COMMUNITY RENEWAL TAX RELIEF ACT OF 2000

18 Dec, 2000 Following is explanatory language on H.R. 5662, as introduced on December 14, 2000. The conferees on H.R. 4577 agree with the matter included in H.R. 5659 and enacted in this conference report by reference and the following description of it.

TITLE I. COMMUNITY RENEWAL PROVISIONS

A. Renewal Community Provisions (secs. 101-102 of the bill and secs. 51, 469, and new secs. 1400E-J of the Code)

Present Law

In recent years, provisions have been added to the Internal Revenue Code that target specific geographic areas for special Federal income tax treatment. For example, empowerment zones and enterprise communities generally provide tax incentives for businesses that locate within certain geographic areas designated by the Secretaries of Housing and Urban Development (`HUD'') and Agriculture.

House Bill

No provision. However, H.R. 5542 1 authorizes the designation of 40 ``renewal communities'' within which special tax incentives would be available. The following is a description of the designation process and the tax incentives that would be available within the renewal communities. --------------------------------------------------------------------------- 1 H.R. 5542 was incorporated by reference into the conference agreement that accompanied H.R. 2614 (H. Rpt. 106- 1004), which was passed by the House of Representatives on October 26, 2000. --------------------------------------------------------------------------- Designation process Designation of 40 renewal communities.--The Secretary of HUD, 2 is authorized to designate up to 40 ``renewal communities'' from areas nominated by States and local governments. At least 12 of the designated communities must be in rural areas. Of the 12 rural renewal communities, one shall be an area within Mississippi, designated by the State of Mississippi, that includes at least one census tract within Madison County, Mississippi. --------------------------------------------------------------------------- 2 In making the designations, the Secretary of HUD must consult with the Secretaries of Agriculture, Commerce, Labor, Treasury, the Director of the Office of Management and Budget; and the Administrator of the Small Business Administration (and the Secretary of the Interior in the case of an area within an Indian reservation). --------------------------------------------------------------------------- The Secretary of HUD is required to publish (within four months after enactment) regulations describing the nomination and selection process. Designations of renewal communities are to be made during the period beginning on the first day of the first month after the regulations are published and ending on December 31, 2001. The designation of an area as a renewal community generally will be effective on January 1, 2002, and will terminate after December 31, 2009. 3 --------------------------------------------------------------------------- 3 The designation would terminate earlier than December 31, 2009, if (1) an earlier termination date is designated by the State or local government in their designation, or (2) the Secretary of HUD revokes the designation as of an earlier date. --------------------------------------------------------------------------- Elibility criteria.--To be designated as a renewal community, a nominated area must meet the following criteria: (1) each census tract must have a poverty rate of at least 20 percent, 4 (2) in the case of an urban area, at least 70 percent of the households have incomes below 80 percent of the median income of households within the local government jurisdiction; (3) the unemployment rate is at least 1.5 times the national unemployment rate; and (4) the area is one of pervasive poverty, unemployment, and general distress. Those areas with the highest average ranking of eligibility factors (1), (2), and (3) above would be designated as renewal communities. One nominated area within the District of Columbia becomes a renewal community (without regard to its ranking of eligibility factors) provided that it satisfies the area and eligibility requirements and the required State and local commitments described below. 5 The Secretary of HUD shall take into account in selecting areas for designation the extent to which such areas have a high incidence of crime, as well as whether the area has census tracts identified in the May 12, 1998, report of the General Accounting Office regarding the identification of economically distressed areas. In lieu of the poverty, income, and unemployment criteria, outmigration may be taken into account in the designation of one rural renewal community. --------------------------------------------------------------------------- 4 Determined using 1990 census data. 5 The designation of a nominated area within the District of Columbia as a renewal community becomes effective on January 1, 2003 (upon the expiration of the designation of the District of Columbia Enterprise Zone). --------------------------------------------------------------------------- There are no geographic size limitations placed on renewal communities. Instead, the boundary of a renewal community must be continuous. In addition, the renewal community must have a minimum population of 4,000 if the community is located within a metropolitan statistical area (at least 1,000 in all other cases), and a maximum population of not more than 200,000. The population limitations do not apply to any renewal community that is entirely within an Indian reservation. Required State and local commitments.--In order for an area to be designated as a renewal community, State and local governments are required to submit a written course of action in which the State and local governments promise to take at least four of the following governmental actions within the nominated area: (1) a reduction of tax rates or fees; (2) an increase in the level of efficiency of local services; (3) crime reduction strategies; (4) actions to remove or streamline governmental requirements; (5) involvement by private entities and community groups, such as to provide jobs and job training and financial assistance; and (6) the gift (or sale at below fair market value) of surplus realty by the State or local government to community organizations or private companies. In addition, the nominating State and local governments must promise to promote economic growth in the nominated area by repealing or not enforcing four of the following: (1) licensing requirements for occupations that do not ordinarily require a professional degree; (2) zoning restrictions on home-based businesses that do not create a public nuisance; (3) permit requirements for street vendors who do not create a public nuisance; (4) zoning or other restrictions that impede the formation of schools or child care centers; and (5) franchises or other restrictions on competition for businesses providing public services, including but not limited to taxicabs, jitneys, cable television, or trash hauling, unless such regulations are necessary for and well- tailored to the protection of health and safety. Empowerment zones and enterprise communities seeking designation as renewal communities.--With respect to the first 20 designations of nominated areas as renewal communities, preference will be given to nominated areas that are enterprise communities and empowerment zones under present law that otherwise meet the requirements for designation as a renewal community. An empowerment zone or enterprise community can apply for designation as a renewal community. If a renewal community designation is granted, then an area's designation as an empowerment zone enterprise community ceases as of the date the area's designation as a renewal community takes effect. Tax incentives for renewal communities The following tax incentives generally are available during the period beginning January 1, 2002, and ending December 31, 2009. 6 --------------------------------------------------------------------------- 6 If a renewal community designation is terminated prior to December 31, 2009, the tax incentives would cease to be available as of the termination date. --------------------------------------------------------------------------- Zero-percent capital gain rate.--A zero-percent capital gains rate applies with respect to gain from the sale of a qualified community asset acquired after December 31, 2001, and before January 1, 2010, and held for more than five years. A ``qualified community asset'' includes: (1) qualified community stock (meaning original-issue stock purchased for cash in a renewal community business); (2) a qualified community partnership interest (meaning a partnership interest acquired for cash in a renewal community business); (3) qualified community business property (meaning tangible property originally used in a renewal community business by the taxpayer) that is purchased or substantially improved after December 31, 2001. A ``renewal community business'' is similar to the present- law definition of an enterprise zone business. 7 Property will continue to be a qualified community asset if sold (or otherwise transferred) to a subsequent purchaser, provided that the property continues to represent an interest in (or tangible property used in) a renewal community business.

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The termination of an area's status as a renewal community will not affect whether property is a qualified community asset, but any gain attributable to the period before January 1, 2002, or after December 31, 2014, will not be eligible for the zero-percent rate. --------------------------------------------------------------------------- 7 An ``enterprise zone business'' is defined in section 1397B. --------------------------------------------------------------------------- Renewal community employment credit.--A 15-percent wage credit is available to employers for the first $10,000 of qualified wages paid to each employee who (1) is a resident of the renewal community, and (2) performs substantially all employment services within the renewal community in a trade or business for the employer. The wage credit rate applies to qualifying wages paid after December 31, 2001, and before January 1, 2010. Wages that qualify for the credit are wages that are considered ``qualified zone wages'' for purposes of the empowerment zone wage credit (including coordination with the Work Opportunity Tax Credit). In general, any taxable business carrying out activities in the renewal community may claim the wage credit. Commercial revitalization deduction.--Each State is permitted to allocate up to $12 million of ``commercial revitalization expenditures'' to each renewal community located within the State for each calendar year after 2001 and before 2010. The appropriate State agency will make the allocations pursuant to a qualified allocation plan. A ``commercial revitalization expenditure'' means the cost of a new building or the cost of substantially rehabilitating an existing building. The building must be used for commercial purposes and be located in a renewal community. In the case of the rehabilitation of an existing building, the cost of acquiring the building will be treated as qualifying expenditures only to the extent that such costs do not exceed 30 percent of the other rehabilitation expenditures. The qualifying expenditures for any building cannot exceed $10 million. A taxpayer can elect either to (a) deduct one-half of the commercial revitalization expenditures for the taxable year the building is placed in service or (b) amortize all the expenditures ratably over the 120-month period beginning with the month the building is placed in service. No depreciation is allowed for amounts deducted under this provision. The adjusted basis is reduced by the amount of the commercial revitalization deduction, and the deduction is treated as a depreciation deduction in applying the depreciation recapture rules (e.g., sec. 1250). The commercial revitalization deduction is treated in the same manner as the low-income housing credit in applying the passive loss rules (sec. 469). Thus, up to $25,000 of deductions (together with the other deductions and credits not subject to the passive loss limitation by reason of section 469(i)) are allowed to an individual taxpayer regardless of the taxpayer's adjusted gross income. The commercial revitalization deduction is allowed in computing a taxpayer's alternative minimum taxable income. Additional section 179 expensing.--A renewal community business is allowed an additional $35,000 of section 179 expensing for qualified renewal property placed in service after December 31, 2001, and before January 1, 2010. The section 179 expensing allowed to a taxpayer is phased out by the amount by which 50 percent of the cost of qualified renewal property placed in service during the year by the taxpayer exceeds $200,000. The term ``qualified renewal property'' is similar to the definition of ``qualified zone property'' used in connection with empowerment zones. Extension of work opportunity tax credit (``WOTC'').--The bill expands the high-risk youth and qualified summer youth categories in the WOTC to include qualified individuals who live in a renewal community. GAO report The General Accounting Office will audit and report to Congress on January 31, 2004, and again in 2007 and 2010, on the renewal community program and its effect on poverty, unemployment, and economic growth within the designated renewal communities. Effective date Renewal communities must be designated during the period beginning on the first day of the first month after the publication of regulations by HUD and ending on December 31, 2001, The tax benefits available in renewal communities are effective for the period beginning January 1, 2002, and ending December 31, 2009.

Senate Amendment

No provision. However, S. 3152 8 authorizes the Secretaries of HUD and Agriculture to designate up to 30 renewal zones from areas nominated by States and local governments. At least six of the designated renewal zones must be in rural areas. The Secretary of HUD is required to publish (within four months after enactment) regulations describing the nomination and selection process. Designations of renewal zones must be made before January 1, 2002, and the designations are effective for the period beginning on January 1, 2002 through December 31, 2009. --------------------------------------------------------------------------- 8 S. 3152 was introduced by Senator Roth and others on October 3, 2000. --------------------------------------------------------------------------- The eligibility criteria (as well as the population and geographic limitations) are similar to those for renewal communities in the House bill, except that S. 3152 provides that any State without any empowerment zone would be given priority in the designation process. Also, the designations of renewal zones must result in (after taking into account existing empowerment zones) each State having at least one zone designation (empowerment or renewal zone). In addition, S. 3152 provides that, in lieu of the poverty, income, and unemployment criteria, outmigration may be taken into account in the designation of one rural renewal zone. Under a separate provision in S. 3152, the designation of the District of Columbia Enterprise Zone is entended through December 31, 2006. In order for an area to be designated as a renewal zone, State and local governments are required to submit a written course of action in which the State and local governments promise to take at least four of the governmental actions described in the House bill with respect to renewal communities. However, S. 3152 does not contain any of the economic growth provision requirements described in the House bill. Tax incentives for renewal zones.--Under S. 3152, businesses in renewal zones would be eligible for the following tax incentives during the period beginning January 1, 2002 and ending December 31, 2009: (1) a zero-percent capital gains rate for qualifying assets limited to an aggregate amount not to exceed $25 million of gain per taxpayer; 9 (2) a 15-percent wage credit for the first $15,000 of qualifying wages; (3) $35,000 in additional 179 expensing for qualifying property; (4) and the enhanced tax- exempt bond rules that currently apply to businesses in the Round II empowerment zones. --------------------------------------------------------------------------- 9 Any gain attributable to the period before January 1, 2002, or after December 31, 2014, would not be eligible for the zero-percent capital gains rate. --------------------------------------------------------------------------- GAO report.--The General Accounting Office will audit and report to Congress every three years (beginning on January 31, 2004) on the renewal zone program and its effect on poverty, unemployment, and economic growth within the designated renewal zones. Effective date.--The 30 renewal zones must be designated by January 1, 2002, and the tax benefits are available for the period beginning January 1, 2002, and ending December 31, 2009.

Conference Agreement

The conference agreement follows H.R. 5542 with the following modifications. The conference agreement does not include the rural renewal community designation with respect to an area within the State of Mississippi. The conference agreement does not include the special rule that provides that one nominated area within the District of Columbia becomes a renewal community (without regard to its ranking of eligibility factors).

B. Empowerment Zone Tax Incentives

1. Extension and expansion of empowerment zones (secs. 111- 115 of the bill and secs. 1391, 1394, 1396, and 1397A of the Code)

PRESENT LAW

Round I empowerment zones The Omnibus Budget reconciliation Act of 1993 (``OBRA 1993'') authorized the designation of nine empowerment zones (``Round I empowerment zones'') to provide tax incentives for businesses to locate within targeted areas designated by the Secretaries of HUD and Agriculture. The Taxpayer Relief Act of 1997 (``1997 Act'') authorized the designation of two additional Round I urban empowerment zones. Businesses in the 11 Round I empowerment zones qualify for the following tax incentives: (1) a 20-percent wage credit for the first $15,000 of wages paid to a zone resident who works in the empowerment zone, 10 (2) an additional $20,000 of section 179 expensing for qualifying zone property, and (3) tax-exempt financing for certain qualifying zone facilities. The tax incentives with respect to the empowerment zones designated by OBRA 1993 generally are available during the 10-year period of 1995 through 2004. The tax incentives with respect to the two additional Round I empowerment zones generally are available during the 10-year period of 2000 through 2009. 11 --------------------------------------------------------------------------- 10 For wages paid in calendar years during the period 1994 through 2001, the credit rate is 20 percent. The credit rate is reduced to 15 percent for calendar year 2002, 10 percent for calendar year 2003, and 5 percent for calendar year 2004. No wage credit is available after 2004 in the original nine empowerment zones. 11 Except for the wage credit, which is reduced to 15 percent for calendar year 2005, and then reduced by five percentage points in each year in 2006 and 2007, with no wage credit available after 2007. --------------------------------------------------------------------------- Round II empowerment zones The 1997 Act also authorized the designation of 20 additional empowerment zones (``Round II empowerment zones''), of which 15 are located in urban areas and five are located in rural areas. Businesses in the Round II empowerment zones are not eligible for the wage credit, but are eligible to receive up to $20,000 of additional section 179 expensing. Businesses in the Round II empowerment zones also are eligible for more generous tax-exempt financing benefits than those available in the Round I empowerment zones. Specifically, the tax-exempt financing benefits for the Round II empowerment zones are not subject to the State private activity bond volume caps (but are subject to separate per-zone volume limitations), and the per-business size limitations that apply to the Round I empowerment zones and enterprise communities (i.e., $3 million for each qualified enterprise zone business with a maximum of $20 million for each principal user for all zones and communities) do not apply to qualifying bonds issued for Round II empowerment zones. The tax incentives with respect to the Round II empowerment zones generally are available during the 10-year period of 1999 through 2008.