[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
TAX INCENTIVES TO ASSIST DISTRESSED COMMUNITIES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
MARCH 21, 2000
__________
Serial 106-80
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
67-485 CC WASHINGTON : 2001
_______________________________________________________________________
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC
20402
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Oversight
AMO HOUGHTON, New York, Chairman
ROB PORTMAN, Ohio WILLIAM J. COYNE, Pennsylvania
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
WES WATKINS, Oklahoma JIM McDERMOTT, Washington
JERRY WELLER, Illinois JOHN LEWIS, Georgia
KENNY HULSHOF, Missouri RICHARD E. NEAL, Massachusetts
J.D. HAYWORTH, Arizona
SCOTT McINNIS, Colorado
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
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C O N T E N T S
__________
Page
Advisories announcing the hearing................................ 2
WITNESSES
U.S. Department of the Treasury, Jonathan Talisman, Acting
Assistant Secretary for Tax Policy............................. 8
______
Community Development Tax Credit Coalition, and Coastal
Enterprises, Inc., Ronald L. Phillips.......................... 26
Computers for Schools Association, Willie Cade................... 76
Fishing School, Tom Lewis........................................ 71
Food Donation Connection, Bill Reighard.......................... 47
Hall, Hon. Tony P., A Representaive in Congress from the State of
Ohio, statement................................................ 24
National Congress of American Indians, and Washoe Tribe of Nevada
and California, Hon. A. Brian Wallace.......................... 42
New York, Town of Mina, Hon. Rebecca N. Brumagin................. 36
Puerto Rico Department of Economic Development and Commerce, Hon.
Xavier Romeu................................................... 66
SUBMISSIONS FOR THE RECORD
Association of American Railroads, Edward R. Hamberger, letter... 82
English, Hon. Phil, a Representative in Congress from the State
of Pennsylvania, letter........................................ 83
Enterprise Foundation, Columbia, MD, F. Barton Harvey III,
statement...................................................... 84
National Trust for Historic Preservation, Richard Moe, statement. 88
North Carolina A&T University, School of Agriculture, Greensboro,
NC, Daniel Godfrey, and University of Florida, Richard Jones,
joint statement................................................ 90
Pechanga Band of Luiseno Indians, Temecula, CA, Hon. Mark A.
Maccarro, statement............................................ 95
United States Hispanic Chamber of Commerce, George Herrera,
statement...................................................... 96
Young, Hon. Don, a Representative in Congress from the State of
Alaska, letter and attachment.................................. 98
TAX INCENTIVES TO ASSIST DISTRESSED COMMUNITIES
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TUESDAY, MARCH 21, 2000
House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:01 p.m., in
room 1100, Longworth House Office Building, Hon. Nancy L.
Johnson (Chairman of the Subcommittee) presiding.
[The advisories announcing the hearing follow:]
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT
CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE
March 10, 2000
No. OV-16
Houghton Announces Hearing on
Tax Incentives to Assist Distressed Communities
Congressman Amo Houghton (R-NY), Chairman, Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing on tax incentives to assist distressed
communities. The hearing will take place on Tuesday, March 21, 2000, in
room B-318 Rayburn House Office Building, beginning at 2:00 p.m.
Oral testimony at this hearing will be from invited witnesses only.
Invited witnesses will include a representative of the U.S. Department
of the Treasury, representatives of State and local governments, and
community development experts. However, any individual or organization
not scheduled for an oral appearance may submit a written statement for
consideration by the Committee and for inclusion in the printed record
of the hearing.
BACKGROUND:
The Omnibus Budget Reconciliation Act of 1993 (OBRA 93) authorized
the U.S. Department of Housing and Urban Development and the U.S.
Department of Agriculture to designate 10 empowerment zones (6 urban, 3
rural, and 1 Indian reservation) and 100 enterprise communities (65
urban, 30 rural, and 5 Indian reservations) based on certain
eligibility requirements, including specified poverty rates and
population and geographic size limits. Qualified businesses operating
in these designated areas are eligible for specified tax incentives.
For qualified businesses operating in these empowerment zones, the
following tax incentives were established: (1) a 20 percent wage credit
for the first $15,000 in wages paid to a zone resident who also worked
within the zone, (2) an additional $20,000 limit for expensing under
section 179, and (3) special tax-exempt financing. Qualified businesses
operating in enterprise communities were eligible for the tax-exempt
financing but not the wage credit or additional section 179 expensing
limit.
The Tax Relief Act of 1997 (97 Act) established two more urban
empowerment zones (effective January 1, 2000) in which qualified
businesses would be eligible to use each of the tax incentives created
in OBRA 93. The legislation also created 20 additional urban and rural
empowerment zones (effective January 1, 1999) in which qualified
businesses could utilize the increased 179 expensing limits and the
tax-exempt financing, but not the wage credit.
Portions of the District of Columbia were designated an enterprise
community in 1994 pursuant to OBRA 93, and qualified businesses were
eligible for tax-exempt financing. The 97 Act designated a District
enterprise zone which included the enterprise community designated in
OBRA 93 and several other tracts. Qualified businesses operating in the
newly designated enterprise zone were eligible for each of the tax
incentives created in OBRA 93 for empowerment zones. In addition, the
97 Act provided for a 0 percent capital gains rate upon the sale of
qualified assets held for five years or longer in the District and a
$5,000 credit for first-time home buyers in the District.
Reps. J.C. Watts, Jr. (R-OK) and James M. Talent (R-MO) have
introduced H.R. 815, the ``American Community Renewal Act of 1999,''
and Rep. Tom Davis (R-VA) is developing a proposal for the District of
Columbia. The Administration has proposed a ``New Markets'' incentive,
extending and expanding the empowerment zone incentives, and expanding
specialized small business investment company incentives.
In announcing the hearing, Chairman Houghton stated: ``The
challenge of revitalizing distressed communities is critically
important. I know this first hand because the current economic boom
hasn't reached every community in New York's Southern tier. We can't
afford to leave anyone behind. We need to take a good look at how well
tax incentives in current law are working, as well as proposals to
expand incentives to help the communities which need it most. ''
FOCUS OF THE HEARING:
The hearing will examine the operation of current law tax
incentives for distressed communities, as well as several proposals.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch
diskette in WordPerfect or MS Word format, with their name, address,
and hearing date noted on a label, by the close of business, Tuesday,
April 4, 2000, to A.L. Singleton, Chief of Staff, Committee on Ways and
Means, U.S. House of Representatives, 1102 Longworth House Office
Building, Washington, D.C. 20515. If those filing written statements
wish to have their statements distributed to the press and interested
public at the hearing, they may deliver 200 additional copies for this
purpose to the Subcommittee on Oversight office, room 1136 Longworth
House Office Building, by close of business the day before the hearing.
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will rely on electronic submissions for printing the official hearing
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The above restrictions and limitations apply only to material being
submitted for printing. Statements and exhibits or supplementary
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and the public during the course of a public hearing may be submitted
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Note: All Committee advisories and news releases are available on
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The Committee seeks to make its facilities accessible to persons
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call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
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NOTICE CHANGE IN LOCATION
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT
CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE
March 15, 2000
No. OV-16-Revised
Change in Location for Subcommittee Hearing on
Tax Incentives to Assist Distressed Communities
Tuesday, March 21, 2000
Congressman Amo Houghton (R-NY), Chairman of the Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the
Subcommittee hearing on tax incentives to assist distressed communities
scheduled for Tuesday, March 21, 2000, at 2:00 p.m., in room B-318
Rayburn House Office Building, will now be held in the main Committee
hearing room, 1100 Longworth House Office Building.
All other details for the hearing remain the same. (See
Subcommittee press release No. OV-16, dated March 10, 2000.)
Chairman Houghton. Ladies and gentlemen, we are going to
begin the hearing.
Last year in presenting proposals from the Second
Bipartisan Congressional Retreat to the House Rules Committee,
one of my colleagues recalled a phone call Bill Hudnut received
when he was first elected to Congress. Maybe some of you have
heard this story. I think it is a pretty good one.
The first call Hudnut received was from a woman in his
district complaining about trash collection. ``Ma'am,'' he
said, ``I have just been elected to serve you in the Congress
of the United States. Don't you think you should call the
sanitation department?'' Her reply was ``I really didn't think
I should start that high.'' So it is a humbling reminder that
many of the matters that people care about most do not fall
within the purview of the United States Congress.
Even so, many of the decisions we make here in Congress,
and here in this committee, have far-reaching implications in
people's daily lives. The first purpose of the Internal Revenue
Code is to collect revenue to finance the services provided by
the Government, but the tax code is also used to help people
buy homes, save for their retirement and put their children
through college.
In recent years, we have tried to use the tax code to help
distressed communities. The Omnibus Budget Reconciliation Act
of 1993, OBRA 93, authorized the designation of 10 empowerment
zones and 100 enterprise communities based on certain
eligibility requirements. Businesses operating in these
designated areas are eligible for special tax incentives. The
Tax Relief Act of 1997 established two more urban empowerment
zones and 20 additional urban and rural empowerment zones.
Portions of the District of Columbia were designated an
enterprise community in 1994 under OMBRA 93, and the 97 Act
designated a District enterprise zone which included the
enterprise community designated in OBRA 93 and several other
tracts.
Building on this experience, Representatives J.C. Watts,
Jr. from Oklahoma, and James M. Talent from Missouri have
introduced H.R. 815, the ``American Community Renewal Act of
1999.'' The Administration has proposed a ``New Markets''
incentive extending and expanding the empowerment zone
incentives and expanding specialized and small business
investment company incentives.
There are a number of other proposals to help communities
that have merit. Mr. Portman and Mr. Becerra have introduced a
bill to encourage the donation of computers to schools. Tony
Hall and I have introduced a bill to encourage restaurants to
donate food to food banks. Mr. Crane and Mr. Rangel have
introduced legislation to provide incentives for investment and
job growth in Puerto Rico. Clay Shaw and John Lewis have
introduced the Historic Homeownership Assistance Act, which
would create a credit for rehabilitating owner-occupied homes
in Federal, State and local historic districts. We will be
hearing about several of these proposals today.
Much of what is needed in distressed communities--improved
public safety and better schools--is primarily the
responsibility of State and local government. However, there
are ways that the Federal Government can help. There are ways
we can help through the tax code. Many communities throughout
our Nation are reexperiencing revitalization. Some are
succeeding with help from the Federal Government and some are
going it alone. We need to know more about what is working and
we need to know how effective current tax incentives are and we
need to give serious consideration to the thoughtful proposals
that are here before us today.
I would like to recognize now the Ranking Democrat, Mr.
Coyne for his opening statement.
Mr. Coyne. Thank you, Mr. Chairman.
Thank you for holding today's hearing on tax incentives to
assist distressed communities throughout the country. It is
critical that Congress periodically review the progress being
made to reverse the years of economic decline many of our urban
and rural areas face. This evaluation must be made in the
context of overall growth of the national economy.
In the 14th Congressional District in Pennsylvania, some
neighborhoods are still suffering from the downturn in the
manufacturing and steel industries that began in the 1970s. To
help these communities, it is vital that the Federal Government
assist in attracting new capital to these distressed areas.
I consider environmental cleanup and redevelopment of old,
abandoned industrial sites a critical issue for our cities. The
400,000 brownfield sites scattered across the country have
become public health and pollution problems. They also
constitute serious impediments to the economic health of the
surrounding communities.
I am co-sponsoring legislation with Congressman Weller to
expand the existing Internal Revenue Code Section 198 provision
that allows expensing of remediation costs at brownfield sites.
The legislation would also extend the expiration date of this
provision.
The President's New Market Initiative, which we are also
considering today, would address one of the largest barriers to
rebuilding communities, the lack of capital for businesses in
distressed areas. The proposal would provide a tax credit for
equity investments in community development. I support this
legislation and believe that the initiative would attract
significant new capital to many distressed communities.
The President also proposed improvements in the Empowerment
Zone and Enterprise Community Tax Program. The proposal would
extend the EZ and EC program, provide enhanced tax incentives
and designate additional zones in communities for assistance.
The EZ/EC Program has a proven record of success and continues
to have strong support.
I hope that we can work together to pass bipartisan
legislation in these areas. It is important that we act
promptly to help our distressed communities. All Americans
should be able to share in the longest economic expansion in
United States history.
Once again, I would like to commend the Chairman for
calling these very important hearings.
Chairman Houghton. Thank you, Mr. Coyne.
Would anyone else like to have an opening statement? Mr.
Watkins?
Mr. Watkins. Thank you, Mr. Chairman, for having these
oversight hearings on community renewal and also the New Market
Initiative.
I have long devoted my public life to economic growth and
job development. A lot of the rural areas in this country have
never recovered from the Great Depression. We have literally
the highest unemployment, the highest underemployment, the
lowest educational level in many of those areas and also out
migration. The out migration has caused many of these small
communities to deteriorate but also, they have gone into the
larger cities, and it has become a problem also in the big
cities.
We have not been able to address that over the years and I
think the Empowerment Zones and the Enterprise Communities have
begun to do that a little bit in some respect in the economic
development out there because a lot of various things are going
on. One of the things I want to do today is hopefully make sure
we have equity for the rural economically depressed areas like
I grew up in as a boy where my family had to leave three times
to go from southeast Oklahoma to California in search of a job
before I was 10 years of age. It destroyed my family.
One of the things I have tried to do in Congress is to have
set asides for the rural areas so we wouldn't have to compete
against Chicago or some of the larger cities, but we would have
opportunities in the small, rural areas.
Also, it is my understanding that under the community
renewal, the tax incentives priority would be given to the
Empowerment Zones and Enterprise Communities. I want to make
sure we have clarification of that today to see if we could
make sure they are designated instead of going around different
areas. There might be more than just those but also to
designate those so that they would not be lost in the shuffle.
Thank you, Mr. Chairman.
Chairman Houghton. Thank you.
Mr. Weller?
Mr. Weller. Thank you, Mr. Chairman.
I want to commend you for holding this hearing as we work
to find ways to revitalized plighted areas, distressed areas in
our country, both urban, suburban and rural.
I wanted to draw attention, as Mr. Coyne has, to an issue
that I believe is an issue we should address as we look at
working in a bipartisan way with the Administration on the
President's New Markets Initiative as well as with the
Republican Congress' Community Renewal Initiative and combining
those two packages.
I want to focus on the issue of brownfields, an issue which
I believe is both an economic development as well as an
environmental issue, particularly as regards the whole concept
of smart growth and bringing urban sprawl under control.
The whole goal of addressing the brownfields issue is to
revitalize as well as to recycle old industrial parks as well
as that abandoned gas station on that strategic corner in a
community that people always wonder why is it never developed.
We can all think of that gas station in many of our
communities.
It is estimated that there are as many as 425,000
brownfields throughout this country. The U.S. Conference of
Mayors recently surveyed 210 of their cities and estimated if
they can clean up, recycle and reuse the existing brownfields
within those 210 cities, they could bring in an additional $2.4
billion in tax revenues and create $550,000 new jobs in those
cities.
I represent part of the city of Chicago and it is estimated
that in the Chicago land area there is an estimated 2,000
brownfields. The Conference of Mayors points out that
revitalizing those brownfields would create 34,000 jobs in the
Chicago metropolitan area. Clearly revitalizing brownfields is
good for the environment, helps bring urban sprawl under
control and also creates jobs.
In 1996 and 1997 many of us worked in a bipartisan effort
along with Mayor Richard Daley of Chicago to come up with a tax
incentive to attract private investors to purchase these old
industrial parks and commercial sites that required
environmental cleanup and to recycle them, clean them up and
put them back to work hiring people.
We successfully obtained in the 1997 Balanced Budget Act a
provision which provided a brownfields tax incentive,
essentially allowing private investors to fully deduct or
expense the cost of cleanup but it was in a targeted way.
Unfortunately, that provision only benefitted low income census
tracts, empowerment zones and a limited number of brownfields
throughout this country.
Time and time again I am often asked by community leaders
and those who want to clean up the environment, those who want
to revitalize distressed areas and rural areas, suburban areas
as well as middle class communities, why this provision is not
available for those communities as well.
It is estimated that there are over 400,000 sites
nationwide that today are left out under the current provision.
I believe, as I know Mr. Coyne does, Ms. Johnson and others,
who joined with me in introducing H.R. 4003 which expands the
current brownfields expensing provision, removes that targeting
which will allow rural, suburban as well as middle class
communities to benefit from this important economic
revitalization as well as environmental initiative.
I am pleased this legislation has the co-sponsorship of a
large number of members of the Ways and Means Committee in a
bipartisan effort and my hope is that this provision can be
included as part of a community renewal/new markets initiative
that we can work together in a bipartisan way.
I commend you for holding this hearing, Mr. Chairman. Mr.
Secretary, I look forward to working with you and discussing
this during the hearing today.
Chairman Houghton. Thank you, Mr. Weller.
Mr. Hulshof?
Mr. Hulshof. Thank you, Mr. Chairman.
Briefly, I want to say I want to associate myself with the
remarks of Mr. Watkins from Oklahoma. If you want to look at a
sector of our economy that has not shared our Nation's economic
prosperity, one need look no further than rural America.
Chairman Houghton. Without objection.
Mr. Hulshof. I will yield the balance of my time.
Chairman Houghton. Thank you.
I would like to call Mr. Talisman, the Acting Assistant
Secretary for Tax Policy, U.S. Department of the Treasury. We
are honored to have you here.
STATEMENT OF JONATHAN TALISMAN, ACTING ASSISTANT SECRETARY FOR
TAX POLICY, U.S. DEPARTMENT OF TREASURY
Mr. Talisman. Thank you very much.
I am pleased this afternoon to have the opportunity to
discuss with you the Administration's program of tax incentives
designed to foster the revitalization of economically
disadvantaged American communities.
There has been substantial bipartisan agreement on the need
to assist these communities. We very much appreciate your
holding this hearing and look forward to working with all of
you to find solutions to address needs in these communities.
As you know, despite the unprecedented prosperity that is
evident in so many places in the United States, not all
communities have shared in this new affluence. In some
communities, good jobs are still scarce, construction is rare
and the infrastructure, including schools, is aged.
The Administration believes that in this period of general
prosperity, no American community should be left behind.
Accordingly, we are dedicated to working on a bipartisan basis
to provide incentives to the private sector to bring economic
opportunity to residents of inner cities and less affluent
rural communities.
Let me be clear, 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 other initiatives to ensure
that all communities have access to the tools that are critical
to success in the new economy.
The tax code already has several measures to aid
economically disadvantaged communities. As discussed in greater
detail in my written testimony, these include tax benefits for
the 135 urban and rural empowerment zones and enterprise
communities that have been designated since 1993, a special set
of incentives designed to foster the redevelopment of the
District of Columbia and the low income housing credit which
has played a vital role in helping working poor people to find
affordable, decent housing while revitalizing communities.
The Administration's fiscal year 2001 tax proposals,
totalling about $17 billion over ten years, seek to build on
these programs and to leverage the progress that has already
been made in revitalizing America's economically disadvantaged
communities.
For example, the New Market Tax Credit would attract
capital to lower income areas by providing a subsidy to
investors. Specifically, it would help to 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 higher 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 so that they may tap a common pool of customers,
employees and other resources. The New Market Tax Credit would
provide incentives for the businesses of the new economy to
locate in distressed areas, even if few such enterprises are
already operating in these communities.
The credit is specifically designed to further the efforts
of community-based financial institutions in promoting economic
revitalization while allowing 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 for authorization to
issue stock 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 the first five years of investment.
We greatly appreciate the active leadership of Mr. Rangel,
Mr. LaFalce, Ms. Velazquez, as well as Senators Rockefeller,
Robb, Sarbanes, Kerry and others in working over the last 12
months to move this proposal forward.
The Administration would also like to see a further
expansion of the Empowerment Zone Program. The President's
fiscal year 2001 budget would extend empowerment zone status
for the existing 31 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
through 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 31 zones would be eligible to
expense rather than to depreciate over time an additional
$35,000 in qualified investment property. Finally, ten new
empowerment zones would be authorized, eight in urban
communities and two in rural areas.
Affordable rental housing remains in extremely short supply
in many communities. Paradoxically, general prosperity can
actually exacerbate the shortage of high quality, affordable
housing for low income workers. For example, in the greater
Washington area as in Silicon Valley, the problem of housing
has become acute as the creation of new jobs has led to a
substantial increase in the cost of housing. Many low income
workers must either contend with the inadequate housing stock
often found in central cities or reside so far from their jobs
that the cost of commuting measured in both time and money is
staggering.
The per capital credit allocation of $1.25 used to
determine the annual State limit was set in 1986. Since that
time, inflation has eroded the value of the cap on low income
housing credit allocations by 45 percent. Most State housing
agencies receive qualified proposals for far more low income
rental housing than they can support with the available credit.
The Administration, is proposing an increase in the cap to
$1.75 per capita and subsequent indexing of this amount for
inflation, a step that has also been proposed by Congress.
These measures will subsidize the construction and
rehabilitation of additional low income housing units while
allowing the State agencies to still choose the projects that
best meet local needs. We appreciate the efforts of Ms. Johnson
and the co-sponsors of HR 2400, including Mr. Watkins, Mr.
Frost, Mr. Ballenger, Mr. Barcia and Mr. Isakson, as well as
Senator Mack and the 75 Senate co-sponsors of S.1017
Another set of proposals will ensure access to computers
and the Internet so that the economically disadvantaged may
participate fully in America's economic, political and social
life. The Administration believes that we must make access to
computers and the Internet as universal as is the telephone
today in our schools, libraries, communities and homes.
To bridge what the Administration sees as this digital
divide, we have made several proposals, including an
enhancement of the current law temporary deduction for
corporate donations of computer equipment to schools and other
institutions in disadvantaged communities, a tax credit for
certain corporate sponsorship payments to schools, libraries
and technology centers in empowerment zones and ECs and a
credit to employers who provide training in technology skills
and other basic education to educationally disadvantaged
workers.
The budget also includes proposals to improve the
specialized small business investment companies to make them
more workable and also to reformulate the economic activity tax
credit under Section 30(a) which will encourage increased
economic redevelopment in Puerto Rico.
Let me now turn briefly to the renewal community proposal
which has been made by Mr. Watts, Mr. Talent, Mr. Davis and
also was passed as part of the budget bill last year. Like the
authors of that proposal, 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.
We are eager to continue working on a bipartisan basis with
members of the committee as well as Mr. Watts, Mr. Talent, Mr.
Davis and the rest of the Congress in ensuring through the use
of targeted tax incentives and other complementary measures
that all American communities share in the Nation's general
prosperity.
While we have certain concerns with the renewal community
proposal including the zero rate capital gains provision and
the family development accounts, we would like to work with the
Congress to develop a package on a bipartisan basis that can
achieve these goals.
We look forward to working with you and the committee 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 want to thank you and the members of the
subcommittee for providing a chance today to discuss these
important issues. I hope that we can work together to ensure
that all Americans share in the current prosperity and have
even greater opportunity in the future.
Thank you and I would be happy to respond to questions.
[The prepared statement follows:]
Statement of Jonathan Talisman, Acting Assistant Secretary for Tax
Policy, U.S. Department of the Treasury
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.
Current Law
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.
Empowerment Zones
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.
Enterprise Communities
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.
District of Columbia Incentives
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.
Native American Wage Credit
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.
New Proposals
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.
New Markets Tax Credit
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.
Empowerment Zones
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.
Low-Income Housing Credit
The low-income housing credit has played a vital role in
helping working poor people to find affordable, decent housing
and in helping to revitalize low-income communities. But
affordable rental housing remains in extremely short supply in
many communities. Paradoxically, general prosperity can
actually exacerbate the shortage of high-quality, affordable
housing for low-income workers. Here in the greater Washington
area, as in Silicon Valley and the areas surrounding New York
City, the problem has become acute as the creation of new jobs
has led to a substantial increase in the cost of housing. Many
low-income workers must either contend with the inadequate
housing stock often found in central cities or reside so far
from their jobs that the cost of commuting, measured in both
time and money, is staggering. To help address this need, the
Administration is proposing an expansion of the low-income
housing credit. We also appreciate the leadership on this issue
of Mrs. Johnson, Mr. Rangel, and the co-sponsors of H.R. 2400,
including Mr. Watkins, Mr. Frost, Mr. Ballenger, Mr. Barcia,
and Mr. Isakson.
This tax credit is allowed in annual installments over 10
years for qualifying low-income rental housing, which may be
newly constructed or substantially rehabilitated residential
units. In order to qualify for the credit, the building owner
must receive an allocation from a state or local housing
authority, which is counted towards an annual limit for each
state.
The per capita credit allocation of $1.25, used to
determine the annual state limit, was set in 1986. Since that
time, inflation has eroded the value of the cap on low-income
housing credit allocations by 45 percent. Most state housing
agencies receive qualified proposals for far more low-income
rental housing than they can support with available credits.
The Administration is proposing an increase in the cap, to
$1.75 per capita, and subsequent indexing of this amount for
inflation. These measures will subsidize the construction and
rehabilitation of additional low-income housing units while
allowing the state agencies to choose projects that best meet
local needs.
Digital Divide
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.
Specialized Small Business Investment Companies
Specialized Small Business Investment Companies play a
special role in insuring that businesses in disadvantaged
communities have access to capital. Licensed by the Small
Business Administration, these partnerships or corporations
make long-term loans to, or equity investments in, small
business owned by socially or economically disadvantaged
entrepreneurs. The Administration has proposed in the FY 2001
budget that these entities be allowed greater flexibility with
regard to their organizational form, and specifically in
transitioning from one organizational form to another without
triggering adverse tax consequences. For example, the proposal
would also allow C corporations to roll over, without payment
of tax on realized capital gains, the proceeds from the sale of
publicly-traded securities if these are used to purchase a
common stock or partnership interest in a Specialized Small
Business Investment Company.
Puerto Rico Economic Activity Tax Credit
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.
Renewal Communities
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.
Chairman Houghton. Thanks very much.
Mr. Coyne?
Mr. Coyne. Thank you, Mr. Chairman.
Mr. Talisman, how would Treasury's fiscal year 2001
proposal, the New Market Initiative, affect three areas:
housing, education and crime in the economically distressed
areas of the country?
Mr. Talisman. We have a number of budget proposals to
address crime and housing. One of the aspects of our proposal
is to bring investment into these communities to provide a
safer environment and to ensure that the communities will be
better developed and therefore, be less suspect to the concerns
that you have raised.
We have what I would call corollary budget proposals to
address the concerns of education, for example, expansion of
the Qualified Zone Academy Bond Program in those areas as well
as our School Modernization Bond Program and then we also have
discretionary authority with respect to the crime issue.
Mr. Coyne. So education concerns would be addressed as part
of the overall proposal?
Mr. Talisman. As part of the overall budget proposal, that
is correct. As I pointed out, our digital divide proposal would
also encourage employers to provide basic training to their
economically disadvantaged workers to bring them up and let
them share in the prosperity.
Mr. Coyne. What tangible progress has been made in
distressed communities that were designated under the EZ/EC
Program since this subcommittee held its oversight hearings in
1997? Could you bring us up to date on progress there?
Mr. Talisman. Again, the usage of EZ/EC, the wage credit
has increased significantly since we last testified between
1997 and 1998. There has been a great deal of activity both on
the discretionary side and on the tax side and educational
efforts to bring greater activity into the EZ/EC.
What we have done is there have been efforts at work force
development, access to capital, increased jobs and projects and
programs that I think all lead to evidence of success, but
again, this is a question I think would take a great deal of
time to answer. I would be happy to answer more fully in
writing.
Mr. Coyne. Could you tell us the status of the Title 20 and
other funding for the EZs? Could you tell us about the funding,
Round 1, Round 2 and the proposed Round 3, the status?
Mr. Talisman. Again, Round 1 is fully funded. Round 2 we
propose in our budget and we would be happy to work with
Congress to ensure that there is budget authority for the Round
3 empowerment zones as well.
Mr. Coyne. What about the proposed Round 3? You are
proposing full funding for Round 3, is that it?
Mr. Talisman. No, we have proposed full funding for Round 2
and would be happy to work with the Congress to ensure full
funding for Round 3.
Mr. Coyne. So that is open for negotiation?
Mr. Talisman. That is correct.
Mr. Coyne. Thank you.
Chairman Houghton. Mr. Hulshof?
Mr. Hulshof. Thank you, Mr. Chairman.
Mr. Talisman, I am going through, in addition to your oral
testimony, your written statement as well. Specifically, a
couple of points that you mentioned on page nine, some of the
concerns that the Administration has exempting from taxation
the capital gains on the sale of appreciated assets. I am not
going to delve into that any further as far as making a
comparison with the Watts-Talent Community Renewal Act but the
paragraph under that talks about your concern about family
development accounts. You allege that allowing low income
individuals who make contributions to their own family
development accounts to claim an above the line deduction would
create complexity and some administrative problems. Would you
expand on that?
Mr. Talisman. The question I think is twofold with respect
to family development accounts. First, it is the first instance
to our knowledge that you would get both an up front deduction
for contributions to the account and exclusion for earnings
from the account and then an exclusion for withdrawals from the
account.
We also think the above the line deduction for the account,
the complexity arises from the fact that it is not only the
individual who can make contributions to the account but other
persons can make contributions to the account as well. It would
be very difficult for the IRS to track those amounts and to
ensure there is not a double dip or more than that with respect
to the accounts.
All of these things, we share the goal of encouraging
economically disadvantaged people to provide for accounts as
evidenced by our retirement savings accounts and our support
for the individual development accounts. Certainly we would be
happy to work with you all to come up with a mechanism we agree
does not create these concerns.
Mr. Hulshof. One of the reasons I asked you that Mr.
Talisman is because just gleaning from your written statement a
host of tax credits, some that are already law like the low
income housing tax credit which I fully support, and then some
new tax credits, I just find it interesting that you talk about
complexity to the Code because I think tax credits adds to that
complexity.
Let me ask you specifically, I think it was a couple of
years ago if my memory serves, maybe as far back as 1995 that
the Housing and Urban Development Inspector General was
somewhat critical of the process used to determine the
empowerment zone designations. As I recall, that report noted
there were several enterprise community applications that were
selected and the categorization of them was ``weak'' and they
were selected over eight strong applications and 21 medium
applications.
Far be it for me to suggest that the Secretary of Housing
and Urban Development would make these decisions on political
reasons, either former, past or future Secretaries, but what
assurance can you give us as far as steps being taken to
improve the selection process to make sure that the neediest
areas do receive these designations?
Mr. Talisman. Mr. Hulsof, to be honest, I think it would be
better if I refer your question to HUD regarding their process.
I know they have put in safeguards since that report and I
would be happy to get them to respond to you with respect to
those safeguards.
Mr. Hulshof. In the new markets proposal, it seems that
Treasury would also have quite a bit of discretion in choosing
which entities would convey a credit to its investors. I guess
I am asking shouldn't those decisions be based on objective
criteria, maybe spelled out in legislation or would you prefer
to allow your department to issue those regulations?
Mr. Talisman. The CDFI Program already uses a criteria to
certify CDFIs. Those criteria include the organization's
financial capacity, the capacity and skills of its management
team, its track record in community development and then
looking at projections for the tax credits that it would be
allocating.
We certainly would be happy to work with the Congress in
developing such criteria we believe that by regulation would
give us the most flexibility for providing those criteria and
potentially reacting to the marketplace in the future.
I appreciate your concern. I think it has worked very well
in the CDFI in response to certain concerns. Again, those
criteria have been strengthened and I think the recent reports
from both GAO and the IG's Office with respect to the CDFI Fund
have been unqualified opinions.
Mr. Hulshof. Thank you.
Chairman Houghton. Mr. Weller?
Mr. Weller. I want to follow up on the comments I made
earlier regarding brownfields and the need to do a better job
of recycling, cleaning up and revitalizing brownfields
throughout this country.
I noted according to the League of Cities and some of the
other community organizations that there is over 410,000
brownfields that currently are left out and do not qualify for
the existing provision in the tax code that we worked together
on back on in 1997 putting together the Balanced Budget Act to
provide a tax incentive for private investors to purchase, do
the environmental cleanup and recycle and to bring jobs to
these blighted communities.
In the President's budget, the President included a
provision to extend the current provision and make it
permanent. While that is a great idea because I am one of those
who worked to put the original provision in the law, I would
like to better understand why the Administration did not
include in your budget this year, not just the extension but
also to expand this provision so that rural, suburban and
middle class communities can utilize this tool to recycle,
reuse and revitalize communities?
Mr. Talisman. I think there is a balance here, Mr. Weller.
Obviously the brownfields proposal is not only about
environmental cleanup, it is also aimed at encouraging the
revitalization of these communities. I think we have some
concern regarding if you extend the ambit of the proposal to
all areas that the distressed communities will be the last ones
to receive the capital necessary to remediate these sites. So
we though the targeting of the proposal was proper to ensure
that the economically disadvantaged communities receive the
first available funds to remediate and that this incentive
would encourage that.
Certainly if the targeting is something that is too tight,
we would certainly be willing to talk to the Congress about the
targeting but we do worry about losing the capital incentive.
Mr. Weller. So you are saying that rural communities,
suburban or middle class communities should not benefit from a
tax incentive to clean up that gas station that is on that
strategic corner, on that major thoroughfare through town or
that industrial park that is on the side of town that hasn't
been used for decades because there is a need for environmental
cleanup and it just happens to be a middle class community?
Mr. Talisman. Again, I think there are issues regarding the
targeting. The market generally will work to provide the
capital necessary to clean up sites in affluent areas.
Certainly with respect to rural areas that you discussed, there
are a number of rural areas that would qualify for the current
brownfields incentive.
Mr. Weller. There have been statements made by the
Administration regarding smart growth and that concept to try
and discourage urban sprawl. Statistics show that to compare
brownfields to new greenfield industrial parks that consumes
about four to five times as much open space to create a new
industrial park. Suburban areas are where you are experiencing
this so-called sprawl, not in the inner city. We want to
revitalize the inner cities and that is the purpose of this
hearing. At the same time, we also want to help the environment
by bringing urban sprawl under control.
If we remove the so-called targeting, we help those
suburban communities control sprawl, don't we?
Mr. Talisman. With respect to sprawl, I think our Better
America Bonds Program would certainly help in that regard and
keep open spaces.
With respect to the brownfields, I think the reason we have
made it permanent is one of the problems we have faced is that
the takeup rate on the brownfields has not been great because
of the lack of permanence, the States need to market this
proposal to encourage capital formation and also that there are
certain brownfield projects such as groundwater cleanup that
take a number of years.
Mr. Weller. My friends Mr. Coyne, Mr. Johnson and others,
in fact ten members of this committee, five Republicans and
five Democrats, have introduced a bill which does extend the
existing provision but also expands it so that rural, middle
class and suburban communities can also utilize this tool to
clean up that old industrial park and to clean up that old gas
station on that strategic corner. We believe that middle class
communities need help too.
Would you be willing to work with us to find a way to
expand this tax provision so that we can help these communities
regardless of where they are located, rural, suburban, middle
class or elsewhere, not just in the inner city and low income
neighborhoods?
Mr. Talisman. Mr. Weller, I would be happy to work with you
to see if we can develop an approach that we are both
comfortable with in this regard.
Mr. Weller. Thank you.
Chairman Houghton. Before I go on to the next questioner, I
would like to say that Representative Thomas Allen of Maine and
Tony Hall of Ohio have joined us. Gentlemen, we are delighted
to have you here.
Mr. Lewis, would you like to inquire?
Mr. Lewis. Thank you very much, Mr. Chairman.
Thank you, Mr. Secretary for being here today. I just have
one question to ask.
As you may know, the district I represent, which includes
the City of Atlanta, has a lot of historic homes, especially in
distressed areas. That is why I am a co-sponsor of H.R. 1172. I
believe Chairman Houghton made a reference to this piece of
legislation in his opening statement. Does Treasury have a
position on H.R. 1172 which would provide a tax credit for the
rehabilitation of owner-occupied homes in historic districts?
Do you agree that such a tax credit would be helpful in
improving these overlooked, distressed communities in our
cities and rural communities all over America?
Mr. Talisman. Mr. Lewis, obviously we did not adopt that
proposal as part of our budget, however, as evidenced by all
the budget proposals discussed in my testimony, we share your
interest in revitalizing these communities and in ensuring that
the economically disadvantaged communities can share in the
prosperity.
We have some concern with respect to the targeting of the
historic home ownership tax credit but share your goal in
making sure these communities are updated and modernized. One
of the ways we think we can do that is by spurring job growth
through the new market tax credit and the empowerment zone
incentives that we provide in our budget.
Mr. Lewis. In supporting this piece of legislation, you
would have tremendous support from this committee. I believe
the great majority of the members of this committee, in a
bipartisan fashion, support this piece of legislation. It would
improve many communities, not just our large urban centers, as
I tried to state, but in hamlets, towns and villages all across
America.
Mr. Talisman. Again, we share your goals and we would be
happy to work with you with respect to the targeting of your
proposal to make sure it functions appropriately but again, we
have certain concerns and we believe the approach taken in our
budget will have an effect on these communities in a way that
will be targeted.
Mr. Lewis. Thank you very much.
Chairman Houghton. You don't have any other suggestions for
us in pushing through this legislation because ultimately we
will be dealing with the Treasury.
Mr. Watkins?
Mr. Watkins. Thank you, Mr. Chairman.
I thank you so much and the members of the committee for
having these oversight hearings. I would like to take some
points being made today that we can take forward and hope the
committee will.
Let me say I was working on the enterprise zone back when
Jack Kemp was and I was on the other side of the aisle at that
time and went all the way to the White House when President
Reagan was there, pounding the table trying to get some kind of
equity for the economically and rural depressed areas of this
country. Finally a third was set aside for rural America and
that helped a lot. We should have equal but at least a third.
What I am pointing out is that I am for community renewal,
new markets, trying to bring out these economically depressed
areas and helping to give people an opportunity to stay, live,
work, and raise their families in those areas. I had to leave
three times before I was nine years of age and it destroyed my
family.
I have been told by Jim Talent and J.C. Watts that the
empowerment zones and enterprise communities will be given
priority. I would like for us to have some clarification
language to that question, that they be designated so that they
are not left out. Yes, expand and create some more, but make
sure we also do that with equity. First, I would appreciate
some clarification language by the Administration and hopefully
by our committee staff to make sure that is very clear in the
language and that we have that priority and designation. When
they were established, there were nine empowerment zones, six
urban and three rural--95 enterprise zones, out of 95, 65 were
given to urban but only 30 given to rural. It should have been
at least 33 given to the rural areas.
In the 1997 Tax Relief Act, two more urban were set up but
not one for the rural areas. So I hope that we can propose--my
staff will work with the committee--and that we add the equity
of at least one more empowerment zone for the rural areas.
I work with Indian tribes in my area and we have 22 percent
of the American Indians in the United States in eastern
Oklahoma. I work with two of the tribes, getting them to work
with the communities there so we can work together but we need
to add that in some additional legislation.
What disturbed me was when I looked at the Administration
proposing that we extend and expand the empowerment zones. When
I look at that, they are proposing ten additional empowerment
zones--eight urban and only two rural. The small people get
stomped on. I sound like a Democrat, don't I? There is still a
little bit of it in me, I guess. I would like the
Administration to treat the rural economically depressed areas
of America with the same equity as urban areas.
I just left some families a while ago in my office who have
lost everything because prices are 1946, 1947 prices but they
have no jobs in those rural areas, off-farm jobs. I have
devoted my entire life to trying to build jobs so our people
could stay, live and work and raise in those areas. When I look
at the inequities, it makes me think maybe the Administration
doesn't care about the rural areas.
We say these tax credits or investments should be going to
selected community development entities. When I look at
community development entities, I don't see the enterprise
communities or empowerment zones listed. I would like to ask
that question of you. Can we get equity for the rural areas
from this Administration, hopefully from this committee too?
Can we get an answer about the CDEs? Do they include the
enterprise zones, empowerment zones and enterprise communities?
Mr. Talisman. Mr. Watkins, in response to your questions,
we would be happy to work with you to ensure equity across the
board for both rural and urban communities. I would point out
that under the new markets tax credit, 51 percent of rural
tracts are eligible for the new markets tax credit and that is
approximately one-third of all eligible tracts. So I do believe
there is equity in that proposal. We certainly want to work
with all members of Congress to ensure equity across the board.
Mr. Watkins. It is so significant in the small rural areas.
The largest movement of people ever in the history of our
country was from the rural areas to the urban cities during the
Great Depression and World War II. Basically, we did nothing to
stop that. Now we have a lot of inner city problems. At least
in rural areas, people are known by name, they can have some
self esteem. We need to have help and I want to say I am going
to stand up and fight for it.
I don't like to see proposals come in where you say you
will and change it. Will you come here and change what you are
proposing to make sure there is a third of those rural areas?
Mr. Talisman. Again, I am happy to work with Congress to
develop a proposal that is balanced. Again, we will work with
you and the rest of the committee to ensure on a bipartisan
basis we have achieved that balance.
Mr. Watkins. I would appreciate that very much.
Let me say the voices of the rural people are faint, they
are scattered. You can have a fire in an urban center and it is
worldwide news. You can burn one of my little towns to the
ground and it is not worldwide news. It is faint because they
have all left.
My mother insisted that I get an education. The only
problem is lots of times in rural areas, you are caught by the
digital divide, you lock yourself out. You cannot go home. I
want equity for the rural areas of this country. I would
appreciate very much if you could provide to me and to this
committee how you are going to provide that equity. Hopefully
our committee will help the other committee to make sure it is
adopted with equity for the rural areas.
Mr. Chairman, I appreciate this opportunity very, very
much. You are familiar with my part of the country and I know
how difficult it is. We have 22 percent of the Native Americans
and I worked very hard putting together a package and we did
not get declared an empowerment zone even though I worked
closely with the tribes in a rural depressed area that is one
of the top ten lowest economic areas in the Nation. Maybe if
that one addition had been done, we would have made it but
didn't do it.
Chairman Houghton. Mr. Secretary, we appreciate your being
here. As you can see, Mr. Watkins feels very strongly about
these matters and if you could work with him we would certainly
appreciate it.
Thank you very much for your testimony.
Mr. Talisman. Thank you very much.
Chairman Houghton. We will move on to the next panel. The
next panel will be Mr. Brian Wallace, Chairman, Washoe Tribe of
Nevada and California and Vice President, National Congress of
American Indians; the Honorable Rebecca Brumagin, Supervisor,
Town of Mina, Findley Lake, New York; Ronald L. Phillips,
President, Coastal Enterprises Incorporated, Wiscasset, Maine,
on behalf of the Community Development Tax Credit Coalition;
and William D. Reighard, President, Food Donation Connection,
Newport, Virginia.
Before the panel starts, I would like to introduce Mr. Tony
Hall of Ohio who is very interested in these areas,
particularly in the food donation program. I would like to have
him say a word or two.
STATEMENT OF HON. TONY P. HALL, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF OHIO
Mr. Hall. Thank you, Mr. Chairman.
I have a written statement that hopefully can be a part of
the record. If it cannot, I am just glad to be here. I don't
sit on the Ways and Means Committee but I am glad to be here to
talk about a bill that you and I are both interested in and I
am grateful for you scheduling this meeting.
I am also here in support of what Mr. Reighard is probably
going to say to you about H.R. 1325, the ``Good Samaritan Tax
Act.'' A good portion of the members of this committee and the
full committee are cosponsors of this legislation. What it says
in so many words is to allow the donation of food to our food
banks and soup kitchens of the country so that the people that
are donating the food can get a better break than what they are
getting now on the donation of food.
For example, if XYZ hardware store offers nails and hammers
to Habitat for Humanity, they get a pretty nice deduction on
that. If the same group of people offer food, they don't get
really a deduction. Corporations get a deduction but small
businesses and certain types of franchisees, for example, Pizza
Hut, the corporation, when they donated lots of food in
Cleveland, Ohio, they got a significant tax break but when a
lot of the stores there when to franchisee stores, the donation
of food dropped substantially.
What we are trying to do is provide for businesses,
farmers, small businesses, franchise stores to be given the
ability to donate food to food banks and soup kitchens. I would
hope that the Congress would approve the ability to buy more
commodities but subject to doing that, whether they are going
to do it or not, we should increase that appropriation. If we
don't do it, this would be the second best thing, to allow
people to donate food to food banks and soup kitchens. Even
though the economy great and going up, there is a tremendous
need out there. As a matter of fact, there has been a 150
percent increase in people asking for food over the past four
or five years.
This bill is a rather simple bill and I hope that this
committee will look on it in a very favorable way.
Thank you, Mr. Chairman.
[The prepared statement follows:]
Statement of Hon. Tony P. Hall, a Representative in Congress from the
State of Ohio
Mr. Chairman, I am grateful to you for scheduling a hearing
on this important topic. It is clear that the benefits of the
longest economic expansion in our history have skipped over
many areas in our nation.
I sense a genuine desire to do something to assist these
distressed communities. This desire exists in both parties; in
both the House and the Senate; and in both the Legislative and
Executive Branches. As the President put it in his State of the
Union Address, ``This is not a Democratic or a Republican
issue. Giving people a chance to live their dreams is an
American issue.''
But as we consider legislation to address the problems of
people who live in the Mississippi Delta or on Native American
reservations, we also should keep in mind that even in areas
that have greatly benefitted from the expansion, some have
fallen through the cracks. Just last week I read in the
Washington Post that in Fairfax County, the home of the
Internet, the number of homeless people now exceeds 2,000. More
than 800 of them are children. In my own district of Montgomery
County, Ohio, the unemployment rate is now lower than the
national average, but the number of people seeking assistance
from food banks is increasing.
This is not a problem that the federal government can solve
alone. There is a role to play for churches and other faith-
based organizations, the private sector and generous citizens.
One way to get these people involved is for federal tax policy
to offer incentives.
Chairman Houghton and I are sponsoring legislation, the
``Good Samaritan Tax Act,'' to encourage donations of food. Our
bill has two simple principles:
1) The tax code ought to treat donations of food in the
same way it treats donations of other inventory; and
2) Tax incentives ought to be available to anyone in the
food business, not just corporations.
Our bill is affordable. The five-year estimate by the Joint
Committee on Taxation is $187 million.
As part of the next panel Bill Reighard, President of the
Food Donation Connection, will speak about this bill in greater
detail. I want to thank Bill for coming here today.
I am pleased that a majority of the Members of the House
Ways and Means Committee has joined us by cosponsoring this
legislation. I would urge that, as the Committee drafts its
legislation, that it include these provisions. Thank you.
Chairman Houghton. Thank you, Mr. Hall. As you know, I
totally agree with you. You are wonderful to make that
statement. I think that will be helpful as background material.
Now I would like to introduce Congressman Tom Allen to
introduce his constituent, Mr. Phillips.
Mr. Allen. Mr. Chairman, I thank you very much for allowing
me to be here. I also am not a member of this committee but I
did want to be here to introduce Ron Phillips to the committee.
In Maine, Coastal Enterprises and Ron Phillips are regarded
as a State treasure. I don't mean to embarrass Ron by that. He
is here today to speak for the Community Development Tax Credit
Coalition but in southern and central Maine, project after
project and business after business owes their prosperity and
sometimes even their existence to the good work of Coastal
Enterprises.
Coastal Enterprises is a nonprofit community development
corporation located in Wiscasset, Maine and it works with
individuals, other financial institutions and government
agencies to make sure that community development takes place as
it is meant to take place, in a concrete way so that
individuals and small businesses get a chance to succeed. To
does a lot of work with financial and technical development
assistance, with research and policy development work. It has
an excellent record for effectively using public funds to help
leverage private investments. In particular, in Maine as we
have lost the textile industry and the shoe industry, Coastal
Enterprises has been very effective in helping displaced
workers retrain for other lines of work.
If you go to the Coastal Enterprises annual meeting, as I
have on several occasions, and hear individuals who stand up
and say I was on welfare and didn't think I had a chance, but
then they started their own business through the good work and
assistance of Coastal Enterprises, you begin to have a sense of
the impact of this organization on individuals and businesses
throughout southern Maine.
Ron Phillips and Coastal Enterprises are recognized more in
Maine but around the country and I am delighted to welcome him
here. We are proud of him in Maine and we know the work they
are doing in Maine is really a model.
I thank you very much for allowing me to welcome him here.
Chairman Houghton. Thank you very much, Tom.
Mr. Phillips, would you like to testify?
STATEMENT OF RONALD L. PHILLIPS, PRESIDENT, COASTAL
ENTERPRISES, INC., WISCASSET, MAINE, ON BEHALF OF THE COMMUNITY
DEVELOPMENT TAX CREDIT COALITION
Mr. Phillips. Thank you, Congressman Allen, very much for
doing that.
Thank you, Chairman Houghton and members of the committee.
I am very glad to be here today to support this bill, the
``New Markets Tax Credit.'' My comments are written and they
can be presented for the record but I will try to summarize
them.
My name is Ron Phillips and I am President of Coastal
Enterprises. We are a nonprofit community development
corporation and community development financial institution
based in the rural, mid-coastal village of Wiscasset, Maine.
Our mission is to help low income people and communities
achieve an equitable standard of living, learning and working
in harmony with the natural environment.
We provide flexible venture capital and subordinated debt
financing and technical assistance throughout the State to
develop small business startups and expansions, value added
natural resources from our farms, fish and forest sectors;
social services facilities such as child care centers and
affordable rental and home ownership housing. We have directed
some $275 million in capital in partnerships with banks and
other private and public investors to over 1,000 projects to
create economy opportunity, livable wage, jobs, self employment
and housing for thousands of Mainers, women in business and now
an increasing number of refugees and new immigrants in our
State.
I am here today both as a practitioner of community
economic development and as a representative of the New Markets
Tax Credit Coalition to encourage your bipartisan support of
this bill. Our New Markets Tax Credit Coalition represents many
of the over 4,000 community development corporations, community
development financing institutions, community development banks
and credit unions, national intermediaries and others, some of
the regions of this country like the Mississippi Delta, the Mid
Atlantic or border regions of the southwest and even
communities where CDCs are active in EC or EZ designated areas.
So we have quite a network.
We believe that the New Markets Tax Credit will provide a
major tool to access private capital for low income rural and
urban neighborhoods and people and enable community development
entities like CEI to invest in small business entrepreneurs,
new ventures, commercial real estate and community development
facilities.
The media, as we have heard, is bursting with news of the
booming stock market and the race to invest but none of these
investments is going to low income rural and inner city areas.
According to PricewaterhouseCoopers, 90 percent of the
nationwide investments have been flowing to high tech and
Internet stocks and related industries. In our own State of
Maine, regional disparities and major plant closings and
downsizings as Congressman Allen talked about and downsizings
are challenging employment and economic opportunity for tens of
thousands of older as well as younger working families. These
conditions are pronounced in other regions like Appalachia
where poverty and unemployment have actually increased for many
of its counties in recent years.
At the same time at the grassroots level, there are
partnerships and alliances underway to rebuild our communities.
Local government, private industry, the banking community,
academic institutions and citizens are engaged.
In Maine, our legislature is actively considering bills to
support innovative, specialized incubators, stepped up
technical assistance for small businesses and micro
enterprises, capital for new farm enterprises and even
incentives for banks to loan money to CDCs and CDFIs. So we
don't just look to the Federal Government for this kind of
assistance. But the New Markets Tax Credit can play a powerful
role in boosting similar initiatives to access private capital,
to invest in small businesses, entrepreneurs, commercial real
estate, facilities and communities that are left out of the
tremendous economic boom. It will encourage long-term
partnerships among the private, nonprofit and public sectors.
Let me say this about the community development field.
There is a network of thousands of CDCs and CDFIs and national
intermediaries ready, willing and able to work with this credit
to achieve the kind of impact on people and communities we are
talking about here today. Many have already had significant
experience with the Low Income Housing Tax Credit. A tested
infrastructure is actually in place.
CEI itself has a record of success in tax credit financing
for community development projects. In 1993, 20 urban and rural
CDCs participated in an innovative HUD tax demonstration
project which provided a five percent credit per year over ten
years to the investor. In partnership with KeyBank of
Cleveland, Ohio which is very active in the small business
market of Maine, and assisted by the National Rural LISC Group,
we mobilized $2 million to capitalize a small business loan
fund. Typically, this kind of capital serves the purpose of
filling a gap in a business financing deal, what we call
subordinated debt or even equity so that the senior debt of
other banks and lenders can come into the project.
To date, we have financed 21 small businesses. That
includes child care centers, fish processing facilities,
alternative home care services, retail food cooperatives and
other ventures that are contributing to Maine's economic
development while creating access to jobs and services for low
income families. Over 500 jobs have been retained or created in
the program, many of them for a TANF recipients. What is more,
millions of dollars, over $8 million, were leveraged in other
capital with these projects. So in actuality, we have put
together about $10 million for these 21 deals. The project is
beginning to pay in government taxes and savings from social
assistance.
One story worth noting because the project simply goes to
the heart of creating opportunity for the harder to employ is
Faithworks in Lewiston. Lewiston, by the way, is a designated
Enterprise Community, the only one in Maine. Father Bill Baxter
of Faithworks created a job shop assembly operation that
performs contract work such as stuffing sample bags you might
find in your Sunday newspapers. It provides employment for
welfare recipients and others who need entry level jobs and the
time and space in a nurturing environment to grow before they
can be ready for better paying jobs.
Over 600 people have participated in the program. On
location at the space in the former mill complex where Faith
Works is located, representatives from the Work Force
Development Center stand by to recruit workers and sign them up
for specialized training and career growth and other job
placement. Funds from this HUD tax credit demonstration we put
together helped start this project.
Let me offer a few recommendations about the New Markets
Tax Credit that we think are important to ensure its optimum
success. The current New Markets Tax Credit proposal is for a
five year, six percent credit. It provides for $3 billion per
year in activity for fiscal years 2001 through 2005. Credits
would be sold to investors, just like we sold our credit to
KeyBank in Cleveland, so that community development entities
such as CDCs or CDFIs can provide the technical and financial
assistance to the range of private business enterprises and
community development projects in designated low income
communities.
Based on our experience in working with businesses, people
we want to help in communities and regions we care about, we
recommend three changes. They relate to the targeting
provisions of the bill, the term of the credit and criteria for
selection of the CDE, the certified development entity as
defined in the bill.
First is targeting. The current proposal would limit the
benefit of the tax credit to low income people and activities
in eligible census tracts. This will unnecessarily exclude a
majority of the geography of the United States and especially
hurt rural regions where poverty is not concentrated
geographically, or businesses simply just don't locate
anywhere. We recommend that an option to target either people
or place be permitted as now contained in the Senate bill.
I was looking over three projects I wanted to describe to
you in detail. I know I only have maybe a couple of minutes
left but one has to do with a project based in Bangor that
provides foster care support for kids in eastern and rural
parts of Maine. It is a great program. In fact, one of the
participants there was featured by the United States Treasury
under the CDFI Program. Former Secretary Rubin was quite taken
with her story. This would not be an eligible area for this
program.
Another project envisioned is a fast growing
telecommunications call center that provides computer support
services. It has a contract with Microsoft for example. There
is a pending contract with a major West Coast bank to tell you
what is going on with on-line banking right in Maine. The jobs
are growing and they are paying relatively good wages. We are
trying to get people in there. In fact, they have hired now
over 200 people with low incomes and on welfare that would
qualify in the program we are trying to help with the New
Markets Tax Credit. However, this company would not be eligible
for the capital that we could invest in under the new market
tax credit as proposed.
Second is the term. Economic development is a long-term
process and the current term of 6 percent credit for five years
from an economic development standpoint is just too short. We
would prefer a ten year term with a minimum of a seven year
threshold. I think the Senate bill contains that provision.
Senators Rockefeller and Robb have that in there.
Finally is selection criteria. I agree with what was said
earlier regarding the criteria for selecting the CDEs, that
there needs to be a screening process that clearly spells out
that a CDE ought to submit a five year business plan, show its
capacity, its track record, and that its mission is compatible
with the goals of the tax credit.
In conclusion, the CDC/CDFI is prepared to serve as a
gateway to underserved new markets, communities and people to
ensure more Americans have a chance at economic fulfillment.
This goal is more important today than ever in a time of great
wealth creation. The lower income and working people of this
country are part of a phenomenon that some are actually calling
growth without prosperity. The New Markets Tax Credit is
designed to divert capital from the private market to new
market opportunities. We have experience, we have a network, we
have untapped potential. We urge your bipartisan support of a
bipartisan issue. We applaud therefore the work of all those
who have brought forward this legislation from the White House
and Treasury Department to members of your staff and this
committee, and those in the Senate with the companion bill. It
is going to make a big difference for a lot of people to get a
share of the expanding American pie.
Thank you very much.
[The prepared statement follows:]
Statement of Ronald L. Phillips, President, Coastal Enterprises, Inc.,
Wiscasset, Maine on behalf of the Community Development Tax Credit
Coalition
Mr. Chairman and members of the House Ways and Means
Oversight Subcommittee, my name is Ron Phillips, and I am
President of Coastal Enterprises, a nonprofit community
development corporation based in the rural, midcoastal village
of Wiscasset, Maine. I am here today both as a practitioner of
community economic development and as a representative of the
Community Development Tax Credit Coalition to speak on behalf
of the New Markets Tax Credit Bill H.R. 2713. I would like to
thank Chairman Houghton, Rep. Coyne and the members of the
Subcommittee for this opportunity to testify in favor of the
New Markets Tax Credit as proposed by President Clinton in his
fiscal year 2000 and 2001 budgets, sponsored by Congressman
Rangel, and sponsored by Senators Rockefeller and Robb in
S.1526. My comments and recommendations are written and are
presented herein for the record.
If enacted, we believe the New Markets Tax Credit will
benefit millions of families, individuals, and rural and urban
regions and neighborhoods in this country still outside of the
mainstream of economic prosperity.
The New Markets Tax Credit will encourage private
investment to promote economic development in communities being
left out of the tremendous economic boom being experienced in
the U.S. It will encourage long-term partnerships among the
private nonprofit and public sectors. Representative Houghton
and members of the Subcommittee, we applaud therefore the work
of all those who have brought this legislation forward, from
the White House and Treasury Department, to members of your
staff, and those in the Senate with their companion bill. It is
going to make a big difference for a lot of people seeking a
share of the expanding American pie.
Introduction
First, a word about the Community Development Tax Credit
Coalition. We represent community development corporations,
community development finance institutions, community
development banks and credit unions, venture capital, secondary
market securitization, and special regions such as the
Mississippi Delta, or boarder regions of the southwest.
Together these groups represent some 4,100 CDCs/CDFIs in rural
and urban regions geared up to implement this NMTC.
Let me also add that I serve on several boards relevant to
our community development field, including the banking
community. These are KeyBank's national community development
board, which partnered with us in an innovative economic
development tax credit I will discuss briefly below, the FHLB
of Boston, whose member banks are potential lenders or
investors in this proposed tax credit, the board of directors
of the National Congress for Community Economic Development,
with 800 CDC members especially representative of African
American and other minorities, the board of National Community
Capital, which is the voice for the CDFI field of 500 entities,
and the Rural LISC advisory board, an organization that is
providing support to an expanding number of rural development
organizations. I was a founding member of the Association for
Enterprise Opportunity which advocates for microenterprises,
and the Community Development Venture Capital Alliance, which
is expanding the role of targeted venture capital to benefit
low income people and communities.
About CEI
Based in the rural, coastal village of Wiscasset, CEI is a
privately and publicly funded organization operating primarily
in Maine's rural regions. Our mission is to help low income
people and communities achieve a better standard of living
working and learning in harmony with the natural environment.
We provide equity and subordinated debt capital and technical
assistance to develop starting or expanding small businesses,
social services facilities such as child care, and affordable
rental and homeownership housing. We employ nearly 70 people,
manage 8 branches throughout the state, and invest capital
raised from private foundations, banks and investors, and
public sources, especially federal agencies. We have directly
invested or leveraged over $275 million in partnerships with
banks and other private or public investors to over 1000
projects to create economic opportunity and livable wage jobs,
self-employment or housing services for thousands of Mainers,
including women in business, refugees and new immigrants.
Maine lags behind the nation in many indicators, whether
R&D, post secondary educational attainment, housing
affordability or disposable income. Per capita income is 13%
below the national average, and hourly wages lag behind as
well. It is the poorest state in New England, and has been hard
hit over the past few years with plant closings and
downsizings, particularly in the central part of the state. Yet
Maine has tremendous assets in natural resources and small
business entrepreneurs. Mainers foremost have an exceptional
work ethic. It is these skills and potential to adapt to new
opportunities in a changing global economy, while preserving a
rural way of life that we seek to optimize. Access to private
capital is essential to unleash the entrepreneurial talent of
people and regions not yet in the mainstream.
At CEI we target financing to small firms that create
livable wage jobs for low income individuals, add value to our
natural resources, such as farms, fish and forest products, and
new and emerging technology sectors including locally-owned
telecommunications firms. We develop alternative, home-based
care and assisted living facilities for the elderly. We have
one of the nation's leading telecommunications capacity
building assistance programs, reaching thousands of businesses
to develop their e-commerce business opportunities. Our current
portfolio consists of 500 ventures employing nearly 5000 Maine
workers. We've counseled 10,000 small entrepreneurs, helping
specific populations such as women business owners, or refugees
and new immigrants gain access to technical and financial
resources for their businesses.
However, we cannot do our work without access to flexible
development capital and technical funds for technical
assistance. These are the lynch pins to create economic
opportunity in new market regions. The NMTC has the potential
of creating access to flexible private capital in a powerful
way to invest in our small business entrepreneurs, new
ventures, commercial real estate and community development
facilities and projects to benefit low-income communities.
What is the New Markets Tax Credit?
First, a few words of background about the New Markets Tax
Credit. The New Markets Tax Credit is a 5-year, 6% per year
credit allocated to qualified CDEs. The CDEs will use the
capital gained from the sale of the credits to private
investors to provide technical and financial assistance to a
range of private business enterprises and community development
projects in designated low-income communities. The Credit is
designed to encourage $15 billion in private sector equity
investment for business growth in low-and moderate-income rural
and urban communities. The Administration's proposal provides
for $3 billion per year in activity for 2001 to 2005.
Qualified community development entities (CDEs) would apply
to the Treasury Department for an allocation of the Credit.
These CDEs must have as their primary mission to serve or
provide investment capital for low-and moderate-income
communities, and maintain accountability to community
residents. CDEs include community development corporations,
community development financial institutions, small business
investment corporations, community development venture capital
firms, and other investment funds. Once the credits is
allocated, CDEs would sell the credits to investors, and use
the proceeds of the sales to benefit low-income community
businesses and programs.
Investors in community economic development would, in turn,
receive tax credits of approximately 25% in net present value
on their investments.
The Community Development Tax Credit Coalition is among the
strongest supporters of the New Markets Tax Credit. I would
like to address three main points regarding the Credit:
1. The need for investment in low-income areas;
2. the ability of community development entities to funnel
this investment; and
3. some suggestions to make the Credit a more effective
tool for the people it is meant to serve.
The need for long-term, Patient Capital in Low-Income Communities
According to PricewaterhouseCoopers, venture capital
investment nationwide hit a record high of approximately $15
billion in the fourth quarter of 1999. This amount of $15
billion should sound familiar -it is equal to what the
President has proposed in his recent New Markets Tax Credit
over five years. We are asking that the federal government
support this Credit to provide incentives to invest in low-
income communities over five years what has been invested in
just three months, primarily in technology. Technological firms
captured more than 90 percent of nationwide investments, and
about half of the remaining 10 percent went to similar
Internet-related industries.
As we all know, rural areas and inner cities are not
centers of Internet technology. Small businesses located in
these communities operate primarily in natural resource-based
industries, manufacturing, and retail. Only a tiny two percent
of the fourth quarter funds reported by PricewaterhouseCoopers
supported industrial investments, and five percent or less went
to non-Internet related rural investment.
For many rural areas, the current economic boom is a
distant echo. The ten poorest counties in the U.S. are rural,
with poverty rates in some cases exceeding 60 percent. The
number of Appalachian counties with unemployment and poverty
rates at least 25 percent higher than the national average went
up to 97 in 1998 from 90 counties in 1992.
We are paying a price for allowing the tide to lift some
boasts so much higher than others. The employment situation,
which seems so upbeat nationally, is distinctly downbeat for
many Americans. For example, while Hispanic males have the
greatest labor participation rate Hispanic families have the
highest poverty rate.\1\ This is aggravated by lack of access
to financial services and capital, manifesting itself in lack
of housing and community facility developments in low-income
Hispanic and African American communities.
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\1\ While Hispanic males have the greatest labor participation rate
(76.9 percent, compared to 75.8 percent for white males and 68.7
percent for black males), Hispanic families have the highest poverty
rate (27 percent, compared to 26.4 percent for African American
families and 8.5 percent for white families).
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These statistics show that while the national economy and
employment rates are at record highs, certain people and areas
of the country are experiencing increased poverty and income
disparity.
It is important to provide an economic stimulus to these
communities that are missing out on this growth. If we do not
provide these incentives now when the economy is at an all-time
high, when will we be able to do so?
The New Markets Tax Credit is an opportunity for low-income
communities to get access to the nation's exploding venture
capital economy.
The Capability of Community Development Entities
A nationwide network of more than 4,100 non-profit
community development entities has the capacity and the proven
ability to funnel new capital into poor areas. They are rooted
in the communities they serve. They are accountable to the
people who live there. And they have demonstrated their ability
to effect change over the past thirty years -by building more
than 580,000 affordable housing units, more than one-third of
all affordable housing nationwide, producing 71 million square
feet of commercial industrial space, and creating or
maintaining 275,000 private sector jobs.
Community development entities have successfully used tax
credit vehicles in the past. Both the Low Income Housing Tax
Credit as well as the Community Development Corporation Tax
Credit Demonstration have been effectively used by community
development entities to attract private investment capital for
development that benefits low-income communities.
The Low Income Housing Tax Credit is an effective tool for
encouraging private investment, and has formed partnerships
between the non-profit and for-profit worlds. The Low Income
Housing Tax Credit has transformed the way the country finances
low-income housing since it was enacted in 1986. Annually, it
generates more than 60,000 to 70,000 units and $1.8 billion in
related wages. Non-profit organizations currently produce one-
third of these units.
CEI's HUD CDC Tax Credit Demonstration
CEI has a record of success in tax credit financing for
community development projects, especially using the Community
Development Corporation Tax Credit program. In 1993, Congress
enacted the Community Development Corporation Tax Credit
program governed by Section 13311 of Title XIII, Chapter I,
Subchapter C, Part II of the Omnibus Budget Reconciliation Act
of 1993. The CDC Tax Credit provided 20 CDCs across the country
with a 10-year, 5 % per year credit for up to $2 million in
activity. In certain instances, a taxpayer also received a
deduction for a charitable contribution to a CDC under the CDC
Tax Credit. CEI was chosen as one of the sites for the Credit.
With the assistance of Local Initiatives Support
Corporation (LISC), we mobilized a $2 million investment from
KeyBank in Cleveland, Ohio, a bank also active in the Maine's
small business market. These funds capitalized a small business
loan fund and provided operating support to start up the fund.
The real story, of course, is not just the innovative way
in which we captured private capital to build our strength for
community development. The real story is in the outcomes. As a
result of the $2 million, we leveraged several million dollars
from other sources, primarily banks and financed 21 small
businesses -child care centers, fish processing facilities,
alternative home-care services, and other ventures that created
employment for low income families. Over 500 jobs were
retained/created in the program.
Here are some relevant impact statistics:
HUD CDC Demonstration
Impact to date
Amount of Capital............................. $2,000,000
Loan fund amount.............................. 1,800,000
Cost of funds to CDC.......................... 3.2%
Funds for operations.......................... 200,000
Number of businesses/loans.................... 21/28
Job impact created/sustained.................. 500
Average interest rate......................... 9.5%
Range of term of loan......................... 5-15 years
Average term of loan.......................... 7 years
Use of funds.................................. primarily working
capital building and
equipment
One story worth noting is a project called Faithworks in
Lewiston aimed at employing the hardest to employ. Fr. Bill
Baxter of Faithworks in Lewiston, Maine created a job shop
assembly operation performing contract work such as stuffing
sample bags you find in your Sunday newspapers. It provides
employment for welfare recipients who needed entry level jobs
from which to grow. Over 600 people have participated in the
program. On location at the space in the former mill complex,
representatives from the Workforce Development Center stand by
to recruit workers for more specialized training and job
placement. Funds from our pool of capital helped this project
in its early start up period.
There are many other successful ventures, but the point is
that the community development entity in this case acted as the
catalyst and money manager to move capital from one place to a
place of need. This is the NMTC at work.
The New Markets Tax Credit will build off of the proven
success of the Low Income Housing Tax Credit and the CDC Tax
Credit to leverage private investment funds for underserved
communities. The network of community development entities
already exists. This new tool would enable CDEs to expand
significantly their ability to attract private capital for
economic development activities in these communities.
Recommendations for the New Markets Tax Credit
The Coalition endorses the New Markets Tax Credit proposal
and applauds the Administration and Congress on their efforts
to encourage private sector investment in low-income
communities. We recommend three changes based on our
experiences working in poor communities. These recommendations
are intended to make the proposal more effective. Specifically,
the three recommendations involve the targeting, the term, and
the demonstration of ability to use the Credit.
Targeting
The New Markets Tax Credit proposal requires that a
community development entity document its ability to provide
investment capital to low-income communities. These communities
are defined as census tracts with poverty rates of 20 percent
of median family income, or with median family income that does
not exceed 80 percent of the greater metro, non-metro, or
statewide area median family income. Empowerment zones and
enterprise communities also qualify.
While this formula includes 40 percent of the communities
around the country, it will exclude many pockets of poverty and
populations of low-income people living within census tracts
that do not meet the criteria. For example, this limitation
would make it difficult for many community development entities
serving low-income rural populations in the Midwest or
Northeast who live within census tracts that do not reflect
high levels of poverty.
My home state of Maine is an example of a state left out by
census tract targeting. For example, when we applied for the
HUD CDC tax credit, similar distress factors were required,
that is, poverty where residents did not exceed 80% of the area
median income. This left only a smattering of parts of Maine
eligible. If I could show you a map of Maine -with 1.2 million
people spread out over 33,000 square miles, 3,500 miles of
coastline, and the 3rd most rural in the nation -patches of
poverty would show up around Lewiston, Portland, north in
Aroostook County, downeast in Washington County, and some other
locations. There would be no correlation of distressed census
tracts to either population, labor markets, or how businesses
and markets functions.
We recommend therefore that the NMTCl give CDEs the option
of targeting their development activities to a qualified
investment area or to a qualified target population, defined as
individuals who are low-income or otherwise lack adequate
access to loans or equity investments. I ask you to note that
this condition already exists in S.1526 bill. In this bill, the
Secretary of the Treasury has the discretion to take the target
populations as defined by section 3(20) of the Riegle Community
Development and Regulatory Improvement Act of 1974, and to
treat them as low-income communities under the New Markets Tax
Credit program.
By giving applicants the option of targeting place or
population, funds may be targeted to individuals and areas in
need while allowing development organizations the flexibility
to serve effectively low-income populations that fall under the
screen of census tract data.
Term
Our second concern is the length of the term of the Credit.
The Coalition proposes to extend the term of the Credit from
five years to up to ten years, without increasing the cost of
the program. Economic development is a long-term process.
Consider conforming uses of capital, such as revitalization of
an idle mill complex, which certainly represents the kind of
challenges we face in New England small towns. Much longer
terms are required. Even equipment financing could benefit from
7-year terms. Consider a limited partnership. We established a
for profit social investment venture capital firm and raised
$5.6 million from 23 investors. They included Fleet, Key,
Peoples Heritage, and other community banks, along with
foundations and private investors. The minimum holding time for
an investor is 10 years. Our equity firm places smaller sums of
capital in businesses that fall off the radar of big venture
capital/high tech investors.
Our experience has shown that anything less than seven
years, for an equipment loan to a start-up company or small
venture capital firm for example, is not practical. Most small
business will not be able to make the profit necessary to repay
the loan fully in five years.
At Coastal Enterprises, we have 500 loans outstanding. Of
these loans, 70 percent have terms of at least seven years, and
15 percent of all of our loans are over 10 years. Under the CDC
Tax Credit described above we were able not only to make 25
loans for working capital and equipment, but also to support a
diverse set of beneficiaries including day care centers,
fisheries, health care facilities, food cooperative, and
biotech companies.
The experience of Kentucky Highlands Investment Corporation
and the Local Initiatives Support Corporation sheds a similar
light. During Kentucky Highlands's 30 years in community
development venture capital, many loans that began as seven-
year loans were extended because the small businesses needed
longer loans with fixed rates. In it current portfolio of 58
loans, almost three-quarters are at least seven years in
length.
The Retail Initiative, an equity investment fund
established by the Local Initiatives Support Corporation,
invests in new supermarkets sponsored by community development
corporations in distressed urban neighborhoods. Small
businesses occupy satellite space around the supermarkets. The
Retail Initiative invests for a ten-year holding period, which
is necessary for the supermarkets to generate the requisite
cash flow and market valuation on which the investment is
based.
For these reasons, we support a seven-year tax credit at
six percent over per year for New Markets, as contained in
S.1526.
Demonstration of Capacity
Our third recommendation is to include language in the bill
that identifies the criteria to be used in making allocations
to community development entities. The current legislative
proposal includes the screening of a community development
entity to ensure that its primary mission is to serve low-
income communities and that it has a targeted area of service.
We propose four recommendations:
1. We propose that each community development entity (CDE)
be required to submit a comprehensive business plan, outlining
its mission, goals, and capacity, as well as a five-year
development strategy, when applying for Credit allocations.
This is consistent with the requirement to secure eligibility
under the CDFI program. We are a professional industry with
ever-sharpening standards of excellence in our practice of
community development finance. We want to be certain the Credit
is allocated to achieve the intended outcomes. The CDE would
then be evaluated on its financial capacity, management team's
capacity, community development track record, and its projected
community development impact. It is critical that the Treasury
Department have the ability to screen applicants effectively
and assess their capacity and commitment as community economic
developers, as well as their understanding of the market.
2. We also support giving priority to applicants that can
demonstrate exceptional capacity and experience in community
development, including relationships with private sector
investors and a plan to market the Credit to these investors.
Those entities that are ``ready-to-go'' i.e. have an
established loan or investment fund, a promised investor, and/
or prepared business deals, should be given priority.
3. In addition to these basic criteria, we recommend that
there be language to ensure national coverage for the program.
This provision must ensure geographic diversity and a balance
between urban and rural development entities in granting
allocations.
Conclusion
The community development field is prepared to use the New
Markets Tax Credit to help ensure more Americans have a chance
at economic fulfillment. The lower income and working people of
this country are part of a phenomenon that some are calling
growth without prosperity. In a time of great wealth creation,
it is the right time to create new opportunity for those who
have not shared in our recent economic success. The NMTC is
designed to direct capital from the private market to new
market opportunities with modest incentives. We have
experience, we have a network, we have untapped potential.
I wish to thank you for the opportunity to address you
today. I would like to emphasize the community development
industry's strong support for the New Markets Tax Credit. I
also appreciate your consideration of our three concerns
regarding the Credit, those being enlarging the target area to
include population, extending the term to seven to ten years,
and requiring the demonstration of capacity by community
development entities.
Thank you.
Chairman Houghton. Thanks very much, Mr. Phillips.
I have the honor, the way Mr. Allen did, of introducing a
constituent of mine, a lovely lady, Rebecca Brumagin. It is a
pleasure to have you here, Rebecca.
Rebecca is a former Town Councilman, Town Clerk, Executive
Director of a very important achievement center, a children's
rehabilitation agency in Erie, Pennsylvania. She also is the
owner of a business, Legacy Designs and Gift Shop in Findley
Lake. She has a distinguished educational record. She is
married to Dennis and have two sons, Lex and Tyler, and two
granddaughters, Emily and Elizabeth.
The redevelopment of Mina is a direct result of the
tremendous work which you have done there and we are honored to
have you here. Please go ahead with your testimony.
STATEMENT OF HON. REBECCA N. BRUMAGIN, SUPERVISOR, TOWN OF
MINA, FINDLEY LAKE, NEW YORK
Ms. Brumagin. Thank you very much.
Chairman Houghton and members of the subcommittee, thank
you for this opportunity to speak to you about the success we
have seen in our town. It is the Town of Mina, Findley Lake,
New York. Let me tell you a little bit about that community.
I am going to summarize my testimony, so I ask that the
written testimony go into the record.
Findley Lake is located the western part of New York State
in Chautauqua County. I don't know if you are familiar with
that county or not, but that county has quite a jewel. It has
Chautauqua Institution. You may have heard of this
internationally renowned cultural center. It is the place where
President Clinton prepared for the presidential debates just a
few years ago.
The entire county is really not as affluent and as
privileged as Chautauqua Institution is. Our rural community
has really struggled, particularly in the last 10-20 years with
how to turn ourselves around. You do have an exhibit before you
in a navy blue book and there are some photos in there that I
would like to share with you.
The first photo is from 1991 and shows what the downtown of
our small community looked like at that point in time. As you
can see, there are sofas, chairs, the place is really a
shambles. Again, we are talking about a community of 1,100
people, a small downtown of only two blocks. This is our main
street. The photo below it from the year 2000 shows you that
same building converted into a victorian gift shop.
The third page shows you a building that has a lot of
history in our community. It was a livery, a gas station, a
supermarket and in 1996, this is what this building looked like
in the downtown of our community. Below it, two years later in
1998, it was renovated and as you can see, it is really very
nice.
When we think about how did this happen, I know you are
talking about tax incentives, I want you to know that this
small, rural community did this by ourselves. We did not do
this with any tax incentives, we did it through a cooperative
effort of people really caring about a community and taking the
steps, on their own, to invest in a very risky way, their life
savings sometimes so that they could develop businesses in our
community.
It really started because we had a couple of people in our
community who said, this is a beautiful community and we have
the opportunity to change it around. They invested and spoke to
other potential business owners and little by little, people
started to invest in this community. Based on the success they
were seeing, the merchants got together and realized that a
cooperative effort was really important. They spoke with the
Chautauqua County Visitors Bureau and used them for public
relations and started creating signature events for our
community to draw people in there on a regular basis. Those
have been extremely successful.
We had visitors come to our community who say I was here
five years ago and this place was a shambles. How did this
community turn around? Who did it? The real answer to that is
not one individual person. The answer to that is we did it as a
community.
Local government was really not involved in the renaissance
of this community. Until a couple of years ago when an
opportunity came before us, our elementary school closed and as
you can well imagine in a small community with only 1,100
people, when we lost our elementary school, we lost a very
important asset. We used that as an opportunity to come
together, to develop a community center and to start assessing
who it is we are and what assets we have and how we could
develop those assets.
In the last two years, we have made incredible strides. We
have developed a pre-school program that is in the process of
becoming an integrated pre-school, a pre-school for children
with disabilities along with children who do not have
disabilities.
We do have a high degree of poverty in our community. Of
the 14 children who attended that pre-school last year, 11 of
them were low income and could not afford to pay the $40 a
month to send their child to the pre-school. So we were able to
get scholarships for those 11 children.
In addition to that, we have developed a senior citizens
group and they are active, they are vital and are just
incredible in our community. They work on beautification
projects and have been thoroughly enjoying themselves.
We have an older constituency, so when I think about that
community, I think about the place where I was raised, it is my
hometown, but also the fact that the people I am accountable to
many are senior citizens and they think of me as their
daughter. They pull me off to the side and tell me what they
think about how we are doing and what else we need to do.
For the first time in our community, we are going to have a
public library and we are excited about that. We have just
received a charter from New York State and are going to be
opening that library on Memorial Day, May 29, 2000.
Also, our lake that was created out of two ponds in the
early 1800s, happens to be the very beginning of the West
Branch of French Creek. Our lake is created through underground
springs, so the West Branch of French Creek starts there. If
you are familiar with French Creek, you will know that it is
the most ecologically diverse stream in North America. There is
a lot to offer the community by bringing people in to see our
nature center.
With that, I would say that our community has really
accomplished what it has accomplished through working together,
not through one segment of the community at the expense of
another segment. Individuals step forward, they are asked to
help and they do that on a regular basis.
With that, I would say to you that the tax incentives you
are contemplating, I think are extremely important. Pilot
projects I think are extremely important. For a community to
have a positive result, they need to have success. They can
build on that success, it is contagious and I think the tax
incentives you are considering are the types of things that
help a community have a small success that eventually builds
into a large success.
Thank you very much.
[The prepared statement follows:]
Statement of Hon. Rebecca N. Brumagin, Supervisor, Town of Mina,
Findley Lake, New York
Chairman Houghton and members of the subcommittee, thank
you for this opportunity to testify before you regarding the
success in recent years of revitalizing the hamlet of Findley
Lake in the Town of Mina, New York State.
This is a great honor for our community and I am grateful
for the opportunity to share with you my perspective on how our
small town, through hard work and the cooperative efforts of
many, has become energized and revitalized.
Background:
Findley Lake is located in the Town of Mina and County of
Chautauqua in western New York State. With 1100 permanent
residents in the town, it is the first community you enter when
traveling east on Interstate 86 from Pennsylvania and it is the
Southern Tier Gateway to New York State.
Findley Lake was founded in the early 1800s by a Scottish
pioneer, Alexander Findley, who out of necessity to power his
sawmill created the lake by constructing a dam at the north end
of two ponds. The lake has four small islands and covers an
area of approximately 300 acres with a distance of 5 miles to
walk or ride around it. The lake is used for recreational
activities in the summer such as swimming, boating, water
skiing and fishing as well as in the winter with ice fishing
and snowmobiling.
Findley Lake is uniquely situated in close proximity to
some important regional assets. Four miles from the town is
Peek'n Peak, a four-season resort. Fifteen minutes away on
Chautauqua Lake is the internationally renowned cultural
center, Chautauqua Institution. Lake Erie is 15 minutes away
and Presque Isle State Park in Erie, Pennsylvania is 30 minutes
from the hamlet. Findley Lake is easily accessible from
Interstate 90, Interstate 79 and the newly designated
Interstate 86.
Findley Lake along with other nearby towns experienced a
significant decline in retail business in the last few decades.
We are part of America's rustbelt, and with family farms
disappearing over the years, we have been struggling to find
our place in the service economy. In the early 1990s, the
downtown area of Findley Lake was run down and many of the
buildings were in disrepair. One of the former storefronts was
converted into slum apartments and there were trashed sofas and
chairs on Findley Lake's Main Street. It was an embarrassment
to the community yet no plan was developed to improve and
reinvigorate downtown. There was little retail trade to keep
local shoppers in the community and it seemed a pipe dream to
think that the hamlet could one day attract tourists and
visitors into quaint specialty shops.
The Renaissance Story:
There were dreamers. There were individuals who saw that
Findley Lake could become a small jewel for the region.
One couple owned a small restaurant in town and they
decided to move the restaurant into their Victorian home and
upscale the menu and the decor. Over time, through their
creativity and hard work, they developed a regional following
and the restaurant's excellent reputation put Findley Lake on
the map. The same couple purchased the slum apartment house
downtown and began renovating the building. They opened a
Victorian gift shop and encouraged others to come to Findley
Lake and start a retail business.
Others followed and experienced success. One by one, new
entrepreneurs developed an idea, invested their savings, and
started a business from scratch or relocated their existing
business to Findley Lake. After a few years, the enthusiasm
became contagious, new ideas sprouted and creative individuals
with dreams became willing to invest in Findley Lake. An
example of the continued interest in Findley Lake is evidenced
by three new businesses that have within the past two months
expressed a serious desire to open in Findley Lake.
Findley Lake has become a source of pride for the region.
The downtown Findley Lake merchants represent one segment
of a whole community. Revitalization must be in keeping with
the character of the community and preserving the rural nature
of the Town of Mina is very important to our residents. Long
term success takes sustained effort and it takes cooperation
among the various segments of the community. Growth and change
do not come along harmoniously unless the majority of the
community is in agreement with that growth and change.
Leadership can make an enormous difference in assisting a
community with identifying and attaining its goals.
Developing a Sense of Community:
The hamlet of Findley Lake and the Town of Mina is a
community. Community is about people, their dreams and their
desire to live in a place where they have an opportunity to be
successful and to enjoy life. It is said, ``If you don't work
where you live, you eventually will live where you work.'' It
is important to look beyond economic success and think in terms
of quality of life when assessing the success of a community.
The renaissance of Findley Lake over the past few years is
a story about more than economic success. It is about people
coming together and truly appreciating one another. Visitors to
Findley Lake regularly ask questions such as, ``Who did all
this? It wasn't like this when I was here 5 years ago.'' The
answer is, we all did it--it is truly a community
accomplishment.
I attribute our current success to the efforts of many
individual citizens as well as to three groups (many
individuals participate in more than one group). Business
leaders, local government officials, community organizations
and civic-minded individuals have worked cooperatively to
achieve community success and have identified additional needs
to develop Findley Lake in a cohesive manner consistent with
our recently developed comprehensive plan. At a recent
appreciation dinner for individuals who support our town,
almost 10% of our population attended. This illustrates that in
a small town, it takes a high percentage of its people to make
the community work.
Business Leaders:
The evolution of Findley Lake to a retail shopping and
tourist destination can be traced back to those individuals who
had a vision of Findley Lake as a diamond in the rough and
individually promoted it to others. The businesses that came to
Findley Lake did so with no support other than their own
initiative. The promotion of Findley Lake took place by word of
mouth from business owner to potential business owner, and it
eventually became an articulated and shared vision for the
community.
The Findley Lake Area Chamber of Commerce was formed and
this was a catalyst for further development and promotion of
the area. Utilizing the advertising and public relations
resources from the Chautauqua County Visitors Bureau, the
downtown merchants in the chamber began promoting Findley Lake
through events. Merchants work together cooperatively and
duties are divided among the members who take turns chairing
and organizing the events. They have developed signature events
such as entertainment every Wednesday night in the summer
entitled ``Live at the Gazebo,'' a Harvest Festival, May Day,
First Sundays and more. They assess what works and build on it
and they are flexible enough to change what doesn't work well
and improve on it for the future. An annual brochure is
prepared and events for the year are listed. Community
organizations are invited to include their fundraising and
other events in the brochure.
Local Government:
Local government became actively involved in the
renaissance of Findley Lake when an opportunity arose out of
the controversial closing of the community's elementary school
in 1997. The community rallied around the concept of purchasing
the building and developing a community center. Negotiations
with the school district were very cordial and the voters in
the Town of Mina agreed to the purchase effective June 1998.
That decision led to the development of various community
initiatives in the past two years which continue to enhance and
support the broader view of community success.
In November 1999, the Town Board of the Town of Mina
adopted a mission statement. The essence of the statement is
that the town will support efforts that enhance the quality of
life while preserving a rural way of life; that diverse
interests of the community will be taken into consideration
when making decisions; and that all parties will approach
issues in an atmosphere of mutual respect and cooperation.
In January 2000, the Town of Mina adopted a Comprehensive
Plan that lays out the priorities for the community including
lake quality and infrastructure as well as the need to further
improve the downtown with signage, public restrooms, parking
and community beautification efforts. The Planning Board for
the town is actively rewriting the zoning law and the town
board has stepped up enforcement of the current zoning law.
These are important steps in preparing for our future.
Community Organizations:
The community has some long standing and supportive
community organizations such as the Findley Lake Volunteer Fire
Department and Auxiliary, Girl Scouts, the Findley Lake
Property Owners, and the Findley Lake and Mina Historical
Society. These active groups have consistently supported the
community in numerous ways over the years.
Findley Lake is very energetic and there are many
initiatives on the horizon that are being pursued and supported
by the community. In the past two years, the following
organizations have been developed to further enhance the
Findley Lake and Mina region:
Findley Lake Early Childhood Center (a service of the
Achievement Center) --An Erie, Pennsylvania non-profit
organization with over 75 years of service to children with
disabilities agreed to develop services for children in Findley
Lake. They are running a preschool and are pursuing state
approval for an integrated preschool for children with and
without disabilities as well as providing various types of
supportive therapies for children.
Young at Heart--A local senior citizens group formed in the
fall of 1998 and they meet weekly. Besides social and leisure
activities, they are a county congregate meals site and they
work on beautification projects at the community center.
Alexander Findley Community Library--After two years of
effort, this group recently received their charter from New
York State to open a public library in the Town of Mina. The
library will have its grand opening on Memorial Day, May 29,
2000.
Findley Lake Nature Center--This group has recently filed
for incorporation. Their goal is to promote the natural
resources of the area. Findley Lake is the beginning of the
west branch of French Creek, the most ecologically diverse
stream in North America. The group will develop nature trails
behind the community center and is working with local
universities to prepare a bio-diversity study.
Quality Findley--A group of enthusiastic individuals formed
Quality Findley in May 1999 to fundraise and promote the long-
term viability of Findley Lake. They are establishing an
endowment fund with a local community foundation and have an
ambitious goal of $1 million dollars to be raised in 5 years.
Within their first year they have pledges totaling $175,000.
Civic-minded Individuals:
Listed below are three examples of the commitment that
individuals have shown to improving the quality of life in the
Findley Lake area:
A ``Community Challenge'' started with one individual
offering $5 to start a fundraising effort for a memorial
flagpole. It resulted in the completion of a flagpole, the
development of a community flag and the donation of a United
States flag by our U. S. Congressman, the Honorable Amo
Houghton. A flag that flew over the Capitol Building now
proudly flies over Findley Lake each Memorial Day.
Water Wheel Committee--After the completion of the memorial
flagpole, the symbolic $5 was turned over to the community this
time with the challenge to build a water wheel at the same
location where our founder, Alexander Findley built his water
wheel. The challenge was accepted and in August 1999, as part
of the celebration of the 175th anniversary of the town, a
water wheel was built with volunteer labor. The water wheel is
an attraction to the community and a source of pride for the
area.
Tapestry Newsletter--Part of the glue that binds our
community is a biweekly newsletter that was developed by two
individuals in September 1998. The purpose of the newsletter is
to promote a sense of community by informing readers about the
various activities that take place throughout the town and the
region. The byline for the Tapestry is ``Our Lives Are
Interwoven.'' The Tapestry is free and there are no paid
advertisements in the newsletter, it is completely supported by
individuals who offer a small contribution to cover the cost of
printing. About 400 copies are distributed of each issue.
People in Findley Lake are friendly, welcoming and eager to
work together. They rise above political and personal
undercurrents. They truly have a sense of community and they
promote the town through their warm enthusiasm.
Community Needs:
Findley Lake is a unique community currently experiencing a
small amount of economic and community success. I am grateful
for the opportunity to be involved in my hometown of Findley
Lake in various capacities and to work with the many
individuals who take pride in our town and are committed to its
success.
However, even with our success to date, we have significant
needs that if go unmet will limit our ability to sustain our
success into the future. Tax incentives could make a
significant difference to us. We have immediate and long term
needs including:
a main street manager to organize and promote
events,
infrastructure (water and sewer),
funding to improve and maintain lake quality,
a state tourist information/welcome center at I-
86,
parking, public restrooms, underground utilities,
and support for community beautification projects,
a bank,
medical and pharmaceutical services,
senior housing and
financial support for retail shops, restaurants
and other compatible businesses.
We have worked diligently as a community and we have tapped
our individual and collective resources and need support to
further advance our town.
In Closing:
Small town America conjures up thoughts of simplicity,
pureness and beauty that can touch the heart and soul and
rejuvenate the spirit. Rural America can inspire freedom,
creativity and independence. However, there is often a shortage
of resources in small towns. Without adequate resources and
incentives, many of America's small communities have stagnated
and they are really struggling.
Financial assistance through tax incentives can help a
distressed community that is attempting to address the
challenges of turning itself around. Communities can become
energized and revitalized if they work collaboratively to
assess their strengths, are realistic about their needs, and
articulate and work diligently toward a common vision.
Improvement in a community is the result of one small success
followed by another. Vital ingredients in the process are
mutual respect, cooperation and perseverance. They also need
financial incentives to help pull themselves up by the
bootstraps so they eventually can become economically self-
sufficient.
For those communities who are struggling, tax incentives
may be the catalyst to bring people together to develop a
common goal and to begin to experience success. Without
incentives, those towns may continue to deteriorate as business
leaders, local government officials and community organizations
do not have the tools to implement positive change. It can be
frustrating to live in a depressed community where there is
very little hope of change.
I applaud the subcommittee for your interest in developing
tax incentives that will help rural communities. I
wholeheartedly support tax incentives for small businesses and
communities. I recommend that you also consider developing or
expanding pilot projects that can assist small rural
communities in their desire to succeed.
Thank you again for allowing me to share the story of one
small American community.
Chairman Houghton. Thanks very much.
Mr. Wallace?
STATEMENT OF HON. A. BRIAN WALLACE, CHAIRMAN, WASHOE TRIBE OF
NEVADA AND CALIFORNIA, AND PHOENIX AREA VICE PRESIDENT,
NATIONAL CONGRESS OF AMERICAN INDIANS, GARDNERVILLE, NEVADA
Mr. Wallace. Thank you, Mr. Chairman.
My name is Brian Wallace. I am Chairman of the Washoe Tribe
of Nevada and California and also have the privilege of
representing the National Congress of American Indians, which
is the oldest national Indian organization in the country.
On behalf of Native America, I would like to extend our
regards and prayers to you and the members of the committee.
In the discussion about tribal economic development, there
are four areas I would like to concentrate on. First is the
necessity for a bipartisan approach to this particular issue.
In some sectors of our country and in Native America this is a
matter of basic survival so it is very important to us.
Also, I would like to talk about some basic, fundamental
principles that need to be articulated throughout this
discussion, highlight current statutes that provide incentives
to investment in Indian country that actually come due and
potentially expire in 2003 and 2004 and comment on some of the
proposals before this body.
On the discussion of the need for bipartisan legislative
processes, I guess a retrospective analysis of the current
economic expansion this country has enjoyed but in Native
American it is somewhat of an alarming issue because the
difference between hope and prosperity is growing even wider.
It is something that concerns us very much. We really appeal to
this body and this committee in particular that maybe can
achieve in working together to find this divine earnestness on
taking the serious nature of this discussion and the work
before us.
The Census Bureau recently certified that the upgrade in
terms of personal economics and family economics across America
has not been arrived in Indian country at all. That is
something that is of grave concern to us.
We would also like to recognize the leadership of
Representatives Watts, Talent and Rangel in finding the courage
and leadership to actually speak on behalf of people who really
do not have a strong voice in this particular discussion today.
We are encouraged by the commitment of Speaker Hastert to
move legislation this year and we really appeal to this
committee and subcommittee to leverage all of the talent and
technical expertise you have in helping us in this discussion.
On the question of principles, I would like to highlight
four basic areas. First and prompt is respect for tribal
sovereignty. In the national discussion about economics self-
determination and the role of governance, there is always
historically a significant omission of including tribal
governments in a national community of governmental efforts. It
is something we continually have to point out and work very
hard to show that there is meaning and effort behind that.
On the question of presumption of status and some of the
perspective solutions that are being talked about, we are
fearful that we don't codify the differences between Indian
country and its developmental interests and other parts of
America. We would certainly be handicapped by having to compete
for special designation and incentives being discussed before
the committee.
Another thing we would like to point out is the role of
non-profit organizations and the governmental role in
development in our community which is dominated by these basic
entities, historically and also in the future particularly in
assisting us in matchmaking and development opportunities and
providing incentives for investment. The access to capital is
critical.
Under current statute, the Omnibus Budget Reconciliation
Act of 1993 codified two particular and worthwhile incentives--
the Indian employment credit that provides incentives for
employment of tribal members and new employment on reservations
outside of certain parts of the development sector and an
incentive for accelerated appreciation to provide incentives
for private investment in business property on Indian
reservations with certain qualifications.
With regard to the prospective debate related to 815 and
2713 and 2840, prospective legislation, we would like to
comment on some proposed modifications, particularly an up-
front tax incentive that is needed to channel capital to slower
growth and riskier long term investments.
Although the capital gains relief is very important,
capital gains relief is very important and provides incentives
but we would like to see the credit to be extended provide for
investing communities and incentives for investment and not
divestment.
We would also be interested in extension and modification
of the employment tax credit now codified in the code to
provide for flexibility for nonprofits and governmental
entities to also take advantage of this particular, and also to
revise the community renewal selection qualification process to
incorporate respect for tribal governmental sovereignty.
My experience here is somewhat like dealing with the ISTEA
legislation where we are exposed to a democratic process where
States and qualified small governments vote en masse on
particular priorities. It is strange we get outnumbered every
time.
I would also like to highlight making tax credits for
commercial renovation at technological centers and academies
available to all Indian reservation communities who would like
to apply, Congressman Portman's initiative but the credit
should be more broadly available to encourage commercial
renovation and corporate sponsorship of technical education on
all Indian reservations regardless of whether they are
enterprise zones or enterprise communities, or for that matter,
renewal communities.
We are very proud to have the opportunity to be a part of
this discussion and to play a meaningful role in the
development of a national character that we can be proud of as
Indian people but also as Americans. Many people are counting
on us to get this right and put the hard work into making a
difference in our community.
In closing, I would like to thank you for the attention you
have given to this very important area and express how
appreciative we are of the meaning behind the work you are
doing.
Thank you for the opportunity to appear before the
committee.
[The prepared statement follows:]
Statement of the Hon. A. Brian Wallace, Chairman, Washoe Tribe of
Nevada and California, and Phoenix Area Vice President, National
Congress of American Indians, Gardnerville, Nevada
I. Introduction
Good morning Chairman Hougton, Congressman Coyne, and
distinguished members of the Ways and Means Oversight
Subcommittee. My name is A. Brian Wallace. I am the Phoenix
Area Vice-President of the National Congress of American
Indians (NCAI) and Chairman of the Washoe Tribe of Nevada and
California. On behalf of NCAI, I would like to thank you for
the opportunity to discuss proposed tax incentives to help
economically distressed communities which include most Indian
reservations.
NCAI is the oldest, largest, and most representative Indian
organization in the Country. NCAI was organized in 1944 in
response to the termination and assimilation policies
promulgated by the Federal Government. These polices proved to
be devastating to Indian Nations and Indian people throughout
the United States. NCAI remains dedicated to furthering the
interests of our 250 member tribes and working on a myriad of
policy issues, including the promotion of Indian economic
opportunity (both on and off reservations), the provision of
incentives for community development, and the attraction of
private capital to Indian reservations and trust lands.
NCAI's testimony contains several major segments. First, it
reaffirms the need for a bipartisan approach to this and other
critical policy issues; second, it articulates basic principles
that are most likely to foster genuine economic development in
Indian Country; third, it describes the current-law tax
incentives for investment and job creation on Indian
reservations, both of which are due to expire in 2003 unless
extended; and finally, it proposes certain modifications and
additions to the distressed community legislation introduced by
various members in this Congress.
II. Need For a Bipartisan Legislative Process
The needs of distressed communities in this Country are
real and urgent, especially those found in most tribal
communities throughout Indian Country. According to the U.S.
Census Bureau, about one-third of the nation's American Indian,
Eskimo, and Aleut households had incomes that placed them below
the poverty line in 1997. And unfortunately, Indian
reservations and Alaska villages, like other distressed
communities, have been untouched by the recent wave of
prosperity that has lifted the fortunes of many United States
regions.
To address this need, Representatives J.C. Watts, James
Talent, Charles Rangel, and others have taken a leadership role
in developing legislation designed to revitalize low-income
communities in the United States, such as economically
depressed Indian reservations. We understand that such
legislation include H.R. 815, the American Community Renewal
bill, H.R. 2713, the New Markets Tax Credit bill, and H.R.
2848, the New Markets Initiative bill. We are encouraged that
Speaker Dennis Hastert has committed to work with the
Administration to move the legislation this year. We are also
encouraged by the bipartisan commitment made to foster economic
development in distressed communities. We would urge this
Subcommittee and the full Ways and Means Committee to lend its
strong support and technical resources to the development and
passage of a bipartisan compromise incorporating features of
all three bills.
III. Principles
In determining what is most likely to foster economic
development in Indian Country which is mostly still
characterized by high unemployment and pervasive poverty, we
believe that it is important to adhere to the following
principles:
Respect for Sovereignty: Indian tribes enjoy the
powers of self government, including the regulatory control of
economic development on their lands, in the same manner as
State and local governments.
Presumption of Status, Not Competition: Indian
communities with high unemployment and poverty rates should not
be forced to compete with each other or with similarly situated
communities for tax incentives.
Role of Nonprofit Organizations and Governmental
Entities in Development: The legislation should recognize and
reward the significant role that tribal governments and
nonprofit organizations play in Indian Country economic
development.
Access to Capital is Critical: In order to
stimulate economic development in Indian communities, tax
incentives must be designed to increase the flow of loan and
equity capital to these communities.
IV. Current Law
The Omnibus Budget Reconciliation Act of 1993 (OBRA)
contained two provisions providing special tax incentives for
job creation and investment on Indian reservations. These
provisions were added to the OBRA incentives for Empowerment
Zone/Enterprise Community investments in recognition of the
widespread poverty existing on most Indian reservations and to
spare Indian communities from having to compete with other
communities or among themselves for such tax incentives.
Indian Employment Credit. The purpose of this credit is to
provide incentives for the employment of tribal members in new
employment on Indian reservations other than gaming. Effective
January 1, 1994 through December 31, 2003, employers may claim
a nonrefundable income tax credit for 20 percent of the wages
and health benefits (up to $20,000) paid to an enrolled member
of an Indian tribe, or the member's spouse, so long as the
employee works on a reservation (and lives on or near that
reservation) and is paid wages that do not exceed $30,000
annually (this amount is updated annually for inflation after
1994). Under this provision, an employer may receive a credit
worth a maximum of $4,000 for up to seven years, for a total of
$28,000 per employee. The credit is not available for gaming-
related employment.
Accelerated Depreciation. The purpose of the accelerated
depreciation provision is to provide an incentive for private
investment in business property on an Indian reservation.
``Qualified Indian reservation property'' and ``qualified
infrastructure property'' are eligible for accelerated
depreciation. To meet the requirements for ``qualified Indian
reservation property,'' the property must: (1) be used
predominantly to conduct business within an Indian reservation;
(2) not be used or located outside the Indian reservation on a
regular basis; (3) not be acquired by a party who is related to
the taxpayer under IRC Sec. 465(b)(3)(C); (4) not be used for
conducting gaming activities; and (5) be between 3-year and 20-
year property, or nonresidential real property. The provision
is effective for property placed in service on or after January
1, 1994, and before December 31, 2003.
To meet the requirements for ``qualified infrastructure
property,'' the property may be located outside the Indian
reservation, so long as the purpose is to connect with
qualified infrastructure property located within the
reservation (e.g. roads, power lines, water systems, railroad
spurs, and communications facilities).
V. Legislation to Spur Indian Country Development
We have reviewed and summarized the three leading
proposals, H.R. 815, H.R. 2713 and H.R. 2848. Listed
immediately below are proposed modifications and comments on
the various components that tribal governments would like to
see incorporated into the bipartisan compromise package:
Include a Tax Credit for Investments in Community
Development Entities. The proposal in H.R. 2713 and H.R. 2848
to provide tax credits for equity investments in certified
``community development entities'' should be incorporated into
the bipartisan package. An up-front tax incentive is needed to
channel capital into slower growth and riskier long-term
investments. Although capital gains relief may provide some
assistance to entrepreneurs when they eventually liquidate
their investment, the tax credit will provide a stronger
initial incentive to invest in distressed communities.
Comment: In order to spur effective partnerships in Indian
Country and other disadvantaged communities, the tax credits
should be fully available to taxable investors in joint
ventures with nonprofit and/or governmental entities.
Extend and Modify the Indian Employment Tax
Credit. The current tax credit for increasing employment of
tribal members should be extended and modified. The credit
should be modified to allow employers the choice of using the
credit to offset either corporate income taxes or payroll
taxes. This election would allow the credit to be utilized by
governmental and nonprofit employers, as well as by for-profit
companies. In extending the credit, Congress should also direct
the IRS to administer the enrolled tribal member requirement in
a flexible manner. Current IRS Form 8845 instructions imply
that an employer must obtain a copy of the tribal government's
enrollment list. Such information is considered highly
proprietary which has discouraged some employers from utilizing
the credit.
H.R. 815 would extend and modify the current Work
Opportunity Tax Credit to apply only to Renewal Communities.
Under this proposal, employers could receive a credit worth 15
percent of up to $10,000 for first-year wages and 30 percent of
up to $10,000 for second and third year wages. There are three
major distinctions between this proposal and the Indian
employment credit available under current law. First, H.R. 815
would apply to wages only, not to health benefits. Second, the
amount of the credit is less--an employer could receive a
credit worth a maximum of $1,500 in the first year and $3,000
in the second and third years, for a total of $7,500 per
employee. Third, the employee receiving the benefit must live
in, not merely near, the Renewal Community.
Comment: The employment credit in H.R. 815 is too
restrictive. It should be supplemented by extension and
modification of the Indian employment credit.
Revise Community Renewal Selection and
Qualification Process to Incorporate Respect for Tribal
Governmental Sovereignty. Tribal governments should not have to
be nominated by a State government in order to be considered
for selection as a renewal community. H.R. 815 is unclear on
this point. In addition, tribal governments should not be
expected to set aside regulatory or environmental standards in
exchange for favorable tax treatment.
Make Tax Credits for Commercial Renovation and
Technological Centers and Academies Available to all Indian
Reservation Communities. H.R. 815 includes a 20 percent tax
credit for the cost of renovating commercial buildings located
in a renewal community. Similarly, the President's FY2001
proposed budget, in the section entitled ``Bridging the Digital
Divide,'' includes a 50 percent tax credit for corporate
sponsorship of qualified zone academies, public libraries, and
community technology centers located in empowerment zones
(``EZs'') or enterprise communities (``ECs''). Both of these
tax credits should be made available more broadly to encourage
commercial renovation and corporate sponsorship of technical
education on all Indian reservations, regardless of whether
they have been designated as an EZ or EC or Renewal
Community.\1\
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\1\ The same broad treatment should apply with regard to the tax
deductibility of computer technology/equipment donations. Note: in the
President's FY2001 budget, this proposal contains the alternative
formulation: ``located in an EZ or EC or in a census tract with a
poverty rate of 20 percent or more.
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Tribal Government Tax-Exempt Bond Authority.
Tribal governments themselves need expanded access to capital
for a variety of economic development purposes. Under current
law, tribal governments are virtually hamstrung when they try
to make a tax-exempt bond offering. Provisions similar to those
contained in H.R. 1946 should be incorporated into the
legislation. See Attachment A (summary of H.R. 1946).
Provide Development Accounts to All Working Poor
Individuals and Families, Regardless of Where They Reside. H.R.
815 limits ``family development accounts'' to individuals
residing in a designated renewal community. Development
Accounts should be provided to all individuals that meet the
income criteria.
VI. Conclusion
Mr. Chairman, thank you for the opportunity to present
testimony on proposed tax incentives to help economically
distressed communities. In this time of unprecedented
prosperity found throughout most of the United States, Indian
communities must be accorded the same opportunities for
prosperity as the rest of the Country. NCAI believes that the
comments and recommendations provided in this statement will
assist in addressing the economic disparity found throughout
Indian Country, and we look forward to working with this
Congress in the development of tax incentives that would
correct this critical situation. Tribal governments are also
very optimistic that a bipartisan approach to addressing this
issue will succeed during this session.
I would be happy to respond to any questions you may have.
Tribal Government Tax-Exempt Bond Authority
Amendments Act of 1999
H.R. 1946, Introduced by Congressman Shadegg May 26, 1999
H.R. 1946 would give Indian tribal governments and tribal
business ventures expanded access to tax-exempt financing
through the following Internal Revenue Code amendments:
1. H.R. 1946 would remove the ``essential governmental
function''restriction on tribal governmental bonds. In its
place, H.R. 1946 would require that the financed facilities be
located on land within or in close proximity to the exterior
boundaries of the tribe's reservation.
Reason for Provision: Under current law, tribes may issue
tax-exempt governmental bonds only for facilities used in the
exercise of an essential governmental function. State and local
governments are not subject to a similar restriction. The
legislative history of this restriction has defined ``essential
governmental function'' narrowly (e.g., roads, sewers,
schools). In removing the restriction, H.R. 1946 would enable
tribes to issue governmental bonds to finance facilities for
tribal use even if the facilities do not serve such functions.
However, no part of the bond issue proceeds may be used for
property placed in service for gaming or casino purposes.
2. H.R. 1946 would allow Indian tribal governments to issue
various types of tax-exempt private activity bonds permitted by
State and local governments under current law, so long as the
tribe maintained a 50% ownership interest in the financed
facility. The business would also have to satisfy an employment
test that is somewhat different than that of current law.
Reason for Provision: Under current law, tribes may issue
tax-exempt private activity bonds only for manufacturing
facilities. H.R. 1946 would treat tribal governments like State
or local governments, enabling them to issue tax-exempt private
activity bonds for various types of facilities, such as
facilities used by 501(c)(3) organizations, low-income rental
housing, and electric generation, water treatment, and solid
waste and sewage disposal plants.
3. H.R. 1946 would exempt tribal private activity bonds
from the State volume cap requirement generally applicable to
tax-exempt private activity bonds.
Reason for Provision: Tax-exempt private activity bonds
issued by State and local governments generally are subject to
a population-based volume cap on the principal amount of
private activity bonds that may be issued during each year.
4. H.R. 1946 would except tribal bonds from the ``federal
guarantee'' prohibition.
Reason for Provision: The ``federal guarantee'' prohibition
generally comes into play where the borrower relies on future
federal assistance to repay the loan. Tribal bond issuances
often fail to secure approval of bond counsel or underwriter's
counsel because of the level of federal assistance being
received by the tribe.
In addition, H.R. 1946 makes an important amendment to the
Securities Act of 1933. It would place bonds issued by a
federally-recognized Tribal Government on par with those issued
by state and local governments by exempting both from federal
securities registration requirements.
Chairman Houghton. Thanks very much, Mr. Wallace.
Mr. Reighard?
STATEMENT OF BILL REIGHARD, PRESIDENT, FOOD DONATION
CONNECTION, NEWPORT, VIRGINIA
Mr. Reighard. Thank you for this opportunity to speak on
H.R. 1325, the Good Samaritan Tax Act. In addition to my oral
testimony, I would like to include written testimony as part of
the record.
This Act would eliminate the uncertainty that exists
concerning the tax deduction a company can take when it donates
its wholesome, excess food to nonprofit organizations that
serve those who are hungry. This would encourage food service
companies to make the effort needed to save their excess food
which otherwise would go to waste.
This Act has the support of Food Chain and America's Second
Harvest as well as the National Restaurant Association and the
National Council of Chain Restaurants.
I have worked in the food service industry for 25 years in
management positions in operations, quality assurance, product
development and technical services. In 1992, I formed Food
Donation Connection which is dedicated to ensuring that excess
wholesome food that is desperately needed in our communities
does not go to waste.
We accomplished this by providing restaurants with an
alternative to discarding this excess food by linking them to
agencies that help those who are hungry. Our primary client is
Pizza Hut who has the largest prepared food donation program in
the country. Pizza Hut restaurants have donated over 30 million
pounds of excess food to 2,000 hunger agencies since 1992. This
program earned Pizza Hut and my company the UPS Foundation
Distinguished Service Award from Food Chain in 1994 and Pizza
Hut received a national U.S.D.A. Hero of Food Recovery and
Gleaning Award in 1997.
We also manage food donation programs for Morrison's
Cafeterias, KFC and Taco Bell and are working with other
restaurants and chains that are considering donating excess
food.
Despite our country's economic prosperity, 36 million
Americans, including 14 million children, don't get enough to
eat. A report by the Conference of Mayors shows demand for
emergency food increasing. The New York Times points out that
America's Second Harvest is not receiving sufficient food to
meet the demand from their affiliate food banks.
As individuals leave welfare and enter the workplace, they
often turn to food banks and other nonprofit, private sector
groups for food to help ends meet. At the same time, good,
wholesome, excess food is being discarded. However, it costs
businesses money to properly save this food.
Recognizing this, Congress included legislation in the Tax
Reform Act of 1976 designed to encourage donations of excess
food to 501(c)(3) organizations that serve infants, ill or the
needy. Section 170 of the IRS Code allows a deduction equal to
the donated food basis cost plus one-half the depreciated value
not to exceed twice the basis cost. This last limitation, as
well as strict receipting requirements, ensures that a company
cannot earn a profit by producing food specifically for
donation.
Two issues with the existing law discourage food service
companies from donating. First, the IRS challenges as an
industry coordinated issue any appreciated value placed on the
donated food. Many companies are not willing to take on the IRS
to gain a deduction to offset the additional cost of
preparation, packaging and storage of donated food. They are
content to settle for throwing away the food and taking a
standard deduction.
Second, current law provides that this deduction is only
available to regular C corporations. Many restaurants are set
up as limited liability or Subchapter S corporations or sole
proprietors and are not eligible for the deduction. The Good
Samaritan Tax Act codifies fair market value and makes all
business entities eligible for the deduction.
The programs we manage have been successful because they
use the tax savings to provide an economic incentive to their
restaurant managers for donating. When this incentive is lost,
donations drop significantly or stop altogether. We see this
repeatedly when restaurants are sold to franchisees that are
not eligible for the deduction under current law.
We know that food service donations of wholesome, excess
food to private sector, nonprofit hunger agencies works. These
donations provide needed food as well as a great source of
protein for these agencies. I believe this Act will encourage
more restaurants to donate food which will go a long way to
solving the hunger problem in America today.
Mr. Chairman, I encourage you and the subcommittee to do
everything in your power to enact the Good Samaritan Tax Act
this year. Every day we wait, another child in America goes to
bed hungry.
Thank you.
[The prepared statement follows:]
Statement of Bill Reighard, President, Food Donation Connection,
Newport, Virginia
Good Afternoon. I would like to thank Chairman Houghton and
ranking member Coyne, and other members of the Subcommittee for
this opportunity to speak on the Good Samaritan Tax Act, H.R.
1325.
This bill, if enacted, will go a long way toward solving
the issue of hunger in America. By allowing companies to offset
the costs associated with donating surplus wholesome food to
hungry Americans, The Good Samaritan Tax Act will encourage
more food service companies to make the effort needed to set up
food recovery and donation programs. The Good Samaritan Tax Act
has the support of the National Restaurant Association, the
National Council of Chain Restaurants, and America's leading
food recovery and distribution organizations--Foodchain and
America's Second Harvest.
My Background:
Since 1992, I have been President of Food Donation
Connection (FDC). FDC assists restaurants in providing an
alternative to discarding excess wholesome unsold food by
linking those restaurants to food rescue programs and agencies
that help the hungry. FDC manages the donations of over 4500
restaurants to 1500+ hunger agencies.
Our Mission Statement is from John 6:12, which reads:
``When they had all had enough to eat, Jesus said to his
disciples, ``Gather the pieces that are left over. Let nothing
be wasted.''
We accomplish this by handling coordination and
administration for our client restaurants. This includes
determining recipient food rescue programs and handling
paperwork, maintaining an 800 number for use by donor
restaurants and hunger agencies, tracking and reporting all
excess food donations, tax savings calculation and reporting
and providing the ongoing follow-up and monitoring necessary
for successful implementation and growth.
Prior to establishing Food Donation Connection, I worked
for 17 years in the food service industry, holding management
positions in operations, quality assurance, product development
and technical services.
Hunger Exists in America
Despite our country's economic prosperity, hunger is a
pressing social issue in America. According to a recent report
by Tufts University, 36 million Americans, including 14 million
children, live in food insecure households. A United States
Conference of Mayors report shows demand for emergency food
increasing, and that over 20% of this demand goes unmet. In a
New York Times article, America's Second Harvest said they do
not receive sufficient food to meet the demand from the member
agencies of their network food banks. As individuals leave
welfare and enter the work place, they often turn to food banks
and other non-profit private sector groups for food to help
make ends meet. Layoffs also remain widespread as companies
reconstitute themselves to compete in the changing economy.
Wholesome Excess Food is Going to Waste
At the same time that many Americans go hungry, good
wholesome food is going to waste. One of the major reasons this
food is not getting to the hungry is because businesses cannot
offset the costs of donating it.
It takes management commitment and money to properly save
excess food for donation to hunger agencies. Prepared food must
be properly saved, packaged, labeled and kept refrigerated or
frozen until it is picked up by the agency. Operating
procedures and food safety standards must be developed and
implemented. Hunger agencies need to be selected and approved,
and ongoing pick-up schedules established. A system for
donation reporting and tracking must be in place. Tax
regulations require strict receipting procedures and limit the
type of non-profit organizations that can receive the donation.
An example of these requirements as they appear on one of our
client's food donation log appear below:
[GRAPHIC] [TIFF OMITTED] T7485.001
A number of expenses are incurred when a restaurant donates
its excess food. Based on our experience, provided below is an
example of the typical cost associated with food donation
programs. Note that costs will vary from company to company
based on type and value of food donated, the type of storage
containers needed, storage method and other factors. This
example assumes the value of the donated food to be two times
cost. Costs represent a percentage of tax savings. Since the
tax incentive is a deduction (as opposed to a credit) a company
must be profitable to realize any tax savings. Two tax rates
are used in this example.
Cost: % of tax savings Cost: % of tax savings
Program Cost Item at 35% Tax Rate at 15% Tax Rate
Storage & Transport Containers.............................. 4% 9%
Restaurant Manager Bonus Costs.............................. 10% 10%
Employee Labor to Save Food................................. 10% 23%
Management oversight........................................ 3% 7%
Program Management.......................................... 15% 25%
Company Incentive After Costs............................... 58% 26%
To increase Donations, Companies must be able to offset costs
Obviously, if we are to encourage food service companies to
donate rather than discard usable surplus food, we need to
allow them to offset the costs of doing so. In fact, Congress
did include legislation in the Tax Reform Act of 1976 designed
to help companies offset the costs of donating food to
501(c)(3) organizations that serve infants, ill or needy.
Section 170 of the IRS Code allows a deduction equal to the
donated food basis cost plus = of the appreciated value, not to
exceed twice the basis cost. This last limitation, as well as
strict receipting requirements, insures that a company cannot
earn a profit by producing food specifically for donation.
Example Calculation of Incentive Provided by Tax Reform Act of 1976
The Tax Reform Act of 1976 allows regular
corporations that donate excess food to certain specified
501(c)(3) non-profit organizations that serve the ill, infants
or needy to take an incremental deduction for donated food.
Strict receipting requirements must be met to take the
incremental deduction
Example of potential tax benefit--
Surplus Not Surplus
Product Sold Donated Donated
Sales revenue........ $1.00 $.00 $.00
Base cost (food & .35 .35 .35
direct labor)................
Gross margin/(loss).. .65 (.35) (.35)
Incremental tax deduction. - - 33*
Total income/(deduction) .65 (.35) (.68)
for tax..................
Tax (assumes 35% (.23) .12 .24
rate)........................
Gross margin/(loss) $.42 $(.23) $(.11)
after tax....................
In this example, donating reduces the after tax cost of
surplus by 52%. The company still loses money on the donated
food. The amount of the loss is reduced.
*Incremental deduction is one-half of the foods'
appreciated value (FMV less base cost) however base cost plus
the incremental deduction cannot exceed twice base cost.
Problems with the Current Law Exist
While the food donation provisions of the 1976 act were
well intended and designed to encourage companies to donate
food, two problems exist today that actually discourage food
service companies from doing so.
First, the IRS challenges, as an industry coordinated
issue, any appreciated value placed on the donated food. The
uncertainty of the value of their deduction prevents many
companies from investing in and incurring the costs of food
donation programs. In fact, under current IRS interpretation,
it actually makes more financial sense for a company to throw
away excess food rather than donate it.
Second, this deduction is only available to regular 'c'
corporations. Many restaurant companies are set up as limited
liability or sub-chapter's corporations or sole proprietors and
are not eligible for the deduction.
The Good Samaritan Tax Act Addresses These Problems
This Good Samaritan Tax Act restores some common sense to
our tax code by addressing these two issues.
First, the Act clarifies the determination of fair market
value when internal company policies relating to the treatment
of food are also involved, ensuring that restaurants that
donate food to non-profit hunger relief agencies will be
allowed to take the full deduction available to them under
current law. Free of the risk of having to defend themselves
against an IRS challenge, more businesses will be encouraged to
donate food.
Second, the Act will extend the deduction to all business
entities, providing the incentive to thousands of restaurants
that are not organized as ``c'' corporations.
Food Donation Programs Meet Local Community Needs
Despite strong economic growth, hunger remains a problem in
every state. Hunger exists in rural areas as well as in urban
areas. A major strength of food donation programs is that
restaurants operate in every part of the country. The result is
a largely untapped source of excess food in each of our
communities.
A strong network of non-profit agencies that serve those
who are hungry has developed across the country. America's
Second Harvest network food banks, along with Foodchain and
other national organizations, provide food to this network.
However, increased demand at these agencies has resulted in the
need for additional food. At the same time, food-manufacturing
companies, a traditional source of excess food, have become
more efficient in their operations. In addition, a secondary
market for excess manufactured goods, i.e. Big Lots, Odd Lots,
Internet surplus food sales etc., has developed. This has
reduced the food available at a time when need is increasing.
These agencies have a need for food now. The Good Samaritan Tax
Act would increase the supply of available wholesome food by
encouraging additional restaurants to donate their excess food.
Mr. Chairman, I appreciate the opportunity to testify here
today. I encourage you and the committee to do everything in
your power to enact the Good Samaritan Tax Act this year. Every
day we wait, another child in America goes to bed hungry.
Testimonials
We know that food donation programs work. The unsolicited
testimonials on the next four pages give an insight into the
heartof Pizza Hut's Harvest program.
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[GRAPHIC] [TIFF OMITTED] T7485.003
[GRAPHIC] [TIFF OMITTED] T7485.004
[GRAPHIC] [TIFF OMITTED] T7485.005
Chairman Houghton. Thank you very much, Mr. Reighard.
I just have one question and then I will turn it over to
Mr. Coyne.
Ms. Brumagin, you have done an extraordinary job, done it
all on your own with no government money at all. You have done
it privately. Why should the Federal Government get in here at
all with tax incentives?
Ms. Brumagin. My feeling is that most communities really do
not have the ability to assess what it is they need and make
the kind of changes they need. I think we were just very lucky
as a community. I think we were very fortunate that we had
people who were willing to come to our community and invest
their life savings not really knowing what was going to happen.
I think tax incentives can make an enormous difference for a
distressed community.
I don't know if you know what it is like to be at a local
level where government officials do not have a lot of time to
really try to assess what they can do for their community, may
not really have the ideas and certainly do not have the money
to invest in their own communities to help turn them around. I
think tax incentives are the way of spurring that on for
people.
Chairman Houghton. Thank you.
Mr. Coyne?
Mr. Coyne. Thank you.
Mr. Phillips, you obviously support the Administration's
New Market Initiative. I wonder if you could give us some
examples of what investments in the short term the private
sector would be expected to make in some of our distressed
communities?
Mr. Phillips. I tried to mention a couple during my initial
remarks but for example, a lot of new investment opportunities
are evolving in the telecommunications sector, even in rural
communities. We are trying to support more homegrown
entrepreneurs in that area.
I mentioned EnvisionNet which is based in Augusta and their
startup and growth. They are employing more and more people
every day. It is a call center support venture for Microsoft,
on line banking and other things of that nature. They require
capital to start and grow that business.
The way that would work is that if we were certified as a
CDE, certified development entity, we would sell the credit say
to an investor, a bank, individual investor, institutional
investor, create a pool of capital and use that money to help
finance that particular project.
Other projects get into areas of natural resources and
value added types of industries which I mentioned. For example,
in partnership with a bank, we helped finance the startup and
expansion of Coast of Maine Organic Products with production
operation downeast in one of Maine's poorest counties. The
company manufactures a compost product for the household
garden. They employ 15 in that particular venture. This is a
much smaller project, so in rural communities you get that kind
of variation.
We see the credit as providing our capacity to inject
capital at the appropriate times and appropriate levels to help
start or grow some of these businesses and these jobs.
Mr. Coyne. Of all the segments of the President's New
Market Initiative, what do you think is the most important
feature of his proposal?
Mr. Phillips. There are several components to it. Each
addresses a variation of capital needs, so all are important.
For example, the CDFI Fund is a component of that because they
are looking for permanent authorization and so forth. There is
also community-based venture capital, the APICs and the New
Markets Tax Credit and probably some other things. A very good
question, all of them, of course, but let me try to answer more
specifically.
The opportunities for access to equity capital is more or
less at the top of our list in the sense that equity capital
gives us the most flexibility, so provisions for community-
based venture capital are important, a very critical one; so
too is the CDFI Fund because you can use those funds for equity
capital; but also for softer loans where the return will not be
as high, such as facility or micro loans; and we believe the
New Markets Tax Credit will allow us some opportunity to
structure funding in a way that will allow us to access a much
higher volume of private capital.
So in a way all of those pieces are moving toward the same
objective of creating access to flexible private capital market
in many ways to invest in some of these projects I speak about.
Mr. Coyne. Thank you.
Chairman Houghton. Kenny?
Mr. Hulshof. Mr. Reighard, thank you for being here and I
especially want to applaud your efforts as President of the
Food Donation Connection in helping to manage the donations of
4,500 restaurants to some 1,500 plus hunger agencies. This is a
hot button issue for me.
My wife, in addition to her full-time career in marketing,
just recently completed her term as president on the board of
directors of the Central Missouri Fund Bank. So I have been
sort of watching from the side as a supportive husband to see,
for instance, in the last year the Central Missouri Food Bank
that has about 20 Missouri counties, distribute 10 million
pounds of food.
Since welfare reform has been instituted, they have
distributed about 113 percent more food now than at the time
that welfare was in play. They are quick to point out that they
are still only reaching about 47 percent of the poverty level
in Missouri. So I think anything we can do is important.
This bill, Mr. Chairman that you authored, that I co-
sponsored, I think is a good bill.
I mention this because we are here in this forum. I
recognize that most and probably your own experience is that as
food is collected, there is a cost or distribution fee. The
Central Missouri Food Bank in Columbia, Missouri is the only
Second Harvest Food Bank in the Nation that does not charge for
its food as it give it to other pantries and kitchens. As a
result, I think that has been an incentive for a lot of other
businesses to partner up with the Central Missouri Food Bank
because they know this is very much a charitable endeavor.
I am not suggesting that you do that in your own experience
but the good thing is that hunger is a curable illness as I
like to say. So I applaud your efforts.
Let me ask you specifically about this bill, H.R. 1325. Do
you think there are enough safeguards in this legislation to
prevent it from becoming the stale bread bill?
Mr. Reighard. That is a good question. As you pointed out
we work with 4,500 restaurants and we have been coordinating
donations for eight years. We found there are really three
solid reasons why this would not become a stale bread bill.
First, the original or the current law requires strict
donating and receipting requirements on any food that is
donated under this bill. It can only be donated to those
organizations that serve the infant, ill or needy. Those
organizations have to sign a receipt each time saying they will
use that food only for this purpose, they will not resell it or
give it to another organization.
Second, like the food bank you mentioned, there is a non-
profit network across the country that is developed to serve
food to the hungry but they are strapped for resources and
money. You are not going to find an agency that is going to go
out and pick up stale bread or food they can't use. We run into
that, for example, there is an overproduction of bagels and
bread in this country and it is very hard for those chains to
donate their surplus food because there is just not sufficient
agency use for it. In fact, on a limited basis, we have run
into that with Pizza Hut in some areas where we cannot find
acceptable organizations.
Third, current law requires that the food meet all FDA and
applicable Health Department requirements. So our experience
says this bill is successful in getting food the agencies need,
we have not seen food they don't need move through it.
Mr. Hulshof. Again, I applaud your ingenuity and your
ministry if I can use that term trying to create these
different partnerships, whether it is as the Central Missouri
Food Bank has attempted to do with local dairy owners and that
is obviously very difficult, getting milk and distributing milk
because it is such a perishable item.
In the recent effort, we have a toastmaster which
manufactures can openers and as they test these can openers on
cans of food, they now have instituted this program to
repackage the cans and then allow those to be distributed.
I am very supportive of the bill and I appreciate you
helping us to bring this to the forefront with your testimony
today.
Mr. Reighard. Thank you for your support.
Chairman Houghton. Thanks very much.
Mr. Weller?
Mr. Weller. I would like to direct my questions to Ms.
Brumagin. First, let me commend you and your community on your
locally-led, locally-driven initiative in revitalizing your
community of Findley Lake and Chautauqua County.
I spoke with the representative from the Treasury
Department earlier in the hearing regarding the issue of
brownfields. Do you have brownfields in Chautauqua County?
Ms. Brumagin. I am sure we do. I am not really that
familiar with it, however.
Mr. Weller. In any case, I represent the south side of
Chicago, the south suburbs and rural areas going about 100
miles from the City of Chicago.
In many cases, here is that gas station that is one that
one corner in every town that no one seems to buy, fix up or
use and everyone wonders why. Usually it is because there is
some environmental cleanup that is necessary. This is an
example of a small brownfield. We can always think of the
industrial parks that have them.
Currently we have a provision that was included in the
Balanced Budget Act of 1997 that provides for a tax incentive
for private investors who purchase a brownfield, clean it up
and then they can expense or deduct in that year the cost of
doing so as a way of recovering the cost of cleanup. That is
incentive for them to purchase an existing industrial park or
an existing commercial site in a community.
That provision is currently limited just to low income
census tracts or empowerment zones. From the standpoint of an
elected official representing the Town of Mina in Chautauqua
County, do you feel that is the best approach or do you feel
that communities that happen to be middle class, rural or
suburban should also have the opportunity to use that type of
incentive for environmental cleanup of a brownfield?
Ms. Brumagin. First of all, we did have a situation in our
community where we had just that. We had a gas station on the
corner and also one of the buildings that is in the photo used
to be a gas station. I know there were people who were really
hesitant to purchase those properties because they were very
concerned about the liability associated with purchasing them.
The one building in particular, the one from 1996, had gas
tanks. I know a lot of people looked at that and they would not
purchase that property. The people who did so really took a big
chance in doing that. It turned out very positively for them,
however, because we just had the State come through and redo
that road and they removed those fuel tanks from the ground.
Mr. Weller. In that case, the taxpayers picked up the tab
for the cleanup?
Ms. Brumagin. We appreciated that very much. I know that
building could have sat there for many more years because
people who had considered purchasing it would not do so because
of the liability associated with that.
Mr. Weller. I find that abandoned gas stations usually are
the best example because almost all of us can think of one in a
town we live in or a town nearby our home. People often wonder
why. It is on the most strategic corner in town, why doesn't
someone buy that and use it for some commercial or positive
purpose. In most cases, it is a brownfield and there is some
cleanup necessary.
I just want to share with you that we do have a bipartisan
proposal. Ten members of the Ways and Means Committee have a
proposal which we introduced last week, H.R. 4003, in which I
am joined by Representative Coyne, Mr. Johnson and seven other
members of this committee in sponsoring which eliminates that
so-called targeting, eliminates that incentive to just low
income areas but also allowing rural and suburban and middle
class communities like yours to have the opportunity to cleanup
that old industrial site or that old gas station.
One thing I found was of great concern. I spoke and met
with a large group of conservation oriented folks a couple of
weeks ago in the south suburbans at a conservation congress
hosted at Governor State University and the great concern at
that meeting was the south suburbs keep growing south and
consuming vast amounts of farmland and open space. They
expressed great concern about the need to revitalize old
brownfields to reduce the need for new greenfields, to take the
pressure off farmland and open space.
I believe that addressing the need to give middle class
communities, rural and suburban communities the opportunity to
cleanup old brownfields is good for the environment as well as
good for creating jobs.
I want to thank you for testifying today.
Chairman Houghton. Thanks very much, Mr. Weller.
Mr. Lewis?
Mr. Lewis. Chairman Wallace, thank you for being here
today. The Assistant Secretary testified in his prepared
statement that many residents of Native American communities
continue to struggle economically in spite of all this
prosperity and all this growth. Could you tell the committee
what has been the impact of the Native American wage credit? Is
it helping? Is it making a difference in your communities?
Mr. Wallace. It has made a difference in certain parts of
the community but some of the development preconditions that
make this advantage more meaningful haven't necessarily
existed, the preconditions where you have the incentives of
capital to be invested for development coming into the
community.
One of the things that handicaps tribes is really creating
the fundamental preconditions that attract capital. In
instances where that does happen with certain advantages like
accelerated depreciation credit that is in the code now,
actually not only had a direct and meaningful contribution to
development in Indian country but it also had a very nice and
intended benefit. Not only does it inspire capitalization of
business facilities and operations on reservations, it also
provided incentives for utility companies and other entities
that provide public infrastructure to bring to the reservation
and also gives them a benefit in terms of accelerated
depreciation of their capital investment in the community as
well.
The wage credit itself does have a benefit. It is just that
right now we are struggling hard to create the broader
preconditions that make it more meaningful.
Mr. Lewis. Could you tell members of the committee what is
the average annual income of an American Indian family?
Mr. Wallace. As I understand, according to the U.S. Census,
and this is something we are not very proud of, I just saw a
citation of approximately almost one third of the national
tribal population is below the Federal poverty line, $18,000 or
less.
Mr. Lewis. In terms of dollars, what did you say?
Mr. Wallace. $18,000 per family. Average income, one-third
of Native America is below $18,000 per capita.
I wanted to again highlight the meaningfulness of this
discussion and the historic requirement to overcome what
appears to be the natural omission of the view of tribal
governments as part of the community of governments and their
central role in creating a development orbit for tribes.
Some of the perspectives that we talked about today and
some of the initiatives are privately oriented but the
architecture of tribal development environment is dominated by
the tribal governments themselves and then the NGOs that have
been with us to try to help jump-start tribal economies. That
is a distinction I think cannot be overlooked and needs to be
repeated over and over.
We are certainly very interested in seeing the existing,
accelerated depreciation credit and the employment tax credit
renewed because we are just beginning to realize its full
benefit.
On a personal note, where I come from, Congressman Lewis
you are considered a very distinguished American and
personally, you have set a standard of public service and faith
that I can only hope to achieve in my lifetime. It is a very
distinct privilege to be here before not only the committee but
also to work with you on these very important issues.
Mr. Lewis. Thank you very much, Mr. Chairman.
Chairman Houghton. Thank you, Mr. Wallace.
Mr. Watkins?
Mr. Watkins. Ms. Brumagin, we think a lot of your
communities and we think a lot of your congressman. He is quite
a guy, we all like him and he does a great job here. He is very
effective and now and then he lets me get a word in but not
very much.
Mr. Lewis. Will the gentleman from Oklahoma yield for a
moment? I just want to say you have a very good congressman. He
is a wonderful Chairman, he is a good leader and he is my
friend. I am a Democrat and he is a Republican.
Ms. Brumagin. Hear, hear.
Mr. Watkins. I have been all three, a Democrat, an
Independent and a Republican. Whatever you want me to be, I
will be.
I read your entire testimony. You have a tremendous
location.
Ms. Brumagin. Yes, we do.
Mr. Watkins. A new interstate coming through there and easy
access to others. I imagine there is a lot of God sent beauty
there too. I can only imagine by the name of the lake and so
forth. What is your per capita income there?
Ms. Brumagin. I actually do not know our per capita income.
Our community is very diverse, even though it is very small,
1,100 people. For those families that are permanent residents,
their incomes are very low because there are really not that
many places to be employed.
Mr. Watkins. You set up an endowment of $175,000 and I was
impressed with that.
Ms. Brumagin. The other part of our community, however, are
those people who are attracted to this beautiful little lake
and we do have people who have second homes there. Those are
the people who really have been contributing to the endowment
fund. So we have a good amount of wealth from the seasonal
residents.
Mr. Watkins. Keep up the good work because they need you
and they need some incentives from time to time for some other
economic opportunities.
This is the reason I questioned the Administration
proposing the tax credit for community development entities.
When you go down and find out what the community development
entities are, they talk about community development financial
institute. We don't have any of those in rural America; the
community development corporation, we don't have any of those
in rural America; small business investment corporations, we
don't have any in economically depressed rural areas; new
market venture capital firms, we don't have any, so we don't
have the vehicles. We don't have the economic infrastructure.
That is what a lot of people don't understand.
Our economic infrastructure has been destroyed. We left the
cotton fields and the fields. I grew up in a town of less than
200. We used to have two banks, two cotton gins, out migration,
two blocks of businesses. We don't have two stores left in my
boyhood hometown. That is why I am so committed and dedicated
to this. That is why I would like to have equity in a lot of
these programs.
Mr. Wallace, I have thought about some Native American
activities. I noticed you talked about these being for
economically depressed Indian reservations. Mr. Wallace, I have
22 percent of the Native Americans in America. We don't have
reservations. I have three grandchildren who are Native
American. They are ignored. I was the only non-Indian on the
baseball team growing up. I was a minority and I didn't know it
in a rural economically depressed area.
I fought this battle because I want my Native Americans to
be included, not left out. Our President of the United States,
Andrew Jackson, forced them to the Trail of Tears, Congressman
List from North Carolina, to march the Trail of Tears and also
from Georgia and other areas. They came to an area called
Indian Territory, part of Oklahoma. That was good enough for
them to be sent to; why isn't it good enough for them to have
some of the incentives that some of the other areas have had?
Don't ignore your own people. There are those out there that
are not on Indian reservations.
Again, I had two of my tribes--the Choctaws and the
Chickasaws--to come together with an empowerment zone
application with the local people. I want our local people to
work together but it was ignored. I see that we weren't treated
with equity, we weren't given the same number of a third of the
urban areas.
I hope the committee is listening. We have to make sure
there is equity for those who are least fortunate if I read the
script correctly.
Thank you.
Chairman Houghton. Thank you, Mr. Watkins.
Mr. Portman?
Mr. Portman. Thank you, Mr. Chairman.
I appreciate my colleague from Oklahoma's statement. It
focuses on the need to make sure that what resources we have
here are used most effectively, whether it is focused on rural
communities, urban communities, those identified by political
jurisdiction, and Chairman Wallace talked about the
reservations, the need for focus there.
I guess one of the points Mr. Watkins is making is
sometimes it is hard to identify a group by political
jurisdiction that might need the same kind of help. Under the
1993 OBRA legislation, we have things like the Indian
employment credits, accelerated depreciation, in 1997 in my own
area, not my district, we were one of the Round II empowerment
zones. We are proud of that and are trying to work through
that. We have had some problems, frankly, in working through
that.
We now have a lot of talk about new initiatives. Mr.
Phillips talked about the new markets initiatives and how that
can be helpful. We have ideas out there to expand the existing
empowerment zones. In my area, the Round II empowerment zones
want whatever benefits the Round I empowerment zones currently
have. We need to work through that and make sure there is
fairness there between zones.
There are proposals to expand the current SSBIC incentives,
expand those and make the small business initiatives work
better. Then there is the Community Renewal Act which is
another series of tax incentives. So there is a lot going on
and a lot out there.
One of the questions I have is what is working and what is
not working? In our case in greater Cincinnati, we have had
trouble with our enterprise zone, putting together the right
kind of board. We haven't been able to come together and reach
a consensus on how to spend the money we have and we're asking
for new money. It is difficult without a track record of
success.
I guess the first question I would have building on Mr.
Lewis' question to you, Chairman Wallace because I think you
have a good feel as to what has worked and what hasn't, on the
Indian employment credit, the 20 percent wage credit which goes
to wage credit or health care, a 20 percent credit for that
which is paid in excess to what was paid in 1993 or before that
time, is that accurate?
Mr. Wallace. Yes, sir.
Mr. Portman. That is something you indicated has been
helpful but not as helpful as it could be and yet you didn't
really explain how it could be more helpful. Could you take a
moment just to expand on that and say how it could be modified
to make it work better? You talk about bringing in capital
which may be another issue but even with the existing credit,
what is working, what isn't and how can it be changed to use
the same resources more effectively?
Mr. Wallace. Thank you for following up on that because the
light came on after I gave my first answer. The employment tax
credit is very beneficial but as I talked about the geography
of the development environment related to tribes, it is heavily
influenced by governmental activities and the participation of
nonprofit organizations, development entities and the tribal
economy.
The credit is very worthy and it certainly needs extension
but if there is a possibility to modify the credit, to take
into consideration the players in the development orbit of the
tribe, the government and the nonprofits, if there could be
some flexibility incorporated where it would be an elective
process where you could either choose to take the credit to
discount your corporate tax liability or more so we would like
to advocate if you could use that to offset your payroll taxes
and give those other players some incentive and some
flexibility in dealing with the credit, and take full advantage
of it.
Mr. Portman. So it is expanding those entities that would
be eligible to receive a credit?
Mr. Wallace. Precisely.
Mr. Portman. Going to the nonprofit area and not just
private companies but both the tribal government and non-
profits that are working in the area to expand development?
Mr. Wallace. Exactly. That would be very helpful because
there is no incentive where they can take advantage of the
discounting of the corporate liability tax.
Mr. Portman. How about getting capital into the area? You
mentioned that as a major problem, that it is great to have the
accelerated depreciation, great to have the tax advantages of
the wage credit, but it is tough to get capital invested. Are
you looking at ways to do that in this new legislation? Do you
like the new markets initiatives in that respect? Is that the
kind of effort you think is necessary to get capital in these
areas?
Mr. Wallace. We find a significant amount of merit in those
proposals and are very supportive of them and some of the other
ideas that have come before the committee.
Also talking about prospective incentives, some of the
other things, tribes are actually involved in issuing debt to
marketplace and providing types of opportunities that are
available to other governments but in Congress' consideration
of some of the limitations and qualifications of this policy
and proposal, particularly as articulated in the Internal
Revenue Code, we would hope we would have the opportunity to
talk about some prospective barriers that have come up.
The essential government function restriction is very
narrow for us to take full advantage. State and local
governments aren't subject to similar restrictions on the bonds
they issue, so it is restrictive to us.
The restriction on private activity bond limits to tribes
issuing bonds were required that only is applicable to
manufacturing facilities, so we are wedded unfortunately to one
specific sector of the economy and don't have the flexibility
to get engaged in other diverse activities.
Third, the fact that tribes as State and local governments
enjoy a relationship with the Federal Government and the
intergovernmental revenue streams that are available to us
disqualifies tribes because of that, because of the Federal
guarantee prohibition. So that is a handicap.
Fourth, tribe bond issues currently do not enjoy an
exemption from the Federal securities registration, so we
really don't have the ability to take advantage of the
efficiency of the bonding network and the community that lives
in this part of the wilderness so to speak in economic terms.
So the tribes have very narrow opportunities. Then the cost of
capital goes up because of the specialized nature of the
inflexibility of our access to the efficiency of the
marketplace.
Mr. Portman. Thank you.
Chairman Houghton. Rebecca, you did us proud.
Gentlemen, you were wonderful.
Thanks so much for your testimony.
Chairman Houghton. Now I think we will have the next panel.
I would like to introduce Tom Lewis, President, Fishing School;
William P.D. Cade, President, Computers for Schools
Association; and then I am going to let Commissioner Carlos
Romero Barcelo introduce his witness.
Mr. Barcelo. The Chairman is sole representative in
Congress of the almost 4 million disenfranchised U.S. citizens
of Puerto Rico.
I appreciate the opportunity to introduce our next
panelist, the Puerto Rico Secretary of Economic Development and
Commerce and Executive Director of the Puerto Rican Industrial
Development Company, Mr. Xavier Romeu.
Mr. Romeu will discuss how Puerto Rico can benefit from the
new community development proposals and how to accomplish
community development goals in the island. As resident
Commissioner for Puerto Rico, it has been my goal to gain full
participation in the Federal programs that promote the health
and welfare of all Americans, including Medicare and Medicaid
while ensuring that we can equally prosper in this period of
unprecedented economic growth.
Puerto Rico was excluded from the 1993 Omnibus
Reconciliation Act that authorized the U.S. Department of
Housing and Urban Development and the U.S. Department of
Agriculture to designate empowerment zones. The principal
reason was the existence at that time of the Section 936 tax
credit on the island. The Section 936 tax credit provided
almost total exemption from Federal income taxes from U.S.
company operations in Puerto Rico and the U.S. territories.
Nonetheless in 1996, Congress enacted a ten year phase out of
the credit, ending it altogether after December 31, 2005.
I still believe, as I did at that time, that the tax credit
provided in Section 936 was to a significant extent a corporate
welfare. As many of you know, I was one of the first voices
calling for its repeal because it gave too much and provided
very little for what it gave. We felt that a tax incentive
directed towards jobs would be much more productive for Puerto
Rico and would be less expensive for the Nation.
Now, Puerto Rico, like many other communities across the
Nation, is at an economic crossroads and I strongly urge
Congress to consider new initiatives that will expand the
economic incentives to Puerto Rico ensuring that the 3.8
million U.S. citizens are not left behind in this time of
economic growth, particularly when we have large unemployment
in Puerto Rico.
There is a stimulus to migration to the mainland looking
for jobs and many times going into communities where they
cannot find a job and end upon welfare, which is a burden on
those communities. This is an incentive for migration
undesirable to us and undesirable to the Nation.
It is my pleasure to introduce Mr. Xavier Romeu from the
Department of Economic Development and Commerce in Puerto Rico.
Chairman Houghton. Thank you very much, Commissioner.
Mr. Romeu?
STATEMENT OF HON. XAVIER ROMEU, SECRETARY, DEPARTMENT OF
ECONOMIC DEVELOPMENT AND COMMERCE, HATO REY, PUERTO RICO
Mr. Romeu. Good afternoon, Mr. Chairman. Good afternoon,
Don Carlos.
I am the Secretary of the Department of Economic
Development and Commerce of Puerto Rico and also the Executive
Director of the Industrial Development Company of Puerto Rico,
better known as PRIDCO. PRIDCO is specifically charged with
attracting new investment and promoting the creation of U.S.
jobs on U.S. soil, namely the beautiful island of Puerto Rico.
I commend you, Mr. Chairman, along with the Speaker and
other members of the House of Representatives, who have labored
on ways to create and extend tax incentives to assist
communities that have not fully participated in our Nation's
economic growth and prosperity. I particularly commend and
highlight the lifelong labor of our Congressman, Resident
Commissioner Carlos Romero Barcelo for his leadership in
including Puerto Rico in all economic development initiatives
that help Puerto Rico develop as a good investment
jurisdiction. I also commend the Administration for including
Section 30(a), the Puerto Rico Economic Activity Tax Credit, in
its proposal to this committee.
I would like to take some time to ask what better time than
this for Congress to ensure that all communities, not just
some, in America prosper and grow to their full capacity.
In announcing these hearings, Mr. Chairman, you emphasized
that we cannot afford to leave anyone behind. Congressman
Watkins just a few moments ago correctly called for equity and
inclusiveness of all world areas in the Nation's well being and
I could not agree more with the Congressman from Oklahoma.
Congressman Portman raises very appropriately the question
of what is working in each one of our communities for economic
development that like Puerto Rico need additional benefits in
order to develop to their full economic capacity.
I am here today to advise the members of the committee on
what works in Puerto Rico and how to best extend the principle
of equity and inclusiveness to the four million U.S. citizens
of Puerto Rico to make sure that we, as proud U.S. citizens and
Americans, are not left behind and are included in the economic
prosperity of our Nation.
I know the members of this committee, as well as many of
your colleagues in the House, are committed to the idea of
inclusiveness and equity. While many of the proposals under
consideration by the subcommittee will succeed in economic
development on the U.S. mainland, it will do little for Puerto
Rico, Mr. Chairman.
However, I am very pleased to report that Representative
Phil Crane, along with Representatives Rangel, Congressman
Romero Barcelo, Congressman Weller and Congressman Dunn have
introduced legislation, H.R. 2138, that will effectively apply
the principal objectives of these initiatives, investment and
job growth in the private sector to the benefit of the American
citizens of Puerto Rico.
The Crane-Rangel initiative is, in your words, Mr.
Chairman, ``a proposal to expand incentives to help communities
which need it the most.'' Under the leadership of Governor
Pedro Rossello and Don Carlos Barcelo, Puerto Rico's economy
has been transformed over the past seven years. Our efforts
have brought Puerto Rico extraordinary results when compared to
the recent past. When I say the recent past, I mean only the
last seven or eight years.
We have sold off most of our state-run companies, we have
undertaken major new infrastructure projects, including modern
mass train systems, a super aqueduct that is already relieving
our chronic water shortage in Puerto Rico, new roads, and the
construction of what will become the largest world trade and
convention center in all of Latin America. We have also pursued
an aggressive local incentives program that reduces our local
corporate tax burden to as little as 2 percent for companies
investing in some parts of the island of Puerto Rico.
While this new Puerto Rico represents historic progress, we
lag the Nation in the key indicators that this committee is
concerned with today. Our current rate of unemployment is
approximately 11 percent, two to three times the average
national rate. To bring it further in line with the national
average, we must work in a partnership with the Federal
Government. Quite frankly, Mr. Chairman, we cannot do this
alone.
In the context of today's hearing, the question for us, the
4 million U.S. citizens of Puerto Rico, is how we can work
together to keep and expand U.S. jobs on U.S. soil, namely the
beautiful island of Puerto Rico.
In 1996 in the context of raising revenue to offset the
impact of minimum wage increase which applied both in the
mainland and in Puerto Rico, Congress eliminated the only
Federal tax program designed to encourage employment and
investment in Puerto Rico, Section 30(a) of the Internal
Revenue Code.
Under Section 30(a), U.S. companies are rewarded for
creating jobs for the American citizens of Puerto Rico by
receiving a Federal tax credit against their income from Puerto
Rico operations that is calculated by taking their wages into
account. Simply stated, the more jobs U.S. companies doing
business in Puerto Rico create, the greater the tax credit.
Under the 1996 changes, the Congress limited the credit to
U.S. operations in Puerto Rico existing as of October 13, 1995
and no credit, I emphasize no credit, was left in place for new
companies or for existing companies planning to expand into new
lines of business. In other words, while Congress was enacting
Federal tax incentives to encourage companies to grow on the
mainland, over four years to the tune of $55 billion, at least
at the Federal level, it created a disincentive for companies
to grow in Puerto Rico.
We have pursued an aggressive program in Puerto Rico to
attract new business but we are limited by the lack of new
Federal incentives and the caps in existing incentives.
Congress knows only too well that there are limits to what a
local jurisdiction can accomplish and that is why it has
enacted new tax incentives almost every year for the mainland.
In the context of the subcommittee's program for all
communities, Section 30(a) is the best way, short of statehood,
to retain and expand the private sector in Puerto Rico. The net
effect of Congress' actions in 1996 are significant. Since 1996
and for the first time in history, we have generally maintained
the presence of our existing mainland U.S. companies but it is
increasingly a challenge to attract new investment in Puerto
Rico.
Puerto Rico is competing against low wage, non-U.S.
jurisdictions for future investment by American companies
because virtually every Federal, commercial, environmental and
labor law, including the minimum wage, applies in Puerto Rico,
we will have an even greater challenge competing with those
jurisdictions such as Mexico, the Dominican Republic and
Central American countries.
I want to stress and make very clear that Section 30(a)
does not take or attract businesses from the mainland. That was
the old Section 936, which like Don Carlos, we were happy to
see go away from the island and which was corporate subsidies.
Instead Section 30(a) makes Puerto Rico competitive with
other non-U.S. jurisdictions. U.S. jobs that do not stay in
Puerto Rico in the future will leave the U.S. altogether. The
retention and growth of these jobs on U.S. soil is an important
point not just for Puerto Rico's U.S. citizens, but for the
mainland as well. Puerto Rico is the tenth largest purchaser of
goods and services from the mainland, totalling approximately
$14 billion a year. Moreover, well over 220,000 mainland jobs
depend directly on Puerto Rico.
As a result, by including Puerto Rico in legislation to
strengthen communities, Congress would not only give additional
tools to continue to create jobs and build communities, but
would also ensure the positive benefit of a strong Puerto Rico
on the mainland.
The likely additional increase in the Federal minimum wage
places an additional challenge on Puerto Rico's effort to
create jobs. Paradoxically, Mr. Chairman, when Congress passed
the 1996 Small Business Job Protection Act, none of the tax
breaks applied to any U.S. businesses in Puerto Rico. I submit
it would be unfair and counterproductive to exclude Puerto Rico
once again. Puerto Rico is more affected by the minimum wage
increase than any other jurisdiction in the U.S. In fact,
because our overall low wage levels, approximately 50 percent
of the work force in Puerto Rico comes within $1 of the minimum
wage and would be directly by this increase.
Congress should include Puerto Rico in any offset to the
negative effects that a minimum wage increase will have on
business and the economy. The most effective way to do so is
through Section 30(a).
The incentives being discussed today for our Nation as a
whole will do a great deal to accomplish the goals of
increasing private sector investment in communities on the
mainland and if Puerto Rico's political status placed it on a
par with the mainland, as a State of the Union, they would be
effective in Puerto Rico as well.
Regrettably absent a change in status to Statehood which
has proven time and again to be the best growth incentive in
American history, we need a program that is designed
specifically for Puerto Rico. Section 30(a) is such a program.
No community development program will be fully successful if it
does not include all American communities, including Puerto
Rico.
For us and for Congress, the challenge is to continue to
encourage U.S. employers to maintain and create new private
sector jobs in Puerto Rico and prevent those jobs from fleeing
to non-U.S. jurisdictions.
We in the Rossello administration and you in Congress share
the commitment to whenever possible, keep American jobs on
American soil and the best way to accomplish this is to extend
Section 30(a).
Mr. Chairman, members of the committee, Congressman Romero
Barcelo, I thank you for the opportunity to share our views
with the committee. I look forward to working with each one of
you to enact legislation to encourage job creation and capital
investment in Puerto Rico.
Thank you.
[The prepared statement follows:]
Statement of the Hon. Xavier Romeu, Secretary, Department of Economic
Development and Commerce, Hato Rey, Puerto Rico
Introduction
Mr. Chairman and members of the Committee, I am the
Secretary of the Department of Economic Development and
Commerce of Puerto Rico and Executive Director of the Puerto
Rico Industrial Development Company (PRIDCO). Economic
Development and Commerce is an ``umbrella'' Department,
encompassing several agencies focused on the development of a
diversified economy and the improvement of the island's
business climate. PRIDCO is specifically charged with
attracting new investment and promoting the creation of U.S.
jobs on U.S. soil.
I commend you Mr. Chairman, along with the Speaker and the
other Members of the House of Representatives who have labored
on ways to create and extend tax incentives to assist
communities that have not fully participated in this Nation's
economic growth and prosperity. I particularly commend our
Resident Commissioner, Carlos Romero Barcelo, for his
leadership on including Puerto Rico in all economic development
initiatives that would help Puerto Rico. What better time than
this to step back and ask how Congress can insure that all
communities in America prosper and grow to their full capacity?
In announcing this hearing you emphasized that ``We can't
afford to leave anyone behind.'' I am here today to advise the
Members of this Committee with respect to how best to extend
the principle of inclusiveness to the four million United
States citizens of Puerto Rico; to make sure that these
Americans are not left behind. I know that the Members of this
Committee, as well as many of your colleagues in the House, are
committed to that ideal.
While many of the proposals under consideration by this
Subcommittee will succeed in economic development on the
mainland, they will do little for Puerto Rico. I am, however,
very pleased to report that Representative Phil Crane, along
with Representatives Rangel, Romero-Barcelo, Weller and Dunn
have introduced legislation (H.R. 2138) that effectively will
apply the principal objectives of those initiatives, investment
and job growth in the private sector, to the benefit of the
American citizens of Puerto Rico. The Crane/Rangel initiative
is, in your words, Mr. Chairman, ``a proposal to expand
incentives to help the communities which need it most.''
Background
Under the leadership of Governor Pedro Rossello Puerto
Rico's economy has been transformed over the past seven years.
Once dominated by state-run enterprises, most of which operated
at a loss and inefficiently, we are now deeply committed to
growing a diversified private sector and to job creation.
Our efforts have brought Puerto Rico extraordinary results
when compared to our recent past. Traditionally, as was the
case when the Rossello Administration came to power, even with
a high public payroll, we suffered from extreme unemployment,
ranging at times as high as twenty-five percent. Our
infrastructure was badly in need of repair and expansion, and
our economy was in need of diversification.
Our efforts have paid off when compared to our past. We
have sold off most of our state run companies. We have
undertaken major new infrastructure projects, including a
desperately needed mass transit system, a new superaqueduct
which will vastly relieve our chronic water shortage problems,
new roads, and the construction of what will become the largest
World Trade and Convention Center in all of Latin America. We
have also pursued an aggressive local incentives program that
reduces our local tax burden to as little as 2% for companies
investing in some parts of our island.
While the New Puerto Rico represents historic progress for
us, we lag the Nation in the key indicators that this Committee
is concerned with today. Our current rate of unemployment,
approximately 11%, while an all time low for us, is
significantly above the national average. To bring it further
in line with the national average, we must work in a
partnership with the federal government. We cannot do it alone.
In the context of today's hearing, the question is how can
we work together to keep and expand U.S. jobs on U.S. soil?
Section 30A--A Job Creation Credit for Puerto Rico
In 1996, in the context of raising revenue to offset the
impact of a minimum wage increase which applied both on the
mainland and in Puerto Rico, Congress eliminated the only
federal tax program designed to encourage employment and
investment in Puerto Rico, Section 30A of the Internal Revenue
Code.
Under Section 30A, U.S. companies are rewarded for creating
jobs for the American citizens of Puerto Rico by receiving a
federal tax credit against their income from Puerto Rico
operations that is calculated by taking their wages into
account. The more jobs they create, the greater the tax credit.
Under the 1996 changes, Congress limited the credit to U.S.
operations in Puerto Rico in 1995, and no credit was left in
place for new companies, or existing companies planning to
expand into new lines of business. In other words, while
Congress was enacting federal tax incentives to encourage
companies to grow on the mainland, it created, at least at the
federal level, a disincentive for U.S. companies to grow in
Puerto Rico.
While we have pursued an aggressive program in Puerto Rico
to attract new business, we are limited by the lack of new
federal incentives and the caps in existing incentives.
Congress knows only too well that there are limits to what a
local jurisdiction can accomplish, and that is why it has
enacted new tax incentives almost every year for the mainland.
In the context of this Subcommittee's program to lift all
communities, 30A is the best way to expand the private sector
in Puerto Rico.
The effect of Congress' actions in 1996 are significant.
Since 1996, and for the first time in modern history, while we
have generally maintained the presence of our existing U.S.
corporate citizens, it is increasingly difficult to attract
significant new U.S. corporations, and existing companies have
disincentives to create new jobs or replace old equipment.
Puerto Rico is competing against low wage non-U.S.
jurisdictions for future new investments by American employers.
Because virtually every federal commercial, environmental, and
labor law, including the minimum wage, applies in Puerto Rico,
we will have even greater difficulty competing with such
jurisdictions once Section 30A expires. With Section 30A in
place, there is no better jurisdiction outside of the mainland
for U.S. companies to grow.
I want to make very clear that Section 30A does not attract
businesses away from the mainland. Instead, it makes Puerto
Rico competitive with other non-U.S. jurisdictions. U.S. jobs
that do not go to Puerto Rico will leave the U.S. altogether.
The retention and growth of these jobs on U.S. soil is an
important point not just for Puerto Rico and its U.S. citizens,
but for the mainland as well. Puerto Rico is the tenth largest
purchaser of goods and services from the mainland, totaling
approximately $14 billion a year. Moreover, well over 220,000
mainland jobs depend directly on the Puerto Rican economy.
As a result, by including Puerto Rico in legislation to
strengthen communities, Congress would not only give us greater
tools to continue to create jobs and build communities, but
would also insure that the positive benefits of a strong Puerto
Rico on the mainland are also preserved and strengthened.
Minimum Wage Impact on Puerto Rico
The likely additional increase in the federal minimum wage
compounds Puerto Rico's efforts to create jobs. Paradoxically, when
Congress passed the 1996 Small Business Job Protection Act, which
provided tax benefits for businesses affected by the 1996 minimum wage
increase, none of the tax breaks applied to any U.S. business in Puerto
Rico.
It would be extremely unfair and counterproductive to exclude
Puerto Rico once again. Puerto Rico is more affected by the minimum
wage increase than any other American jurisdiction. In fact, because of
lower overall wage levels, approximately 57 percent of the workforce in
Puerto Rico comes within $1 of the minimum wage and would be directly
affected by this increase. Congress should include Puerto Rico in any
offset to the negative effects that a minimum wage increase will have
on its businesses and its economy. The most effective way to do that is
by expanding Section 30A.
The Job Creation Tax Incentive for Puerto Rico
The incentives being discussed today by the nation as a
whole will do a great deal to accomplish the goals of
increasing private sector investment in communities on the
mainland, and if Puerto Rico's political status placed it on a
par with the mainland, they would be effective for us as well.
Regrettably, absent a change in status to statehood, which has
proven time and time again in American history to be the best
growth incentive, we need a program that is designed
specifically for Puerto Rico. Section 30A is the best way to
help us create jobs.
No community development program will be fully successful
if it does not include all Americans communities, including
Puerto Rico. For us, and for Congress, the challenge is to
continue to encourage U.S. employers to maintain and create new
private sector jobs in Puerto Rico. We in the Rossello
Administration, and you in Congress, share a deep commitment to
wherever possible, keep American jobs on American soil.
I look forward to working with you to enact legislation to
encourage job creation and capital investment by U.S. companies
in Puerto Rico.
Chairman Houghton. Thank you very much.
Mr. Lewis?
STATEMENT OF TOM LEWIS, FOUNDER AND PRESIDENT, FISHING SCHOOL
Mr. Lewis. Thank you, Mr. Chairman, members of the
committee. It is an honor for me to be here with you today.
My name is Tom Lewis and I am a retired Metropolitan Police
Officer here in Washington, D.C., a local minister and the
founder and President of the Fishing School. It is an after-
school motivation program that I run in northeast Washington.
I started out many years ago as a police officer working in
schools with children. My job was to go into schools and talk
with children about the jobs of police officers and things we
did to help them and their families. As I talked with these
children from time to time, I would see the one in the third
grade bringing the one in the first grade to school just as
filthy and dirty in the morning, slobbering over each other and
it just kind of broke my heart.
I all too often witnessed the results of that kind of
childhood with children coming to school dressed and looking
like orphans. The result of that kind of thing led to children
growing up involved in robberies, drug addiction and even
murder. I once remember finding the body of a man who had been
dead and the stench of that body for four days, I never smelled
anything like it in my life.
As I began to think about that, I also thought about the
smell, the stench of the other things that were going on within
our communities, the smell of pain and suffering and
degradation. So I wanted to find a way to do something about
it. As victims, the children were being presented as victims
and far too often as perpetrators as time went on.
Through my police work, it became clear that someone had to
do something to rid this community of this kind of poison. I
desperately wanted to help the children but I didn't know what
to do. I didn't know where to begin, I just knew I had to do
something.
In 1985, I purchased a building in a distressed part of
Washington, D.C. on Wylie Street, a street that was said to
have been the worse street in America. When I had that house
there I was trying to help supplement my own income for my own
three children. As I was praying at church I had a vision and I
decided I was going to open that house as a family service
center there in Washington, D.C. It is a rough area and people
though I was crazy for going there but my mind and my vision
drove me there and I decided to do my life's work there.
Taxicabs don't go on that block, pizza delivery trucks don't go
there, police officers don't want to go there. They won't go
there unless they are with someone else.
I named it the Fishing School based on the adage that says,
``If you give a man a fish, it will feed him for a day. Teach
him how to fish and he will feed himself for a lifetime.'' What
we are actually trying to do is fishing in the rivers of the
mind there. We work with about 35 children a day, teaching them
a variety of skills. We help them with homework, deal with
computer skills, give them a warm meal every day, teach them
basic life skills like practicing good manners, showing respect
and practicing self discipline.
The children, despite their chaotic even dangerous
environment, show signs of getting the message, catching on to
kindness and decency and self respect, catching on to hope and
confidence and the joy that comes from learning. Every day more
and more kids on Wylie Street are learning how to fish in the
rivers of the mind.
I wouldn't want to mislead you to believe this is anything
less than a slow and arduous process. Some of the children
still won't even dare to dream. Some of them come to me as
children who have never known a real childhood and real
laughter, to play hopes and gains. The Fishing School offers
them hope, the Fishing School teaches them to dream big dreams
and to work hard to achieve their dreams whatever it may be.
People who don't live in our neighborhood can't understand
the hopelessness that invades the lives of our children. It is
like a thief. They watch the evening news and shake their heads
at those kids in the inner city who join gangs, sell drugs,
bring babies into the world at an alarming rate. They shake
their heads and breathe a sigh of relief that their kids are
safe at home at least, safer in the suburbs and in their
private schools. I don't blame them, I want the same thing for
my children but I want to tell those people who only know the
kids in my neighborhood from what they see in the media, these
aren't really bad kids.
The kids that join the gangs, the girls that have babies
they can't support, are undisciplined, they are reckless, their
behavior isn't moral by anyone's standards but what most people
can't comprehend is that these kids, many of them, have never
been told they have a choice. For many of these children, they
believe it is the only way they can get along or belong, the
only way they can have an identity, the only way they know how
to get along, how to get love and acceptance. They don't know
there is another way.
If you say, but don't they understand this kind of behavior
will ruin their future? The vast majority of them will look you
in the eye and say, what future? It is up to us to give these
kids a future. How do we do that? By giving them hope, by
showing them the world outside their neighborhood.
At the Fishing School we often take field trips to the
museums all over town, Goddard Space Center, we bring them up
here to Capitol Hill to learn about Congress and to the many
other historic landmarks that make our city so rich. We show
them the world of books, bring in volunteers and consultants
who inspire them in a variety of subjects. We teach them about
virtue, self respect and respect for others. At the Fishing
School, we teach them about God and the dignity he bestows on
each one of them.
We often pray for their families and their friends and
their futures. It is all about hope at the Fishing School. I
encourage each child to find his own strength. For the boy who
is good at carpentry, we show him how to build things; for the
children who can write, we encourage them to read their work to
audiences at Borders Book Store. To the young man who wanted to
dance, I found him a tutor and they got him a scholarship at
the Washington School of Ballet. He ended up dancing the
Nutcracker Ballet with Chelsea Clinton before she left town.
So you see I don't just want children to survive; we want
them to strive and go beyond that. I believe our program works
not because we spend a lot of time lecturing kids on the
dangers of drugs. These kids know how dangerous drugs can be.
They have sick and in some cases, dead brothers, mothers and
fathers to prove it. They don't need my lectures. They need my
love.
Mr. Chairman, if you will allow me to continue half a
minute. I believe there is a need for Fishing Schools in every
inner city in this country. My cousin has been trying to open a
school in rural North Carolina and after several years of
trying this, we finally opened it last year.
I got a call from a lady in Dayton, Ohio who wants to open
a Fishing School there. I got a call from a lady who is coming
to Washington the first week in April to look at our school
from Augusta, Georgia. She wants to open a program there.
I believe a program such as we are dealing with here today
can make an honest effort to assist these people who open these
kinds of programs. They can help now if you pass this bill.
Though I recently opened a second Fishing School in my
neighborhood, there are still many other neighborhoods where
another Fishing School is needed and a tax write-off like the
one you are proposing today would provide a tremendous jump-
start.
In fact, as I see it, your proposals are really about jump-
starting programs all over the country just like the Fishing
School. You can turn crack houses into Fishing Schools one
neighborhood at a time until we have a Nation where Fishing
Schools are the norm in our inner cities and crack houses are
the exceptions.
Until we have a Nation where the Pizza man will deliver
pizzas to children on any block in America.
Thank you for your time and patience.
[The prepared statement follows:]
Statement of Tom Lewis, Founder and President, Fishing School
Thank You Mr. Chairman, Members of the Committee. It's an
Honor for me to be here with all of you today.
My Name is Tom Lewis. I'm a 20 year veteran of the
Washington D.C. Metropolitan Police Department, an ordained
Minister and the Founder of the Fishing School--an after school
program for children in northeast D.C.
As a Police Officer, I met hundreds of young people in the
inner-city. As part of my work, I visited D.C.'S Public Schools
on a regular basis. I talked to them about the work I did and I
taught them that Police Officers are their friends, that we're
there to protect them and their families. The kids started
calling me ``Officer Friendly,'' a name that stuck for years.
Many times after I gave a talk, little children would come
up to me and ask, ``would you be my daddy?''
It broke my heart to see so many children--far too many--
with fathers in prison and mothers on drugs. Mr. Chairman, they
were virtually orphans.
In other parts of my police work, I all too often witnessed
the results of that kind of childhood: robberies, drug
addiction, even murder.
I once remember finding the body of a man who had been dead
for four days, killed by another man's bullet. The stench from
that body was repugnant, even painful, but not nearly as
painful as the stench of poverty that emanated from the
community around me; the stench of child abuse; the stench of
crime; of drugs. . .especially where children are involved,
both as victims and--far, far too often--as perpetrators.
Through my police work, it became clear that someone had to
do something to rid the community of this pervasive poison. I
desperately wanted to help the children, but I didn't know what
to do. I didn't know where to begin. I Just knew I had to do
something.
In 1985, I purchased a building on wylie street--a street,
once called the most dangerous street in the United States. God
gave me a vision to turn that house into a place where children
could be safe, where they could study, where they could learn
right from wrong. When people asked (and still ask) why I chose
such a dangerous street, I tell them, ``because it's where
these children live''.
Taxis won't go there. Pizza delivery trucks won't go there.
My brother-in-law, a police officer, won't go there with less
than four officers in a squad car. The fishing school is an
oasis, a haven on wylie street. Even the gang members, a few
doors down, have been told by their leaders to leave us alone.
and they do, because as one of them told me, ``Mr. Lewis, we
know you're doing good things with the children''.
I named it the Fishing School based on the adage: ``Give a
man a fish and you'll feed him for a day; teach him how to fish
and he'll feed himself for a lifetime.'' up to 35 kids crowd
into our cramped building everyday. We have tutors who help
them with their homework and work on their computer skills.
We teach them basic life skills like: practicing good
manners, showing respect and practicing self-discipline. Those
aren't skills adopted readily by any child, much less the child
of a prostitute, the child of a drug dealer, the malnourished
child, the abused child. And yet, everyday, I see tiny miracles
at the fishing school. These children, despite their chaotic,
even dangerous environments, show signs of getting the message.
Catching onto kindness and decency and self-respect. Catching
onto hope and confidence and the joy that comes from learning.
Everyday, more and more kids on wylie street are learning to
fish.
But I wouldn't want to mislead you into believing this is
anything less that a slow and arduous process, and some of the
children still won't eveN dare to dream. Some of them come to
me as children who've never known a real childhood, with
laughter and play and hopes and dreams. The Fishing School
offers them hope. The Fishing School teaches them to dream big
dreams and to work hard to achieve their dream, whatever it may
be.
I once had a banker visit The Fishing School to teach the
children about finances. One little nine year old boy asked
him, ``why are you wearing that suit and tie in this
neighborhood?''
``These are my work clothes,'' the man explained. ``As a
little boy, I was very poor, but I decided when I grew up, I
wanted to make something of myself. So I studied hard and
worked hard and today I'm a banker, and this is what bankers
wear to work''.
And then he looked at the boy and said, ``if you study very
hard and obey your teachers, you can be whatever you want to be
when you grow up''.
``I'm not going to grow up to be a man,'' the little boy
said. ``I won't live that long. I'll probably get shot first.''
Today that boy is fifteen years old. He's a good student.
He plays on a basketball team. I believe he will grow up to be
a man, and a fine one at that. And what's more, he believes it
too.
He has something he didn't have six years ago as a little
boy.. . .he has hope.
People who don't live in our neighborhood can't comprehend
the hopelessness that invades the lives of our children like a
thief. They watch the evening news and shake their heads at
``those kids'' in the inner-city who join gangs, sell drugs,
and bring babies into the world at an alarming rate. They shake
their heads and breathe a sigh of relief that their kids are
safe-or at least safer-in the suburbs and in their private
schools. I Don't blame them. I hope my kids will someday live
in safe neighborhoods, too.
But I want to tell those people who only know the kids in
my neighborhood from what they see in the media, that these
aren't really bad kids. The boys that join the gangs. The girls
that have babies they can't support. They're undisciplined and
they're reckless. And their behavior isn't moral by anyone's
standards.
But what most people can't comprehend is that these kids--
many of them--have never been told they have a choice. For many
of these children, they believe it's the only way they can
belong. The only way they can have an identity. It's the only
way they know how to get love and acceptance. They don't know
there's any other way.
If you say, ``but don't they understand this kind of
behavior will ruin their future?'' The vast majority of these
kids would look at you and reply, ``what future?''
It's up to us to give these kids a future. And how do we do
that? By giving them hope.
By showing them the world outside their neighborhood. At
the fishing school, we often take field trips to the museums
all over town to Goddard Space Center. . .we bring them up here
to capitol hill to learn about congress, and to the many other
historic landmarks that make our city so rich.
We show them the world of books and bring in volunteers who
inspire them in a variety of subjects. We teach them about
virtue. We teach them about self-respect and respect for
others. And at the Fishing School, we teach them about god and
the dignity he has bestowed on each one of them. We often pray
for their families and friends and for their futures. It's all
about hope at the Fishing School
I encourage each child to find his or her strengths. For
the boy who is good at carpentry, I have him help me build
things. For the children who can write, I encourage them to
read their work to audiences at Border's Bookstore. To the
young man who wanted to dance, I found him a tutor. He went on
to join the Washington Ballet where he danced in the Nutcracker
Suite next to the president's daughter. He has now moved to new
york where he has joined the theater. One young lady, just this
year, left for college. She's the Fishing School's first
graduate to go onto college. I expect there will be many more.
You see, I don't just want these kids to survive. I want
them to thrive.
I believe the Fishing School works not because I spend a
lot of time lecturing kids on the dangers of drugs. These kids
know how dangerous drugs can be. They have sick-and in some
cases dead--brothers and mothers and fathers to prove it.
They don't need my lectures. They need my love. Tough love
at times, but love just the same. Over 97% of the children who
come to the Fishing School have no fathers in their home. I'm
the only father many of them will ever know. And I take the
responsibility very seriously. Their achievements and failures
affect me just as much as if they were my own flesh and blood.
Everyday, I help each child focus on his or her gifts and
talents and abilities. Just because a child is poor, doesn't
mean he's bereft of god-given talent. But what is often the
case, the child is without anyone who will unleash that talent
and encourage him, encourage her to cultivate that talent. at
the fishing school, we do this everyday, and everyday we see
results both large and small.
I believe that there is a need for a fishing school in
every inner-city of this country. My cousin has been trying to
open such a school in rural North Carolina for several years.
Like most people with the will and the interest to open this
type of school in a depressed neighborhood, my cousin lacked
the money and thus had to wait until the right opportunity came
along. For her, it came recently in the form of an old
dilapidated gas station which was donated by someone in the
neighborhood. This facility, like the one that was donated to
me for one of my schools, is sorely in need of repair before it
can really provide the benefit intended for the children. If
the HR. 815, the American Community renewal act of 1999, and
the proposed new markets incentive were to pass, costs for the
start-up of these types of schools could be minimized by as
much as 35,000 dollars. Specifically, the current proposals
would allow persons who attempt to start a Fishing School
program to spend 35,000 dollars--tax free--to equip and furnish
the school.
I know up here on Capitol Hill, where you talk in terms of
billions of Dollars everyday, a number like $35,000 sounds
small.
But Mr. Chairman, to someone like my cousin, and others
like her, $35,000 could mean the difference between starting
and actually running an effective Fishing School and just
dreaming about it.
Thirty-five thousand dollars can buy several computers,
faxes, copiers and desks. It would buy needed books and kitchen
equipment for those of us who feed the children. It sure would
have helped when i got started ten years ago.
And it can help now if you pass this bill. Although I
recently opened a second Fishing school in my neighborhood,
there are still many other neighborhoods where another Fishing
School is needed and a tax write-off like the one you are
proposing here today would provide a tremendous jump start. In
fact, as I see it, your proposals are really about jump-
starting programs all over the country, just like the Fishing
School.
You can help turn crack houses into Fishing Schools. One
neighborhood at a time, until we have a nation where Fishing
Schools are the norm in our inner cities, and crack houses are
the exception.
Until we have a nation where the pizza man will deliver
pizza to children on any block in america.
Thank you for your time and god bless you.
Chairman Houghton. Thanks very much, Mr. Lewis
Mr. Cade?
STATEMENT OF WILLIE CADE, PRESIDENT, COMPUTERS FOR SCHOOLS
ASSOCIATION, CHICAGO, ILLINOIS
Mr. Cade. Thank you, Mr. Chairman.
I want to give you a perspective of what it means to have
donated computers in our school systems today from two
perspectives. First, from the point of view of Chairman of the
national association where we have 30 programs in States all
over the U.S. that are donating used computers to schools and,
from my own personal experience as the person in Chicago who
does it.
Over the last nine years, our program has donated over
77,000 computers in 30 States in the United States. I am here
to testify about some legislation that can actually help us get
our job done. There are some amazing statistics in my mind when
we get to our school systems and the computers that are in the
schools.
Probably the most amazing one to me right now is that the
computers in schools today on average are seven years old. If I
was to look at a computer in my own private business that was
seven years old, I would scrap it.
Our goal, with this legislation, is to encourage businesses
to donate newer computers relative to the seven year old,
computers that are less than three years old. It is codified in
H.R. 2308 here at the House.
Our process would do three basic things with the new
legislation. It would expand the currently existing 21st
Century Classroom Act and it would expand it by adding one more
year of eligibility on donated equipment for the tax benefit.
It would include organizations that are now not included.
Finally it would create an enhanced tax credit.
In 1999, there were 45 million computers that were
delivered to industry or homes in the United States. This year,
it is expected that 54 million computers will be installed.
That is over 100 million computers in the last two years alone.
If we can capture a mere percentage of that, in two years we
would be able to supply the 12 million plus computers that will
be required in our school system to make them technologically
sound. That does include, by the way, all of the 107,000
schools that are in our country today.
I know today our hearings are specifically about
empowerment zones. Most of the computers that I donate or work
with in schools are computers that actually go into schools
where students don't have a chance to have computers. An
example that I saw last week was a school of 600 children on
the west side of Chicago where the last three years the
principal had locked up the computers because he didn't want
them stolen. When I looked at the computer he was protecting, I
suggested to the new staff at that point they probably should
be stolen, that they were technology that had been around since
1980.
It is estimated that 50 percent of our labor force is going
to be involved in the technology area in a few short years. It
takes five years for teachers to actually integrate technology
into their classrooms. We have done a marvelous job of getting
Internet to the schools in the last four years. Currently 95
percent of schools in the U.S. have an Internet connection.
Unfortunately though, most of them don't have computers to
connect to those wonderful T1 lines that are there. So I can go
into the City of Chicago and find a T1 line, which is the
equivalent of 24 telephone lines and find three computers
connected to it.
We need computers in our schools in a big way. If we waited
and bought new equipment at our current budget levels, it would
take us 17 years to get the equipment there. I assume Congress
and the rest of us are very sensitive with our dollars and I
therefore assume level funding. If we do it with used
computers, we could do it in two to three years.
The bill would encourage Pentium II level technology
donations. Right now our minimum standard is a Pentium system
operating at approximately 75 megahertz. That makes machines
that are very well received in the schools.
I will stop at this point because my time has expired.
[The prepared statement follows:]
Statement of Willie Cade, President, Computers for Schools Association,
Chicago, Illinois
Thank you for the privilege of addressing you on what I
consider legislation valuable for the future of our country. I
would like to begin by wholeheartedly thanking Congressmen
Portman and Becerra for their strong support of this
legislation. I am among the many students, parents, teachers
and friends of education most grateful to Congressmen Portman
and Becerra for their sponsorship of this far-sighted
legislation and their championing of better technology in our
schools, particularly schools located in empowerment and
enterprise zones and on reservations.
My name is Willie Cade. I am the president of the Computers
for Schools Association. I am responsible for the computer
donation program called ``Computers for Schools'' in states and
communities across the country.
The Computers for Schools Association has taken over the
computer donation program initiated and run until recently by
the Detwiler Foundation. The program refurbishes computers
being retired from businesses to use in schools, places where
the level of technology continues to lag significantly behind
the business standard. Unofficially, we are the nation's single
most productive source of donated computers to schools. We have
facilitated donation of more than 77,000 computers in 30
states. Today I am here to testify about legislation that could
vastly improve the educational environment of children located
in some of our poorest areas.
The 21st Century Classrooms Act, part of the Tax Relief Act
of 1997, was an attempt to enhance computer donations with more
and newer technology. It provides businesses with an enhanced
tax deduction for donation of equipment two years old or less.
Unfortunately, the promise of the Act has not been
fulfilled. We at Computers for Schools have received more than
a thousand calls regarding the Act and have worked with dozens
of companies eager to put it to use. Most could not....for
three primary reasons: the two-year provision did not fit their
equipment use cycle, the provision was limited to original
acquirers and the deduction enhancement did not provide
significant incentive. In general, a business buys a computer
with a three-year life cycle in mind. Asking business owners to
donate equipment before that cycle is complete essentially asks
them to take a loss on their equipment investment. Many in a
position to donate-those with accelerated equipment use
patterns-still found that the deduction provisions in the Act
did not adequately compensate them for the loss of revenue they
could receive by getting a fair market price for the machines.
Before us today is the New Millennium Classrooms Act, which
builds on the foundation laid with the 21st Century Classrooms
Act. It is our opinion at Computers for Schools that the New
Millennium legislation will take us closer to accomplishing the
intent behind the 21st Century Classrooms Act. Several elements
of the bill are key in this regard; it expands the window
through which donations can be made from two years to three and
it provides for a more straight-forward tax credit for eligible
donations -a tax credit that could be converted to a deduction
to achieve the same effect. Additionally, the credit-30 percent
for donations for unspecified direction-will rise to 50 percent
when the donation is designated for enterprise or empowerment
zone schools. This legislation also helps us expand the group
of eligible donors and thus raises the potential for the
significant donations intended. Lastly, the New Millennium
Classrooms Act extends the law for 3 more years -current law
will sunset at the end of this year.
The question before us today is whether reconditioned
computers can play a significant role in getting current
technology (multimedia capable) into the neediest classrooms.
In 1999, 45 million new computers were sold in the United
States. This year it is expected that 54 million computers will
be installed. Assuming 50% of these computers were replacing
systems currently in use, if we captured 15% of those
replacement systems, we could put the number of needed
computers in all our schools in three years. Unfortunately,
donations of current technology are in the low single digits.
The legislation will encourage the capturing of these
computers, helping us to meet our goals, particularly in the
most needy schools -those in enterprise and empowerment zones
and on reservations.
Ladies and gentlemen of the committee, the legislation you
are considering has the power to alter lives. I don't have to
tell you we live in a world increasingly dependent on
technology. By the year 2006 it is estimated that 50% of our
labor force will work directly or indirectly in information
technology. Our children and our society must be prepared for
that world as thoroughly as is within our power. This is about
life options-the ability and capability of students to make
positive choices about who they are, what they can do and who
they will become.
The New Millennium Classrooms Act helps open those options.
The case for computer-aided teaching and its positive impact on
academic achievement grows stronger every day. Secretary of
Education Richard Riley emphasized the importance of technology
in education. He noted that with an expectation of 70 percent
growth in computer and technology-related jobs in the next six
years, students who can use technology effectively will be in
the best position to build rewarding careers and productive
lives. But, children not exposed to technology will grow
increasingly disenfranchised. All this while recent studies
show that there is an increasing number of children who are
being left behind.
Consider that children from lower income areas and many
disadvantaged minority children, children less likely to have
computers at home, are unfortunately also less likely to have
computers in their schools. A recent National
Telecommunications and Information Administration study shows
that with regard to computers, the gap between White and Black
households grew 39% between 1994 and 1998. With regard to
Internet access, the gap between White and Black households
increased by 37.7% between 1997 and 1998. Additionally there
was a 73% gap in ownership between families earning less than
$15,000 and $35,000.
At the same time, studies show that schools with 81 percent
or more economically disadvantaged students as defined by
federal education Title I eligibility, have one multimedia
computer for every 32 students while a school with less than 20
percent economically disadvantaged will have a multimedia
computer for every 22 students. Schools with 90 percent or more
minority students have one multimedia system for every 30
students.
Now consider that the very students with the least
technology available to them are the ones who can be helped
most by its use. This was borne out by a recent City University
of New York study that noted dramatic increases in test scores
for disadvantaged students once computer-aided instruction was
introduced or increased in their curricula. Computers are
patient, persistent and operate with total equanimity. These
characteristics have special relevance for disadvantaged youth
growing up in tough, often less-than-nurturing surroundings.
These are also the very youth helped most by this legislation
because of its incentive clause to encourage equipment
donations where they are needed most, to enterprise and
empowerment zones. The New Millennium Classrooms Act is an act
of empowerment.
Even outside the target zones delineated in the bill, our
schools stand in dire need of technology upgrading. Depending
on which figures you look at, our current students-per-computer
ratio across the country is ten or 11 to one. That's about ten
students for each computer. But that ratio includes millions of
woefully substandard machines; 386's, 286's, Apple IIe's, even
old 8086's and Commodore 64's. The best that can be said about
these systems is that they're a step above typewriters, but
even that statement is suspect. Getting serious, up-to-date
education software installed on any of these is out of the
question.
While that ten-to-one ratio of students per computer may
sound promising, it needs to be put in another context.
Statistics by the Educational Testing Service show a much lower
students per computer ratio for multimedia computers.
Multimedia computers are the type that provide adequate access
to the Internet and to the kind of software that teachers find
useful as teaching tools. The students-per-multimedia computer
ratio increases even more in lower income districts. In an
Educational Testing Service study conducted just a few years
ago, the ratio of multimedia computers to students in lower
income school districts was 1 computer to 32 students. This,
while the Department of Education recommends that the optimal
ratio of students per computer is five to one.
The New Millennium Classrooms Act would spur the donation
of nothing older than Pentium II generation technology. This
raises the bar in our schools where the average machine today
is a circa 1993 model. If enacted, New Millennium accepts
nothing built prior to 1997 and keeps that standard moving
forward with the calendar.
In addition to its direct impact on teaching and learning,
this bill provides other benefits to help us better prepare for
the next century.
The Rand Institute estimates it will cost about $15 billion
to provide US schools with the technology necessary to educate
our children for the future. New Millennium helps us stretch
the funds available, providing more opportunities for other
critical technology needs such as teacher training,
infrastructure and curricular software.
As we approach a preferable level of technology in our
schools, this bill lets us do so in a cost-effective manner-
easing pressure on federal and state budgets. I want to be
clear; we do not advocate this legislation as a replacement to
state and federal technology expenditures. This is, however, a
way to limit the inflation of that spending. Many of you have
already noted that a time of better budget health is also a
time to be more mindful of spending. From a cost-benefit
perspective, New Millennium helps keep the pulse of spending
more even and secures more for less in the process.
New Millennium also triggers more business interest and
involvement in our communities and our schools. I am not here
to discuss the extent and nature of that involvement--that is
for local schools and communities to decide. But the Act gives
businesses another tool through which they can contribute to
their communities. In the process those businesses are not
penalized financially when they concentrate their giving on
empowerment and enterprise zones. The Act also encourages the
most environmentally sensitive of recycling options...re-use.
This Act also has Welfare to Work and workforce development
implications. In our work, Computers for Schools is partnered
with numerous refurbishing facilities where trainees are the
chronically underemployed or unemployed. To give one example,
our donations in New Jersey, which go through four state
community colleges, are refurbished and outfitted for schools
by former welfare recipients. They are learning skills that can
move them so far ahead it turns welfare checks into distant
specks in their rear-view mirrors.
Other trainees through our program include inmates at
correctional facilities, students in vocational and technical
schools and those in high schools and even middle schools. For
all of them, the equation is the same; exposure to the current
technology only enhances their training, making them more ready
for key certifications such as A+ and MCSE or Microsoft
Certified Systems Engineer. These skills are in high demand.
They can make the transition from welfare to work, or crime to
work, permanent. But it doesn't happen without the opportunity.
As we see it at Computers for Schools, opportunity is what
the New Millennium Classrooms Act is all about. First and
foremost, it opens a world of opportunity to students and
teachers in the classroom. It gives local, state and federal
budget makers the opportunity to extend their tight dollars.
For business it's an opportunity to contribute to students and
communities without being penalized in the process. And we have
just noted how this legislation can help trainees.
The Community Reinvestment Act is about creating
opportunity in areas long left outside the economic growth and
success of America. The New Millennium Classrooms Act adds to
the benefits of this bill by providing an opportunity to give
the children in these areas access to technology in their
schools and libraries. This access can be the great equalizer,
but without it, we stand to disenfranchise our most vulnerable
children and alienate them from the opportunities that could
change their lives. The least we can do for these children, the
future generation, is give them all the positive tools at our
disposal to help them meet the challenges of the 21st Century.
The New Millennium Classrooms Act does that.
Thank you.
Chairman Houghton. Thank you very much.
Mr. Coyne? Mr. Portman?
Mr. Portman. I appreciate the testimony of all three
panelists. Mr. Lewis, God bless you for what you are doing with
the Fishing School. I am from Cincinnati and you mentioned
somebody from Dayton might be coming to talk to you. I know
some folks in Cincinnati who might be interested as well and I
want to get your card afterwards or whatever information you
have.
Mr. Cade, as you know, the nexus here between the
enterprise zones and the empowerment zones and the computer
bill is that we give an enhanced credit if the donation is made
to an enterprise zone, an empowerment zone or to an Indian
reservation. It goes from a 30 percent credit to a 50 percent
credit. Therefore, it does target schools that you have talked
about, like the school in Chicago that really needs the help
the most and really doesn't have the resources to go out and
get the technology that is needed to allow these kids to be
able to experience what they are going to need out in the real
world in terms of high technology.
I have a few questions for you if I could go through them
quickly in the time that I have because there have been some
concerns raised about this legislation. As you said, it is
competing with everything else and we want to be sure the
dollars we provide through tax incentives are targeted and well
spent.
There was an article in the Washington Post recently that
addressed computer training for teachers. Do you think this
legislation, H.R. 2308, addresses the issue of teachers not
having adequate training to be able to effectively teach with
computers?
Mr. Cade. Absolutely. First, let me thank you for your work
on this bill and specifically H.R. 2308. It has been a great
help to us.
One of the things we do with our donated computers is
actually provide them for teachers in their homes so that they
can operate on a personal basis with this. The only way I know
to really learn today's technology is to have it in your home
and have it be something you find personally useful. So we
provide them to the teachers, they can take them home, and that
is the only way it is going to really work in terms of teachers
being trained on technology.
Mr. Portman. The other thing we have talked about with your
organization and with schools is they have a technology budget
and if they can get some of the hardware, then they can spend
more money on the Internet wiring, training or other things.
They don't have room in the budget for the whole thing, so what
you are doing in Chicago and around the country is allowing
them to do more with regard to training.
Current law does provide for two year computers but not
three year computers and there has been some back and forth on
that. Could you address the criticism that this change would
allow for donations of three year computers that would be out
of date?
Mr. Cade. The current technology that is three years old is
a Pentium II system running at 266 megahertz. Those are the
kinds of systems that frankly are wonderful systems to have.
They run every piece of software I know of in terms of the
educational environment. As a matter of fact, when we go in
with a Pentium 100 system, we are considered heroes. So this
legislation actually goes beyond that and provides even a
higher standard that we hope to attain with all of our
donations.
Mr. Portman. I appreciate that. I think that is true and I
think the current law is just a little too restrictive. Why not
make it three years. I just upgraded myself to that Pentium II.
It is a huge difference and many schools are working not just
with a Pentium but even earlier technology that a three year
computer would be well received as you said.
There has been this sense that this legislation would make
it more lucrative for a company to donate a computer than to
sell it on the resale market. Can you talk about that?
Mr. Cade. My suspicion is that actually won't and I looked
at the numbers, but it will actually give them a sufficient
incentive to donate it to the schools. Right now there is just
not enough of an incentive to do that en masse. There are a few
individual corporations who do it but if we can get more and
more to do it, it would help us enormously, especially given
the task.
The other thing I might mention is our national goal has
been to get five students for every one computer. We need to
not lose sight of the fact that once we accomplish that goal,
we have to repeat it again and again and again because of the
nature of technology which changes so fast.
Mr. Portman. The final question and I will pose it more as
a rhetorical question. There has been the sense we don't want
to force these schools to take computers they don't want. Is
any school forced to take a computer they don't want, or any
library or anybody else?
Mr. Cade. Sir, I don't have time to deal with schools that
don't want computers, I have so many who do. I have never heard
of one that doesn't.
Mr. Portman. Obviously they don't have to accept the
donation. Some schools aren't going to want them, some schools
may have more hardware than they need but less of something
else and may need something else like training or wiring.
Thank you very much for what you do around the country, and
your organization. We hope we can expand this particularly into
those communities that need it the most.
Chairman Houghton. Thank you, Mr. Portman.
I just have a few questions. Mr. Cade, it is a fascinating
program you are involved in. Several friends of mine and myself
have been giving computers to a school in Zimbabwe. We don't
care whether they go back to 1980; any computer in the schools
there is very, very helpful, but I understand what you are
saying. The Tax Relief Act of 1997 was of help.
Mr. Romeu, tell us a little bit about Section 30(a) prior
to 1996?
Mr. Romeu. Prior to 1996, Section 30(a) was available to US
companies with Puerto Rico operations starting in 1994 through
October 13, 1995. A number of companies in Puerto Rico elected
Section 30(a) status. Section 30(a) was not available after
October 13,1995 for new companies and new Puerto Rico
operations. Although a number of companies including, among
others, Sara Lee from the State of Illinois, have used Section
30(a), they are not able to make use of that section for new
lines of business that were not in Puerto Rico in 1995. This is
because not only is it being phased out with Section 936 until
2005, but it is not available to companies who are Section
30(a) and who want to bring in new operations and new lines of
businesses to Puerto Rico. If they do, the Section 30(a)
benefits are eliminated completely.
As it stands right now, there are a number of corporate
citizens that do well that can't compete with other foreign
jurisdictions with Section 30(a) because they will lose that
incentive as of 2005 and there will be severe income cap limits
in 2002.
Chairman Houghton. Thank you very much.
Mr. Lewis, I don't have any questions for you but I think
that was as compelling testimony as I have ever heard here and
I thank you very much for it. I also thank you for the fact you
weren't given very much time to prepare. You are a good sport
and you are very articulate. If you could give me some more
information on this individual in Augusta, Georgia, that would
help me tremendously.
Mr. Lewis. Yes, sir. I do have that information.
Chairman Houghton. Good. That is wonderful.
Are there other questions? Mr. Portman? Commissioner?
[No response.]
Chairman Houghton. Thank you again, so much for this great
help this afternoon.
There being no further business before the subcommittee,
the hearing is adjourned.
[Whereupon, at 4:39 p.m., the hearing was adjourned.]
[Submissions for the record follow:]
Association of American Railroads
Washington, DC 20001
April 4, 2000
Dear Mr. Chairman:
The Association of American Railroads (AAR) submits the following
comments in connection with the hearing held by the Subcommittee on
Oversight of the Committee on Ways and Means on Tuesday, March 21, 2000
concerning tax incentives to assist distressed communities. AAR asks
that the comments be made a part of the hearing record.
Background
Freight railroads move just about everything--from lumber
to grain, from chemicals to scrap iron, from orange juice to
new automobiles. Overall, railroads carry more than 40 percent
of U.S. intercity freight, including 64 percent of the coal
shipments which are used to generate 36 percent of our nation's
electricity.
In 1998, Class I railroads operated 20,250 locomotives
across a network of more than 132,000 route miles.
Collectively, these locomotives consumed 3.6 billion gallons of
diesel fuel transporting freight at a total cost of more than
$2 billion.
Higher Diesel Prices
In recent months, railroad diesel fuel prices have risen
by more than 80 percent, causing the cost of fuel to jump
sharply for an industry which is already highly energy-
intensive. This rise is attributable to a considerable
tightening in world oil markets during the last year as OPEC
and other exporting countries have cut production.
As a result, on an annualized basis, railroads today are
paying about $1.3 billion more for fuel than they were just 12
months ago. Placing this into perspective, $1.3 billion
represents the equivalent of 700 new locomotives or double
tracking some 1400 miles of rail line. These higher fuel costs
have significantly reduced railroad cash flows which are
essential to sustain the substantial capital investment
required by the industry. More important to the subject matter
of the Subcommittee's hearing, a portion of these increased
fuel costs are passed along to freight shippers and other
railroad customers, including agricultural communities.
Distressed Communities
Our nation's rural farming communities, many of which are
located in economically disadvantaged areas, are highly
dependent on efficient and economical methods of transportation
to move their agricultural produce to market. Railroads
transport the bulk of agricultural goods to market in the
United States. The higher transportation costs attributable to
the dramatic rise in diesel fuel have equated to lower profits
for our nation's farmers, as well as lost sales in both
domestic and foreign markets.
Proposed Legislation
One solution to help reduce the burden of high fuel costs
on both economically distressed farming communities and the
nation's railroads would be to enact H.R. 1001, the
Transportation Tax Equity and Fairness Act. This legislation,
which is pending in the House Committee on Ways and Means,
would repeal the inequitable 4.3 cent-per-gallon deficit
reduction motor fuel excise tax that is currently imposed on
the nation's railroad and barge industries. This unfair tax is
exacerbating the impact of higher fuel prices both on the
railroad industry and its customers in economically
disadvantaged communities. The measure would allow distressed
farming communities to improve their profit margins which have
been squeezed due to increasing diesel fuel costs and enhance
the railroad industry's ability to keep shipping rates
reasonable, while it continues to invest in necessary equipment
and infrastructure improvements.
The American Farm Bureau Federation, the American Soybean
Association, National Association of Wheat Growers, National
Corn Growers Association support efforts to repeal the 4.3
cent-per-gallon deficit reduction motor fuel excise tax to help
revitalize distressed farming communities.
AAR is pleased that Congress recognized the importance of
repealing the 4.3 cent deficit reduction fuel tax last year by
passing the measure as part of the Taxpayer Relief Act of 1999.
Unfortunately, the President vetoed the legislative package for
reasons unrelated to this issue.
Mr. Chairman, AAR thanks you for agreeing to cosponsor
H.R. 1001 and urges enactment of the measure in the second
session of the 106th Congress.
Sincerely,
Edward R. Hamberger
President and Chief Executive Officer
Statement of Hon. Phil English, a Representative in Congress from the
State of Pennsylvania
Dear Chairman Houghton:
I would like to commend you for scheduling a hearing to
address the issue of tax incentives for distressed communities.
As such, I would like to bring to your attention a proposal to
provide favorable tax treatment for qualified urban housing
fringe benefit programs.
As you may be aware, a number of urban colleges,
universities and hospitals are endeavoring to stabilize
distressed or transitional urban neighborhoods by providing
financial incentives to employees to purchase, renovate, and
occupy houses in those neighborhoods. These programs, which
have been very well received in the communities where they are
offered, are intended to promote stability by stimulating
housing demand, increasing the investment in maintenance of
owner-occupied housing and keeping the middle class households
within city boundaries.
I have introduced legislation, H.R. 3389, to stimulate and
encourage neighborhood revitalization in our communities by
excluding such housing incentives from taxable income of
employees who purchase and occupy housing in distressed
neighborhoods. I feel that excluding such benefits from income
for tax purposes would make them more attractive to employees
and thereby help to build and strengthen communities. In
addition, by increasing the value of the housing incentives,
the proposed benefit would increase employee participation in
existing programs and encourage other institutions to establish
similar programs.
The benefit of this proposal would be capped at $25,000,
and indexed for inflation. H.R. 3389, however, would not
delineate the form or scope of incentives that employers may
offer. In particular, this proposal would not limit
participation on the basis of compensation, as urban renewal
strategies should seek to attract employees of all income
levels.
I would appreciate your consideration of this proposal, as
I believe it represents a way in which the federal government
can be instrumental in addressing the challenges of
revitalizing distressed communities. Thank you again for
holding a hearing on this very important issue. I look forward
to working with you in the future.
Sincerely,
Phil English
Member of Congress
Statement of F. Barton Harvey III, Enterprise Foundation, Columbia, MD
Introduction and Overview
The Enterprise Foundation appreciates the opportunity to
comment for the printed record of the Oversight Subcommittee's
March 21 hearing on tax incentives to assist distressed
communities. We commend Chairman Houghton and the rest of the
Subcommittee for recognizing the importance of providing
targeted tax benefits to encourage investment in communities
yet to share in our nation's historic economic prosperity.
The Enterprise Foundation is a national nonprofit
organization founded in 1982 by Jim and Patty Rouse. Our
mission is to see that all low-income Americans have access to
fit and affordable housing and the opportunity to move up and
out of poverty into the mainstream of American life. Working
with public and private partners, the Foundation provides low-
income people with decent affordable homes, safer streets and
access to jobs and child care. We have raised and invested more
than $3.2 billion in loans, grants and equity to build or
renovate 107,000 apartments and houses. Through our employment
network we have placed more than 30,000 people in permanent
full-time jobs.
We view revitalizing distressed communities as both a moral
obligation and a market opportunity. It is, we believe, a moral
obligation of a just society to assure that all its citizens
have the opportunity to participate fully in that society. It
is also a market opportunity because the very places that are
most cut off from the mainstream of our society are also the
largest untapped domestic markets for American business
investment and expansion. President Clinton's New Markets Tour
last summer demonstrated both propositions. I was honored to
join the President on that tour, to visit examples of
Enterprise's work in the Watts neighborhood of Los Angeles and
the Pine Ridge reservation in South Dakota.
This statement focuses on two proposals the Subcommittee
is considering in connection with its March 21 hearing:
increasing the Low Income Housing Tax Credit (Housing Credit)
cap and enacting the New Markets Tax Credit (New Markets
Credit). The Enterprise Foundation strongly supports both these
proposals and we urge Congress to include them in any tax bill
it passes this year. Before discussing these proposals,
however, we would like to comment on why we believe now is the
time to provide these and other tax incentives to revitalize
America's distressed communities and give a brief overview of
the unique and essential role nonprofit community development
groups play in community revitalization efforts.
Now is the Time to Invest in America's Distressed Communities
No one would dispute that we are living in a period of
unprecedented economic prosperity for many Americans. No one
would dispute either that some areas of our nation have yet to
experience that prosperity. And few would dispute that one of
the best ways to assure that our prosperity continues is to
expand it to include those who so far have been left behind.
Assuring all Americans the opportunity for decent housing,
good jobs and stable communities should not be a partisan
political issue. We were heartened by Speaker Hastert and
President Clinton's commitment to find common ground on how
best to bring new investment and new tools to our nation's
distressed communities. The principles of Speaker Hastert and
the President's shared commitment were eloquently articulated
and are worth repeating:
1. The Administration and the Congress should work in a
spirit of good faith to develop a bipartisan effort to bring
capital and new tools to the impoverished urban and rural parts
of America so that individuals who live there will be empowered
to renew their communities and develop new markets of economic
opportunity.
2. Since these solutions need to come from within these
distressed communities, both political parties need to put
aside politics and ideological constraints, and participate in
a process that focuses on solutions that can work in those
communities without being subject to waste or abuse.
3. We believe that there are significant untapped new
markets in both rural and inner city communities, which have
unique competitive advantages, that, given the tools, can
enable individuals in those areas to renew their communities.
4. To accomplish that, our goal is to responsibly and
effectively empower impoverished communities with new equity
capital, tax incentives and other tools needed to address these
problems within their neighborhoods, nurturing new enterprises
while providing private sector and government resources to
empower communities to solve their long term problems.
5. These economic incentives must be seen as a complement
to other efforts to strengthen education, housing, crime and
drug-abuse reduction.\1\
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\1\ ``Shared Commitment to Empower America's Impoverished
Communities,'' Statement by the Press Secretary, The White House,
November 5, 1999.
---------------------------------------------------------------------------
We wholeheartedly agree with those principles. Given this
commitment by the Speaker and the President to work together,
we believe bipartisan agreement on a community revitalization
bill is possible this year. We urge members on both sides of
the aisle to take advantage of that opportunity. For if we do
not seize the opportunity now, when our economy is stronger
than ever before, when will we?
Nonprofit Community Development Groups Are Revitalizing Communities
It has been said that no social problem in America is not
being solved by someone somewhere. Very often, that someone is
a resident of a low-income community, working in or with a
community development group to bring hope and opportunity to
their neighborhood. Community development groups come in
countless shapes and sizes and vary widely in scope and
sophistication. They may be faith-based, established by a
church or synagogue. They may be bank-sponsored, set up by a
lender. They may be government-created or they may have grown
on their own from indigenous block clubs, community
associations and other neighborhood civic groups. They may
focus on one activity, such as developing affordable housing,
or several, such as economic development, social services and
community organizing.
Despite and far more important than their differences, most
community development groups share a few important
characteristics. First, most are nonprofit, as their missions
do not emphasize making money for themselves. Second, they are
located in and accountable to the neighborhoods they serve.
Third, like successful small businesses, they are
entrepreneurial and creative, since tackling society's toughest
problems on tight budgets demands it. Fourth, they work most
effectively in partnership with other private sector,
government and nonprofit intermediaries, such as The Enterprise
Foundation, committed to community revitalization. Enterprise
works with nearly 1,500 nonprofit groups in 550 communities
nationwide.
Ultimately, nonprofit community development organizations
are indispensable because they do what neither the public nor
the private sector can or will do alone. Recent research
indicates that there are more than 3,600 of them. Their
achievements, in the toughest communities in America, are
nothing less than extraordinary. These groups have produced
approximately 550,000 affordable homes and apartments. They
have provided nearly $2 billion in financing to almost 60,000
small and large businesses and developed 71 million square feet
of commercial and industrial space. And they have created
nearly 250,000 jobs.\2\
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\2\ National Congress of Community Economic Development, 1999
Community Development Census, as excerpted in 2000 Advocate's Guide to
Housing and Community Development Policy, National Low Income Housing
Coalition, p. 6 and p. 14.
---------------------------------------------------------------------------
The Subcommittee is considering a variety of thoughtful,
worthy proposals from members of both parties. All have merit
and we commend their congressional sponsors and advocates for
their intent. The remainder of this statement will focus on the
two proposals that we believe would generate the most
investment in distressed communities: increasing the Housing
Credit cap and enacting the New Markets Credit. We urge the
members of this Subcommittee and all members of Congress to
strongly support including these two proposals in any tax bill
Congress passes this year.
Increasing the Low Income Housing Tax Credit Cap
In our view, any discussion of tax incentives to revitalize
distressed communities, and, indeed, any comprehensive
community revitalization tax bill, must start with the Housing
Credit. Housing alone cannot turn around most distressed
neighborhoods. But a decent, affordable place to live is the
foundation for fighting poverty and disinvestment. Housing
provides family stability, spurs additional investment and
provides a tangible sign of hope to a community.
The Housing Credit is one of the most successful federal
housing programs ever created. The more than one million homes
the program has helped finance since its creation in 1986
account for virtually all the affordable apartments produced in
this country since then. Three years ago, this Subcommittee
held hearings on the General Accounting Office's (GAO's)
exhaustive examination of the program. That examination--
perhaps the most extensive ever undertaken by GAO--showed that
the vast majority of Housing Credit properties serve lower
income tenants, paying lower rents, for longer periods of time
than required by law. The report further showed that Housing
Credit developments are well maintained, managed and monitored
for compliance with the strict requirements of the law.
Our Housing Credit investment subsidiary, The Enterprise
Social Investment Corporation, has committed over $3 billion in
private sector equity that has or will produce over 77,000
affordable apartments in distressed communities nationwide.
This massive infusion of capital would not have been possible
without the Housing Credit. In addition to financing
desperately needed homes, generating jobs and fueling local tax
bases, Housing Credit development sends a powerful signal that
a community is coming back. This new investment has a powerful
catalytic effect, inspiring confidence and triggering other
investments in the neighborhood.
The only problem with the Housing Credit is that it cannot
nearly keep up with the need for affordable housing in this
country, especially in distressed communities. The annual
Housing Credit cap, $1.25 per capita in each state, has never
been adjusted since the program was created in 1986. As a
result, inflation has cut the Housing Credit's purchasing power
in half. Meanwhile, demand for decent, affordable apartments
has exploded. Nearly five and-a-half million low-income
households pay more than half their income for rent and/or live
in dilapidated housing. Every year, tens of thousands of
affordable apartments are demolished or converted to market
rate use. It is no surprise that demand for Credits outstrips
supply by more than three to one in most states.
Huge majorities of both houses of Congress and President
Clinton have recognized the urgent need to update the Housing
Credit for inflation and protect it from future erosion. Nearly
85 percent of the House--369 members--has cosponsored
legislation (H.R. 175) sponsored by Mrs. Johnson and Mr. Rangel
to increase the annual Housing Credit cap to $1.75 per capita
and index it to inflation. The Enterprise Foundation sincerely
thanks Mrs. Johnson and Mr. Rangel for their leadership on this
vital piece of legislation. We also thank Senators Mack and
Graham for their leadership on an identical Senate bill (S.
1017) to increase the Housing Credit cap. That bill has 77
Senate cosponsors. Finally, we thank President Clinton for
proposing to increase the Housing Credit cap in his last three
annual budgets.
Enacting the New Markets Tax Credit
All businesses need equity to succeed, especially those
trying to make it in distressed communities. Consider the
following recent comments by Federal Reserve Board Chairman
Alan Greenspan:
"An important key to the success of small and large
businesses is having access to capital and credit. Credit alone
is not the answer. Businesses must have equity capital before
they are considered viable candidates for debt financing.
Equity acts as a buffer against the vagaries of the
marketplace. . .Continued efforts to develop the markets for
private equity investments will be rewarded by an innovative
and productive business community. This is especially true in
lower income communities, where the weight of expansive debt
obligations on small firms can severely impede growth
prospects.'' \3\
---------------------------------------------------------------------------
\3\ ``Changes in Small Business Finance,'' Remarks at the Federal
Reserve System Research Conference on Business Access to Capital and
Credit, Arlington, VA, March 9, 1999.
---------------------------------------------------------------------------
Using the Housing Credit and other tools, nonprofit
community development groups have shown they can produce high-
quality affordable housing in distressed communities. Many have
found it more difficult to generate the business development
and job creation their neighborhoods need to complement and
reinforce new housing development. The President's New Markets
Credit would provide an effective tool for doing that. We
strongly support this proposal. We thank the President for
proposing the Credit and Mr. Rangel, Mr. LaFalce and Ms.
Velazquez and Senators Rockefeller, Robb, Sarbanes, Kerry,
Kennedy and Daschle for their strong leadership on behalf of
this proposal.
The New Markets Credit would provide a six percent annual
tax credit for five years to ``Community Development Entities''
(CDEs) whose mission is providing capital in low-income
neighborhoods. CDEs would include the nonprofit community
development groups described earlier. CDEs would use proceeds
from the sale of the Credits to finance commercial facilities,
manufacturing plants, small businesses and community service
centers in qualified communities. Qualified communities would
be census tracts where the poverty rate is at least 20 percent
or where the median family income does not exceed 80 percent of
the greater of metropolitan area income or statewide median
family income. The Treasury Department would allocate the
Credit. The program would be funded at $3 billion per year for
five years.
One of the most promising features of the New Markets
Credit is its modeling on the Housing Credit. That bodes well
for the program's success. The Housing Credit has channeled
billions of dollars in private investment into distressed
communities and spawned a sophisticated industry of community
developers, intermediaries and investors who understand how to
use a tax credit to revitalize low-income communities. These
same entities will be prepared to utilize the New Markets
Credit because it so closely resembles a program they already
are using with such success.
While we strongly support the New Markets Credit as
proposed by the President, we recommend two modifications
included in Senator Rockefeller's New Markets Credit
legislation (S.1526): extending the term of the Credit to seven
years and targeting the Credit to low income populations in
addition to low income areas. We believe these modifications
would make the New Markets Credit even more effective.
Extending the Credit term from five to seven years would
assure that new businesses in distressed communities receive
the sustained capital investment they need to succeed.
Community development lenders generally agree that business
development in distressed areas typically requires a seven-to
ten-year investment. We are concerned that a five-year term may
not provide patient-enough capital to fledgling enterprises
before their Credit subsidy would terminate.
Targeting the Credit to low-income populations in addition
to low-income areas would enable distressed communities located
outside poverty census tracts to benefit from the investment
the Credit would generate. Senator Rockefeller's bill would
provide the Treasury Secretary the authority to target the
Credit in this manner. This more flexible targeting, similar to
the targeting of the Community Development Financial
Institutions program on the spending side of the budget, would
be particularly useful in extending the Credit's benefits to
rural communities. Many such communities would not be eligible
for New Markets Credit investment without this change.
Conclusion
Expanding our nation's historic economic prosperity to
include those yet to share in it is both a moral obligation and
a market opportunity for our society. Congress can help meet
that obligation and maximize that opportunity by enacting
targeted tax incentives to revitalize our nation's distressed
communities. Nonprofit community development groups and their
partners have demonstrated what works in community
revitalization. Now, they need the tools to continue rebuilding
their neighborhoods. Increasing the Low Income Housing Tax
Credit cap and enacting the New Markets Tax Credit would
provide two such tools. We urge Congress to seize the
opportunity to enact these proposals this year.
The Enterprise Foundation thanks the Subcommittee for the
opportunity to submit this statement for the printed record.
Statement of Richard Moe, President, National Trust for Historic
Preservation
The National Trust for Historic Preservation is pleased to
have the opportunity to submit testimony for the record on tax
incentives to assist distressed communities. The National Trust
is a non-profit organization with more than 265,000 members,
chartered by Congress to promote public participation and
education in historic preservation and to engage the private
sector in preserving our nation's heritage. Our mission is
protecting the irreplaceable. As the leader of the national
historic preservation movement, the National Trust is committed
to saving America's diverse historic resources and to
preserving and revitalizing communities nationwide.
The Internal Revenue Code contains numerous provisions that
assist distressed communities. There are also numerous
legislative and Administration proposals, many of which were
detailed during the hearing. This testimony will focus on the
commercial historic rehabilitation tax credit, which has been a
component of the tax code since 1976, and on H.R. 1172, a
proposal by Representatives Clay Shaw (R-FL) and John Lewis (D-
GA) to expand the historic rehabilitation tax credit to include
owner occupied historic residences.
The subject of this hearing, assistance to distressed
communities, is an important issue and one of principal
interest to the National Trust in accomplishing its mission.
Over the decades since World War II, a combination of social
and economic forces, abetted in no small measure by government
policies and programs, has produced a steady migration of
population and business activity from large and small urban
areas. Left behind in the surge to the suburbs and exurbs is an
enormous (but dwindling) inventory of sound housing stock and
older commercial buildings, much of which has historic or
architectural importance. Investment decisions have been
greatly influenced by substantial subsidies provided for low-
density, land consumptive development and the demolition of
existing building stock through the well-intentioned but
ultimately catastrophic bulldozing of established urban centers
and neighborhoods under federal urban renewal and highway
construction programs.
The decline and disinvestment of our nation's older
communities puts their historic resources, and the
neighborhoods themselves, at great risk. From 1980-1990,
Chicago lost 41,00 housing units to abandonment, Philadelphia
10,000 units, and St. Louis 7,000 units. If we lose these
neighborhoods, we will lose the physical fabric of our nation--
where ordinary Americans have worked, played, learned, prayed,
and participated in the civic life of America. We will be
losing, in short, the physical evidence of our history and the
diverse cultures upon which it is built. These are not large
mansions or house museums--they are the brownstones of Harlem,
the row houses of Baltimore, the bungalows of Miami.
Tax incentives for historic rehabilitation cannot reverse
demographic trends, restore fiscal solvency to cities and
towns, fight crime, or improve education. What they can do is
provide, at the margin, a corrective to the institutionalized
bias toward out-migration of population and business activity
and the consumption of open space at the expense of
reinvestment in declining areas that are already equipped with
buildings and infrastructure. In addition, where incentives are
linked to the rehabilitation and reuse of buildings of historic
or architectural value, the benefits of historic preservation--
both tangible and intangible--can also be realized.
The federal commercial historic rehabilitation tax credit,
which is a 20% credit for rehabilitation and preservation of
income-producing properties, is the nation's most effective
federal program to promote urban and rural revitalization and
to encourage private investment in rehabilitating historic
buildings. According to the Annual Report for Fiscal Year 1999
entitled ``Federal Tax Incentives for Rehabilitating Historic
Buildings'' produced by the National Park Service, the
commercial historic rehab tax credit has generated over $20
billion in historic preservation rehabilitation since its
inception in 1976.
In 1999, the commercial rehab tax credit was used to create
or improve over 13,000 rental housing units, a third of which
now house low and moderate-income tenants. Taking into account
new construction, which often takes place in conjunction with
approved rehabilitation and is ineligible for the credit, the
program leverages far greater than five to one in private to
public investment in the preservation and renewal of our older
communities. In 1999, the rehab tax credit leveraged $2.3
billion in private investment, at a cost to the federal
treasury of less than $475 million.
As a result of this remarkable incentive, citizens across
the country have rescued landmark railroad stations, hotels,
schools, and office buildings from decay and demolition. These
restorations frequently catalyze reinvestment in the
surrounding neighborhood, thus adding value beyond that of the
rehabilitation itself. Historic preservation fueled the ``back
to the city movement'' of the 1970s and 1980s, bringing new
life to abandoned and deteriorated warehouse districts,
waterfronts, downtowns, and other remnants of an area's history
and settlement which had previously been in tatters. Today,
fueled by a real estate boom, strong national and regional
economies, and resurgent interest in distinctive, walkable,
close-in neighborhoods, the commercial rehab tax credit is
experiencing strong and steady growth on an annual basis.
Moreover, in 15 states around the country, the federal tax
credits can be combined with state rehabilitation tax credits
to make large-scale, historic renovation projects feasible. In
St. Louis, a $250 million renovation is planned for historic
Cupples Station that will encompass a 260-room hotel and a
mixed-use complex with nearly 500,000 square feet of office
space. The 12 acre project, which will include the renovation
and development of a 10 building complex, will utilize both the
federal historic rehab tax credit program and a new program of
state tax credits passed by the Missouri legislature last year.
Already, the Missouri credit has given rise to nearly 20
projects in downtown St. Louis.
As the St. Louis example illustrates, the combination of
federal and state commercial tax credits make feasible large-
scale commercial projects that might otherwise not get off the
ground. Several states also have a residential rehab tax credit
program to accomplish the same goals for homeowners and home
buyers. Connecticut's Historic Homes Rehabilitation Tax Credit
Program is billed as ``a catalyst for renewal in urban
neighborhoods.'' The program establishes a tax credit up to
30%, with a maximum credit of $30,000, of the eligible rehab
costs for owner-occupied historic buildings containing one to
four dwelling units. The program targets urban areas in 29
Connecticut towns and cities such as Bridgeport, East Hartford,
New Haven and others that need renewal and revitalization.
What our states and cities need is a corresponding federal
tax incentive that will support efforts underway at the state
level to address the problems of blight and abandonment that
threaten older residential neighborhoods and communities.
Neither the proposed New Markets Tax Credit, which the
Administration and several Democratic members of Congress are
proposing, nor the ``American Community Renewal Act''
championed by several House Republicans, would address the need
for a targeted incentive for residential neighborhoods and
moderate income home ownership. Such an incentive is badly
needed. As any inner-city developer, community organization, or
public official involved reclaiming distressed communities
knows, projects designed to help residential neighborhoods
always involve a carefully constructed financial package that
operates on a narrow margin.
Clearly, this is no time for massive government programs,
which might or might not be successful in helping to preserve
these resources. What is needed is an incentive that will
involve a minimum of government involvement and a maximum of
individual initiative, one that is modest in cost, and limited
in scope but can spark broad private activity. H.R. 1172, the
Historic Homeownership Assistance Act, introduced by
Representatives Clay Shaw and John Lewis, is a fair, feasible,
and effective answer.
H.R. 1172 is designed to promote home ownership, historic
preservation, and community revitalization. The legislation
would create a 20 percent federal tax credit for rehabilitation
expenses in connection with a the historic rehabilitation of an
owner occupied historic home or an eligible structure in a
national, state, or locally designated historic district. As
passed by the Senate, the credit can be used only for
substantial rehabilitation projects in historic districts where
the median family income is no more than twice the state median
income.
Because of its potential to help older distressed
communities, restore historic neighborhoods, and in doing so
combat sprawl, H.R. 1172 enjoys broad bi-partisan support: it
has been cosponsored by 197 members of the House of
Representatives, including 25 members of the Ways and Means
Committee. The Senate version, S. 664, sponsored by the late
Senator John Chafee (R-RI) and Senator Bob Graham (D-FL) has
garnered 35 cosponsors.
Last year, the Senate passed a slightly modified version of
the legislation, providing a tax credit of 20 percent for
qualified rehabilitation expenditures up to $20,000 as part of
S. 1429, the ``Taxpayer Relief Act of 1999.'' The Senate-passed
version targeted the tax credit to homeowners in historic
districts where the median income was no greater than 200% of
median family income. The final tax package passed by Congress
last November, which President Clinton vetoed, contained a
historic homeownership deduction proposal which would have
allowed taxpayers to deduct 50 percent of the costs of
qualified rehabilitation expenditures on a historic home, up to
$100,000.
The National Trust supports the Senate-passed version of
the historic homeowner tax credit because it would provide
greater benefit to low and moderate income neighborhoods. A
historic homeowner tax credit would provide a much needed boost
to older neighborhoods in our cities and small towns, where
once vibrant communities decline for want of adequate
incentives for reinvestment. This tax credit would be a tool
both for do-it-yourself homeowners and community development
corporations that are trying to turn around depressed areas.
Contrary to popular perception, most historic districts are
home to people of modest means. And the targeting requirement
in the Senate-passed version of the bill means that wealthy
historic districts would not, in any event, be eligible for the
credit.
According to National Park Service and Census Bureau data,
more than 50% of all buildings eligible for the proposed
historic homeownership tax credit are located in National
Register Historic Districts within census tracts with poverty
rates of greater than 20 percent. Lower income people tend to
live in old buildings, which makes historic preservation a
highly effective community revitalization tool targeted to the
less affluent. Places like Georgetown and Annapolis are what
people think of when they hear the words ``historic district.''
But in fact, they should be thinking of Anacostia, where there
are 550 historic buildings in a National Register Historic
District, or the Greater Fourteenth Street Historic District
here in Washington, where there are 485 historic buildings.
The historic homeowner tax credit would help spur
revitalization of small town neighborhoods such as Southside
Historic District in Corning, New York, as well as inner-city
historic neighborhoods such as Quaker Hill Historic District in
Wilmington, Delaware. Both of these neighborhoods were
important to the settlement and history of their communities,
but in recent decades have experienced decline and
deterioration of their diverse historic housing stocks. A
historic rehab tax credit would help bring reinvestment to
these neighborhoods and utilize their rich mix of architectural
styles as part of an overall revitalization strategy.
According to the National Park Service, there are now
almost one million buildings nationwide that are already in
historic districts on the National Register which were built as
housing or could be used for housing. Moreover, there are many
more neighborhoods--particularly in low income areas--that are
eligible for listing in the National Register of Historic
Places but have not been listed because there has been no
impetus to do so. The universe of lower-income districts and
communities that could be served by the credit would grow if
the credit were enacted, because there would be an incentive to
get them registered.
For those with insufficient tax liability to use the
credit--including the 72% of all Americans who do not itemize
their deductions--the bill provides a fair and simple mechanism
by which the credit can be transferred to the bank or mortgage
banker making the mortgage loan. The lender then would pass the
value of the credit to the homeowner in the form of a reduced
interest rate, or in distressed areas, as down payment
assistance. This legislation has been designed to help boost
moderate income renters into homeownership, to give them a
lasting stake in their community which will bring new vitality
to areas that have suffered a spiral of neglect and despair.
Mr. Chairman, our struggling communities need to regain
many things that they have lost. The Historic Homeownership
Assistance Act enjoys extraordinarily broad, bi-partisan
support because Members recognize that it holds great potential
to assist our cities and small towns in reinvesting in what is
already there--the people, homes, and neighborhoods that have
constituted their communities. I want to thank you for your
support for this legislation and for the opportunity to provide
testimony for the hearing record.
Statement of Daniel Godfrey, North Carolina A&T University, School of
Agriculture, Greensboro, North Carolina, and Richard Jones, University
of Florida
Initiative for the Development of New Markets in Underdeveloped
Communities
America Needs A New Initiative for the Economic Development of
Communities
For the first time in three decades, the United States
government is in the black. The federal budget switched from a
$290 billion deficit in 1992 to a $69 billion surplus last
year. Yet, while wages are rising and welfare rolls are
shrinking in most of the nation, persistent economically
depressed communities still exist. The President and many in
Congress have indicated that these people should not and will
not be forgotten. While the economy has created nearly 19
million new jobs since January 1993 and unemployment has
dropped from 7.2 % to just 4.3 %, there is more work to do.
Several rural communities, such as Appalachia, the Mississippi
Delta, Native American communities, and others have poverty
rates over 30%, high school drop out rates over 50% and some
reservations have unemployment as high as 80%. It will take a
broad, yet, localized approach to begin breaking these
persistent cycles of economic depression.
Of course, private industry investments are essential for
community development and traditional tax credits are an
excellent mechanism to spur growth. However, there are other
elements that struggling communities need. Coordinating outside
resources, infrastructure development, children and youth
programs, and workforce training are areas that traditional tax
credits inadequately address. For example, a small town in New
York may be 100 miles away from a city of significant size and
they have a company interested in relocating to their region.
Of course, the company will build their building and the
surrounding streets; however, they want to bring 1000 new
families to the area that need a place to live but the city
cannot support this influx of people. How do they find
engineers to design their roads, properly trained city
planners, or achieve a bond rating high enough to fund new
projects. These communities need access to a variety of
professionals that do not typically locate in such areas.
Role of Land-Grant University's Extension and Research Programs
Land-Grant Universities with their extension and research
staff can help small towns and cities overcome these obstacles.
Extension agents have daily experience coordinating efforts
between federal, state, and local interests and give local
individuals ownership in the development process. However,
universities are having to decrease staff designated to these
activities because of lack of adequate federal and state
funding. A program needs to be developed that:
-provides adequate base funding for extension and research
at universities,
-encourages all federal agencies and their state
counterparts to work together at the local level, and
-creates new tax credits that stimulate private industry to
make investments in communities beyond the direct needs of the
company.
Elements Necessary for Successful Development of Under-served
Areas
1) Underdeveloped communities, whether urban, rural or
suburban, need creative, sustainable economic development
strategies. These strategies must be designed and calculated to
transform these under-served areas into self-sufficient
communities. From the start, this requires local leaders who
have the information needed to develop these strategies and
technical assistance to make the strategies a reality. This
provides citizens the opportunity to be involved from the
beginning rather than later in a reactive mode. The Initiative
should focus on providing programs to teach individuals how to
communicate with one another and understand fundamentals of
economic development. The initiative should also apply to both
2) It is futile to ``reinvent the wheel.'' Communities need
to develop communication and coordination mechanisms to be able
to learn from each other about how to tap available resources
of support. Local organizations, such as the extension service,
are in place which have experience coordinating Federal
Agencies and transferring information across and between
states. Local organizations, which have the ability, can
institute place-based solutions by selecting services from
among the federal agencies rather than the federal government
dictating a program to each community.
3) A local workforce investment initiative is an essential
element of community development Workforce investment is one
step toward building infrastructure that eventually reaches
across several disciplines from family and youth support, to
transportation, to business and industry, to agriculture. Any
workforce initiative must include diverse organizations that
can provide diverse services. The companies that are going to
eventually invest in the community need to be assured they can
find a skilled labor force and support services for that labor
force. A system must be set up to train current workers and
future employees. A strong school system with work training in
high school is an example of an important tool toward
attracting private sector investment. Several types of
workforce programs for current and future employees exist;
however, they are not reaching many under-served communities.
4) There is a need to provide community leaders with
training necessary to build quality roads, parks, housing,
utilities, childcare, and healthcare are essential. However,
these services are not cheap and require, in some cases, the
ability to issue bonds or raise tax revenue. Federal support to
build roads, parks, or adequate housing is desperately needed.
The New Initiative must establish a grant funding, low-interest
loans, or direct funding for these infrastructure services. The
funding program must be flexible so a community can access only
what it needs. Thus, avoiding scenarios where one year only
sewer projects receive funding and another year only healthcare
projects receive funding. Communities must be able, as simply
as possible, to receive funding to enhance the essential
services they lack in a coordinated manner.
5) Private sector investment is crucial to achieve a
successful long-term solution. More than 100 communities
benefit from the Empowerment Zone/Enterprise Community
provisions of the tax code. As most in state government and
many in local government have known for years, certain tax
incentives which attract private investment serve the public
good as they deliver jobs and income which bring the public
returns, often many times over, for their initial investment.
Public investments like these have made good business sense to
local and state governments for decades.
The New Formula
There are three important steps to successfully
implementing an improved formula for community development:
providing adequate base funding for extension and research at
universities, encouraging all federal agencies and their state
counterparts to work together at the local level, and creating
new tax credits that stimulate private industry to make
investments in communities beyond the direct needs of the
company.
1. State extension services and research specialists across
America, with the resources of their universities and a local
understanding of community needs, can coordinate on a level
beyond most organizations. Their place-based structure and
flexibility allows the federal government to play a supportive
role rather than the lead role and empowers the local
community. These services can address the changing economic
infrastructure in under-served communities and facilitate
leadership development programs for community leaders and
elected officials. However, without proper base funding
extension programs cannot live up to their potential. Funding
for extension programs has been stagnant for years. Yet, wages
and staffing needs increase overtime. This has caused either
reallocation of staff or loss of much needed personnel. Thus,
an important delivery mechanism and resource is depleted in
under-served areas.
2. This new approach will create a matrix of local, state
and locally delivered federal services that reaches every
community using local mechanisms. Under a matrix approach, the
local delivery mechanisms of each federal or independent
agency, including the Department of Agriculture, Department of
Labor, the Department of Health and Human Services, the
Department of Housing and Urban Development, Department of
Commerce, Department of Transportation, Department of
Education, Department of Energy, and the Environmental
Protection Agency provide resources either through grants or
direct assistance. Providing resources and enabling local
community governments to grow and manage the human and public
infrastructure necessary to maintain any community is necessary
to attract solid private investment to these under-served
communities. These federal and independent agencies already
work directly with Extension Agents, Rural Development Centers,
Councils of Governments, local officials, and other community-
based organizations. Therefore, federal funds that support
local resources such as extension agents must be provided so
communities have a fighting chance. These organizations
currently coordinate resources among state and federal agencies
and local governments; however, a focused effort is needed to
extend and formally encourage coordination with under-served
communities.
3. Let us leave no doubt that the EZ/EC program has been a
much needed initiative. However, new ideas in tax incentives
are necessary to spur private investment in under-served
communities. These incentives would focus on providing under-
served areas the expertise to solve problems, the know how to
coordinate resources, and knowledge of what other communities
have done to help themselves. Some examples of areas where tax
incentives might be helpful are:
-Encouraging companies to participate in distance learning
opportunities for employees
-Stimulate specialty businesses to promote community
programs related to their industry. For example, sports product
companies assisting with after-school programs or food product
companies sponsoring food safety/nutrition programs in schools
and for employees
-Providing an incentive for companies to sponsor parenting
classes
-Encouraging businesses to sponsor youth organizations like
4-H groups
-Spurring private companies to coordinate courses in family
economics and financial planning.
These programs not only add benefit to the companies but
provide needed resources to build strong communities. Research
and Extension faculty provide training, modeling, and
implementation of these programs and can work with business to
implement these programs.
USDA and The Land Grant University Resources
USDA--Rural Development
As coordinator of the EZ/EC program, the USDA's Rural
Development Office would be one of several crucial facilitators
of a matrix model for under-served communities. By drawing from
expertise throughout USDA and other parts of the government,
the Rural Development office can facilitate crucial community
infrastructure support from within a matrix of federal
departments and independent agencies. In addition, they can
contract with Land Grant Universities and extension faculty to
provide telecommunications access for medical and training
services, assists local governments in design of management
systems and negotiating skills, and assists the private sector
in developing markets and financing.
Cooperative State Research, Extension, and Education Service
The Cooperative State Research, Extension, and Education
Service (CSREES) is the USDA Agency designated as the federal
partner working directly with the Land Grant University System.
CSREES provides resources, planning, coordination, and
accountability efforts for research, extension, and higher
education programs within the Land Grant Universities. In
addition, the county extension offices are a matrix unto
themselves in a unique state-federal partnership between the
nation's 105 Land Grant Universities, USDA, and other federal
agencies. Local extension agents can serve a key role as
liaisons and facilitators on behalf of the communities and
empower community leaders with the ``How to Knowledge'' to
address their local mix of economic challenges.
Land Grant Universities
Small towns and rural places face numerous barriers of
infrastructure, transportation, education, economic and other
amenities that inhibit their full development. Knowledge and
program content from the Land Grant University, located in each
state, helps these community-elected officials build their
knowledge of government accounting and management. Since their
establishment, the land-grant colleges and universities have
grown to represent to the world a unique system of widely
accessible non-formal and higher education. Colleges of design
and architecture can be tapped for advice and support for the
community's infrastructure needs. Colleges of Human Science
provide education and advice about childcare, human nutrition
and health care and family financial management. The Colleges
of Agriculture provide valuable support to both the rural
communities and their families involved in food and fiber
production. Rural Development Centers (detailed in the next
paragraph) and Land Grant Universities have the ability to
assess problems, build community coalitions toward planning and
solutions, and access private and government resources. Within
this structure, 1890 institutions contribute specialized
expertise in serving predominately African-American communities
and the 1994 institutions provide similar expertise for Native
American communities.
Rural Development Centers
Four Regional Rural Development Centers coordinate research
and extension activities of the Land Grant Universities in
their specific areas of the U.S. They serve specific regional
needs and share resources across the U.S. The Southern Rural
Development Center is located in Starkville, Mississippi. The
Northeast Regional Center for Rural Development is located at
Pennsylvania State University in University Park, Pennsylvania.
The North Central Regional Center for Rural Development is
located in Ames, Iowa at Iowa State University. And finally,
the Western states are served by the Western Rural Development
Center located in Logan, Utah at Utah State University. Federal
support for these centers should be expanded to scale up their
contribution potential to a nationally focused matrix for
under-served communities.
National Rural Development Partnership and the Rural Policy
Research Institute
The National Rural Development Partnership, through 36
State Rural Development Councils and National Rural Development
Council, brings together federal, state, local and tribal
governments, as well as the private for-profit and non-profit
sectors, to work in partnership for the improvement of rural
America's communities. Also, the Rural Policy Research
Institute (RUPRI) located at the University of Missouri is
actually a consortium of several universities and since its
inception has involved over 176 scientists representing 16
different disciplines at 67 universities all focused on policy
analysis of the challenges, needs and opportunities facing
rural America. Federal support for RUPRI should be expanded to
scale up its potential contribution to a nationally focused
matrix for under-served communities.
Other Related Resources/Organizations
There are additional organizations that USDA's Rural
Development Office would need to work with as facilitators.
These organizations have extensive expertise in community
modeling, research, place-based solutions, and coordinating
multi-level government programs. They include but are not
limited to the National Rural Development Partnership, National
Association of Counties (NACo), and the regional Councils of
Government within each state. Each organization has a network
which can prevent cities and communities from ``reinventing the
wheel'' and using resources efficiently and effectively.
The National Association of Counties (NACo) represents over
75 percent of the nation's population through the member
counties. The association acts as a liaison with other levels
of government, works to improve public understanding of
counties, serves as a national advocate for counties and
provides them with resources to help them find innovative
methods to meet the challenges they face. NACo is involved in a
number of special projects that deal with such issues as the
environment, sustainable communities, volunteerism and
intergenerational studies.
Regional councils are organizations promoting regional
approaches in dealing with the many problems facing America's
communities. Typically, a regional council is created by joint
agreement of the local governments they serve, usually in
accordance with State ``enabling'' legislation. Both the State
legislation and the joint agreement define the role, mission,
duties, authority and geographic coverage of the regional
council. Regional councils are governed by boards of directors
that are comprised differently, depending on State legislation,
but most are made up of local elected officials appointed by
the local governments that created the council. Regional
Councils are, therefore, actually local government
organizations designed to study and recommend solutions to
problems facing the region and to help their local government
members plan for a healthy and prosperous regional community.
All of the organizations above support and strengthen
individual state efforts in rural areas by developing networks
of private and public sectors. These organizations study the
basic building blocks of rural society. In the context of
globalization and changing demographics, the solutions required
for these under-served communities are increasingly complex and
multi-dimensional. There are increasing numbers of public
issues which must be resolved. Each organization has similar
abilities to support their home-state under-served communities,
but could be strengthened by providing targeted public
investments and encouraging partnerships to nurture this
development through coordination of a full range of community
resources drawn from across the government.
Conclusion and Program Recommendations
We see an opportunity to build sustainable partnerships
with rural stakeholders and to develop from the ground up
national constituencies to support rural development. This
national effort will provide a more efficient use of limited
resources across the country, allow communities to find local
solutions to local problems, and provide help to all
communities at the level they need and not just most needy.
Recent trends in declining local extension agents negatively
impacts communities struggling to survive. With the proper
support, we envision the Land Grant Universities as partners
among equals in seeking a better life for rural people and a
sustainable environment. Clearly, the people who live in these
under-served places are the central actors, and will be the key
developers if given the opportunity, knowledge, and resources
that lead them to create their own solutions. A coordinated
partnership among state, local, and federal governments can
work with communities from a holistic perspective to meet the
community's stated goals including self-sustained growth.
Statement of Hon. Mark A. Macarro, Pechanga Band of Luiseno Indians,
Temecula, CA
I am pleased to have the opportunity to present written
testimony on behalf of the Pechanga Band of Luiseno Indians in
support of tax incentives to assist distressed communities. I
appreciate the Subcommittee's interest in developing bipartisan
legislation to revitalize and empower impoverished urban and
rural communities through the infusion of capital and the
development of new markets. As Congress begins to draft this
legislation, it is critical that the unique needs of Indian
Country are addressed in a useful way.
The Pechanga Band of Luiseno Indians: An Economic Revitalization
Success
The Pechanga Band is a federally-recognized tribe with
political jurisdiction and governmental authority over its
reservation land of roughly 4,500 acres in the Temecula Valley
of Southern California, and its 1,200 tribal members.
After centuries of destitution, Pechanga Band members feel
a new sense of optimism and pride from the strong economic
foundation we have begun with the success of our first economic
enterprise, an entertainment center, which is the main source
of tribal government funding for long-needed and previously
unaffordable infrastructure improvements on the reservation. We
are now upgrading substandard roads and housing, building
adequate sewage and water storage facilities. providing
security and emergency services for our people. We also can
provide basic and previously unattainable life-sustaining
services to our tribal members -such as health and social
services, senior housing, child care, supplementary education
and scholarships for advanced degrees and job-skill training.
In addition to employing our tribal members, Pechanga's
economic development projects provide jobs that make life
better for Indian and non-Indian people alike in the Temecula
Valley. We are creating a demand for services and products that
expand and support other local businesses. We take pleasure in
the fact that we are beginning to be able to share with our
neighbors and participate in the civic and charitable life of
our community and throughout Indian Country.
Well-Crafted Tax Exempt Bond and other Incentives will help Reverse
Centuries of Poverty
We are proud of our economic successes so far, but there is
much more work to do. The Pechanga Development Corporation
(PDC) must generate jobs and governmental revenues, as well as
new businesses, that will provide a steady and continuous flow
of revenues to fund governmental services.
We urge serious commitment by Congress to enact targeted,
commonsense and effective tax proposals that really will spur
tribal and private sector investment and economic development
in Indian Country, as a part of comprehensive community renewal
legislation. In determining what is most likely to spur
economic growth, we endorse the National Congress of American
Indians (NCAI) recommendations based on the following
principles:
Indian tribal governments must be accorded the
same status as State and local governments, and the ability of
tribal members and their governments to determine their own
development plans must be preserved;
The role of tribal governments and nonprofit
organizations in Indian Country economic development must be
recognized and rewarded; and
Tax incentives must be designed to increase the
flow of loan and equity capital to Indian Country.
Recommendations
1. Enact Tribal Tax Exempt Bond Authority.
We concur with NCAI's recommendation that the community
renewal bill include provisions based on those contained in the
Tribal Government Tax-Exempt Bond Authority Amendments (H.R.
1946), legislation that has been introduced by Representative
Shadegg.
Tax-exempt financing rules are overly restrictive for
tribal private activity bonds. H.R. 1946 would remove some
restrictions to give tribes the same rights state and local
governments have to issue tax-exempt government and private
activity bonds for such projects as low-income rental housing,
electric generation facilities, water treatment plants, and
solid waste disposal facilities.
For tribal government bonds, the bill would remove the
``essential government function'' restriction and instead
require that the financed facilities be located on or near a
reservation. Under current law, tribes can issue tax-exempt
governmental bonds only for facilities used for essential
governmental functions, like roads, sewers, schools. State and
local governments do not have similar restrictions.
For private activity bonds, the bill would allow tribal
governments to issue these bonds for various kinds of tax-
exempt private activities so long as: the tribe keeps a 50%
ownership interest in the financed facility; at least 95% of
the net proceeds are used to finance tribal facilities; and no
part of the bond issue proceeds is used for gaming.
2. Extend Investment and Employment Tax Credits.
In addition, we urge the Congress to include provisions,
along the lines of the Indian Reservation Jobs and Investment
Act, (H.R. 1945), which would allow tax credits to companies
which locate on reservations certain kinds of income-producing
property. Such property would have to be connected to existing
tribal infrastructure, such as roads, power lines, water
systems, railroad spurs, and basic and advanced
telecommunication facilities. In this time of restrained
federal spending, tax credits can spur the private investment
that many Indian communities urgently need for infrastructure
and economic development, job creation, and economic
empowerment in the 21st Century.
Conclusion
We hope that we can count on Congress' firm commitment to
include the strongest possible Indian provisions, such as tax-
exempt bond and investment tax credit proposals designed to
spur economic development in Indian country, in the community
renewal bill as it moves forward.
Statement of George Herrera, United States Hispanic Chamber of Commerce
Introduction
Mr. Chairman and members of the Committee, I am the
President and Chief Executive Officer of the United States
Hispanic Chamber of Commerce (USHCC). The USHCC seeks to
advocate, promote and facilitate the success of Hispanic
businesses. The primary agenda of the USHCC is and will remain
an economic one. Since its inception, the USHCC has worked
towards bringing the issues and concerns of the nation's more
than one million Hispanicowned businesses to the forefront of
the national economic agenda. Through a network of nearly 200
Hispanic Chambers of Commerce and Hispanic business
organizations, the USHCC serves as the national advocate for
the growth and development of Hispanic entrepreneurs in the
United States.
Today, the USHCC would like to express concern over current
tax incentives for communities that have not fully participated
in the economic prosperity of our country. We support President
Clinton's and Speaker Hastert's incentives. Mr. Chairman, even
you have emphasized the fact that we cannot afford to exclude
anyone from such incentives. However, Puerto Rico will be left
behind unless this Congress acts on the job creation
legislation introduced by Representative Crane and Senator
Moynihan to restore wage tax incentives to U.S. companies
investing and creating jobs in Puerto Rico.
Background
In 1996, the only federal tax program designed to encourage
employment and investment in Puerto Rico was terminated;
Section 30A of the Internal Revenue Code. While existing
investments were protected through a grandfather provision, no
tax benefits were made available for new companies or existing
companies planning to expand into new lines of business. This
has had a very negative economic impact on Puerto Rico's
economy. In effect, it discourages companies from growing and
penalizes companies that have grown the most. Since 1996, for
the first time in modern history, few U.S. stateside companies
have established new business operations in Puerto Rico.
Existing companies have little incentive to create new jobs and
investments or replace old equipment. If this continues, Puerto
Rico will suffer by being excluded from the current economic
growth and prosperity being experienced throughout the United
States.
Under the leadership of Puerto Rico's Governor, Pedro
Rossello, Puerto Rico has undertaken major efforts to diversify
and expand key sectors of the economy, including manufacturing,
tourism, research and development and trade. But even these
efforts cannot indefinitely make up for the loss of all tax
incentives for U.S. businesses. In 1998, Puerto Rico enacted a
special incentive law providing additional tax benefits to
companies that expand employment, invest capital, and conduct
research and development in Puerto Rico. Puerto Rico is doing
what it can at the local level. However, help is needed. Local
efforts without a federal partnership cannot attract U.S.
companies that are being lured to foreign locations such as
Ireland, Singapore and other sites in this hemisphere.
The loss of U.S. jobs in Puerto Rico to foreign locations
is equally harmful to the states. More than 65 % of all Puerto
Rico purchases come from the states in the mainland. In 1998,
this surpassed $14 billion, a substantial portion of which was
directly imported by Section 30A companies. This translates
into over 225,000 direct jobs in the states. If Section 30A
companies continue to move offshore, billions of dollars of
goods now purchased from American suppliers will be lost to
foreign suppliers. This may lead to the loss of additional U.S.
jobs, growth and federal tax revenues. It is important to
understand that job creation incentives in Puerto Rico create
jobs both in Puerto Rico and the mainland; diminish federal
expenditures for social programs; and generate U.S. tax
revenues. The alternative leads to the growth of foreign
manufacturing, loss of U.S. jobs and little or no U.S. tax
revenues.
Minimum Wage Impact on Puerto Rico
Moreover, the likely increase in the federal minimum wage
thwarts efforts to create jobs in Puerto Rico. When Congress
passed the 1996 Small Business Job Protection Act, which
provided tax benefits for businesses affected by the 1996
minimum wage increase, none of the tax breaks applied to any of
the U.S. businesses located in Puerto Rico. Further, the
revenues used to pay for these benefits were derived from the
repeal of the job creation incentives for Puerto Rico.
Therefore, minimum wage increases went into effect in Puerto
Rico but U.S. businesses were not given an opportunity to
offset the affect of the minimum wage increase the way their
counterparts were given the opportunity in the United States.
It would be unjust as well as counterproductive to exclude
Puerto Rico once again. It is also important to note that
Puerto Rico is more affected by the minimum wage increase than
any other American jurisdiction. In fact, because of lower
overall wage levels, over 50 percent of the workforce in Puerto
Rico comes within $1 of the minimum wage and would be directly
affected by this increase. This is a level that is much higher
than that of the workforce in any of the states and even the
workforce nationally. Congress should therefore allow U.S.
businesses located in Puerto Rico to offset any negative
effects that a minimum wage increase will have on its
businesses and its economy by allowing these companies to enjoy
any tax benefits included with the enactment of an increase in
the minimum wage.
The Job Creation Tax Incentive
There are other investment incentives being considered by
this Committee, such as the community renewal proposals.
However, because Puerto Rico does not fully participate in the
U.S. tax system, it is insufficient to add Puerto Rico as a
location that would be eligible for such incentives. Doing so
would provide little to no direct benefit to Puerto Rico
because in fact it would not apply to U.S. corporations in
Puerto Rico. In the alternative, Section 30A job creation
incentives provide exactly the kind of benefits to accomplish
in Puerto Rico what these other incentives accomplish in the
states. Section 30A rewards job creation and capital
investments--the two elements necessary for economic growth.
Congressmen Phil Crane, Charles Rangel, Jerry Weller and others
are sponsoring H.R. 2138, legislation that would expand and
extend Section 30A incentives for both existing and new
businesses. This will encourage the development of new U.S.
businesses and the growth of existing ones operating in Puerto
Rico rather than in foreign locations.
Community renewal and economic development initiatives
provide Congress a perfect opportunity to enable all Americans
to participate in the economic prosperity of our nation.
Affording Puerto Rico an opportunity to compete fairly will
demonstrate the inclusiveness embraced by this Congress, by
ensuring that the benefits reach all citizens nationwide. On
the other hand, if Puerto Rico, which has a poverty level twice
that of the poorest state, and unemployment of approximately
11%, is excluded from any job creation and economic development
initiatives, a message of exclusion is sent to United States
citizens residing in Puerto Rico and Hispanics throughout
America.
It is essential that Congress address this inequity
immediately. Existing law further restricts the remaining
Section 30A incentives to existing businesses until 2002 and
eliminates them entirely after 2005. This creates a significant
disincentive for businesses considering expansion in Puerto
Rico at this very moment. Section 30A expansion would restore a
positive incentive program before more jobs are lost. The USHCC
is committed to keeping American jobs on American soil, and
with your help this objective can be realized.
Thank you.
Congress of the United States
House of Represenatives
April 3, 2000
The Honorable Amo Houghton, Chairman
Subcommittee on Oversight
Committee on Ways & Means
U.S. House of Representatives
1110 Longworth House Office Building
Washington, DC 20515
Re: Testimony to Subcommittee on Oversight Regarding Tax
Incentives For Distressed Communities
Dear Mr. Chairman:
The purpose of my letter is to forward to you a statement
which I would appreciate having made part of the record of your
Subcommittee's March 21, 2000, hearing on Tax Incentives for
Distressed Communities. Additionally, I would like to request
your assistance in including an Alaska Native Settlement Trust
in any legislation which may be reported by the Ways and Means
Committee as a result of your Subcommittee's hearing on this
matter or as part of separate legislation.
As you will recall, you and I, along with your fellow
Subcommittee members J.D. Hayworth, Wes Watkins and Scott
McInnis, and 17 other of our colleagues co-sponsored H.R. 2359
last year to address a number of inequities and deficiencies in
the existing settlement trust provision of the Alaska Native
Claims Settlement Act. The purpose of such trusts is to
``promote the heath, education, and welfare . . . and preserve
the heritage and culture of Natives.''
As my enclosed statement will set forth, Chairman Archer
included a Settlement Trust provision in the House version of
the major tax bill last year. Unfortunately, that provision did
not include a key element of the Settlement Trust legislation
that you and I and others co-sponsored. In order to remedy that
deficiency and inequity and to concurrently make a significant
contribution to helping distressed communities, remedial
legislation similar, if not identical, to the bill you and
others co-sponsored, is critically needed.
I am enclosing an outline of a provision which is the
result of consultations over the past two years with the
Committees of jurisdiction, individual Member offices, and
representatives of the Administration. My sense is that, while
I still believe that the settlement trust provision you and I
and others introduced as H.R. 2359 is a somewhat better
approach, I am prepared to recommend that, in the alternative,
we rely upon a modified approach outlined in the enclosed
statement and outline.
I know the Alaska Native community is, as I am, deeply
appreciative of your stepping forward last year to assist this
effort through your co-sponsorship of H.R. 2359. I believe that
we now have a genuine opportunity to achieve something of great
importance that will assist the descendants of the original
inhabitants of Alaska as well as assist distressed communities
within our state in the years to come.
The Settlement Trust mechanism is particularly meritorious
in that it utilizes funds which the Native Village and Regional
Corporations generate themselves to help them attempt to
address many health, education, welfare, economic, heritage and
cultural issues facing communities. In short, this legislation
represents a good investment and will have substantial and
lasting benefits for distressed communities into the future.
Thank you again for your co-sponsorship of Settlement Trust
legislation and your assistance in advancing this cause within
the Ways and Means Committee through the attachment of a
Settlement Trust provision to appropriate legislation the
Committee may report to the House in the days ahead.
Warmest and best wishes.
Sincerely,
Don Young
Congressman for All Alaska
Enclosure: Statement dated March 21, 2000
Statement of Hon. Don Young, a Representative in Congress from the
State of Alaska
Mr. Chairman and Members of the Subcommittee on Oversight:
Thank you for holding this oversight hearing on the
important issue of ``Tax Incentives to Assist Distressed
Communities.'' As Chairman of the authorizing Committee with
oversight and legislative responsibility for the Alaska Native
Claims Settlement Act (ANCSA), I appreciate this opportunity to
bring to your attention an acute need for remedial tax
legislation regarding a provision of ANCSA which holds promise
for helping a number of economically distressed communities in
Alaska.
I would like to urge your Subcommittee's support for
inclusion of a provision to address deficiencies in the
existing Settlement Trust provision of ANCSA in any legislation
which may ultimately be reported from the Ways and Means
Committee in response to your Subcommittee's oversight hearing
on March 21, 2000, or as part of other tax legislative
initiatives this year. The provision on which I seek your
assistance and support would make more workable, and enhance
the public policy objectives of, the ANCSA Settlement Trust
provision and thereby provide a measure of relief to a number
of economically distressed Alaska Native communities.
Context for Native Claims Settlement
As the Members of the Subcommittee may know, in 1971, the
Congress enacted legislation to provide a settlement with
Alaska's indigenous peoples regarding their aboriginal claims
to lands and resources in areas in which their ancestors lived
for thousands of years and which is today the State of Alaska.
The context for that settlement was that oil had been
discovered at Prudhoe Bay and our Nation sought to settle
claims with the original habitants of Alaska, in part, to
facilitate obtaining rights of way for the construction of the
Trans-Alaska pipeline. A settlement with Alaska Natives not
only was long overdue, it was needed to clear the way for the
construction of a pipeline from Prudhoe Bay to Valdez, Alaska
to transport petroleum reserves of the North Slope once they
were developed and produced for further shipment to the lower
48 states.
ANCSA Settlement Trust Provision
To facilitate the Alaska Native land claims settlement,
Congress authorized the establishment of Native Village and
Regional Corporations, a bold new concept born from the
experience of the economic hurdles continuing to be faced by
lower 48 Indian Tribes as they sought to help provide
critically needed assistance to members of their tribes.
In an amendment to ANCSA in 1987, the Congress provided
that Alaska Native Corporations could establish trust funds
from their own resources (Settlement Trusts) ``to promote the
health, education, and welfare . . . and preserve the heritage
and culture of Natives.'' The overall purposes for such trusts
are similar to those associated with certain trust funds for
lower 48 Native Americans. In general, in the lower 48 Indian
Tribe context, trust funds are established from appropriated
funds, court awards or receipts from hydroelectric dams or oil
and gas leasing on tribal land; their establishment does not
generate a tax obligation for the beneficiary; they are not
routinely taxed on their interest earnings; and while some
distributions from such funds are taxable at the beneficiary
level, others are not.
Under current I.R.S. tax rulings, the Alaska Native
Settlement Trust funds are established with private funding
resources, i.e. the Alaska Native Corporations themselves;
their establishment does generate an immediate tax obligation
for the beneficiary if the Alaska Native Corporation has
earnings and profits; interest earnings are taxed at the
highest trust rate of 39.6%; and distributions by the trusts
are taxed at the ordinary income tax rate of the beneficiary,
subject to a tax audit for trust taxes paid by the trust in the
current and prior years under a complex ``throwback rule.''
Furthermore, under current law, a Settlement Trust
beneficiary would be required to prepay taxes on his or her
share of the property transferred to the trust (to the extent
of the corporation's earnings and profits) irrespective of
whether the beneficiary ever receives any distribution from the
trust. Such a beneficiary easily could pay more in taxes than
distributions he or she would ever receive from the trust. This
is particularly true of elders.
Although I am not advocating that Congress provide
treatment to Alaska Native Settlement Trusts identical to lower
48 Indian Tribal Trust Funds, many of our colleagues and I do
believe that this Settlement Trust provision needs remedial
work. Such Remedial amendment would make it more equitable and
productive in terms of carrying out the purposes for which it
was authorized and thereby provide the additional benefit of
assisting economically distressed communities.
Unique Conditions in Alaska
As you may know, much of Alaska remains predominately rural
and in many cases, not just rural, but isolated and remote. For
example, for many of our communities, people must oftentime
receive emergency medical attention by personnel other than
doctors or even nurses. In remote isolated villages in bad
weather, frequently treatment other than first aid has to be
conveyed to the medical caregiver by radio or telephone. If one
faces a medical emergency and is lucky, he or she might be able
to be air or boat evacuated to a larger location with better
medical facilities.
In many areas of Alaska, unlike even the most rural areas
of the lower 48, there are simply no roads. In many
communities, people have to move from place to place by
airplane, boat, dogsled, snowmobile, or on foot. Our State
remains a frontier in many ways. Higher education remains out
of reach for many Alaska Native children. Native language and
culture are in danger of being lost from numerous social,
economic and cultural forces today. Although much of national
welfare reform has been positive, such reform, nevertheless,
poses a particularly difficult challenge for the future to many
Alaska Natives who are from rural areas where job opportunities
are historically severely limited or simply not available.
In many of our rural Native communities in Alaska,
sanitation is still a challenge similar to the way it was many
decades ago in the lower 48. Many communities still use honey
wagons for sewage disposal. . . others did so until only
recently. Still others have only rudimentary sanitation
facilities. Hepatitis rates, meningitis rates and teenage
suicide rates are in a number of communities near or among the
highest in the Nation. And, while rural communities have made
progress over the years, many Alaska Native villages are still
far behind similar rural areas of the rest of this Nation.
Additionally, because so many Alaska Natives in rural
Alaska have not had the opportunity for conventional work as
one would have in most areas in the rest of the Nation, many do
not have the benefits of Social Security having simply not
qualified for such benefits over the years in conventional
jobs. Many villages have 2 or 3 or at most a handful of ``for
pay'' jobs available. Unemployment rates (i.e. ``not
employed'') of 20% to 60% are commonplace. Seasonal and non-
seasonal unemployment in some regions can reach as high as 70%
to 100%.
Because of not having easy or inexpensive transportation to
markets, developing job opportunities in most villages is
challenging far beyond what one would face in a rural community
in the lower 48 states. Although Native Villagers are more
dependent today on a partial cash economy than they were 10 or
20 years ago, today most rural Alaska Natives remain heavily
reliant on a subsistence way of life. Nowhere else in our
Nation are so many people so dependent on subsistence to place
food on the table. The subsistence way of life and the heritage
and culture of Alaska Natives are unique aspects of America
and, are, and I hope you will agree, key parts of the diversity
of our Nation that we in Congress should recognize, respect,
assist, and conserve.
Mr. Chairman and Members of the Subcommittee, this is part
of the back drop for the provision that I am seeking your
support for today.
Recent Efforts to Remedy Inequities and Deficiencies of ANCSA Trusts
Last year, 21 of our colleagues from both sides of the
aisle and I introduced H.R. 2359 to address some of the
inequities and deficiencies in the current ANCSA Settlement
Trust provision. A similar bill (S.933) was introduced in the
Senate.
Also, last year the Senate-passed version of the Taxpayer
Refund and Relief Act of 1999, contained a Settlement Trust
provision which was fairly balanced and achieved the twin goals
of permitting transfers to settlement trusts without immediate
taxation of beneficiaries and providing a mechanism to defer
some trust income to ensure trust longevity. As introduced,
that provision was virtually identical to S.933 and H.R. 2359.
Unfortunately, the comparable House-passed version of the
Taxpayer Refund and Relief Act contained remedial taxation of
beneficiaries upon transfer to the trust, but did not include
other key provisions. The House version was adopted in
conference.
The attached outline of an alternative provision has been
developed after numerous consultations over the past two years
between the Settlement Trust Working Group from both Regional
and Village Native Corporations and others within the
Administration and relevant Congressional Committees and Member
offices and staff. The enclosed proposal would greatly simplify
the tax treatment of Settlement Trusts, correct deficiencies
and inequities in the existing law, and would encourage the
maintenance of these trusts to carry out the important purposes
for which they were intended.
The proposal would require that all income from Settlement
Trusts be taxed currently to the Trust itself at the 15 percent
rate (or 10 percent if capital gains). Under current law,
income distributed is not taxed at the trust level, but is
separately taxable to each beneficiary. The 15% tax rate is
likely higher than what a blended rate would be for all Alaska
Natives. Instead of sending many complex K-1 or 1099 forms to
thousands of beneficiaries, tax would be collected annually at
the Trust level. I understand that these forms, for even a
small Native village Corporation, can easily reach a foot or
two feet tall. With this proposal, there would be no need for
the added cost of administering an IRS audit activity to check
on the compliance with thousands of Alaska Native beneficiaries
since the tax would be collected once from the Settlement
Trust. Distributions in excess of the income of a Settlement
Trust would be treated as if distributed directly by the Alaska
Native Corporation to the Alaska Native beneficiaries, i.e.,
first as a dividend to the extent of earnings and profits,
thereafter as a return of basis, and a capital gain to the
extent the distribution exceeded the basis.
Mr. Chairman, the extensive work that has occurred over the
past few years to forge the foundation for this bill has been a
genuine cooperative effort. A responsible, remedial Settlement
Trust provision has strong bipartisan support and should have
an even lower revenue estimate than the earlier provision
incorporated in H.R. 2359, S.933 and in the Senate-passed tax
bill last year.
I strongly recommend and request that this alternative
provision outlined as an enclosure to my statement be included
in tax legislation which may be reported from the Ways and
Means Committee regarding distressed communities and in any
other appropriate tax legislation the Committee may pursue this
year. I will soon provide to your Subcommittee and the full
Committee actual legislative language for this provision.
I deeply appreciate the consideration of this Subcommittee
of my statement on this matter as well as the enclosed
proposal, which holds such importance and promise for the
original inhabitants of Alaska . . . and through them a number
of economically distressed communities in rural Alaska.
Enclosure: Outline of Alternative Alaska Native Settlement
Trust Provision, March 21, 2000
Outline of Alternative Alaska Native Settlement Trust Provision
1. Taxation of All of Settlement Trust's Income to Trust.
All of the income of an electing Settlement Trust for
Alaska Native beneficiaries, whether or not distributed, would
be taxable to the Trust itself. The rate of tax on all income
would be 15 percent, except that capital gains would be taxed
at the maximum capital gains tax rate of individuals in the 15
percent bracket (currently 10 percent).
2. No Immediate Taxation of Contributions to Settlement
Trusts.
As in section 1332 of H.R. 2488, the Taxpayer Refund and
Relief Act of 1999 as passed by Congress and vetoed by the
President, transfers to an electing Alaska Native Settlement
Trust would not be taxable to the beneficiaries of the Trust
when the contributions were made.
3. No Additional Tax on Trust Income Distributed to Alaska
Natives.
Because the income has already been subjected to tax at the
Settlement Trust level, it would not be taxable a second time
when distributed to beneficiaries. Therefore no Form 1099 or K-
1 reporting would be required for this income. The trust
throwback rule would not apply.
4. Taxation of Distributions In Excess of Trust Income
Distributions by an electing Settlement Trust to Alaska
Native beneficiaries in excess of distributable net income plus
undistributed net income would be treated as if they were
distributed by the Alaska Native Corporation directly to the
beneficiaries. Thus, the distributions would first be fully
taxable to the beneficiaries in the year of the distribution to
the extent of the previously undistributed earnings and profits
of the Alaska Native Corporation at the time transfers were
made to the Settlement Trust. (Reporting of such taxable
distributions to the beneficiaries would be on Form 1099.)
Further distributions from the electing Settlement Trust to the
beneficiaries in excess of the earnings and profits accumulated
at the time of the transfer to the Settlement Trust would be a
return of capital to the extent of each beneficiary's basis in
stock of the Alaska Native Corporation, and thereafter as
capital gain. The earnings and profits of the Alaska Native
Corporation would not be reduced upon transfer of monies into
the Settlement Trust but would be reduced as taxable
distributions made to beneficiaries out of the Alaska Native
Corporation's earnings and profits, determined at the time of
the contribution by the Alaska Native Corporation to the
Settlement Trust. This concept was included in Section 1332 of
H.R. 2488.
5. Rationale
Since many Alaska Natives are primarily in low tax
brackets, taxation of the income currently to the Trust at a
rate of 15% is more than fair to the Government.
Distributions of trust income by an electing Settlement
Trust would be non-taxable, eliminating the need for a K-1 or
Form 1099. The trust throwback rule would be inapplicable.
Taxation of the amounts transferred by the Alaska Native
Corporation to the Settlement Trust in excess of Trust income
would be taxed to the beneficiaries as ordinary income to the
extent of the Alaska Native Corporation's earnings and profits
at the time of transfer to the Trust (unless distributions by
the Alaska Native Corporation dissipated these earnings and
profits), and thereafter as return of basis or capital gain as
in the Conference Committee version of last year's legislation.
This approach in this legislative provision would be very
efficient from a revenue perspective because all of the income
would be taxed to one entity when it is earned, without
application of the net operating losses of the Alaska Native
Corporation, and no further paperwork or IRS audit resources
would be necessary.
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