provided for the designation of two additional Empowerment Zones. The Act also authorized the designation of twenty "Round II" Empowerment Zones using slightly expanded eligibility criteria. Although businesses in the "Round II" Empowerment Zones may not claim a wage credit, the available tax incentives are otherwise very similar to those provided in the original nine zones and remain, under current law, in place through the end of 2008.

Since environmental hazards often pose a major obstacle to the privately-financed revitalization of both urban and rural areas, the 1997 legislation provided an additional incentive to help private firms clean up such contamination. Under this provision, businesses in Empowerment Zones may expense, and therefore recover immediately for tax purposes, the costs of remediating certain environmental hazards in the soil and ground water. This favorable tax treatment, which is also available in some other economically depressed areas, reduces the expected return necessary to justify investments that often benefit the entire community.

In addition to the Empowerment Zones, the Omnibus Budget Reconciliation Act of 1993 also provided for the designation of 95 Enterprise Communities, at least thirty-five of which would be located in rural areas. Businesses in these communities are entitled to the same favorable tax treatment of environmental remediation expenses and tax-exempt financing benefits as those in the Empowerment Zones.

A special set of incentives, bearing a broad resemblance to those provided to the Empowerment Zones, were enacted in 1997 to foster the redevelopment of the District of Columbia. The Taxpayer Relief Act of 1997 included tax incentives for both residents and business to locate in the District of Columbia. A $5,000 income tax credit for first-time home purchasers was intended to attract new homeowners to the District. A second set of incentives, similar to those provided to the original nine Empowerment Zones, was intended to encourage the establishment of new businesses in the District as well as new investment in existing enterprises.

Subject to certain income restrictions, the $5,000 credit is available to first-time purchasers of a principal residence in the District of Columbia who have not owned houses in the District during the year preceding the purchase. Although the credit was initially available only for property purchased through the end of 2000, subsequent legislation in 1999 extended the incentive through the end of 2001.

Other tax incentives offer a range of economic inducements to businesses operating in the more economically disadvantaged parts of the District. With the exception of a provision related to the sale of capital assets, these incentives are available only to businesses located either within the boundaries of the D.C. Enterprise Community, or located in census tracts elsewhere in the District where the poverty rate exceeds 20 percent. These areas are collectively known as the D.C. Zone. With certain minor adjustments, businesses in the Zone may claim the same wage credit, expensing of certain capital investment, expensing of environmental remediation costs, and tax exempt bond financing, as businesses in the original nine Empowerment Zones. In addition, capital gains realized from the sale of certain assets are excludable from the income of the seller, whether a business or individual. For the purposes of this provision alone, the DC Zone is expanded to include all census tracts in the District in which the poverty rate exceeds 10 percent.

Unfortunately, many residents of Native American communities continue to struggle economically, even during these times of prosperity. The Indian Wage Credit provides a powerful incentive for job growth in these communities. Employers may claim an Indian employment credit equal to 20 percent of the qualified wages and employee health insurance costs paid to an enrolled member of an Indian tribe in compensation for services performed on or near a reservation. The aggregate amount of qualified wages and health insurance costs may not exceed $20,000 per person per year. This incentive is now available through 2003.

The President's FY2001 budget proposals, the Administration seeks to leverage the progress that has already been made in revitalizing America's economically disadvantaged communities through the provision of another $17 billion in targeted tax incentives over the next decade. These measures will allow more communities to benefit from the investment that is so important in a technology-driven economy, while offering an innovative approach to the task of attracting patient equity capital to businesses in economically disadvantaged areas.

An important priority is the New Markets Tax Credit, a part of the President's broader New Markets Initiative. This tax incentive would help attract $15 billion in equity capital to community-based financial institutions which, in turn, would invest these funds in their communities, spurring the creation of high-quality jobs and, equally important, building lasting links to the new economy.

High technology and service firms at the heart of the new economy have generally sought to locate near other similar enterprises, in places like the Silicon Valley and the Dulles Corridor, so that they may tap a common pool of customers, employees and other resources. Thus these enterprises tend to be highly concentrated geographically, and often not in lower-income areas. The New Market Tax Credit would attract capital, and therefore high-growth industries, to lower-income areas by providing a subsidy to investors. This temporary subsidy will, at least in part, compensate investors for the additional costs involved in establishing operations in locales which have yet to benefit from the strength of the U.S. economy over the past decade and where the presence of other fast-growing firms may therefore be limited.

The New Markets Tax Credit is specifically designed to further the efforts of community-based financial institutions in promoting economic revitalization while encouraging these entities to make the "on the ground" decisions concerning where the need for capital is greatest. Such institutions - including a wide variety of existing or newly-formed community development banks and venture funds - would apply to the Treasury Department for authorization to issue stock (or other equity interests) with respect to which the investors could claim a tax credit equal to approximately 25 percent of the investment, in present value terms. The credit would be claimed in five equal installments, each equal to 6 percent of the original investment, during each of the first five years of investment.

Community development entities selected for a credit allocation would be required to invest the leverage funds by taking equity stakes in, or providing loans to, businesses located in low- income communities. The required investments could be made in a wide range of commercial ventures, the basic requirement being that the business conduct an active trade or business in one or more low-income communities. The selected community development entities themselves would decide which local commercial ventures are likely to produce the greatest social and financial return.

We greatly appreciate the active leadership of Mr. Rangel, Mr. LaFalce and Ms. Velazquez, as well as Senators Rockefeller, Robb, Sarbanes, Kerry, Kennedy and Daschle, in working over the last twelve months to move New Markets Tax Credit legislation forward. Our current budget proposal would, relative to the original design, more than double the amount of capital with respect to which credits could be allocated, raising this amount from $6 billion to $15 billion by providing $3 billion per year from 2001 through 2005.

In addition to the New Markets Tax Credit, the Administration would like to see a further expansion of the Empowerment Zone program, as well as movement towards standardization of incentives across the already-designated zones.

The President's FY2001 budget proposal would extend empowerment zone status for the existing thirty-one designated zones through 2009. At present, these designations expire as early as 2004. Furthermore, the wage credit rate would remain at 20 percent in all zones until 2009. The current set of incentives available in some zones does not include the wage credit, while in other zones this credit phases out over the final three years of designation.

Businesses in all thirty-one zones would be eligible to expense, rather than to depreciate over time, an additional $35,000 in qualified investment property. Under current law, this additional expensing authority in Empowerment Zones is limited to $20,000.

Finally, ten new Empowerment Zones would be authorized, eight in urban communities and two in rural areas. During the period 2002 through 2009, businesses located in these zones would be eligible for the same tax incentives that are available to businesses in the other 31 Empowerment Zones, including the expensing of qualified environment remediation costs and certain tax-exempt financing benefits.

Access to computers and the Internet -- and the ability to use this technology effectively -- are becoming increasingly important for full participation in America's economic, political and social life. Unfortunately, unequal access to technology by income, educational level, race, and geography could deepen and reinforce the divisions that exist within American society. The Administration believes that we must make access to computers and the Internet as universal as the telephone is today -- in our schools, libraries, communities, and homes.

In recognition of the importance of technology in the new economy, the President's FY 2001 Budget includes a series of tax incentives to insure that residents of disadvantaged communities are able to develop the skills that will be essential for labor market success in the coming years. This initiative, to help "bridge the digital divide", consists of three components. The first is an enhanced deduction for corporate donations of computer equipment to schools and other institutions in disadvantaged communities. Such donations will help to provide these institutions the tools necessary to train residents in new technology. The second is a tax credit for certain corporate payments to schools, libraries and technology centers in Empowerment Zones and Enterprise Communities. This credit will help insure that innovative educational programs, many with a focus on technology, flourish in communities undergoing economic and social revitalization. The final incentive is a tax credit for certain employer-provided education programs in workplace literacy and basic computer skills. This credit is vital in ensuring that our least-educated workers obtain the basic skills necessary for success in the new economy.

The first measure, designed to encourage corporate donations of computer equipment, builds upon and extends a similar provision of the Taxpayer Relief Act of 1997. Under the 1997 legislation, a taxpayer is allowed an enhanced deduction, equal to the taxpayer's basis in the donated property plus one-half of the amount of ordinary income that would have been realized if the property had been sold. This enhanced deduction, limited to twice the taxpayer's basis, was made available to donors for a limited three-year period. Without this provision, the deduction for charitable contributions of such property is generally limited to the lesser of the taxpayer's cost basis or the fair market value. To qualify for the enhanced deduction, the contribution must be made to an elementary or secondary school. The Administration proposal would extend this special treatment through 2004, as well as expand the provision to apply to contributions of computer equipment to a public library or community technology center located in a disadvantaged community.

The second measure is a 50 percent tax credit for corporate sponsorship payments made to a qualified zone academy, public library, or community technology center located in an Empowerment Zone or Enterprise Community. The proposed tax credit would provide a substantial incentive that would encourage corporations to sponsor such institutions. Up to $16 million in corporate sponsorship payments could be designated as eligible for the 50 percent credit in each of the existing 31 Empowerment Zones (and each of the 10 additional Empowerment Zones proposed in the Administration's FY2001 budget). In addition, up to $4 million of sponsorship payments would be credit-eligible in each Enterprise Community. All told, this credit could induce over $1 billion in sponsorship payments to schools, libraries and technology centers, providing innovative educational programs to disadvantaged communities.

The third component of the Digital Divide proposal is a credit to employers who provide training in basic technology skills, English literacy, and other basic education to educationally disadvantaged workers. The credit would be equal to 20 percent of qualified training expenditures, up to a maximum of $1,050 per participating worker. Eleven percent of the labor force has less than a high school education. Their employers may hesitate to provide general education because the benefits of basic technological and other skills and literacy education are more difficult for employers to capture through increased productivity than the benefits of job-specific education. The proposed credit will help workers with low levels of education to improve their job skills and enhance their employment opportunities.

The Administration supports extension of the wage-based credit as a more efficient means of promoting beneficial economic activity in Puerto Rico, which is still seeking to recover economically from the repeal of section 936 and, in addition, from the devastating effects of Hurricane Mitch. The Administration views the proposed extension of the credit as providing a means to helping Puerto Rico and its people through this difficult recovery and transition period. To provide a more efficient tax incentive for the economic development of Puerto Rico and to continue the shift from an income-based credit to an economic-activity-based credit that was begun in the 1993 Act, the President's FY 2001 budget would extend and modify the phase-out of the economic-activity-based credit for Puerto Rico by opening it to newly established business operations during the phase-out period and extending the phase-out period through taxable years beginning before January 1, 2009.

In the "American Community Renewal Act", Mr. Watts, Mr. Talent, and Mr. Davis, joined by numerous cosponsors from both parties, proposed further expansion and refinement of the use of tax incentives to encourage private sector investment in the revitalization of disadvantaged communities. The full Committee has since adopted a version of this proposal. We are eager to work with members of the Committee, as well as Mr. Watts, Mr. Talent, and Mr. Davis, in ensuring, through the use of targeted tax incentives and other complementary measures, that all American communities share in the Nation's general prosperity.

H.R. 3832, which incorporates provisions originally introduced in the "American Community Renewal Act", would permit the designation of up to 15 Renewal Communities, at least three of which would be located in rural areas. Renewal communities would be composed of contiguous low-income census tracts, with respect to which the State and local government had promised to reduce taxes, improve local services, or reduce government regulation. A number of tax incentives would be available to businesses and individuals located in the Renewal Communities.

Clearly, there is broad agreement between the Administration and Congress on the problems facing low-income areas, and the power of tax incentives to help address these needs. In particular, both the Administration and Congress view increased investment as critical to community redevelopment, and tax incentives as a valuable tool to attract capital to lower-income areas.

H.R. 3832 would provide for additional expensing of certain capital investment in excess of that permitted under section 179 of the Internal Revenue Code, and for the expensing of qualified environmental remediation expenses. In addition, H.R. 3832 provides an extension of the Work Opportunity Tax Credit, with certain adjustments, for businesses located in Renewal Communities. H.R. 3832 would permit a credit against tax equal to 15 percent of the first $10,000 in wages paid, per eligible employee, for the first year of employment. The credit rate rises to 30 percent for the second year of employment. Like the authors of the "American Community Renewal Act", the Administration favors increased expensing authority as a means to encourage capital formation in disadvantaged areas, expensing authority to encourage the remediation of environmental hazards, a wage credit to spur the hiring of residents of distressed communities, and measures to encourage saving by low-income workers.

However, the Administration has concerns with the specifics of certain proposals in H.R.3832. Most notably, exempting from taxation the capital gains on the sale of appreciated assets is not an efficient means to encourage capital formation, and may lead to unintended and undesirable consequences. Potential investors in distressed communities are unlikely to respond to an incentive that provides benefits not at the time funds are committed but only upon the sale of the assets. Furthermore, a reduction in capital gains rates will not provide a meaningful incentive to invest in depreciable property - such as machinery and equipment that is so often thought to spur job growth - since such property is unlikely to increase in value above its original cost. And the ability of taxpayers to deduct interest on borrowing while entirely excluding the gains from the sale of certain property, could create negative tax rates like those associated with the individual tax shelters of the early 1980s. This would result in an expansion of non-productive investments that benefit neither the targeted area nor the country as a whole. Finally, exempting capital gains from taxation could have the perverse effect of encouraging disinvestment, as owners of appreciated assets accelerate their liquidation of investments to receive the tax benefit while this is available.

The Administration has supported - and continues to support in the President's FY2001 budget -- the basic concept of development accounts. But we have concerns with the particular provisions related to Family Development Accounts included in H.R. 3832. First, allowing an up-front deduction for contributions to a savings account, and an exclusion for earnings and withdrawals from that account, sets a bad precedent by effectively assessing a negative rate of tax on such savings. Second, allowing eligible low-income individuals who make contributions to their own Family Development Accounts, and non-eligible individuals who make contributions to one or more other individuals' Family Development Accounts, to claim an above-the-line deduction for their contributions would create complexity and significant administrative problems.

The Administration supports the structure contained in the Assets for Independence Act, under which Individual Development Accounts established on behalf of low-income individuals receive matching grants from the Federal government and non-profit entities. The Department of the Treasury, in conjunction with the Internal Revenue Service, recently issued guidance clarifying the favorable tax treatment under current-law rules of matching grants received by a low-income individual who establishes such an Individual Development Account.

In addition, the Administration's Retirement Savings Account proposal, a substantial initiative in the FY 2001 budget, provides another model for powerful incentives that should encourage savings by low-income workers while avoiding unintended, and potentially serious, negative interactions with certain facets of the pension and tax systems. We are now actively discussing the structure of this program with representatives from the private sector, including employers and financial service providers. We have been pleased at their generally favorable response thus far, and hope that these conversations will help us further refine and improve the Retirement Savings Account concept.

Notwithstanding these concerns, the Administration looks forward to working with Members of Congress to craft a set of measures that will help reach our common goal of promoting the revitalization of America's most economically disadvantaged communities as efficiently and quickly as possible.

I would like to thank Mr. Houghton, Mr. Coyne and the members of the Subcommittee for providing the chance today to discuss these important issues. I hope that, working together, we can insure that all Americans share in the current prosperity and have even greater opportunity in the future. This concludes my prepared remarks. I would be pleased to respond to your questions.