Empowerment zones (EZs) are economically distressed communities designated by government for aid—but this aid is intended primarily to lift the communities out of poverty by stimulating business enterprise and creating jobs. “Empowerment” is thus a somewhat euphemistic or hopeful term. The chief characteristic of targeted communities is poverty. Most of the actual dollars earmarked for empowerment zones are intended to be spent on infrastructure development. Support for business is indirect and takes the form of tax credits. To be sure, a business has to be doing well enough to owe taxes before credits are meaningful. Tax benefits are governed by complex rules that specifically identify classes of employees (they must be poor), types of property (they must be “qualified under the poverty rate criteria”), and types of equipment (they must be on qualifying property), etc.
From the viewpoint of the communities themselves, a major motive for being designated an EZ was eligibility for up to $40 million in outright grants. Empowerment zones are designated as rural or urban, rural programs administered by the U.S. Department of Agriculture (USDA) and the urban programs by the U.S.
Department of Housing and Urban Development (HUD). EZs were created by the Empowerment Zones and Enterprise Communities Act of 1993.
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Government initiatives to reduce poverty by tax incentives to business have a venerable history somewhat linked to the War on Poverty. The first such program arose in the United Kingdom. Sir Geoffrey Howe, a member of the British Parliament, announced the first “enterprise zones” in 1978 to help improve economic conditions in the dock districts of London. The system implemented in England reduced government restrictions in order to encourage the formation of new businesses in impoverished areas. It met with limited success, however, because it did not fund infrastructure upgrades in urban areas later found to be necessary for new businesses to succeed.
The first enterprise zone legislation in the United States was passed in 1987 as Title VII of the Housing and Community Development Act. The act did not offer tax incentives but was intended to relax federal regulations and to coordinate the efforts of existing programs in the designated zones. HUD received applications from 270 distressed communities for assistance under the program, but political maneuvering prevented the designation of any enterprise zones during the 1980s.
The Empowerment Zones and Enterprise Communities Act, passed by Congress in 1993, corrected for some of deficiencies of the U.K. experience and the U.S. experience under Title VII: it was designed to provide incentives to business through the tax code, provide bonding authority for infrastructure development, and offered distressed communities an attractive grant program. The act is frequently referred to as EZ/EC.
Developments under EZ/EC (and modifying legislation passed since 1993) are classified by the term “rounds” because three rounds of national competition have taken place in which communities vied for EZ/EC designation.
The first took place in 1994, the second in 1998, the third in 2001. Benefits offered empowerment zones changed slightly between Round I and Round II and again between Round II and III, the last changes in part due to the provisions of new legislation, the Community Renewal and New Markets Initiative of 2000. The provisions of all three rounds end on December 31, 2009— unless, of course, Congress extends that date in the intervening time.
For a community to be considered for designation as an empowerment zone under the act, it had to demonstrate economic distress: high levels of unemployment, a poverty rate of at least 20 percent, a declining population, and a pattern of disinvestment by businesses. In addition, an EZ community had to show the potential for economic development and the capacity to build publicprivate partnerships. Communities could meet this requirement by having public and private resources available to aid in the renewal process and by involving various community groups and other interested parties in developing and implementing the strategic plan.
Once a community met the economic distress and development potential criteria, it had to apply for the program with the help of its local and state governments.
The application for the empowerment zone designation required communities to submit a strategic development plan—incorporating the input of all affected members of the community, from business and government to church groups and community organizations—and identify sources of private funds and support for the renewal effort. Finally, the community had to develop baseline measurements and benchmark goals to evaluate program success.
Tax Credits for Business Under Round III benefits, designated communities could offer tax benefits to business. In order to create jobs for area residents, employers received a 20 percent wage credit for the first $15,000 paid to a resident of the empowerment zone; they also received tax breaks for training such employees. Credits could be applied to full- or part-time workers. Owners themselves and relatives of owners could not qualify.
Nor, surprisingly, could those employees who worked for golf courses, massage parlors, liquor stores, gambling facilities, or other ineligible business enterprises: not all businesses have the same status in EZs.
Employers who hired “targeted employees” also received a 40 percent tax credit on the first $6,000 of first-year only wages. Targeted employees are defined as high risk youth residents within the EZs, food stamp recipients, SSI recipients, vocational rehabilitation referrals, and others.
The act provided rapid depreciation on capital expenditures up to $35,000 (Round III) provided that the equipment was on land parcels meeting certain criteria.
As reported by American City & County, HUD conducted a study of the program’s first five years (19952000) but focused on Round I EZs only and found that its results were mixed. In five of six EZs jobs had increased, in one they had declined. The number of resident- and minority-owned businesses increased substantially in the six EZs under HUD’s oversight. But in only half of the EZs did employment growth correlate with EZ program activities. In one such area, employment increases were attributable to non-EZ activities. In looking at the businesses themselves, HUD discovered that larger companies were much more likely to make use of the tax credits available than smaller organizations.
HUD also discovered that targeted population groups were very difficult to employ or keep employed. The period covered by HUD’s survey, of course, also coincided with a boom period in the U.S. economy.
The auditing arm of Congress, the Government Accountability Office (newly renamed from “Government Accounting Office” but still GAO) concluded in 2004 that data for effective measurement of the EZ/EC legislation were not adequate to reach firm conclusions. GAO found that the communities, as grants recipients, were continuing to draw down on their grants and that some corporations had made use of the tax credits available to businesses in EZs. But, according to the GAO, IRS had difficulty pinning down the actual locations where these credits were being used.