Community Development: Federal Revitalization Programs Are Being 
Implemented, but Data on the Use of Tax  Benefits Are Limited	 
(05-MAR-04, GAO-04-306).					 
                                                                 
Congress established the Empowerment Zone and Enterprise	 
Community (EZ/EC) program in 1993 and the Renewal Community (RC) 
program in 2000 to provide assistance to the nation's distressed 
communities. To date, Congress has authorized three rounds of	 
EZs, two rounds of ECs, and one round of RCs. The Community	 
Renewal Tax Relief Act of 2000 mandated that GAO audit and report
in 2004, 2007, and 2010 on the EZ/EC and RC programs and their	 
effect on poverty, unemployment, and economic growth. This report
describes (1) the features of the EZ/EC and RC programs, (2) the 
extent to which the programs have been implemented, and (3) the  
methods used and results found in evaluations of their		 
effectiveness.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-306 					        
    ACCNO:   A09440						        
  TITLE:     Community Development: Federal Revitalization Programs   
Are Being Implemented, but Data on the Use of Tax  Benefits Are  
Limited 							 
     DATE:   03/05/2004 
  SUBJECT:   Audit reports					 
	     Community development programs			 
	     Economically depressed areas			 
	     Federal grants					 
	     Grant award procedures				 
	     Grant monitoring					 
	     Program evaluation 				 
	     Reporting requirements				 
	     Tax credit 					 
	     HUD Empowerment Zones and Enterprise		 
	     Communities Program				 
                                                                 
	     Renewal Communities Program			 

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GAO-04-306

United States General Accounting Office

GAO

                       Report to Congressional Committees

March 2004

COMMUNITY DEVELOPMENT

 Federal Revitalization Programs Are Being Implemented, but Data on the Use of
                            Tax Benefits Are Limited

GAO-04-306

Highlights of GAO-04-306, a report to Congressional Committees

Congress established the Empowerment Zone and Enterprise Community (EZ/EC)
program in 1993 and the Renewal Community (RC) program in 2000 to provide
assistance to the nation's distressed communities. To date, Congress has
authorized three rounds of EZs, two rounds of ECs, and one round of RCs.

The Community Renewal Tax Relief Act of 2000 mandated that GAO audit and
report in 2004, 2007, and 2010 on the EZ/EC and RC programs and their
effect on poverty, unemployment, and economic growth. This report
describes (1) the features of the EZ/EC and RC programs, (2) the extent to
which the programs have been implemented, and (3) the methods used and
results found in evaluations of their effectiveness.

March 2004

COMMUNITY DEVELOPMENT

Federal Revitalization Programs Are Being Implemented, but Data on the Use of
Tax Benefits Are Limited

Both the EZ/EC and RC programs were designed to improve conditions in
distressed American communities; however, the features of the programs
have changed over time. Round I and II EZs and ECs received different
combinations of grant funding and tax benefits, while Round III EZs and
RCs received mainly tax benefits. To implement the programs, federal
agencies have, among other things, designated participating communities
and overseen the provision of program benefits. Since 1994, HUD and USDA
have designated a total of 41 EZs and 115 ECs, and HUD has designated 40
RCs. Available data show that Round I and II EZs and ECs are continuing to
access their grant funds and IRS data show that businesses are claiming
some tax benefits. However, IRS does not collect data on other tax
benefits and cannot always identify the communities in which they were
used. Also, efforts by HUD to obtain these data by survey were limited to
Round I designees, and EZ and RC officials have had difficulty obtaining
such information directly from businesses. The lack of tax benefit data
limits the ability of HUD and USDA to administer and evaluate the
programs.

The few evaluations that systematically collected and analyzed data on
EZ/EC program effectiveness used a variety of research methods to study
different aspects of the program. The most comprehensive of these
studies-the HUD Interim Assessment-found that employment of Round I EZ
residents had increased from 1995 to 2000, that larger businesses were
more likely to use tax benefits than smaller businesses, and that resident
participation in EZ or EC governance has been uneven, among other things.

To facilitate the administration, audit, and evaluation of the EZ/EC and
RC programs, we recommend that HUD, USDA, and IRS collaborate to (1)
identify the data needed to assess the use of the tax benefits; (2)
determine the costeffectiveness of collecting these data; (3) document the
findings of their analysis; and, if necessary, (4) seek the authority to
collect the data, if a cost-effective means is available. HUD and IRS
agreed with our recommendation, and USDA said such data could have
marginal utility.

www.gao.gov/cgi-bin/getrpt?GAO-04-306.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact William Shear, (202)
512-8678, [email protected].

      Geographic Location of EZ/EC and RC Communities as of September 2003

Contents

  Letter

Background
Results in Brief
EZ/EC and RC Programs Share Similar Goals and Objectives, but

Features Vary
The EZ/EC and RC Programs Are Well Under Way, but Data on the
Use of Some Benefits Are Limited
Among the Few EZ/EC Evaluations That Have Been Conducted,

Research Methods and Results Have Varied
Conclusions
Recommendation
Agency Comments

                                       1

                                      2 5

                                       7

20

41 45 46 46

Appendix I Scope and Methodology

Appendix II List of Designated Communities

Appendix III 	Federal Benefits Available to EZs, ECs, and RCs at the Time
of Designation and as of September 30, 2003

Appendix IV 	Other Tax Benefits Available to Businesses Serving Distressed
Communities and Low-Income Individuals

Appendix V Other Benefits Available to Certain Designees 65

  Appendix VI Summary of Evaluations of the EZ/EC Program 70

      Appendix VII         Comments from the Department of Housing and 
                                     Urban Development                     78 
     Appendix VIII    Comments from the Internal Revenue Service       
      Appendix IX           Comments from the U.S. Department of       
                                        Agriculture                    

Appendix X 	Comments from the Department of Health and Human Services

Appendix XI GAO Contacts and Staff Acknowledgments 86

GAO Contacts 86 Acknowledgments 86

Bibliography

Related GAO Products

  Tables

Table 1: Summary of Legislation Authorizing the EZ/EC and RC Programs 3
Table 2: Some Eligibility Requirements Differ among Rounds of the EZ/EC
Program and between the EZ/EC and RC Programs 10 Table 3: Social Services
Block Grant Funds Authorized for Round I EZs and ECs 14 Table 4: Economic
Development Initiative Grants for Supplemental

Empowerment Zones and Enhanced Enterprise

Communities 15 Table 5: HUD Appropriations for Round II Urban Designees,
Fiscal Years 1999-2003 (Dollars in thousands) 16

Table 6: USDA Allocation of Appropriations for Round II Rural

Designees, Fiscal Years 1999-2003 (Dollars in thousands) 17 Table 7:
Federal Tax Benefits Specifically Available to Businesses

Operating in EZs, ECs, and RCs 18 Table 8: Number of EZ/EC and RC
Nominations and Designations 25 Table 9: Amount of Grant Funds Awarded and
Drawn Down, as of

September 30, 2003 (Dollars in thousands) 30 Table 10: Limitations with
Data on EZ, EC, and RC Tax Benefits 35 Table 11: Variation in Census
Statistics for EZs, ECs, and RCs 51 Table 12: Confidence Intervals for EZ
Employment Credit

Estimates 53 Table 13: List of Designated Communities 55 Table 14: Summary
of Benefits Provided to EZs, ECs, and RCs at

the Time of Designation and as of September 30, 2003 61 Table 15: Other
Tax Benefits Available to Businesses Serving

Distressed Communities and Low-Income Individuals 63 Table 16: Section 108
Loan Guarantees for Supplemental

Empowerment Zones and Enhanced Enterprise

Communities 67 Table 17: Amount of Section 108 Loan Guarantees Awarded and

Used as of September 30, 2003 (Dollars in thousands) 67

  Figures

Figure 1: Timeline of Events in the Selection of EZ/EC and RC

Program Participants 22 Figure 2: Geographic Distribution of Designees By
Round 24 Figure 3: Geographic Location of All Designated Communities as of

September 30, 2003 27 Figure 4: Variation in Average Characteristics of
EZs, ECs, and RCs

(Based on 1990 census data) 29 Figure 5: Corporate Returns with EZ
Employment Credit 31 Figure 6: Individual Returns with EZ Employment
Credit 32 Figure 7: Number and Amount of Enterprise Zone, D.C. Enterprise

Zone, and EZ Facility Bonds Issued 1995 through 2001 34

Abbreviations

EC Enterprise Community
EZ Empowerment Zone
HHS Department of Health and Human Services
HUD Department of Housing and Urban Development
IRS Internal Revenue Service
RC Renewal Community
USDA U.S. Department of Agriculture

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United States General Accounting Office Washington, DC 20548

March 5, 2004

The Honorable Charles E. Grassley
Chairman
The Honorable Max S. Baucus
Ranking Minority Member
Committee on Finance
United States Senate

The Honorable William M. Thomas
Chairman
The Honorable Charles B. Rangel
Ranking Minority Member
Committee on Ways and Means
House of Representatives

For decades the nation has faced the challenge of revitalizing its
distressed
urban and rural communities. To help such communities, the federal
government provides assistance in the form of grants, tax benefits, loans,
and loan guarantees involving more than 100 programs and billions of
dollars. Within the past 11 years, Congress has created two new programs
to help distressed communities-the Empowerment Zone and Enterprise
Community (EZ/EC) program and the Renewal Community (RC) program.
When it was enacted in 1993, the EZ/EC program provided grants to public
and private entities for social services and community redevelopment and
tax benefits to local businesses to attract or retain jobs and businesses
in
distressed communities. More recently, this program has provided mainly
tax benefits. Since its enactment in 2000, the RC program has focused on
providing tax benefits to businesses in designated communities to attract
or retain jobs and businesses.

The Community Renewal Tax Relief Act of 2000, which created the RC
program, also mandated that we audit and report in 2004, 2007, and 2010
on the EZ/EC and RC programs and their effect on poverty,
unemployment, and economic growth. This report is the first in a series
examining these programs. Specifically, this report describes (1) the
features of the EZ/EC and RC programs, (2) the extent to which the
programs have been implemented, and (3) the methods used and the
results found in evaluations of the programs' effectiveness, especially in
terms of poverty, unemployment, and economic growth in the
participating communities.

To determine the features of each program, we reviewed statutes,
regulations, and program documentation and interviewed agency personnel.
To describe the implementation of these programs, we reviewed program
documentation, financial data, and taxpayer data and interviewed agency
personnel, community officials, and experts. To describe the methods used
in and the results of evaluations, we identified relevant research by
conducting several literature searches and interviewing agency personnel
and community development experts. Our descriptions include analyses of
data that have been and could be used to administer and evaluate the
programs. However, we did not evaluate the effectiveness of the programs
or their implementation in this report. We conducted our work between
April 2003 and February 2004 in accordance with generally accepted
government auditing standards. Appendix I provides additional details on
our scope and methodology.

                                   Background

The EZ/EC and RC programs target federal grant monies to public and
private entities, tax benefits to businesses, or both in order to improve
conditions in competitively selected, economically distressed communities.
To be considered for these programs, areas must be nominated by one or
more local governments and the state or states in which they are located.1
Areas on Indian reservations must be nominated by the reservation's
governing body.

Congress authorized the EZ/EC and RC programs under four separate acts of
legislation (see table 1). To date, Congress has authorized the
designation of three rounds of EZs, two rounds of ECs, and one round of
RCs. See appendix II for a list of all designated communities.

1An area can also meet this nomination requirement if it is nominated by
an economic development corporation chartered by the state.

     Table 1: Summary of Legislation Authorizing the EZ/EC and RC Programs

Program Title Summary

Round I EZ/EC Omnibus Budget Reconciliation Act of 1993  o  	Established
the EZ/EC program and its package of grants and tax benefits.

o  Authorized six urban and three rural Round I EZs.

o  Authorized 65 urban and 30 rural Round I ECs.

o  	Established the eligibility requirements and selection criteria for
EZ/ECs.

Round II EZ/EC Taxpayer Relief Act of 1997  o  Authorized 5 rural and 15
urban Round II EZs.

o  Authorized two additional Round I EZs.

o  Changed the eligibility requirements for EZ/ECs.

a

o  Created the Washington, D.C. Enterprise Zone.

Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1999

o  Authorized up to 20 additional rural ECs.

                                Round III EZ and

  Community Renewal Tax Relief Act of 2000  o  Authorized two rural and seven
                        urban Round III EZ designations.

RC

o  Established the RC program and its package of tax benefits.

o  	Authorized designation of 40 RCs, with 12 designations reserved for
rural areas. Designation valid until December 31, 2009.

o  Made some additional tax benefits available to EZs.

o  	Extended Round I and II EZ designations through December 31, 2009.b

Source: GAO summary of P.L. 103-66, P.L. 105-34, P.L. 105-277, and P.L.
106-554.

aThe D.C. Enterprise Zone received a set of tax benefits that are similar
to those of EZ/ECs, but are unique to this designation.

bThe designation for all Round I ECs will expire as previously scheduled
on December 31, 2004.

The Omnibus Budget Reconciliation Act of 1993 authorized the number of
EZ/EC designations to be awarded in the first round of the program, as
well as the benefits that the designated communities would receive. The
legislation authorized the special use of $1 billion in Social Services
Block Grant funds for the EZ/EC program.2 It also established three tax
benefits for businesses in the designated communities: (1) a tax credit
for wages paid to employees who both live and work in an EZ, (2) an
increased expensing deduction for depreciable property, and (3) tax-exempt
bonds.3

2Social Services Block Grant funds, administered by the Department of
Health and Human Services (HHS), have been available to state governments
since 1981 to address the social service needs of their residents.

3Businesses in Round I ECs are eligible only for the tax-exempt bond
benefit.

At the same time that the Department of Housing and Urban Development
(HUD) and the U.S. Department of Agriculture (USDA) announced the Round I
designations, HUD created two additional designations- Supplemental
Empowerment Zones and Enhanced Enterprise Communities. Unlike EZs or ECs,
these designations were not legislatively mandated. Rather, they were
awarded to communities that had been nominated for but did not receive EZ
designations.4 HUD designated two communities as Supplemental Empowerment
Zones and four communities as Enhanced Enterprise Communities. HUD
provided these communities with certain grants and loan guarantees, which
can be used for activities eligible under the Community Development Block
Grant program.

The second round of EZ/EC designations and the benefits those designees
would receive were authorized by two acts of legislation-the Taxpayer
Relief Act of 1997 and the Omnibus Consolidated and Emergency Supplemental
Appropriations Act of 1999. However, neither act authorized block grant
funding for Round II EZs and ECs. Instead, Round II EZs and ECs received
annual appropriations through HUD and USDA appropriations bills each year
from 1999 to 2004.

The Community Renewal Tax Relief Act of 2000 enhanced the tax benefits
available to businesses in newly designated EZs and made these new tax
benefits available to EZs that had been designated in previous rounds, but
not to ECs. The legislation also did not make any appropriations or grant
funds available to Round III EZs or to RCs. However, in January 2004, the
Consolidated Appropriations Act of 2004 appropriated a total of $994,100
to Round III rural EZs. This legislation did not make any funding
available to Round III urban EZs or RCs.

Four federal agencies are responsible for administering the programs:

o  	HUD oversees the EZ/EC program in urban areas, administers the grants
to Round II urban EZs, and oversees the RC program in both urban and rural
areas.

o  	USDA oversees the EZ/EC program in rural areas and administers the
grants to Round II rural EZ/ECs and Round III EZs.

4One Supplemental Empowerment Zone and all four Enhanced Enterprise
Communities had also received Round I EC designations.

o  	The Department of Health and Human Services (HHS) administers the
Social Services Block Grant funds to communities designated in Round I of
the EZ/EC program.5

o  The Internal Revenue Service (IRS) is responsible for administering the

  Results in Brief

tax benefits available under the EZ/EC and RC programs.

Although the EZ/EC and RC programs have similar goals and objectives, we
found that the features differed among the EZ/EC rounds and between the
EZ/EC and RC programs. First, administrative features varied under the
different EZ/EC rounds and between the EZ/EC and RC programs. For example,
an interagency Community Empowerment Board consisting of high ranking
federal officials existed to facilitate interagency coordination in Rounds
I and II of the EZ/EC program, but not in Round III, and a smaller
Advisory Council appointed by the HUD Secretary and consisting of
individuals from nonprofit and for-profit organizations advises HUD on the
RC program. Second, eligibility requirements often differed among rounds
and between the programs. For example, the poverty level required for
eligibility decreased between EZ/EC rounds and between the EZ/EC program
and the RC program. Third, the participants for the two programs were
selected differently. For instance, EZ/EC nominees were judged on the
effectiveness of their strategic plans and assurances that these plans
would be carried out, while RC nominees were selected on the basis of the
communities' poverty, unemployment, and income statistics. Finally, the
benefits available to designees varied both by round and by program. EZs
and ECs in the first two rounds of designation received different
combinations of benefits, including grant funding and tax benefits, while
Round III EZs and RCs received mainly tax benefits.

To implement the EZ/EC and RC programs at the national level, the federal
agencies involved have carried out selection procedures; designated
participating communities; provided program benefits, outreach, and
technical assistance; and monitored community performance. Since 1994,
over the course of three rounds HUD has designated 31 urban EZs and 65
urban ECs, and USDA has designated 10 rural EZs and 50 rural ECs.6 In

5HHS does not participate in the administration of Rounds II and III of
the EZ/EC program or in the RC program, because Congress only authorized
these grants in Round I of the EZ/EC program.

6At the same time as Round I EZ/EC designations, HUD also designated two
Supplemental Empowerment Zones and four Enhanced Enterprise Communities.

2002, HUD also designated 40 RCs-28 urban and 12 rural. In addition,
several federal agencies have provided grant funding, tax benefits, and
other program benefits. Data from HHS indicate that the 104 Round I EZ/EC
designees have drawn down about 70 percent of their $1 billion in Social
Services Block Grant funds, while HUD and USDA data show that the 40 Round
II designees have drawn down about 40 percent of their $434 million in
grant funds. IRS data showed that taxpayers claimed an estimated $251
million in EZ Employment Credits between 1995 and 2001. Over that same
period of time, state and local governments issued about $315 million in
tax-exempt facility bonds for the benefit of businesses in EZs and Round I
ECs. However, IRS does not have data on the use of other benefits, such as
the increased expensing deduction, the Commercial Revitalization
Deduction, or the Nonrecognition of Gain on the Sale of EZ Assets. In
addition, IRS does not collect data that would enable it to link the use
of data for the employment credit to specific designated communities.
Senior IRS officials indicated that they do not collect this information
because, among other things, these tax benefits are not considered high
risk since the amount claimed is small, compared with revenues collected
from other tax provisions. The lack of data on the use of the tax benefits
available to businesses in designated communities limits the ability of
(1) HUD and USDA to administer the programs; (2) designated communities to
attract additional resources; and (3) HUD, USDA, and others to audit or
evaluate the programs.7 We found that federal agencies had provided
outreach and technical assistance to applicants and designees through
training, conferences, written guidance, and Web sites. HUD and USDA have
also established oversight procedures for participating communities that
include online reporting systems to collect performance data. But recent
GAO, HUD Inspector General (IG), and USDA IG reports have raised concerns
about EZ/EC program oversight and the reliability of program performance
data.

The few evaluations that systematically collected and analyzed data on
EZ/EC program effectiveness used a number of research methods and reported
results that varied, depending upon the aspect of the program studied.8
None of the evaluations we reviewed assessed the effect of the program on
poverty, although one assessed its effect on resident employment and three
assessed its effect on aspects of economic growth

7HUD and USDA expect EZs, ECs, and RCs to use their designations to
attract additional investment.

8None of the evaluations we reviewed analyzed the RC program.

in the designated communities. Those evaluations that have been conducted
used a variety of research methods-including statistical analyses,
surveys, and document reviews-to carry out their research. In some cases,
the data available to researchers affected the methods they chose. For
example, the most comprehensive of these evaluations-the HUD Interim
Assessment-included a survey of businesses as a way to partly address a
lack of data on the use of tax benefits.9 The HUD Interim Assessment
found, among other things, that employment of Round I EZ residents had
increased from 1995 to 2000, that larger businesses were more likely to
use tax benefits than smaller businesses, and that resident participation
in EZ or EC governance had been uneven. As with all evaluations of
community development programs, these evaluations were also subject to
some limitations. In particular, the researchers faced challenges
demonstrating what would have happened in the communities in the absence
of the program.

This report contains a recommendation to facilitate the administration,
audit, and evaluation of the EZ/EC and RC programs. We recommend that HUD,
USDA, and IRS collaborate to (1) identify the data needed to assess the
use of the tax benefits and the various means of collecting such data; (2)
determine the cost-effectiveness of collecting these data, including the
potential impact on taxpayers and other program participants; (3) document
the findings of their analysis; and, if necessary, (4) seek the authority
to collect the data, if a cost-effective means is available.

Although the EZ/EC and RC programs have similar goals and objectives,
several features of the programs vary within the EZ/EC program by round
and between the EZ/EC and RC programs. The EZ/EC and RC programs share the
goal of improving conditions in distressed communities by reducing
unemployment and fostering investment in designated areas. However,
certain administrative mechanisms, eligibility requirements, selection
criteria, and benefits vary among EZ/EC rounds and between the EZ/EC and
RC programs.

9Scott Hebert and others, Interim Assessment of the Empowerment Zones and
Enterprise Communities (EZ/EC) Program: A Progress Report, prepared for
U.S. Department of Housing and Urban Development (Washington, D.C.:
November 2001).

  EZ/EC and RC Programs Share Similar Goals and Objectives, but Features Vary

    EZ/EC and RC Programs Have Similar Goals and Objectives

Although the legislation that created the EZ/EC and RC programs does not
explicitly state the goals for these programs, HUD's and USDA's
performance plans suggest that the goals of the programs are similar.
According to HUD's Annual Performance Plan for Fiscal Year 2004, the EZ/EC
and RC programs are contained within its strategic goal to strengthen
communities. Similarly, in its Fiscal Year 2004 Annual Performance Plan
and Revised Plan for Fiscal Year 2003, USDA includes the EZ/EC program
under the strategic goal to "support increased economic opportunities and
improved quality of life in rural America."

HUD's and USDA's implementing regulations for the EZ/EC program include a
statement of their "objective and purpose," each of which generally states
that the EZ/EC program is intended to reduce unemployment and promote the
revitalization of economically distressed areas. HUD's regulations
implementing the RC program do not have an objective and purpose
statement; however, HUD's guidance states that the RC program is intended
"to foster investment in the designated areas, which are some of the most
severely distressed and development-resistant areas in the Nation."10
Further, HUD program officials have stated that they regard the RC program
as pursuing the same objective and purpose as the EZ/EC program, but
relying on different methods.

    EZ/EC Program Rounds I and II and the RC Program Received Administrative
    Assistance

Certain features designed to help in the administration of the EZ/EC and
RC programs varied by round in the EZ/EC program and between the EZ/EC and
RC programs. To facilitate federal interagency coordination in the EZ/EC
program, a 26-member Community Empowerment Board was established in 1993,
with the U.S. Vice President as its chair and cabinet secretaries and
other high-ranking federal officials as members. The board's function was
to consult in the designation of Round I and II EZs and ECs and coordinate
the various federal agency resources that EZs and ECs would use to
implement their strategic plans. For example, the Community Empowerment
Board encouraged other agencies to provide preference points to EZs and
ECs in selection competitions for other federal programs. The Community
Empowerment Board was disbanded prior to Round III of the EZ program.

10U.S. Department of Housing and Urban Development, "Renewal Communities:
Urban and Rural Application Guide" (Washington, D.C.: 2001).

In 2000, the legislation creating the RC program established a sevenmember
Advisory Council on Community Renewal to advise the HUD Secretary on the
selection of designees and the operation of the RC program. Unlike the
Community Empowerment Board, the Advisory Council does not have federal
interagency membership. Instead, the members of the Advisory Council
include individuals from nonprofit and for-profit organizations who are
appointed by the HUD Secretary. The legislation that created it required
the Advisory Council to hold hearings "as appropriate," obtain data from
federal agencies, and submit a report containing a detailed statement of
the council's findings and conclusions and any recommendations to the HUD
Secretary by September 30, 2003. HUD officials expect an interim report
from the Advisory Council to be released sometime in February 2004 and the
final report in October 2004.

    The EZ/EC and RC Programs Have Had Different Eligibility Requirements

Communities nominated for EZ/EC or RC designations have been required to
meet certain eligibility requirements based largely on the socioeconomic
characteristics of the residents living in the nominated areas.
Specifically, nominated census tracts have been required to meet statutory
or regulatory requirements for (1) poverty in each census tract, (2)
overall unemployment, (3) total population, (4) total area in square miles
(in the case of the EZ/EC program), and (5) general distress.11 In most
cases, these requirements were based on 1990 census data. The levels
required for eligibility differed by round, by program, and between urban
and rural nominees. For example, the statutory requirements for poverty
differed between Round I and subsequent rounds of the EZ/EC program, and
between the EZ/EC program and the RC program. In the absence of statutory
guidelines, HUD and USDA regulations defined other eligibility
requirements differently (see table 2). For example, the requirements for
unemployment differed between urban and rural nominees and between the
EZ/EC program and the RC program.12 The

11In Rounds II and III of the EZ/EC program, nominated communities located
in Alaska or Hawaii could also use income criteria instead of criteria for
poverty, size, and general distress.

12In the EZ/EC program, the legislation required that the nominated area
have "pervasive" unemployment, but did not define this term. In its
regulations, HUD defined unemployment as not less than the national
average rate of unemployment in the 1990 census. In contrast, USDA
specified that unemployment could be demonstrated by a combination of
information on the unemployed, underemployed, discouraged workers, plant
or military base closings, or "other relevant unemployment indicators,"
but did not specify the required level of unemployment. In Rounds II and
III, the legislation also allowed nominees in rural areas to use
outmigration criteria as an alternative to poverty criteria.

population requirements also differed between urban and rural nominees and
by program. Finally, communities nominated for the EZ/EC program were
required to meet area requirements, while RC nominees were not. 13

Table 2: Some Eligibility Requirements Differ among Rounds of the EZ/EC Program
                     and between the EZ/EC and RC Programs

Urban EZ/EC Rural EZ/EC RC Round I Rounds II and III Round I Rounds II and
III Minimum required 35% in 50% of tracts and 25% in 90% of 35% in 50% of
tracts 25% in 90% of 20% in all tractsc

poverty level in nominated census tractsa

                            25% in 90% of tracts and

b

20% in all tracts tracts and 20% in all tractsb and

25% in 90% of tracts and

20% in all tractsb tracts and 20% in all tractsb

Minimum required 6.3%a,d 6.3%a,d No minimum specified; could be 9.45%a,e
unemployment rate demonstrated by several different indicators

    Required        Maximum: 200,000 or the Maximum: Maximum:    Maximum:     
                          greater of 50,000  30,000    30,000 
               or 10% of the population of  Minimum: Minimum:         200,000 
populationa the most populous city         None     None    Minimum: 4,000 
               within the nominated area                      
                                                              if any portion  
                      Minimum: None                           is within a     
                                                              metro           
                                                                area, 1,000   
                                                                fotherwise    

      Maximum     20 square                  1,000                            
     required      milesg          20 square square        1,000 square Nonei
                                      miles, milesg              miles, 
      area a                  with up to 3               with up to 3   
                                                        developable     
                               developable              sitesg,h        
                                sitesg,h                                

Source: GAO summary of P.L. 103-66, P.L. 105-34, P.L. 106-554, 24 C.F.R.
597, 24 C.F.R. 598, 24 C.F.R. 599, and 7 C.F.R. 25.

aBased on 1990 census data.

bIn all rounds of the EZ/EC program, communities were not able to include
census tracts containing central business districts in the nominated area
unless those areas have a poverty level of 35 percent or greater. The
authorizing legislation also established special requirements for
nominated census tracts with low or no population.

cIn urban areas, at least 70 percent of households must have incomes below
80 percent of local median.

dThe 1990 national average unemployment rate was 6.3 percent. Evidence of
especially severe economic conditions could also be used to meet the
unemployment test.

eThis number is 1.5 times the 1990 national unemployment rate.

fNo population restriction exists if nominated area is entirely within an
Indian reservation.

gNominated communities may include up to three noncontiguous parcels.

13Also, while Round I EZ/EC nominees could not include any area on an
Indian reservation, nominees for other rounds of the EZ/EC program and for
the RC program could.

hA developable site is a parcel of land in a nominated area that may be
developed for commercial or industrial purposes. The developable site can
be no more than 2,000 acres and can be noncontiguous to other nominated
areas.

iAlthough the legislation did not impose any maximum area requirements for
the RC program, it did stipulate that the area boundary be continuous.

Nominated communities were also required to show conditions of general
distress. Because the legislation did not define the term "general
distress," HUD and USDA each provided communities with lists of potential
indicators containing criteria that could be used to meet this
requirement. HUD provided Round I urban EZs and ECs with a list of six
indicators and communities in Rounds II and III of the EZ/EC program and
the RC program with a list of 17 indicators.14 USDA provided Round I, II,
and III rural EZs and ECs with a list of 14 indicators.15 For example,
USDA's Round I list included indicators not included in HUD's Round I
list, such as a below-average or declining per capita income, earnings per
worker, per capita property tax base, and average years of school
completed. USDA, in turn, did not include homelessness as an indicator of
general distress, while HUD included homelessness.

As a part of the EZ/EC eligibility requirements, nominated communities
were also required to submit a strategic plan. The strategic plan had to
follow the four key principles of the EZ/EC program, which were
established by HUD and USDA in their regulations:

o  	Economic opportunity-including job creation within the community;
supporting entrepreneurship; small business expansion; and job training,
job readiness, and job support services.

o  	Sustainable community development-advancing the creation of livable
and vibrant communities through comprehensive approaches that coordinate
economic, physical, environmental, community, and human development.

o  	Community-based partnerships-involving the participation of all
segments of the community, including the political leadership, community
groups, the private and nonprofit sectors, and individual citizens.

1424 C.F.R. 597.102(c), 24 C.F.R. 598.110(c), 24 C.F.R.
599.105(e)(2)(iii). 157 C.F.R. 25.102(c).

o  	Strategic vision for change-coordinating a response to community needs
in a comprehensive fashion and setting goals and performance measures.

HUD's and USDA's regulations implemented legislative requirements
regarding community participation in the development of their strategic
plans. Nominees were to obtain community input to identify their
communities' needs and to develop plans for addressing them according to
the four principles. Nominees were also required to describe the role
citizens would play in the implementation of the plans.

To be eligible for the RC program, nominees were required to submit a
"course of action," in which they committed to carry out four of six
specific legislatively mandated activities:

o  A reduction of tax rates or fees applying within the RC;

o  An increase in the level of efficiency of local services within the RC;

o  Certain crime reduction strategies;

o  	Actions to reduce, remove, simplify, or streamline governmental
requirements applying within the RC;

o  	Involvement in economic development activities by private entities,
organizations, neighborhood organizations, and community groups; and

o  	The gift or sale at below fair-market value of surplus real property
in the RC held by state or local governments to neighborhood
organizations, community development corporations, or private companies.

In addition, communities nominated for RC designation had to certify that
they would meet four of five legislatively specified economic growth
promotion requirements, such as repealing or reducing some occupational
licensing requirements, zoning restrictions, permit requirements, or
franchise and other business restrictions. The designees were also
responsible for submitting plans within 6 months of designation for
promoting the use of the tax benefits and for carrying out other state and
local commitments. RCs were required to certify that they had solicited
community input but not that community representatives had been involved
in developing the course of action.

    EZ/EC and RC Selection Criteria Differ

The selection criteria contained in the authorizing legislation for the
EZ/EC and RC programs differed substantially. For the EZ/EC program, HUD
and USDA were required to rank nominees based on the effectiveness of
their strategic plans, the nominees' assurances that the plans would be
implemented, and additional criteria specified by the respective
Secretary.16 In Round I of the EZ/EC program, the legislation also
reserved designation for nominees with certain characteristics.17 In
contrast, the RC selection process did not require a review of the
effectiveness of the planning documents, such as the course of action,
that communities submitted to meet eligibility requirements. Instead, the
legislation authorizing the program required HUD to select the highest
average ranking nominees based on poverty, unemployment, and, in urban
areas, income statistics. HUD was also required to consider the extent of
crime in the area and whether the nominated area contained any tracts that
were identified in one of our reports as being distressed.18 For the first
20 designations, HUD was to give preference to existing EZs and ECs that
had been nominated and met the eligibility requirements for designation as
an RC; the remaining designations went to the next-highest scorers.

    EZ, EC, and RC Benefits Differed by Round and by Program

As discussed earlier, the authorizing legislation provided EZ/EC and RC
program participants with grants, tax benefits, or both. Over the course
of the three rounds of the EZ/EC program, however, the amount of the
grants available to EZs declined, and the number of tax benefits
increased. In Rounds I and II, ECs received much smaller grant benefits
than EZs. Businesses in Round I ECs were eligible for one tax benefit;
however, businesses in Round II ECs were not eligible for any tax
benefits. RCs did not receive grants, but businesses operating in RCs were
eligible to receive tax benefits. In addition, HUD and USDA provided
designated communities with other benefits. For example, HUD and USDA
provided Round II EZ/ECs with grant funds from their annual
appropriations. See

16The secretarial criteria used by HUD and USDA differed in each round of
the EZ/EC program. For example, in Round I, HUD included geographic
diversity. USDA also considered the diversity within and among the
nominated areas in Round I, but did not limit it to the geographic
diversity used in HUD regulations. In Round II, HUD removed the
secretarial criteria used for Round I.

17It specified that one urban EZ be designated in an area where the most
populous city had a population of 500,000 or less and that one urban EZ be
designated in an area that included two states and had a combined
population of 50,000 or less.

18U.S. General Accounting Office, Community Development: Identification of
Economically Distressed Areas, RCED-98-158R (Washington, D.C.: May 12,
1998).

Grants Were Available to Round I and II EZs/ECs and to Some Rural Round
III EZs

appendix III for a table summarizing the benefits provided to the
designated communities.

Congress appropriated a total of $1 billion in Social Services Block
Grants for the benefit of Round I EZs and ECs (see table 3). These funds
were to be used to (1) prevent, reduce, or eliminate dependency; (2)
achieve or maintain self-sufficiency; and (3) prevent neglect, abuse, or
exploitation of children and adults. In addition, the legislation required
that the funds be used to benefit EZ/EC residents and in accordance with
designees' strategic plans. Like other Social Services Block Grant funds,
those allotted for the EZ/EC program were granted to the states, which
were given fiscal responsibility for them. The legislation authorizing the
EZ/EC program requires that the states obligate these grants for specific
EZ or EC community-based organizations in accordance with state laws and
procedures and within 2 years of the date that HHS awarded the funds.
These block grant funds remain available to finance qualified projects
until December 21, 2004, after which time the grants are subject to state
closeout procedures, and all amounts reported as unspent must be returned
to the federal government.19

Table 3: Social Services Block Grant Funds Authorized for Round I EZs and
ECs

                                         Total amount of block     Amount per 
                             Designation   grants authorized         designee 
                       Round I urban EZs           $600 million  $100 million 
                       Round I rural EZs           $120 million   $40 million 
           Round I ECs (urban and rural)           $280 million $2.95 million 
                                   Total             $1 billion 

Source: P.L. 103-66 and GAO analysis.

As stated previously, HUD created the Supplemental Empowerment Zone and
Enhanced Enterprise Community designations at the same time as the Round I
EZ/EC designations. HUD awarded $300 million in Economic Development
Initiative grants to the two Supplemental Empowerment Zones and four
Enhanced Enterprise Communities (see table 4).20 These

19According to an HHS official, HHS is currently establishing policies for
granting extensions to EZs and ECs with unspent Social Services Block
Grant funds.

20HUD awarded separate Economic Development Initiative grants to
overlapping or adjacent government entities in the city and county of Los
Angeles, California, and in Kansas City, Missouri and Kansas City, Kansas.
As a result, HUD awarded Economic Development Initiative grants to eight
government entities.

grants were designed to enhance the feasibility of certain economic
development or revitalization projects by paying for certain project costs
or providing additional security for loans that finance such projects. The
government entities were required to use these grants in accordance with
the community's strategic plan and Community Development Block Grant
regulations.

Table 4: Economic Development Initiative Grants for Supplemental
Empowerment Zones and Enhanced Enterprise Communities

Amount in allocated Economic Local government entity Development
Initiative grants

                         Supplemental Empowerment Zones

Los Angeles, Calif. (city) $100 million Los Angeles, Calif. (county) $25 million

                           Cleveland, Oh. $87 million

                        Enhanced Enterprise Communities

                           Boston, Mass. $22 million

                          Oakland, Calif. $22 million

                           Houston, Tex. $22 million

         Kansas City, Mo. $14.2 million Kansas City, Kans. $7.8 million

                               Total $300 million

Source: HUD.

Initially, the administration planned to provide the Round II EZ designees
with the same level of funding as Round I designees. Instead, Round II
EZ/EC designees received funding through annual appropriations for HUD and
USDA in fiscal years 1999 through 2003 (see tables 5 and 6).21 According
to HUD's annual appropriations legislation, program grants for Round II
urban designees are to be used in conjunction with economic development
activities consistent with designees' strategic plans.22 The

21The data in this report are as of September 30, 2003. However, in
January 2004, the Consolidated Appropriations Act of 2004 appropriated an
additional $14.9 million for Round II urban EZs and $11.6 million for
Round II rural EZs and ECs.

22According to HUD officials, HUD is currently developing regulations that
would clarify "economic development activities." In lieu of an explicit
rule, HUD has advised Round II urban EZs that acceptable economic
development activities include job creation and training, entrepreneurial
activities, small business expansion, and job support services such as
affordable child care and transportation services that would help zone
residents gain employment in jobs that offer upward mobility.

USDA appropriations language did not impose these requirements on Round II
rural designees; however, in March 2002, USDA issued regulations limiting
the allowable uses of Round II grants to those for Round I EZ/EC Social
Services Block Grants. Unlike Round I funds, which pass through a state
agency, Round II EZs and ECs access their grants directly from HUD or
USDA. In most cases, these funds are available to communities until
expended.23

Table 5: HUD Appropriations for Round II Urban Designees, Fiscal Years
1999-2003 (Dollars in thousands)

                       Total appropriations to Round II 
           Fiscal year                        urban EZs Appropriations per EZ 
                  1999                          $45,000                $3,000 
                  2000                          $55,000                $3,667 
               2001a,b                         $184,593               $12,306 
                  2002                          $45,000                $3,000 
                 2003b                          $29,805                $1,987 
                 Total                         $359,398               $23,960 

Source: P.L. 105-277, P.L. 106-74, P.L. 106-377, P.L. 106-554, P.L.107-73,
P.L. 108-7, and GAO analysis.

aIn fiscal year 2001, funds were appropriated in two separate pieces of
legislation. bAppropriations in these years were affected by rescissions.

23However, fiscal year 2003 appropriations for Round II urban EZs will
remain available only until September 30, 2005.

Table 6: USDA Allocation of Appropriations for Round II Rural Designees,
Fiscal Years 1999-2003 (Dollars in thousands)

                                                Total           
                                                allocations     
         Fiscal Total                           to Round II        Allocation 
                allocations to   Allocation per rural                     per 
           year Round II rural               EZ            ECsa            EC 
                EZsa                                            
           1999          $10,000         $2,000          $5,000          $250 
           2000          $10,000         $2,000          $5,000          $250 
          2001b           $9,978         $1,996          $4,989          $249 
           2002           $9,978         $1,996          $4,989          $249 
          2003b           $9,913         $1,983          $4,957          $248 
          Total          $49,869         $9,975         $24,935        $1,247 

Tax Benefits Have Increased Since the EZ/EC Program Began

Source: P.L. 105-277, P.L. 106-74, P.L. 106-377, P.L. 106-554, P.L.
107-73, P.L. 108-7, and GAO analysis.

aOnly the fiscal year 1999 bill distinguished between appropriations to
the rural EZs and rural ECs. For other years, Congress appropriated funds
for the rural EZ/EC program, and USDA allocated the appropriations between
the EZs and ECs.

bAppropriations in these years were affected by rescissions.

As of September 30, 2003, no direct funding was available for Round III
EZs or RCs. However, the Consolidated Appropriations Act of 2004
appropriated $994,100 for Round III rural EZs.24 It did not appropriate
funding for Round III urban EZs or any RCs.

Businesses operating in or employing residents of EZs and RCs are eligible
for a number of federal tax benefits designed to encourage business
investment (see table 7). Businesses operating in ECs are generally
ineligible for the tax benefits, although state and local governments can
issue tax-exempt bonds for businesses in Round I ECs. Since the initial
legislation authorizing the EZ/EC program, the number of federal tax
benefits has grown.25 For example, businesses operating in Round I EZs
were originally eligible for three tax benefits: (1) a credit for wages
paid to employees who both live and work in an EZ, (2) an increased
expensing

24P.L. 108-199. We did not include these funds in our analysis because the
data in this report are as of September 30, 2003.

25In 1993, the Joint Committee on Taxation estimated that the tax benefits
available to businesses in Round I communities would result in a $2.5
billion reduction in tax revenues between 1994 and 1998. In 2000, this
committee estimated that the EZ and RC tax benefits contained in the
Community Renewal Tax Relief Act of 2000 would reduce tax revenues by a
total of about $3.9 billion between 2001 and 2005, and about $10.9 billion
between 2001 and 2010.

deduction for depreciable property, and (3) tax-exempt bonds.26 By 2002,
businesses operating in EZs were eligible for several additional tax
benefits, including capital gains exclusions, and more generous taxexempt
bond and expensing provisions. In addition to some of the same tax
benefits available in EZs, businesses operating in RCs were also eligible
for a deduction on commercial property and a different type of capital
gains exclusion. These benefits are generally available until 2009, when
the EZ and RC designations expire.

Table 7: Federal Tax Benefits Specifically Available to Businesses Operating in
                               EZs, ECs, and RCs

    Tax benefit   Expiration year Applicable zones         Provisions         
Effective year                                  
EZ Employment       2009             EZs            Businesses can claim a 
    Credit 1994a                                     20-percent credit on the 
                                                        first $15,000 paid in 
                                                    wages to EZ residents who 
                                                   perform substantially all  
                                                   of their work in the EZ.   

Increased Section 179 1994 2009 EZs and RCs       Qualified businesses can 
                                                          deduct $35,000 more 
         Deduction                                 than the maximum allowable 
                                                              deduction under 
                                                  section 179 of the Internal 
                                                             Revenue Code for 
                                               certain qualifying property in 
                                               the year the                   
                                                  b property was placed in    
                                                          service.            

Enterprise Zone 1994 2009c EZs and Round I Facility Bonds ECs

State and local governments can issue taxexempt bonds to provide loans to
qualified businesses to finance certain property. A business cannot
receive more than $3 million in bond proceeds for activities in any EZ or
Round I EC or more than $20 million for activities in all EZs and Round I
ECs nationwide. These bonds are also subject to state volume caps, which
limit the amount of tax-exempt debt that state and local government
entities can issue.

EZ Facility Bonds 1998d 2009 EZse	State and local governments can issue
taxexempt bonds to provide loans to qualified businesses to finance
certain property.f State and local government entities can issue up to $60
million for each rural EZ, $130 million for each urban EZ with a
population of less than 100,000, and $230 million for each urban EZ with a
population greater than or equal to 100,000. These bonds are not subject
to state volume caps.

    Nonrecognition of   2000g 2009 EZs  Taxpayers that incur capital gains on 
                                                                  the sale of 
Gains on the Sale of                qualified assets may elect to postpone 
                                                                        those 
        EZ Assets                         gains from tax liability if they    
                                                     purchase a               
                                         replacement asset within 60 days.    

26A deduction for depreciable property reduces a taxpayer's taxable income
for assets that could be used for over 1 year.

Tax benefit Effective year Expiration year Applicable zones Provisions

Partial Exclusion of 2000h 2009 EZs     Taxpayers that hold stock for more 
                                                                 than 5 years 
Gain on the Sale of                  in corporations with assets under $50 
                                                                      million 
         EZ Stock                            incur a tax liability on only 40 
                                                             percent of their 
                                          capital gains, provided the company 
                                                                 offering the 
                                        stock is a qualified zone business.   

RC Employment 2002 2009 RCs 	Businesses can claim a 15-percent credit on
the perform substantially all of their work in the RC.

Credit first $10,000 paid in wages to RC residents who

     Commercial   2002 2009 RCs Businesses that receive an allocation from an 
Revitalization                 agency authorized by the state for costs    
     Deduction                            associated with new construction or 
                                                                   renovation 
                                    of nonresidential commercial property can 
                                                                       either 
                                deduct half of the qualifying expense for the 
                                                                         year 
                                 in which a building is placed in service or  
                                 amortize all of the expenses over a 10-year  
                                                   period.                    

Zero Percent Capital 2002i 2009 RCs Investments in qualified RC businesses 
    Gains Rate for RC                    purchased after 2001 and before 2010 
                                                                     and held 
          Assets                       for more than 5 years are not subject  
                                       to tax                                 
                                            liability on capital gains.       

Source: GAO summary of HUD and IRS publications; P.L. 103-66, P.L. 105-34,
P.L. 105-277, and P.L. 106-554.

aBusinesses in Round II EZs did not become eligible until 2002.

bThe term "placed in service" indicates the year in which the business
began using the property for which it is claiming the deduction. Between
1994 and 2001, businesses could deduct $20,000 more than the maximum
allowable section 179 deduction.

cState and local governments can issue these bonds for the benefit of EZs
through 2009. However, these bonds can be issued for the benefit of Round
I ECs only through 2004.

dState and local governments could issue these bonds for qualified EZs
beginning in December 1998, the month of Round II designation. However, no
EZ Facility Bonds were issued until 1999.

eBusinesses in Round I EZs did not become eligible until 2002.

fPurchasers of tax-exempt bonds incur no federal tax liability on interest
income.

gTaxpayers have to purchase the asset after December 21, 2000, and before
2010 and hold it for more than a year to be eligible for this benefit.

hTaxpayers have to make the investment after December 21, 2000, and before
2010 and hold it for more than 5 years to be eligible for this benefit.

iTaxpayers have to make the investment after 2001 and before 2010 and hold
it for more than 5 years to be eligible for this benefit.

Taxpayers Can Claim Other Taxpayers operating businesses in or employing
residents of EZs, ECs, or
Benefits Not Specific to RCs can also claim other tax benefits not
specific to the federal
Federal Designations designations. Some federal tax benefits are aimed at
businesses that

operate or invest in a distressed community or that employ or provide
housing for low-income persons. For example, certain banks, insurance
companies, and corporations that lend money may purchase Qualified Zone
Academy Bonds, which raise funds for public schools located in low-

income areas, such as those located in EZs or ECs. Purchasers of these
bonds receive a tax credit in lieu of interest payments. (See app. IV for
examples of federal tax benefits aimed at distressed communities and
lowincome individuals.) In addition to the federal tax benefits,
businesses operating in federally designated EZs, ECs, and RCs may also be
eligible for tax benefits from the state when a federal designation
overlaps with a state-designated Enterprise Zone. While the specific tax
benefits provided to businesses operating in state Enterprise Zones vary
from state to state, they can include credits on state taxes against
withholdings, property tax reductions, and sales tax exemptions.

In addition to grant monies and tax benefits, certain designees have also
been eligible for other benefits. In Round I of the EZ/EC program, HUD and
USDA guidance invited nominees to request, as an addendum to their
applications, waivers from federal programmatic, statutory, or regulatory
requirements to facilitate their ability to conduct revitalization
efforts. Also, communities designated by HUD as Supplemental Empowerment
Zones or Enhanced Enterprise Communities were provided with a total of
$653 million in Section 108 Loan Guarantees to provide security for loans
that finance economic development and revitalization projects.27 Finally,
HUD and USDA expect EZs, ECs, and RCs to use their designations to attract
additional investment. In some cases, EZ, EC, and RC designees were
provided with a competitive priority in other federal programs to help
them meet this expectation. Appendix V provides details on these benefits.

Other Benefits Were Also Available to Certain Designees

  The EZ/EC and RC Programs Are Well Under Way, but Data on the Use of Some
  Benefits Are Limited

To date, the federal agencies have selected three rounds of EZs, two
rounds of ECs, and one round of RCs; provided program benefits, outreach,
and technical assistance; and established oversight procedures. Available
data indicate that community organizations and businesses are using the
program benefits; however, certain limitations with tax benefit data will,
among other things, make it difficult to audit or evaluate the programs
and limit the ability of designated communities to report on their
activities.

27A Section 108 Loan Guarantee allows local governments to obtain loans
for economic development projects that (1) benefit low and moderate income
families, (2) prevent or eliminate slums or blight, or (3) meet other
urgent community development needs.

HUD and USDA Have HUD and USDA have implemented three rounds of selection
for the EZ/EC Selected Communities for program, and HUD has implemented
one round of selection for the RC the EZ/EC and RC program. Following the
authorizing legislation for each round, HUD and

USDA released interim rules for designation and formally invited

Programs 	community nominations through a notice inviting applications or
notice of funding availability. Figure 1 shows a timeline of the selection
process for each of the programs.

Figure 1: Timeline of Events in the Selection of EZ/EC and RC Program
Participants

The implementation of the selection process varied by round of the EZ/EC
program and between the EZ/EC and RC programs. In Round I of the EZ/EC
program, HUD and USDA used several interagency review teams to rank
nominees based on their strategic plans' effectiveness and alignment with
the program's four principles. As a part of their review of nominees

for Rounds II and III of the EZ/EC program, the interagency review teams
assigned point values based on the quality of various characteristics of
the nominees' strategic plans. In Rounds I and II, nominees that had
applied for an EZ designation but had not been chosen were added to the
list of eligible nominations for EC designations.28 For the RC program,
HUD used a statistical formula that was based on the eligibility criteria
to identify the eligible nominees with the highest scores. Figure 2 shows
the geographic locations of the designated communities by round.

28Rural nominees that did not receive EZ or EC status from USDA were
offered Champion Community status. Champion communities are eligible for
technical assistance from USDA and preferences for other government
programs. There are currently 118 Champion Communities.

Figure 2: Geographic Distribution of Designees By Round

Communities that had received designations in prior rounds of the EZ/EC
program were permitted to apply for subsequent rounds. Within the EZ/EC
program, communities that had received EC designations in Rounds I and

II were permitted to apply for EZ status in subsequent rounds.29 If an EC
was chosen to receive an EZ designation, it maintained both designations,
along with the associated benefits. The five Round I ECs that also
received Enhanced Enterprise Community or Supplemental Empowerment Zone
designations maintained their EC status as well. In addition, ECs and EZs
were encouraged to apply for RC designations. However, in contrast to the
EZ program, the authorizing legislation for the RC program required that
the communities forfeit prior designations when they received RC
designation.30 Table 8 provides more information on the number of
nominations, communities selected in each round, and the number of
designations retained as of September 30, 2003. Figure 3 shows the
geographic locations of the designated communities by designation status
as of September 30, 2003.

          Table 8: Number of EZ/EC and RC Nominations and Designations

Number of communities Number of nominations Number of designations as
nominateda selected for designation of September 30, 2003 Urban

c, d

Round I EZ 74b 8c

              Round I EC                      219             65          49d 
         Round I Supplemental                                       
           Empowerment Zones            Not applicable        2     
      Round I Enhanced Enterprise                                   
              Communities               Not applicable        4     
              Round II EZ                     119             15    
            Enterprise Zone             Not applicablee       1     
             Round III EZ                     36              8f    
                  RC                          62              28    

Rural

Round I EZ 88b 3

                             Round I EC 139 30 28d

29Enhanced Enterprise Communities were also permitted to apply for EZ
status. One Enhanced Enterprise Community, Boston, Mass., received an EZ
designation.

30One exception occurred, in which an EC dissociated itself from the part
of its area that had applied for RC status prior to that area receiving
designation.

                          Number of           Number of             Number of 
                        communities         nominations       designations as 
                         nominateda selected for        of September 30, 2003 
                                    designation         
Round II EZ                  160                   5                     5 
Round II EC      Not applicableg                  20 

Round III EZ

55 2

RC 41 12

                               Total 993 203 184h

Source: HUD and USDA program documents.

aCommunities not selected in earlier rounds could apply for subsequent
rounds.

bNominations for Round I EZs that did not receive an EZ designation were
added to the list of eligible nominations for ECs. Some ECs that were
designated had originally been nominated for EZ designation.

cSix urban communities originally received EZ status in Round I, and the
two Supplemental Empowerment Zones were later given full Round I EZ
status.

dOne urban Round I EZ and 16 urban and 2 rural Round I ECs lost their
prior EZ or EC designations when part or all of the former community area
received RC designation.

eThe Washington, D.C. Enterprise Zone designation was awarded directly by
the Taxpayer Relief Act of 1997.

fThe legislation authorizing the third round of the EZ program authorized
seven urban EZs. When the Atlanta EZ became an RC, HUD used its statutory
authority to designate an additional Round III EZ.

gSelection of ECs made out of the pool of 160 nominations for Round II
rural EZ designation.

hThis figure represents the number of designations that are maintained as
of September 30, 2003. Because communities did not lose prior designations
when they subsequently received EZ, Supplemental Empowerment Zone,
Enhanced Enterprise Community, or Enterprise Zone designations, 19
communities are counted more than once in this total.

Figure 3: Geographic Location of All Designated Communities as of
September 30, 2003

The average characteristics of the designated geographic areas in the
three rounds of the EZ/EC program and the RC program had slightly
different poverty and unemployment levels, but their average population,
area, and population density statistics differed more greatly. As noted
earlier, with some exceptions, nominees were directed to use 1990 census
data to qualify for poverty, unemployment, population, and area criteria;
however, the levels required for eligibility varied among rounds of the
EZ/EC program and between the EZ/EC program and RC program. According to

1990 census data, a total of about 8 million people lived in EZs, ECs, and
RCs. Among urban EZs, each round had somewhat lower average percentages of
poverty, but similar percentages of unemployed.31 The

poverty and unemployment rates of rural EZs were relatively constant,
although unemployment was higher in Round I. ECs did not vary greatly
between rounds in terms of poverty and unemployment. The RCs' average
percentages in poverty and unemployed are comparable to those of EZ
designees in rounds II or III. However, the average population of the
rural communities designated as RCs was much higher than that of rural EZs
or ECs, and the average population for urban communities was highest in
Round I EZs and in RCs. The average area of the communities varied among
the rounds and between the two programs. The population density for urban
communities remained much higher than that of rural communities, with
urban communities ranging from about 4,000 persons per square mile to over
10,000 persons per square mile and rural communities ranging from less
than 10 persons per square mile to about 45 persons per square mile.
Figure 4 shows the average characteristics of the communities by
designation, round, and urban or rural location.

31Census poverty and unemployment data are estimates based on a sample of
the population. All poverty and unemployment percentage estimates have 95
percent confidence intervals of plus or minus 1.2 percentage points or
less. See appendix I for details.

Figure 4: Variation in Average Characteristics of EZs, ECs, and RCs (Based
on 1990 census data)

Note: All poverty and unemployment percentage estimates have 95 percent
confidence intervals of plus or minus 1.2 percentage points or less. See
appendix I for the confidence intervals for each estimate. Round I EZ
averages include the Supplemental Empowerment Zone data, and Round I EC
averages include the Enhanced Enterprise Community data.

aPercent based on individuals for whom poverty status has been determined.

bPercent based on individuals 16 years of age and older.

cThe actual area of these communities could be smaller, because areas
nominated for Round II and III rural EZ/ECs were not required to adhere to
census tract boundaries if they were wholly within an Indian reservation
and could exclude land owned by federal, state, or local governments from
their calculation of the maximum area requirement.

Designees Are Drawing As of September 30, 2003, (1) state agencies had
drawn down about 71

Down Grant Funds 	percent of the Social Services Block Grants authorized
for the EZ/EC program, (2) the eight local government entities that
received Economic Development Initiative grants as part of the
Supplemental Empowerment Zone and Enhanced Enterprise Community
designations had drawn down about 55 percent of the $300 million in
Economic Development Initiative

funds that HUD had awarded, and (3) Round II EZs and ECs had drawn down 42
percent in HUD and USDA program grants appropriated between fiscal years
1999 and 2003 (see table 9).32

Table 9: Amount of Grant Funds Awarded and Drawn Down, as of September 30, 2003
                             (Dollars in thousands)

                                                    Amount     Amount 
                          Type of funds awarded  awarded   drawn down % Drawn 
                                                                         down 
Round I    Urban EZs   Social Services Block  $600,000    $362,737   60.5% 
                                 Grants                               
              Rural EZs   Social Services Block    $120,00    $95,521   79.6% 
                                 Grants                               
              Urban ECs   Social Services Block  $191,579    $172,663   90.1% 
                                 Grants                               
              Rural ECs   Social Services Block    $88,421    $80,575   91.1% 
                                 Grants                               
                Total                           $1,000,000   $711,496   71.1% 
             Supplemental Economic Development                          57.7% 
              Empowerment Initiative Grants      $212,000    $122,267 
               Zonesa                                                 
              Enhanced    Economic Development                          47.3% 
             Enterprise   Initiative Grants        $88,000    $41,613 
            Communitiesb                                              
                Total                            $300,000    $163,880   54.6% 
Round II   Urban EZs    HUD Appropriations    $359,398    $155,293   43.2% 
              Rural EZs    USDA Appropriations     $49,869    $18,169   36.4% 
              Rural ECs    USDA Appropriations     $24,935     $9,084   36.4% 
                Total                            $434,202    $182,546   42.0% 

Source: GAO analysis of HUD, USDA, and HHS data.

aThree government entities received these grants as part of the
Supplemental Empowerment Zone designations.

bFive government entities received these grants as part of Enhanced
Enterprise Community designations. Only one local government entity,
Kansas City, Kansas, has drawn down all of its awarded Economic
Development Initiative funds.

Little Information Is IRS maintains two principal sources of tax data. The
first is an electronic Available on the Use of master file system, which
includes a business master file and an individual Some EZ- and RC-Specific
master file, each of which contains selected line-item data from business
Tax Benefits and individual tax filings. In addition, IRS's Statistics of
Income Division

maintains a second set of data files that are generally based on a sample
of

tax returns.33 IRS maintains selected information on the EZ/EC and RC

32A "draw down" occurs when a grantee accesses awarded funds.

33While IRS's Statistics of Income Division maintains data on the use of
the EZ Employment Credit for all corporate tax returns from 1998 through
2000, it maintains sampled data on this tax credit from individual returns
from 1995 through 2001 and from corporate returns from 1995 through 1997
and for 2001.

programs' tax benefits in the master file data sets for tax years 1996
through 2002 and the Statistics of Income data set for tax years 1994
through 2001.34 In addition, the contractor preparing the HUD Interim
Assessment performed a survey of businesses to determine their use of tax
incentives, but these findings are limited to Round I designees.35

Currently, IRS can report on the use of the EZ Employment Credit at the
national level. The most readily available IRS data from the Statistics of
Income Division indicate that taxpayers are making some use of this
credit. Nationally, corporations and individuals claimed an estimated
total of $251 million in EZ Employment Credits between 1995 and 2001 (see
figs. 5 and 6).36

IRS Collects Some Data on the EZ and RC Employment Credit, but Limitations
Exist

Figure 5: Corporate Returns with EZ Employment Credit

34Because it is not possible to compute a reliable estimate for 1994
returns, we are reporting only on the years from 1995 through 2001.

35See Hebert and others, Interim Assessment.

36With the exception of 1998 through 2000 corporate data, this number is
based on sampled data. We calculated the 95 percent confidence interval
for the total EZ Employment Credits claimed at between $224 million and
$278 million. The 95 percent confidence intervals for all estimates are
included in appendix I.

Note: This figure includes employment credits claimed in the D.C.
Enterprise Zone. However, data do not include credits claimed against the
Alternative Minimum Tax or credits claimed by regulated investment
companies, real estate investment trusts, or S corporations. Data from
1995 through 1997 and for 2001 are estimates based on a sample of tax
returns. The 95 percent confidence intervals for these estimates can be
large, sometimes exceeding +/- 50 percent. See appendix I for these
values. 1998 through 2000 data are based on the population of returns.

Figure 6: Individual Returns with EZ Employment Credit

Note: This figure includes employment credits claimed in the D.C.
Enterprise Zone. However, data do not include credits claimed against the
Alternative Minimum Tax. Data from individual tax returns are based on a
sample. The 95 percent confidence intervals for these estimates can be
large, sometimes exceeding +/- 50 percent. See appendix I for these
values.

Businesses were able to begin claiming the RC Employment Credit in 2002,
using the same form they use to claim the EZ Employment Credit. IRS will
be able to report on taxpayers' use of the RC Employment Credit when some
data becomes available in mid-2004.37 However, because the same line is
used to record the amount claimed for both the RC Employment Credit and
the EZ Employment Credit, IRS will not be able to distinguish between the
amount claimed for RC Employment Credits and the amount claimed in EZ
Employment Credits.

In addition, according to IRS officials, the agency cannot reliably link
businesses claiming the employment credit with specific EZs or RCs due

37The 2002 data from individual taxpayers will be available in mid-2004.
The 2002 data from corporate taxpayers will be available in 2005.

National Use of Tax-Exempt Bonds Has Grown

to two factors. First, according to IRS officials the addresses business
owners list on tax forms do not necessarily correspond with the location
of their business operations, but may be a residence or the address where
the business is incorporated. Second, the IRS form used to claim the EZ
and RC Employment Credits does not require the taxpayer to identify the
EZ(s) or RC(s) where the business operations eligible for the credit are
located.

To identify the amount of employment credits claimed by businesses in
specific EZs or RCs, taxpayers would have to identify the EZs or RCs where
they had business operations. One way to collect this information would be
for IRS to amend its form to request additional information. Senior IRS
officials cited several reasons why amending its tax forms is not a high
priority for the agency. First, they said that IRS's role is to administer
tax laws, and that collecting more comprehensive data on the use of these
benefits does not help the agency to acheive this objective. Second, the
officials indicated that requesting taxpayers to provide more information
would add to taxpayer burden and IRS workload. Third, IRS officials told
us that they allocate their resources based on the potential effect of
abuse on federal revenue and noted that these tax benefits are not
considered high risk, since the amount claimed is small compared with
revenues collected from other tax provisions or the amount of potential
losses from abusive tax schemes.

Between 1995 and 2001, state and local governments issued a total of 36
different series of tax-exempt bonds with an aggregate issue price of $315
million explicitly for the benefit of businesses operating in EZs and
Round I ECs, as well as the D.C. Enterprise Zone.38 Figure 7 shows the
number and aggregate issue price of tax-exempt bonds issued for the
benefit of businesses operating in these communities between fiscal years
1995 and 2001.39 The dramatic increase in the amount of bonds issued since
1999 can be attributed to the issuance of EZ Facility Bonds, which are not
subject to state volume caps and can be issued for generally larger
amounts than the original Enterprise Zone Facility Bonds, and the issuance
of D.C. Enterprise Zone Facility Bonds.

38D.C. Enterprise Zone Facility Bonds are subject to a $15 million per
borrower limit and are subject to the state volume cap. These bonds became
available in 1998.

39This figure includes bonds issued to refund previously issued debt.

Amount of Other Tax Benefits Claimed by EZs and RCs Is Unknown

Figure 7: Number and Amount of Enterprise Zone, D.C. Enterprise Zone, and
EZ Facility Bonds Issued 1995 through 2001

Note: These figures include bonds issued to refund previously issued debt.
These figures represent the issue price of these bonds, not the actual
savings to businesses in EZs or ECs. These bonds were issued to provide
loans to businesses at a lower interest rate than through conventional
financing arrangements. Bond purchasers are willing to accept a lower
interest rate because the interest income is not subject to federal income
taxes. The actual savings to businesses in EZs or ECs are the lower
interest rates at which they repay their loans.

IRS cannot report on the extent to which businesses operating in an EZ or
RC are claiming the increased expensing deduction, the Commercial
Revitalization Deduction, or the Nonrecognition of Gain on the Sale of EZ
Assets, because taxpayers do not report these benefits as separate items
on their returns. In addition, two benefits, the Zero Percent Capital
Gains Rate for RC Assets and the Partial Exclusion of Gain on the Sale of
EZ Stock cannot be claimed until 2007 and 2005, respectively. Table 10
provides a summary of the data available on all nine tax benefits.

Table 10: Limitations with Data on EZ, EC, and RC Tax Benefits

                                                             Can IRS reliably 
                                                                         link 
                                               Does IRS have        data to a 
                                                                   designated 
                                  Tax benefit national level       community? 
                                              data?          
                         EZ Employment Credit           Yesa              Noe 
                         RC Employment Credit           Yesb              Noe 
               Enterprise Zone Facility Bonds            Yes              Nof 
                            EZ Facility Bonds            Yes              Nof 
              Increased Section 179 Deduction             No   Not applicable 
                    Commercial Revitalization             No   Not applicable 
                                    Deduction                
              Zero Percent Capital Gains Rate            Noc   Not applicable 
                                for RC Assets                
               Nonrecognition of Gains on the             No   Not applicable 
                            Sale of EZ Assets                
             Partial Exclusion of Gain on the            Nod   Not applicable 
                             Sale of EZ Stock                

Source: GAO analysis.

aSome Statistics of Income data are based on statistical samples and may
not accurately represent the population of filers. For tax years after
2001, IRS data cannot distinguish between this benefit and the RC
Employment Credit.

bThe first Statistics of Income data will become available in 2004 when
the 2002 individual return data become available. However, IRS will not be
able to distinguish between taxpayers claiming this credit and the EZ
Employment Credit.

cThis benefit cannot be claimed until 2007.

dThis benefit cannot be claimed until 2005.

eTaxpayers do not identify the EZ or RC where the business operations are
located.

fIRS collects data on tax-exempt bonds issued by state and local
governments. However, if a city or state government entity with more than
one EZ/EC located in its jurisdiction issues these bonds, IRS data cannot
identify which EZ or EC benefited from the bond issue.

The lack of data on the use of some of the tax benefits available to
businesses in EZs and RCs limits the ability of HUD and USDA to administer
the programs. For example, HUD requires EZs and RCs to report on the
extent to which businesses are using certain tax benefits, such as the EZ
or RC Employment Credit, to demonstrate progress in meeting program
outputs. However, EZ and RC officials have had difficulty in obtaining tax
information directly from businesses. As a result, the lack of data on the
use of these benefits limits the ability of the designated communities to
comply with this requirement. Also, the lack of data on these tax benefits
limits the ability of EZs and RCs to use their designations to attract
additional resources, which is a program

Lack of Data Limits Ability to Determine Use of Tax Benefits in Individual
EZs and RCs

Some Businesses Face Obstacles in Using the Tax Benefits

expectation. For example, according to tax and community development
specialists, the inability to report on the extent to which some existing
tax benefits are being used limits the ability of EZs and RCs to
demonstrate the effectiveness of their revitalization programs. Moreover,
the lack of data on these benefits limits the ability of HUD, USDA, or
others to audit or evaluate the programs.40

Although available data show that businesses are using some tax benefits
in EZs, ECs, or RCs, we found that some businesses might face obstacles in
using the tax benefits. In 1999, we reported that businesses cited several
reasons for not taking advantage of the tax benefits, including not
knowing about them, finding them too complicated, not qualifying for them,
and not having federal tax liability.41 During our current audit work,
research results showed and tax experts expressed similar concerns. For
example, a HUD-sponsored report noted that in 2000 many businesses did not
know about the tax benefits available to them.42 In addition, one tax
expert noted that businesses must make several complicated calculations
about their business activities to determine whether they satisfy the
requirements for using the tax benefits. IRS officials suggested that the
complexities of the tax code and changes in it over time might prevent
smaller businesses from taking advantage of the EZ or RC benefits, because
smaller businesses may not have access to tax professionals.43 Also, one
tax expert noted that some businesses, such as farms with assets greater
than $500,000, do not qualify for the tax benefits. Moreover, businesses
can only claim the tax credits against their reported profits. Since small
companies and start-up businesses may not have federal tax liabilities,
they may not be able to claim the EZ or RC credits to the same degree as
larger or more profitable businesses.

40Even if these data were available, federal officials raised concerns
regarding whether IRS could legally disclose taxpayer data to EZ or RC
representatives. Under section 6103 of the Internal Revenue Code, IRS
cannot release taxpayer information to unauthorized persons. Taxpayer
information is generally defined as information that would reveal a
taxpayer's identity or financial position.

41U.S. General Accounting Office, Community Development: Businesses' Use
of Empowerment Zone Tax Incentives, GAO/RCED-99-253 (Washington, D.C.:
September 1999). Our report was based on a survey of businesses operating
in the original nine Round I EZs to determine the extent to which they
took advantage of tax benefits available at that time.

42See Hebert and others, Interim Assessment.

43HUD recommends that businesses contact a tax attorney or certified
public accountant before claiming these benefits.

    Participating Federal Agencies Have Conducted Outreach and Provided
    Technical Assistance

HUD, USDA, IRS, and HHS have provided outreach for the EZ/EC and RC
programs through conferences, training, and other resources. HUD and USDA
have sponsored conferences to educate nominated and designated communities
on a variety of subjects. HHS has provided information on its EZ/EC Web
site and has participated in HUD and USDA conferences. Both IRS and HUD
have made efforts to educate businesses about the tax benefits available
to them through educational workshops. HUD sponsors satellite broadcasts
on a semiannual basis on issues pertaining to performance, tax benefits,
availability of funds, regulatory changes, and other issues. To aid in the
designees' outreach to businesses, HUD has provided communities with lists
of local businesses.

The agencies have also provided technical assistance through a variety of
means, including Web sites, published guidance, and desk officers. HUD,
USDA, and HHS each have Web sites dedicated to the programs that include
links to resources, such as relevant audit guidance, best practices from
designated communities, and online training materials. HUD also provides
an EZ/EC/RC address locator on its Web site that enables taxpayers to
determine whether businesses or employees are located within a zone and
therefore eligible for tax benefits. USDA worked with HUD to ensure that
their rural EZs and ECs were included in this tool. In addition, HUD, IRS,
USDA, and HHS have provided guidance to designated zones, community
groups, and businesses about available benefits.44 HUD and USDA have also
prepared application guides that explain the application process and
benefits of designation. HUD and USDA have each published strategic
planning guidebooks to help communities through the required strategic
planning process, as well as guidebooks on program implementation and
benchmarking.45 HUD and USDA also have a group of desk and field officers
available to respond to community inquiries about the program.

44IRS is currently preparing guidance for professional tax preparers.

45As used by HUD and USDA, "benchmarking" refers to specific tasks and
timetables necessary to implement the strategic plan.

    Participating Federal Agencies Have Developed Oversight Procedures

HUD and USDA Have Set Up Systems for Reporting Performance Data

HUD and USDA are responsible for overseeing the progress of the urban and
rural EZs and ECs, and HUD is responsible for overseeing the progress of
the RCs.46 The legislated role of HUD and USDA in both the EZ/EC and RC
programs is to ensure that a community (1) does not modify the boundaries
of the designated area and (2) is complying with or making progress toward
the benchmarks of the EZ's or EC's strategic plan or, in the case of HUD,
the RC's course of action and economic growth promotion requirements. HUD
or USDA can revoke a community's designation if either of these two
provisions is not met.

To implement their oversight responsibility for the EZ/EC program, HUD and
USDA rely on Memorandums of Agreement, benchmark tracking, and annual
progress reports. The Memorandum of Agreement that is signed by the state
and local governments and HUD or USDA states the responsibilities of the
parties for compliance with federal requirements.47 HUD and USDA require
designees to report annually on the steps they have taken in conjunction
with their strategic plans. RC designees do not sign Memorandums of
Agreement but do have to certify that they will take certain actions as
part of the course of action and economic growth promotion requirements
submitted with the application.

HUD and USDA make determinations as to the progress of the EZs or ECs in
implementing their strategic plans and, when necessary, send warning
letters to the designated communities based on data reported in the
performance management systems. In 1997, HUD issued warning letters to
five EZs and ECs. These warning letters ultimately did not result in any
dedesignations. As of late 2003, USDA has not sent warning letters to any
rural EZs or ECs.

Beginning with the Round II designations in 1998, HUD and USDA began using
Internet-based performance management systems-the Performance Management
System and the Benchmark Management System, respectively-to track the
communities' performance. These systems allow each community to enter
baseline and benchmark data on funding and results. Although designated
communities update the systems

46HHS administers the use of Round I EZ/EC Social Services Block Grants.
As set out in its regulations covering block grants, HHS provides maximum
fiscal and administrative discretion to the states and relies fully on
state laws and procedures.

47HHS also signs grant agreements with the recipients of Round I block
grant funds.

constantly, an annual reporting deadline exists to provide a firm date at
which a community should have all of its information up to date.

HUD's Round III EZ and RC annual reporting requirements are less stringent
than those of prior rounds. Since Round III urban EZs and RCs do not
receive grant funds, HUD officials do not expect Round III EZs to have as
many projects as Round II EZs to include in their annual reporting. The
RCs use a much simpler report template that includes sections on required
goals and actions, economic growth promotion requirements, tax incentive
utilization, and other accomplishments. HUD officials have also said that
the use of tax benefits in the Round III EZ and RC programs makes it
difficult to design and execute a way of tracking the programs. HUD is
exploring the idea of developing a data collection method on the use of
the tax benefits. This data collection effort would require approval from
the Office of Management and Budget. HUD officials noted that one concern
in developing a data collection procedure is that potentially the
additional paperwork burden could discourage businesses from using the
benefits. USDA has the same reporting requirements for Round III EZs as it
does for Rounds I and II.

To assess the reliability of the performance data, field staff from HUD
and USDA verify some of the community-reported data in the performance
management systems. As part of its oversight role, HUD also provides field
offices with a grant monitoring checklist, that requires determining
whether (1) the documentation matches the information in the performance
management system, (2) spending is reasonable in relation to progress, (3)
the program and funds serve eligible purposes, (4) the activity took place
within the EZ, (5) the resident benefit data are accurate, and (6) the EZ
has appropriate accounting records and procedures. USDA state field staff
check the reliability of the data entered by communities, and headquarters
staff check for inconsistencies and outliers. In addition, every 2 years
USDA has a "Management Control Review," in which headquarters staff verify
the accuracy of the state-level reviews.

Recent Audits Have Raised In our previous reports, we found weaknesses in
program oversight. In Some Concerns About EZ/EC 1996, we reported that HUD
and the EZs had not yet (1) described Program Oversight and Data
measurable outcomes for the program's key principles or (2) indicated
Reliability how the outputs anticipated from one or more benchmarks would
help to

achieve those outcomes.48 A HUD official reported that the agency
implemented its Internet-based performance measurement system in response
to a recommendation contained in our report. In 1997, we reported that
rural EZ/ECs were not consistently reporting their progress to USDA and
that USDA's EZ/EC state coordinators were not providing systematic
reporting on the progress of rural EZ/ECs.49 In response, USDA officials
told us that they addressed this deficiency by adopting a nationwide
community development field training program.

Both HUD's and USDA's IGs have raised concerns about the accuracy of the
performance management systems and the adequacy of EZ/EC program
oversight. For example, in a 2003 audit the HUD IG found that some Round
II activities were benefiting people who did not live in the zones. They
also found that 76 percent of the activities in the performance management
system selected for their audit contained inaccurate data.50 HUD noted in
response that it had developed revised monitoring procedures and that it
was developing regulations to clarify the requirements for resident
benefits. During audits it conducted in 1999 and 2001, USDA's IG found
that data pertaining to a Round I rural EZ and a Round II rural EC were
not accurate or had not been updated as required. In response to the 2001
audit, USDA officials stated that the agency would initiate immediate
actions to increase training efforts to community personnel in the areas
of reporting, using the performance management system, maintaining proper
accountability, and preparing annual budgetary reports. In another 2001
audit, which focused on one EZ, the USDA IG found that USDA staff had not
looked at the performance and progress of any EZ-funded projects and
provided little oversight of how the EZ used program funds. In addition,
the audit noted that one funded project was located outside of the EZ and
did not serve the required number of EZ residents. In response to the
audit, USDA stated that the EZ tracking system would be amended to ensure
that residents within the EZ were benefiting from EZ services but that the
EZ was authorized to waive the resident benefit requirement if the project
was deemed important to the community. USDA officials informed us that
limited resources

48U.S. General Accounting Office, Community Development: Status of Urban
Empowerment Zones, GAO/RCED-97-21 (Washington, D.C.: December 20, 1996).

49U.S. General Accounting Office, Rural Development: New Approach to
Empowering Communities Needs Refinement, GAO/RCED-97-75 (Washington, D.C.:
March 31, 1997).

50HUD IG's sample was not randomly selected, but was based on the
projects' reported expenditures.

  Among the Few EZ/EC Evaluations That Have Been Conducted, Research Methods and
  Results Have Varied

prevented the agency from performing a 100-percent verification of data
contained in the performance management system.

The few evaluations that have systematically collected and analyzed data
on the effectiveness of the EZ/EC program involved a variety of research
methods and reported results that varied depending upon the aspect of the
program studied.51 In some cases, the methods researchers used depended on
the data available to them. The most comprehensive of these
evaluations-the HUD Interim Assessment-found, among other things, that
employment of Round I EZ residents had increased from 1995 to 2000, that
larger businesses were more likely to use tax benefits than smaller
businesses, and that resident participation in EZ or EC governance had
been uneven.52 As with all evaluations of community development programs,
these evaluations were also subject to some limitations. In particular,
the researchers faced challenges demonstrating what would have happened in
the communities in the absence of the program.53

    Relatively Few Evaluations Have Been Conducted on the EZ/EC Program

Although 10 years have passed since the first round of communities were
designated, we found only 11 evaluations that systematically collected and
analyzed data on EZ/EC program effectiveness.54 We found that none of
these evaluations had assessed the effect of the EZ/EC program on poverty,
one had assessed the effects of the EZ/EC program on resident employment,
and three had assessed the effects of the EZ/EC program on aspects of
economic growth in the distressed communities. Further, most of the
evaluations examined the first few years of implementation by Round I
designees. We found only one evaluation that assessed the effectiveness of
Round II EZ/EC designees and no evaluations of the

51None of the evaluations we reviewed analyzed the RC program.

52See Hebert and others, Interim Assessment.

53This research challenge is often referred to as testing for the
counterfactual.

54We reviewed more than 1,100 article and report abstracts to identify
outcomes-focused evaluations of the federal EZ/EC and RC programs. We
included evaluations that met the following criteria: (1) they focused on
the federal EZ/EC or RC program; (2) they were research evaluations that
systematically collected and analyzed empirical data (as opposed to
reports of Best Practices/Lessons Learned or policy discussions of the
program); and either (3) they evaluated the program in terms of its effect
on poverty, unemployment, and/or economic growth consistent with our
congressional mandate; or (4) they evaluated the program's effectiveness
in any of the other program goal areas.

Round III EZs. In addition, we found that nine evaluations had assessed
the implementation of the EZ/EC program's community participation and
governance processes. Only the HUD Interim Assessment attempted to assess
on a national scale the effect of the early stages of Round I EZ/EC
implementation on unemployment and aspects of economic growth. Although
USDA, IRS, and HHS each published studies of some aspect of the Round I
EZ/EC designees, we did not find that these agencies had sponsored or
conducted a comparable evaluation. A summary of the 11 evaluations we
reviewed, listing the purpose and scope, primary research methods and data
sources, major findings, and major limitations, appears in appendix VI.

    A Variety of Methods Have Been Used to Evaluate EZs and ECs

Quantitative research methods were generally used to assess the
effectiveness of the EZ/EC program in increasing employment and promoting
economic growth, while qualitative research methods were generally used to
determine the program's effectiveness in incorporating community
participation and developing governance structures.55 Statistical analysis
of survey data and existing data (e.g., census data) were the most common
research methods used to assess the effect of the EZ/EC program on
employment and economic growth. Document reviews, interviews, and
comparative analysis were the most frequent type of methods used to
examine site governance structures and community participation. When
multiple program objectives were evaluated, researchers generally used
both quantitative and qualitative methods. For example, the HUD Interim
Assessment used multiple methods and analytical approaches, such as
regression analysis, surveys, and document reviews, to assess the
effectiveness of the federal EZ/EC program in the first 5 years after the
first round of EZ/EC designation.56

In some instances, neither qualitative nor quantitative data were
available, requiring researchers to collect original data. For example,
because IRS data on tax benefits cannot be reliably linked to individual
designated communities, some researchers were required to collect data on
tax usage through qualitative methods. According to a HUD official, the
HUD Interim Assessment relied on commercial data and surveys to collect
information

55Quantitative methods are methods of analysis that use data in the form
of numbers. Qualitative methods analyze data in the form of words.

56Regression analysis is a method for determining the association between
a dependent variable and one or more independent variables.

on the use of the EZ Employment Credit, because existing IRS data could
not be attributed to individual EZs. He added that without the ability to
attribute the credits to particular EZs, researchers cannot establish the
connection between the businesses' use of the employment credit and
observable changes in the EZ communities. Some evaluations, such as the
HUD Interim Assessment and our 1998 report, also used surveys of business
owners to assess their attitudes toward the tax benefits and to gauge the
potential influence of the tax benefits on businesses.57 To collect
qualitative information on the strategic planning process or community
participation, researchers reviewed documents and conducted interviews.
Lastly, several evaluations reported results from agency performance data
on the EZ/EC program; however, both the HUD IG and USDA IG reported
concerns about the reliability of these data.

    Early Evaluations Reported A Variety of Findings

The HUD Interim Assessment found that resident employment within five of
the six Round I EZs had generally increased between 1995 and 2000.58
Researchers also found that the employment of residents of four of the six
EZs had grown faster than in similar neighborhoods. In addition, these
researchers found that EZ residents owned an increasing number of the EZ
businesses and that these businesses were more likely to hire other EZ
residents.

Several evaluations reported factors that affected economic growth.59 For
example, the HUD Interim Assessment found that a variety of factors
influenced the success of businesses (one measure of economic growth) in a
designated community, with the central location of zones in their
metropolitan areas cited as a positive influence and crime and poor public
safety cited as the worst problems. In addition, GAO and the HUD Interim
Assessment found that larger businesses were more likely to use available
tax benefits than smaller businesses.

Results of some evaluations concluded that citizen participation and
influence were greatest during the planning phase of the EZ/EC initiative

57Hebert and others, Interim Assessment; GAO/RCED-99-253.

58Hebert and others, Interim Assessment.

59Hebert and others, Interim Assessment; GAO/RCED-99-253; Richard P.
Nathan and others, Investing in a New Future: Special Report on Community
Development Financing in Selected Empowerment Zone/Enterprise Community
Sites (Albany, NY: The Nelson A. Rockefeller Institute of Government,
1997).

and tapered off as the initiative moved into the implementation phase.60
Researchers suggested that the decline in citizen participation might have
occurred for several reasons, including a lack of federal supervision
during implementation, the difficulty of implementing projects in
reasonable time frames, and the technical nature of implementation
activities, such as benchmarking reports.61 Two evaluations concluded that
citizen participation in the EZ/EC program was higher than participation
in similar types of federal initiatives.62 However, the HUD Interim
Assessment found that local attention to resident participation in zone
governance has been uneven.

    Evaluations of EZs and ECs Were Subject to Some Limitations

The findings of these evaluations provide valuable descriptions of the
early progress of Round I EZ/ECs. However, because of the difficulty of
proving what would have happened in the absence of the program, these
evaluations cannot be used to conclude that the program actually caused
the observed changes. For example, the evaluations found that resident
employment levels had increased, but it is possible that factors other
than EZ/EC designation and the program benefits influenced employment
levels. Although the HUD Interim Assessment attempted to control for these
other factors by comparing EZ/EC employment to employment in both adjacent
and nonadjacent comparison neighborhoods, the authors could not say
conclusively what the employment levels in the zones might have been if
these areas had not been designated as EZs or ECs. If, for example, the
communities selected for the EZ/EC program were those with the most
potential for development from among the eligible areas within a city, it
is possible that these analyses overstated the program effects.

60Robert J. Chaskin and Clark M. Peters, Governance in Empowerment Zone
Communities: A Preliminary Examination of Governance in Fifteen
Empowerment Zone Communities (Chicago, IL: University of Chicago, Chapin
Hall Center for Children, 1997); Marilyn Gittell, Kathe Newman, and
Francois Pierre-Louis, Empowerment Zones: An Opportunity Missed: A Six
City Comparative Study (New York, NY: The City University of New York, The
Howard Samuels State Management and Policy Center, 2001); Nathan, and
others, Empowerment Zone Initiative: Building a Community Plan for
Strategic Change (Albany, NY: The Nelson A. Rockefeller Institute of
Government, 1997).

61Gittell, Newman, Pierre-Louis, Empowerment Zones; Chaskin and Peters,
Governance in Empowerment Zone Communities; Nathan and others, Empowerment
Zone Initiative.

62Nathan and others, Empowerment Zone Initiative; Fahui Wang and Joseph A.
Van Loo, "Citizen Participation in the North Delta Mississippi Community
Development Block Grants, Empowerment Zones and Enterprise Communities,"
Planning Practice and Research 13, no. 4 (1998), pp. 443-51.

Many evaluations were unable to make generalizations about all EZ/ECs
because their conclusions were limited to the specific communities that
they studied. For example, the large number of EC sites makes it
relatively difficult to fully investigate the effectiveness of programs in
all sites. Authors of the HUD Interim Assessment and others have noted
that creating an evaluation of the EZ/EC program and its four principles
is difficult, because the program is based on the idea that effective
community revitalization occurs when the strategy is tailored to the local
site.63 This type of program requires an evaluation design, such as a case
study, that is able to capture changes that result from each site's
specific strategic plan, but generalizing the results of such evaluations
to a larger population may not be possible. For example, the diverse
nature of the Round I EZ/ECs-in which each EZ/EC may differ in terms of
objective, size of the targeted areas, type of designation, governance
structure, projects used, and strategies for implementation-made it
difficult for researchers to generate general conclusions for the early
stages of Round I implementation.

                                  Conclusions

HUD, USDA, HHS, and IRS have implemented the EZ/EC and RC programs. As
part of the implementation, HUD and USDA expect designated communities to
report on how program benefits are being used, both directly and as a
method of attracting additional resources. However, because of the limited
amount of data on the use of EZ and RC tax benefits-which the Joint
Committee on Taxation estimates will reduce federal tax revenue by about
$11 billion between 2001 and 2010- EZs and RCs cannot reliably report on
their use by local businesses. In addition, Congress has requested that we
audit and evaluate the programs. Acquiring additional data that can
attribute the use of the tax benefits to particular EZs and RCs would
provide information to facilitate an audit of these programs. Also,
additional tax data would be necessary to evaluate certain aspects of the
programs, such as the use of the tax benefits. While it is difficult to
isolate the effects of these programs on improving conditions in
distressed communities, without the ability to attribute the tax benefits
to particular EZs and RCs, researchers cannot begin to establish the
connection between the businesses' use of the tax benefits and observable
changes in the communities. Such data could potentially

63Hebert and others, Interim Assessment; N. T. Jenkins and M. I. J.
Bennett, "Toward an Empowerment Zone Evaluation," Economic Development
Quarterly 13, no. 1(1999), pp. 23

28.

  Recommendation

Agency Comments

come from a variety of sources, including IRS forms, surveys of
businesses, or commercial databases.

To facilitate the administration, audit, and evaluation of the EZ/EC and
RC programs, we recommend that HUD, USDA, and IRS collaborate to (1)
identify the data needed to assess the use of the tax benefits and the
various means of collecting such data; (2) determine the
cost-effectiveness of collecting these data, including the potential
impact on taxpayers and other program participants; (3) document the
findings of their analysis; and, if necessary, (4) seek the authority to
collect the data, if a costeffective means is available.

We provided copies of a draft of this report for review and comment to
HUD, IRS, USDA, and HHS. These agencies' written replies are reproduced in
appendixes VII through X, respectively. HUD and IRS agreed with the
report's descriptions of the EZ/EC and RC programs as well as the
recommendation. HUD generally agreed with our descriptions of the features
of the EZ/EC and RC programs, and the status of their implementation at
the national level. IRS stated that the data they provided us on the tax
benefits available to businesses operating in EZs, ECs, and RCs were
accurately reflected in our report. USDA raised several concerns about our
discussion of the EZ/EC program. In particular, the Acting Under Secretary
for Rural Development stated that our focus on grants and tax incentives
neglected the broader purpose of empowering impoverished communities to
plan for and achieve their own goals through "holistic means." HHS's
Administration for Children and Families had no comments. HUD, IRS, and
USDA also provided technical comments, which we have incorporated into
this report where appropriate.

According to HUD's Deputy Assistant Secretary for Economic Development,
HUD agrees with the report's recommendation that HUD, USDA, and IRS
collaborate to examine options for collecting data on the use of tax
benefits available to businesses operating in EZs, ECs, and RCs. He noted
that HUD concurs with the report's findings, including the finding that
data on the use of the tax benefits is limited at this time, and added
that HUD is currently developing a strategy to use available federal
agency resources to develop the data needed to assess the use of the EZ/EC
and RC tax incentives. In addition, he noted that IRS had assisted HUD in
answering technical questions and participating in HUD training
conferences and workshops. He stated that HUD would continue its

efforts to work with IRS to gather the data needed to measure businesses'
use of tax benefits in designated communities. In response to findings
from its Office of Inspector General, HUD's Deputy Assistant Secretary
indicated that HUD was taking action to improve program oversight,
including developing guidance on eligible uses of EZ funds and
instructions for reporting on the progress of EZ activities.

The Commissioner of Internal Revenue agreed with our recommendation to
work with HUD and USDA to identify the data needed to assess the use of
the tax benefits and the costs of collecting that data.

The Acting Under Secretary of Rural Development for USDA raised a number
of concerns with our discussion of the EZ/EC program. While he indicated
that USDA welcomed the opportunity to collaborate with IRS and HUD, he
raised concerns that responding to the report's recommendation could
stretch the agency's already scarce resources to produce data of possibly
marginal utility and potentially invade taxpayers' privacy. We believe
that the lack of data on the usage of EZ/EC tax benefits limits the
ability of USDA and HUD to administer the EZ/EC program, and limits the
ability of these agencies and others to evaluate such programs. We stated
in our report that data on the use of the tax benefits could come from a
variety of sources, such as IRS forms, surveys of businesses, or
commercial databases. As a result, collecting such information may not
necessarily have a significant impact on USDA's resources. Moreover, the
recommendation calls for HUD, USDA, and IRS to determine the cost
effectiveness of collecting these data. Any data that are collected on the
use of the tax benefits should be done according to IRS rules for
protecting taxpayer privacy.

In his letter, the Acting Under Secretary also stated that our report
addresses only two program tools (grants and tax incentives) and, by doing
so, neglects the broader purpose behind the program of "empowering
impoverished communities to plan for and achieve their own goals through
holistic means." To the contrary, the report describes a variety of
program features including, but not limited to, grant and tax benefits. In
particular, the report discusses the programs' stated goals and objectives
and the key principles nominated communities were required to include in
their strategic plans, including the need for community-based partnerships
that involve all segments of the community. However, because the report is
largely descriptive, it does not examine the extent to which the
objectives and purposes of the EZ/EC program have been met.

In addition, the USDA Acting Under Secretary indicated that our statement
that the lack of data on tax benefits is a limiting factor in communities'
ability to attract additional resources presumes that these data are the
only tool that designated communities have to attract additional
resources. We agree with the Acting Under Secretary's statement that such
data are not the only means that communities can use to attract additional
resources. However, representatives of EZs and RCs we spoke with stated
that their ability to attract additional resources was limited by not
being able to report on the extent to which the programs' tax benefits
were being used in their communities.

The Acting Under Secretary also raised concerns about our description of
the agency's online performance management system. Our purpose in
discussing the system was to describe the efforts USDA has made to oversee
the EZ/EC program. We described the purpose of the system and the steps
USDA takes to verify data contained in it. We also reported the findings
of the USDA IG audits concerning the system and actions USDA officials
reported that the agency had taken in response to the audits. We did not
use data from the system in our report, nor did we evaluate the
reliability of the data contained in it.

Finally, the Acting Under Secretary also noted that our report did not
include all federal programs that provided benefits to communities
designated in the EZ/EC program, such as the AmeriCorps program benefits
that Round I rural EZs and ECs received in the first two years of the
program. As we reported in appendix V, we found that several federal
programs offered preferences to applicants located in EZs, ECs, and RCs.
However, the extent to which these applicants have taken advantage of
these preferences is not known.

We are sending copies of this report to the Secretary of Housing and Urban
Development, the Secretary of Treasury, the Commissioner of the Internal
Revenue Service, the Secretary of Agriculture, the Secretary of Health and
Human Services, and other interested Members of Congress. We will make
copies of this report available to others upon request. In addition, this
report will be available at no charge on the GAO Web site at
http://www.gao.gov.

Please call me on (202) 512-8678 if you or your staff have any questions
about this report. Key contributors to this report are listed in appendix
XI.

William Shear Director, Financial Markets and Community Investment

                       Appendix I: Scope and Methodology

The objectives of this study were to describe (1) the features of the
Empowerment Zone and Enterprise Community (EZ/EC) program and Renewal
Community (RC) program; (2) the extent to which the programs have been
implemented; and (3) the methods that have been used and the results that
have been found in evaluations of the programs' effectiveness, especially
on poverty, unemployment, and economic growth in the participating
communities. While our descriptions included analyses of the data that
have been and could be used to address these three topics, we did not
evaluate the effectiveness of the programs or their implementation in this
report. We addressed the activities of federal programs in both rural and
urban areas in all three rounds of the EZ/EC program and the RC program.

To describe the features of each round of the program, we relied on a
review of congressional legislation related to the EZ/EC and RC programs;
the Department of Housing and Urban Development (HUD), the U.S. Department
of Agriculture (USDA), and the Department of Health and Human Services
(HHS) regulations; and HUD, USDA, the Internal Revenue Service (IRS), and
HHS publications. To supplement our understanding of these documents, we
interviewed a number of program officials at these agencies. We put the
available program data and descriptions into data matrices and
spreadsheets in order to summarize, compare, and contrast the features of
the program in each of the rounds.

To describe the implementation of the programs at the national level, we
relied on reviews of legislation, regulations, program publications, Web
sites, and existing Inspector General (IG) studies and interviews with
program officials and other area experts. We analyzed 1990 census data to
report on some characteristics of the designated communities. We also
obtained and analyzed data from HUD, USDA, HHS, and IRS on the utilization
of grants, tax benefits, and loan guarantees. To assess the data's
reliability, we searched for missing data and values outside an expected
range and assessed the relationship of data elements to each other. As
appropriate, we analyzed a sample of some financial data to confirm their
reliability by comparing the agencies' financial data with original source
documents. We interviewed knowledgeable agency officials from IGs'
offices, divisions of payment management, and program offices regarding
the work they had done to assess the data's integrity and the results of
that work. We determined that the data were sufficiently reliable for use
in this report. This report does not include data from HUD's or USDA's
performance management systems.

Appendix I: Scope and Methodology

To determine the average characteristics of designated communities, we
used data from the 1990 census. Because census estimates of poverty and
unemployment rates for EZs, ECs, and RCs are estimates based on
probability samples, each estimate is based on just one of a large number
of samples that could have been drawn. Since each sample could have
produced different estimates, we express our confidence in the precision
of our particular sample's results as a 95 percent confidence interval.
For example, the estimated poverty rate is 45.23 percent for urban Round I
EZ communities, and the 95 percent confidence interval for this estimate
ranges from 44.86 to 45.59 percent. This is the interval that would
contain the actual population value for 95 percent of the samples that
could have been drawn. As a result, we are 95 percent confident that each
of the confidence intervals in this report will include the true values in
the study population. All poverty and unemployment percentage estimates
have 95 percent confidence intervals of plus or minus 1.2 percentage
points or less, as summarized in table 11.

Table 11: Variation in Census Statistics for EZs, ECs, and RCs

95 percent confidence interval

 Description Communities Estimate From To Percent in poverty Percent unemployed

                  Round I EZ    Urban       45.23%         44.86%      45.59% 
                                Rural       44.75%         43.70%      45.80% 
                 Round II EZ    Urban       42.84%         42.42%      43.27% 
                                Rural       35.60%         34.57%      36.64% 
                Round III EZ    Urban       42.92%         42.37%      43.48% 
                                Rural       31.02%         29.83%      32.20% 
                  Round I EC    Urban       41.12%         40.92%      41.33% 
                                Rural       35.79%         35.40%      36.17% 
                 Round II EC    Rural       37.67%         37.15%      38.20% 
                          RC    Urban       41.33%         41.10%      41.57% 
                                Rural       38.23%         37.89%      38.57% 

                  Round I EZ    Urban       20.75%         20.37%      21.12% 
                                Rural       13.05%         12.22%      13.88% 
                 Round II EZ    Urban       15.40%         15.04%      15.76% 
                                Rural       12.26%         11.46%      13.07% 
                Round III EZ    Urban       15.36%         14.87%      15.84% 

Appendix I: Scope and Methodology

95 percent confidence interval

               Description     Communities     Estimate       From         To 
                                     Rural       13.37%     12.41%     14.33% 
                Round I EC           Urban       15.73%     15.55%     15.91% 
                                     Rural       13.12%     12.80%     13.43% 
               Round II EC           Rural       15.39%     14.94%     15.84% 
                        RC           Urban       18.62%     18.39%     18.84% 
                                     Rural       13.57%     13.29%     13.85% 

Source: GAO analysis of HUD, USDA, and Census data.

In addition to sampling errors, census data (both sampled and 100 percent
data) are subject to nonsampling errors, which may occur during the
operations used to collect and process census data. Examples of
nonsampling errors are not enumerating every housing unit or person in the
sample, failing to obtain all required information from a respondent,
obtaining incorrect information, and recording information incorrectly.
Operations such as field review of enumerators' work, clerical handling of
questionnaires, and electronic processing of questionnaires also may
introduce nonsampling errors in the data. The Census Bureau discusses
sources of nonsampling errors and attempts to control them in detail.

To address businesses' use of the EZ Employment Credit, we obtained
information from IRS's Statistics of Income databases of corporate and
individual tax returns for 1995 through 2001. Although there were some
data available for 1994, we excluded it from our analysis because the
sample was based on a small number of returns in this year and yielded
unreliable confidence intervals. All reported individual return statistics
and the corporate return statistics for years 1995 to 1997 and 2001 are
estimates based on probability samples. Using IRS's Statistics of Income
Division sampling weights, we estimated confidence intervals for the
estimated number and amount of total credits. These estimates and their
confidence intervals are summarized in table 12.

                       Appendix I: Scope and Methodology

  Table 12: Confidence Intervals for EZ Employment Credit Estimates 95 percent
    confidence interval Description Year Estimate From To Corporate returns

Number of returns claiming the EZ Employment Credit

1995 193 88

1996 464 176

1997 630 409

a a

1998 402

a a

1999 420

a a

2000 479

2001 559 555

                     Amount claimed in EZ Employment Credit

                         1995   $7,409,228      $3,574,947        $11,243,510 
                         1996   $9,382,387      $6,612,327        $12,152,448 
                         1997   $13,222,819     $10,432,042       $16,013,595 
                         1998   $19,117,527                 a               a 
                         1999   $21,645,271                 a               a 

a a

2000 $23,527,478 2001 $23,401,274 $23,037,765 $23,764,782

Individual returns

Number of returns claiming the EZ Employment Credit

                                     1995     239             126         412 
                                     1996     460             176         975 
                                     1997     686             291       1,368 
                                     1998    3,100          1,904       4,698 
                                     1999    4,752          3,571       6,199 
                                     2000    5,074          3,744       6,722 
                                     2001    6,745          5,199       8,606 
    Amount claimed in EZ Employment                               
                Credit                                            
                                     1995 $8,497,429  $3,142,915  $13,851,942 
                                     1996 $10,810,233 $1,901,366  $19,719,099 
                                     1997 $19,090,668 $5,670,794  $32,510,542 
                                     1998 $22,088,019 $10,360,890 $33,815,148 
                                     1999 $26,728,435 $14,596,766 $38,860,105 
                                     2000 $21,948,244 $12,826,922 $31,069,565 

                       Appendix I: Scope and Methodology

        95 percent confidence interval Description Year Estimate From To

                    2001 $24,274,141 $17,115,109 $31,433,173

Source: GAO analysis of IRS data.

aThese data do not require confidence intervals because the total amounts
are based on the population of tax returns.

To identify the methods that have been used and the results that have been
found in assessments of the effectiveness of the EZ/EC and RC programs, we
conducted searches of the literature and interviewed agency personnel and
community development experts. We reviewed more than 1,100 article and
report abstracts to identify outcomes-focused evaluations of the federal
EZ/EC and RC programs. We included evaluations that met the following
criteria: (1) they focused on the federal EZ/EC or RC program; (2) they
were research evaluations that systematically collected and analyzed
empirical data (as opposed to reports of Best Practices/Lessons Learned or
policy discussions of the program); and either (3) they evaluated the
program in terms of its effect on poverty, unemployment, and/or economic
growth consistent with our congressional mandate; or (4) they evaluated
the program's effectiveness in any of the other program goal areas. The
remaining 11 evaluations, on which we focused our work, were program
evaluations or described the process of implementation that affected how
the program operated.

We conducted our work in Washington, D.C., from April 2003 through
February 2004 in accordance with generally accepted government auditing
standards.

                  Appendix II: List of Designated Communities

To date, Congress has authorized the designation of three rounds of EZs,
two rounds of ECs, and one round of RCs. In addition, at the same time
that HUD and USDA announced the Round I designations, HUD created two
additional designations-Supplemental Empowerment Zones and Enhanced
Enterprise Communities. See table 13 for a complete list of designated
communities.

Table 13: List of Designated Communities

Round I Urban EZs (6)

a

Atlanta, Georgia
Baltimore, Maryland
Chicago, Illinois
Detroit, Michigan
New York, New York
Philadelphia, Pennsylvania/Camden, New Jersey

Round I Rural EZs (3)

Kentucky Highlands, Kentucky
Mid-Delta, Mississippi
Rio Grande Valley, Texas

Round I Urban ECs (65)

Akron, Ohio
Albany, Georgia
Albany/Schenectadya/Troy, New York
Albuquerque, New Mexico
Birmingham, Alabama
Boston, Massachusetts
Bridgeport, Connecticut
Buffalo, New Yorka
Burlington, Vermonta

                                       a

Charleston, South Carolina
Charlotte, North Carolina
Cleveland, Ohio
Columbus, Ohio
Dallas, Texas
Denver, Colorado
Des Moines, Iowa
East St. Louis, Illinois
El Paso, Texas
Flint, Michigan

                  Appendix II: List of Designated Communities

Harrisburg, Pennsylvania
Houston, Texas
Huntington, West Virginia
Indianapolis, Indiana
Jackson, Mississippi
Kansas City, Missouri/Kansas City, Kansas
Las Vegas, Nevada
Little Rock/Pulaski, Arkansas
Los Angeles, Californiaa
Louisville, Kentucky
Lowell, Massachusetts
Manchester, New Hampshire
Memphis, Tennesseea
Miami/Dade County, Florida
Milwaukee, Wisconsina
Minneapolis, Minnesota
Muskegon, Michigan
Nashville/Davidson, Tennessee
New Haven, Connecticut

                                       a

New Orleans, Louisiana
Newark, New Jerseya
Newburgh/Kingston, New York
Norfolk, Virginia
Oakland, California
Ogden, Utah
Oklahoma City, Oklahoma
Omaha, Nebraska
Ouachita Parish, Louisianaa
Phoenix, Arizona
Pittsburgh, Pennsylvania
Portland, Oregon
Providence, Rhode Island
Rochester, New Yorka
San Antonio, Texas
San Diego, Californiaa

                                       a

San Francisco, California Seattle, Washington Springfield, Illinois
Springfield, Massachusetts

                  Appendix II: List of Designated Communities

St. Louis, Missouri
St. Paul, Minnesota
Tacoma, Washingtona
Tampa, Florida
Waco, Texas
Washington, District of Columbia
Wilmington, Delaware

Round I Supplemental Empowerment Zones (2)

Cleveland, Ohiob, c c

Los Angeles, California

Round I Enhanced Enterprise Communities (4)
Boston, Massachusettsb
Houston, Texasb
Kansas City, Missouri/Kansas City, Kansasb
Oakland, Californiab
Round I Rural ECs (30)

Accomack and Northampton County, Virginia
Arizona Border Region, Arizona
Beadle/Spink Counties, South Dakota
Central Appalachia, West Virginia
Central Savannah River Area, Georgia
Chambers County, Alabama
City of East Prairie, Missouri
City of Lock Haven, Pennsylvania
City of Watsonville, California
Crisp/Dooly County, Georgia
East Arkansas, Arkansas
Fayette/Haywood County, Tennessee
Greater Portsmouth, Ohio
Greene-Sumter, Alabamaa
The Halifax/Edgecombe/Wilson Empowerment Alliance, North Carolina
Imperial County, California
Jackson County, Florida
Josephine County, Oregon
La Jicarita, New Mexico
Lake County, Michigan
Lower Yakima County, Washington

a

Macon Ridge, Louisiana McDowell County, West Virginia

Appendix II: List of Designated Communities

Mississippi County, Arkansas
North Delta Mississippi, Mississippi
Northeast Louisiana Delta, Louisiana
Robeson County, North Carolina
Scott, Tennessee/McCreary, Kentucky
Southeast Oklahoma, Oklahoma
Williamsburg-Lake City, South Carolina

Round II Urban EZs (15)

Boston, Massachusetts
Cincinnati, Ohio
Columbia/Sumter, South Carolina
Columbus, Ohio
Cumberland County, New Jersey
El Paso, Texas
Gary/Hammond/East Chicago, Indiana
Ironton, Ohio/Huntington, West Virginia
Knoxville, Tennessee
Miami/Dade County, Florida
Minneapolis, Minnesota
New Haven, Connecticut
Norfolk/Portsmouth, Virginia
Santa Ana, California
St. Louis, Missouri/East St. Louis, Illinois

Round II Rural EZs (5)

Desert Communities, California Griggs-Steele, North Dakota Oglala Sioux
Tribe, South Dakota Southernmost Illinois Delta, Illinois Southwest
Georgia United, Georgia

Round II Rural ECs (20)

Allendale ALIVE, South Carolina
Bowling Green, Kentucky
City of Deming, New Mexico
Clare County, Michigan
Clinch-Powell, Tennessee
Empower Lewiston, Maine
Empowerment Alliance of Southwest Florida, Florida
Fayette, Pennsylvania
Five Star, Washington

Appendix II: List of Designated Communities

Fort Peck Assiniboine & Sioux Tribe, Montana
Four Corners, Arizona
FUTURO Communities, Texas

                                       a

Huron-Tule, California
Metlakatla Indian Community, Alaska
Molokai, Hawaii
Northwoods NiiJii, Wisconsin
Town of Austin, Indiana
Tri-County Indian Nations, Oklahoma
Upper Kanawha, West Virginia
Wichita County, Kansas

Round III Urban EZs (8)

Fresno, California
Jacksonville, Florida
Oklahoma City, Oklahoma
Pulaski County, Arkansas
San Antonio, Texas
Syracuse, New York
Tucson, Arizona
Yonkers, New York

Round III Rural EZs (2)

Aroostook County, Maine FUTURO, Texas

Urban RCs (28)

Atlanta, Georgia
Buffalo-Lackawanna, New York
Camden, New Jersey
Charleston, South Carolina
Chattanooga, Tennessee
Chicago, Illinois
Corpus Christi, Texas
Detroit, Michigan
Flint, Michigan
Hamilton, Ohio
Lawrence, Massachusetts
Los Angeles, California
Lowell, Massachusetts
Memphis, Tennessee
Milwaukee, Wisconsin

Appendix II: List of Designated Communities

Mobile, Alabama
New Orleans, Louisiana
Newark, New Jersey
Niagara Falls, New York
Ouachita Parish, Louisiana
Philadelphia, Pennsylvania
Rochester, New York
San Diego, California
San Francisco, California
Schenectady, New York
Tacoma, Washington
Yakima, Washington
Youngstown, Ohio

Rural RCs (12)

Burlington, Vermont
Central Louisiana, Louisiana
Eastern Kentucky, Kentucky
El Paso County, Texas
Greene-Sumter, Alabama
Jamestown, New York
Northern Louisiana, Louisiana
Orange Cove, California
Parlier, California
Southern Alabama, Alabama
Turtle Mountain Band of Chippewa, North Dakota
West-Central Mississippi, Mississippi

Source: HUD and USDA.
aLater received RC designation.
bDuring Round I, these communities were also designated as Round I ECs.
cThese communities received Round I EZ status on January 1, 2000.

Appendix III: Federal Benefits Available to EZs, ECs, and RCs at the Time of
Designation and as of September 30, 2003

The authorizing legislation for the EZ/EC and RC programs provided
participants with grant and/or tax benefits. A prominent feature of the
EZ/EC program-the Social Services Block Grant-was only offered to Round I
EZ and EC participants. However, Round II EZs and ECs received grant funds
from HUD's and USDA's annual appropriations. In addition, the number of
tax benefits increased over the course of the three rounds of the EZ/EC
program and was the main benefit available to RCs. (See table 14.)

Table 14: Summary of Benefits Provided to EZs, ECs, and RCs at the Time of
                    Designation and as of September 30, 2003

                At time of designation As of September 30, 2003b

Round I EZs 1994  o  EZ/EC Social Services Block Grants

o  EZ Employment Credit

o  Increased Section 179 Deduction

o  Enterprise Zone Facility Bonds

o  Regulatory waiversa

o  Preference points for other federal programs

o  Earmarked grants and loans  o  EZ/EC Social Services Block Grants

o  EZ Employment Credit

o  Increased Section 179 Deduction

o  Enterprise Zone Facility Bonds

o  EZ Facility Bonds

o  Nonrecognition of Gains on the Sale of EZ Assets

o  Partial Exclusion of Gain on the Sale of EZ Stock

o  Preference points for other federal programs

o  Earmarked grants and loans Round I ECs 1994  o  EZ/EC Social Services
Block Grants

o  	Enterprise Zone Facility Bonds a

o  Regulatory waivers

o  Preference points for other federal programs

o  Earmarked grants and loans

o  	Economic Development Initiative Grants (Supplemental Empowerment Zones
and Enhanced Enterprise Communities)

o  	Section 108 Loan Guarantees (Supplemental Empowerment Zones and
Enhanced Enterprise Communities)c  o  EZ/EC Social Services Block Grants

o  Enterprise Zone Facility Bonds

o  Preference points for other federal programs

o  Earmarked grants and loans

o  	Economic Development Initiative Grants (Supplemental Empowerment Zones
and Enhanced Enterprise Communities)

o  	Section 108 Loan Guarantees (Supplemental Empowerment Zones and
Enhanced Enterprise Communities)

Round II EZs  o  Increased Section 179 Deduction 1998  o  Enterprise Zone
Facility Bonds

o  EZ Facility Bonds

o  Preference points for other federal programs

o  Earmarked grants and loans

o  Annual Appropriations, Fiscal Years 1999-2004

o  EZ Employment Credit

o  Increased Section 179 Deduction

o  Enterprise Zone Facility Bonds

o  EZ Facility Bonds

o  Nonrecognition of Gains on the Sale of EZ Assets

o  Partial Exclusion of Gain on the Sale of EZ Stock

o  Preference points for other federal programs

o  Earmarked grants and loans

Appendix III: Federal Benefits Available to EZs, ECs, and RCs at the Time
of Designation and as of September 30, 2003

                At time of designation As of September 30, 2003b

Round II ECs  o  Preference points for other federal programs  o  Annual
Appropriations, Fiscal Years 1999-2004 1998  o  Earmarked grants and loans
    o  Preference points for other federal programs

o  Earmarked grants and loans Round III EZs 2002  o  EZ Employment Credit

o  Increased Section 179 Deduction

o  Enterprise Zone Facility Bonds

o  EZ Facility Bonds

o  Nonrecognition of Gains on the Sale of EZ Assets

o  Partial Exclusion of Gain on the Sale of EZ Stock

o  Preference points for other federal programs

o  Earmarked grants and loans  o  EZ Employment Credit

o  Increased Section 179 Deduction

o  Enterprise Zone Facility Bonds

o  EZ Facility Bonds

o  Nonrecognition of Gains on the Sale of EZ Assets

o  Partial Exclusion of Gain on the Sale of EZ Stock

o  Preference points for other federal programs

o  Earmarked grants and loans

o  Annual Appropriations, Fiscal Year 2004 (rural only)

RCs  o  Increased Section 179 Deduction o  Increased Section 179 Deduction 
2002 o       RC Employment Credit       o       RC Employment Credit       
        o     Commercial Revitalization    o     Commercial Revitalization    
                      Deduction                          Deduction            
        o  Zero Percent Capital Gains Rate o  Zero Percent Capital Gains Rate 
                    for RC Assets                               for RC Assets 
        o    Preference points for other   o    Preference points for other   
                  federal programs                   federal programs         

Source: GAO summary of HUD and USDA program documents.

aFollowing Round I, the EZ/EC program de-emphasized the waiver feature,
but communities could still request waivers on a more informal basis.

bSome new benefits provided to later rounds of designation were also
provided to earlier designees. Thus, in some instances, the number of
benefits as of September 30, 2003, exceeds the number of benefits for
which a community was originally eligible.

cAccording to a HUD official, these Section 108 Loan Guarantees were
awarded between May and July, 1995.

Appendix IV: Other Tax Benefits Available to Businesses Serving Distressed
Communities and Low-Income Individuals

In addition to federal tax benefits that have been specifically available
for businesses in EZs, ECs, and RCs, taxpayers who engage in business in
these communities are typically eligible for other federal tax benefits
not specifically designed for such communities. These benefits include tax
credits and deductions intended to encourage taxpayers to invest in
distressed communities, employ low-income people, and provide housing for
low-income people. (Table 15 provides a list of other federal tax benefits
intended to assist distressed communities.)

    Table 15: Other Tax Benefits Available to Businesses Serving Distressed
                     Communities and Low-Income Individuals

                           Effective Expiration 
         Tax benefit         year       year             Provisions           
                                                Owners of newly constructed   
                             1987       none    or renovated rental housing   
Low Income Housing Tax                       who set aside a               
                                                specified percentage or units 
           Credit                               for low-income persons for a  
                                                minimum of 15                 
                                                years are eligible for a tax  
                                                credit over a 10-year period. 
                                                The taxpayer must             
                                                  receive an allocation of    
                                                 these credits from a state   
                                                     agency to qualify.       
                                                Businesses that hire certain  
Indian Employment         1994       2004     individuals who live on or   
Credit                                              near an Indian         
                                                reservation may be eligible   
                                                for a credit of 20 percent on 
                                                certain wages and             
                                                 benefits paid to qualified   
                                                         employees.           
                                                   Businesses can use shorter 
       Depreciation of       1994       2004              recovery periods to 
          Property                               depreciate certain qualified 

Used on Indian Reservations property that is used predominantly in the
active conduct of a trade or business on an Indian reservation.

Work Opportunity Tax  1996 2003a  Businesses can claim up to $2,400 in tax 
                                         credits for first-year wages paid to 
          Credit                    targeted employees, such as ex-felons,    
                                    food stamp recipients, and                
                                     employees between 18 and 24 who live in  
                                                an EZ, EC or RC.              
                         1997 2003  Businesses that clean up certain sites    
Environmental Cleanup            contaminated with hazardous               
      Cost Deduction                substances can deduct their cleanup costs 
                                              in the year that the businesses 
                                     incur those costs. Businesses may deduct 
                                             these costs in 1 year instead of 
                                      taking depreciation deductions over a   
                                            specified period of time.         
    Welfare-to-Work Tax  1998 2003a    Businesses can claim credits for wages 
                                          paid to long-term family assistance 
          Credit                    recipients in the first 2 years of        
                                    employment. The allowable credit limit is 
                                    $3,500 for wages paid in the first year   
                                    and $5,000 for wages paid in the          
                                                     second.                  

Qualified Zone Academy 1998 2003b State and local governments can issue    
                                     bonds at a zero-percent interest         
           Bonds                        rate to finance certain public school 
                                       programs, such as building renovation, 
                                     teacher training, and educational        
                                     materials and equipment. Certain         
                                      businesses, such as banks and insurance 
                                               companies, that purchase these 
                                     bonds are eligible for tax credits equal 
                                       to the market taxable interest rate in 
                                     lieu of interest payments. Schools that  
                                     benefit from these bonds must be         
                                     located in an EZ or EC, or have at least 
                                        35 percent of their students eligible 
                                        for free or reduced cost lunches.     

New Markets Tax Credit 2001 2007c	Investors in qualified Community
Development Entities can claim tax credits over a 7-year period. The
credit is 5 percent in the first 3 years of the investment, and 6 percent
for the remaining 4 years, for a total of 39 percent. The Community
Development Entitity must receive an allocation of credits through the
Treasury Department for investors to be eligible.

Source: GAO summary of HUD and IRS publications; P.L. 99-514, P.L. 103-66,
P.L. 104-188, P.L. 105-34, P.L. 106-554, and P.L. 107-147.

Appendix IV: Other Tax Benefits Available to Businesses Serving Distressed
Communities and Low-Income Individuals

aExpires for individuals who begin work after December 31, 2003.

bNo new credits are authorized after 2003. However, unused credits may be
carried forward through 2006.

cCongress authorized $15 billion in New Markets Tax Credits and provided a
schedule limiting the amount of allocations for each calendar year
beginning in 2001 through 2007. Congress also allowed for a carryover of
unused credits to the next calendar year, increasing the amount of credits
available by that amount; however, no amount may be carried to any
calendar year after 2014.

Appendix V: Other Benefits Available to Certain Designees

In addition to grants and federal tax benefits, EZs, ECs, and RCs were
eligible to seek waivers from federal programmatic, statutory, or
regulatory requirements to facilitate their revitalization efforts.
However, nominees made limited use of the waiver initiative and, although
still available to designees, it is no longer considered a primary
feature. Also, communities designated by HUD as Supplemental Empowerment
Zones or Enhanced Enterprise Communities were provided with Section 108
Loan Guarantees to provide security for loans that finance economic
development and revitalization projects. Finally, in some cases, EZs, ECs,
and RCs received a preference in receiving assistance under a variety of
federal programs. However, the extent to which communities have received
these preferences is unknown.

  Round I EZs and ECs Made Limited Use of the Waiver Initiative

In Round I of the EZ/EC program, both HUD and USDA guidance invited
nominees to request, as an addendum to their applications, waivers from
federal programmatic, statutory, or regulatory requirements to facilitate
their ability to conduct revitalization efforts. This feature was not
established in the EZ/EC program legislation or regulations; rather, it
was an administrative initiative. In response to a request, HUD and USDA
would offer to work with the communities to seek statutory authority for
broader flexibility of federal programs. For example, nominees could ask
for exemptions, increased flexibilities, or changes in eligibility
requirements for other federal programs.

Available data indicate that Round I designees made limited use of the
available waivers from programmatic and regulatory requirements to
facilitate their ability to conduct revitalization efforts. Program
officials said that many of the nominees requested waivers of statutory
requirements, which HUD and USDA could not provide. The HUD Interim
Assessment examined 244 waiver requests made by 18 urban Round I EZ/ECs.
The HUD Interim Assessment found that the most commonly requested waivers
included requests such as exemption from Davis-Bacon Act requirements;
flexibility in using block grant funds; and changes in eligibility for
federal programs, such as Aid to Families with Dependent Children, Food
Stamps, and Medicaid. The report found that federal agencies fully or
partially approved 5 percent of the requests and denied 33 percent of the
requests either because the agencies lacked the authority to grant them or
for other reasons. In addition, 21 percent of the waiver requests asked
for flexibilities that already existed, and the remaining requests either
required more information or the agency reached some other disposition.
Although USDA officials did not quantify the disposition

Appendix V: Other Benefits Available to Certain Designees

of waiver requests through an independent study, a USDA official estimated
that fewer than 10 waiver requests had been approved annually.

Because of the Round I experience, both HUD and USDA de-emphasized the
waiver initiative. In the application materials for HUD Round II and III,
and for the RCs, no mention is made of encouraging requests for waivers.
In the USDA Round II application materials, the waiver request initiative
is retained, but in the Round III application, no mention is made of the
opportunity for nominees to request waivers. HUD and USDA officials told
us that designees could still request waivers, but that there was no
longer a formal initiative such as was used in Round I.

  HUD Designees Have Begun to Use Loan Guarantees

After HUD designated the Supplemental Empowerment Zones and Enhanced
Enterprise Communities in Round I, the agency provided them with a total
of $653 million in Section 108 Loan Guarantees (See table 16).64 Like the
Economic Development Initiative Grants also offered to these designees,
these loan guarantees are to provide security for loans that finance
economic development and revitalization projects. A Section 108 loan
guarantee allows local governments to obtain loans for economic
development projects that (1) benefit low and moderate income families;
(2) prevent or eliminate slums or blight; or (3) meet other urgent
community development needs. These loans are secured by a community's
current and future Community Development Block Grant allocations for up to
five years and carry the full faith and credit of the U.S. government in
the event of a default. This benefit allows a local government entity to
reduce its borrowing costs. The local government entities can also provide
additional security for their section 108 loan repayments or enhance the
feasibility of certain projects by paying directly for certain project
expenses with its Economic Development Initiative grants.

64HUD awarded separate Section 108 Loan Guarantees to overlapping or
adjacent government entities in the city and county of Los Angeles,
California, and in Kansas City, Missouri and Kansas City, Kansas.

Appendix V: Other Benefits Available to Certain Designees

Table 16: Section 108 Loan Guarantees for Supplemental Empowerment Zones
and Enhanced Enterprise Communities

Amount in allocated Section 108 Loan Local government entity Guarantees

                         Supplemental Empowerment Zones

Los Angeles, Calif. (City) $300 million Los Angeles, Calif. (County) $25 million

                          Cleveland, Ohio $87 million

                        Enhanced Enterprise Communities

                           Boston, Mass. $22 million

                          Oakland, Calif. $22 million

                           Houston, Tex. $175 million

         Kansas City, Mo. $14.2 million Kansas City, Kans. $7.8 million

                               Total $653 million

Source: HUD.

As of September 30, 2003, the eight local government entities that
received Section 108 Loan Guarantees as part of the Supplemental
Empowerment Zone and Enhanced Enterprise Community designations had used
about 36 percent of the loan guarantees that HUD awarded (see table 17).

Table 17: Amount of Section 108 Loan Guarantees Awarded and Used as of
September 30, 2003 (Dollars in thousands)

Amount awarded Amount used % Drawn down

             Supplemental Empowerment Zones $241,000 $86,560 35.9%

            Enhanced Enterprise Communities $412,000 $151,741 36.8%

                         Total $653,000 $238,301 36.5%

                       Source: GAO analysis of HUD data.

Designees' Use of HUD and USDA expect EZs, ECs, and RCs to use their
designations to Competitive Preferences Is attract additional investment.
Businesses and community organizations in Unknown these communities can
seek grants and loans from for-profit corporations,

nonprofit entities, foundations, state and local governments, and other
federal agencies. For example, a bank might help capitalize a community
lending institution or a private foundation might contribute to a
recreational facility for youths. In some cases, organizations or
individuals

Appendix V: Other Benefits Available to Certain Designees

operating or residing in EZs, ECs, or RCs receive competitive priority for
federal grants, loans, or technical assistance based solely on their EZ,
EC, or RC designations. HUD and USDA officials said that during Round I of
the EZ/EC program the Community Empowerment Board encouraged federal
agencies to provide preferences to applicants from EZs or ECs in
competition for federal funds. For example, communities designated as
federal EZs, ECs, or RCs could receive a competitive preference for the
Environmental Protection Agency's 2003 National Brownfields Assessment,
Revolving Loan Fund, and Cleanup Grants.65 In addition, in 2003, the U.S.
Department of Education's Teacher Quality Enhancement Grants program
provided a competitive priority to applicants who proposed to carry out
activities in EZs or ECs.66 In addition, Congress has regularly earmarked
federal funds, such as grants for low-income housing repair or direct
loans for rural development projects, to projects located in EZs and ECs.

The extent to which EZs, ECs, and RCs have taken advantage of competitive
preferences is not known. Although HUD and USDA maintain data in their
performance management systems on EZs', ECs', and RCs', use of other
sources of funding, these systems do not differentiate whether the funding
source included a preference for applicants located in EZs, ECs, or RCs.
However, officials from HUD and USDA told us that their perception was
that many federal agencies that provided competitive preferences to
applicants located in EZ/ECs in Round I no longer offer these preferences.
For example, one HUD official told us that the Department of Justice's
Weed and Seed program, which provides assistance to communities for
reducing crime and drug abuse and bringing in human services, no longer
offers bonus points to applicants located in EZs, ECs, or RCs. One HUD
official noted that the number of preferences offered might have decreased
because the Community Empowerment Board disbanded.

65This program is intended to help recipients clean up brownfield sites.

66This program provides grants to promote improvements in the quality of
new teachers with the ultimate goal of increasing student achievement in
the nation's classrooms.

Appendix V: Other Benefits Available to Certain Designees

                    [This Page Is Intentionally Left Blank]

Appendix VI: Summary of Evaluations of the EZ/EC Program

Author/Title Purpose and scope Primary methods and data used

Aigner, Stephen M., Cornelia B. Flora,  o  To investigate the usefulness
of  o  Collected data through existing data sources (e.g., and Juan M.
Hernandez. several concepts (e.g., educational and banking
administrations) and "The Premise and Promise of empowerment paradigm,
citizen USDA performance management system data

Citizenship and Civil Society for 	participation, and inclusion, civil  o 
Performed descriptive statistical analysissociety) in local sites' ability
to

Renewing Democracies and leverage dollars for sustainable
Empowering Sustainable development.
Communities."

Sociological Inquiry 71, no. 4 (2001):  o  33 Round I rural EZ/ECs
493-507.

                    Chaskin, Robert J. and Clark M. Peters.

o  To examine the engagement of

o  	Collected data through open-ended interviews and document reviews

o  Prepared case studies local actors in a process of planning and
governance, and their place within the broader governance structure in the
EZ/EC program

o  	Round I urban, rural, EZs, ECs, Supplemental Empowerment Zones, and
Enhanced Enterprise Communities

Governance in Empowerment Zone Communities: A Preliminary Examination of
Governance in Fifteen Empowerment Zone Communities.

Chicago, IL: University of Chicago, Chapin Hall Center for Children, 1997.

Community Partnership Center.  o  To assess, primarily from the
perspective of local residents,Rural Empowerment Zones/Enterprise how
effectively the EZ/EC

Communities: Lessons from the
Learning Initiative. Findings and Program is carrying out the key
Recommendations of the Community principles
Partnership Center EZ/EC Learning  o  Round I rural EZ and ECs
Initiative.

Knoxville, TN: Community Partnership Center, University of Tennessee,
1998.

Gittell, Marilyn, Kathe Newman, and  o  To determine the extent to which
Francois Pierre-Louis. the EZ program achieved its

Empowerment Zones: An Opportunity goal of increased citizen Missed: A Six
City Comparative Study. participation through community organization

New York, NY: The City University of  o  Round I urban EZs
New York, The Howard Samuels State
Management and Policy Center, 2001.

Gittell, Marilyn, and others.  o  To assess the degree to which

"Expanding Civic Opportunity: Urban the participation of
community-Empowerment Zones." based organizations in the EZ

strategic planning process has Urban Affairs Review 33, no. 4 (1998):
expanded community capacity

530-58. Round I urban EZs

o  	Collected data through participant observation of Learning Initiative
Team workshops and document reviews of 1996 Annual Reports and executive
summaries

o  	Collected data through open-ended interviews and document reviews

o  Prepared case studies

o  	Collected data through open-ended interviews and document reviews

o  Prepared case studies

                                       o

Appendix VI: Summary of Evaluations of the EZ/EC Program

                        Major findings Major limitations

o  	As the percent of individual citizens involved on a governing  o  The
study findings are not generalizable outside of the board increased, so
did the number of women board members sample studied. (in this study,
women served as a proxy for how "inclusive"  o  Reviews by USDA's
Inspector General stated that they had

 boards were in representing diverse groups). little confidence in the accuracy
                            of the performance data.

o  	Findings related to dollars leveraged relied heavily on the USDA
Therefore, such findings are not reported here. performance management
system data.

o  	Community participation in governance structures was greater  o  The
study examined only the first year of the functioning of during the
planning phase than during the implementation the EZs. phase, because of
difficulties of implementing projects in reasonable time frames.

o  	All but one of the rural sites had made progress on at least  o 
Findings are not generalizable to other EZ/EC rural or urban some of their
benchmark activities. sites.

o  	Citizen participation was identified as the most important aspect  o 
Annual report and executive summary data were selfof the EZ/EC Program;
however, recruiting and sustaining reported and were not independently
verified. A lack of citizen participation over the long term is an
on-going challenge consistency across sites was observed. in rural
communities.

o  	Sustained community participation seems to be influenced by the
capacity of existing community-based organizations.

o  	Effective EZ/EC boards are those that represent low-income communities
and lessen the role of typical political players.

o  	Although the EZ program was specifically designed to support  o  Time
frames of the study are not completely clear. the participation of local
groups, that process was enforced only in the initial planning phase of
the program.

o  	During the implementation of the EZ program in designated cities,
federal supervision diminished and local elites asserted their control.

o  	Community groups were underrepresented in EZ governance  o  The study
examined only the first year of the functioning of structures. the EZs.

o  	One year into the EZ process, there was little evidence that the
program had contributed significantly to the development of community
capacity.

Appendix VI: Summary of Evaluations of the EZ/EC Program

Author/Title Purpose and scope Primary methods and data used

Hebert, Scott, and others.  o  To present an initial assessment of how  o 
Acquired commercially provided employment Interim Assessment of the the
four EZ/EC principles have been data

Empowerment Zones and interpreted and implemented and how the  o 
Performed longitudinal analysis of employment Enterprise Communities
(EZ/EC) application of these principles may be data during the 5 years
before and the 5 years contributing to the revitalization of the after
designation

Program: A Progress Report. targeted communitiesa

Prepared for the U.S. Department  o  Round I urban EZ/ECs  o  Collected
data on business employment levels of Housing and Urban and attitudes
toward the tax incentives through Development Washington, D.C.: a
telephone survey of zone businesses

November 2001.  o  Performed multiple regression models on

                                       o

                                     o   o

survey data to determine whether use of the zone's financial incentives
was associated with change in resident employment

Collected data using document reviews, openended interviewing, and
comparative analysis to determine site resident participation in program
governance, reinvention of government, and diversity of partnerships

Used agency performance management system data

Performed descriptive statistical analysis on performance data to examine
the programs and activities that sites used to address physical and human
development Nathan, Richard P., and others.

Investing in a New Future: Special Report on Community Development
Financing in Selected Empowerment Zone/Enterprise Community Sites.

Albany, NY: The Nelson A. Rockefeller Institute of Government, 1997.

o  	To compare commercial and residential lending activities and
characteristics of these lending activities with respect to the
Metropolitan Statistical Areas where the sites are located

o  	18 Round I urban EZs, ECs, Supplemental Empowerment Zones, and
Enhanced Enterprise Communities

o  	To determine the character of community input and governance in
EZ/EC-funded community development activities

o  	18 Round I urban EZs, ECs, Supplemental Empowerment Zones, and
Enhanced Enterprise Communities

o  	Used loan data constructed by aggregating 1995 Home Mortgage
Disclosure Act census tract-level data into 18 EZ/EC geographic areas

o  	Conducted and analysis of residential lending activities

o  	Used Small Business Administration data on commercial loans, which
were constructed by apportioning and summing all the zip-code level data
into 18 EZ/ECs and their respective geographical areas

o  	Conducted and analysis of commercial lending activities

o  Collected data through document reviews

o  Prepared case studies

Appendix VI: Summary of Evaluations of the EZ/EC Program

Major findings Major limitations

o  	Between 1995 and 2000, employment of EZ residents grew  o  It is not
possible to determine whether zone designation faster in zones than in
demographically similar neighborhoods in caused employment rates to
increase or whether rates four of the six cities and in the six-city
total. increased for other reasons, such as general economic

o  	Larger business establishments reported using tax incentives
conditions or local initiatives. more frequently than smaller businesses. 
o  Because of the low response rate, survey responses might

o  Many small businesses were not aware of the tax incentives. be biased
toward firms that favor the EZ.

o  	The number of business establishments owned by zone  o  Because the
survey found that most small zone residents increased. businesses were
unaware of financial incentives, it is not

o  	Both zone-resident owned businesses and small businesses plausible
that these businesses could have been motivated located in zones were more
likely to hire local zone residents. by the financial incentives of which
they were not aware.

o  Findings regarding ECs are based on a nonprobability

o  	There was a significant relationship between use of the EZ Wage sample
and cannot be generalized to ECs that were notTax Credit and Section 179
Expensing Provision and the studied. percentage change in the number of
residents employed.

o  Local attention to building the capacity of zone residents to  o 
Particular cases in the analysis are identified as successes

or failures, but the criteria for determining success orparticipate in
zone governance has been extremely uneven. failure are not specified.

o  	Residents and community-based organization representatives combined
constitute typically 50 percent of board memberships.  o  Zone governance
was difficult to monitor.

o  Reviews by HUD's Inspector General stated that they had

o  	Program partnerships took many forms from temporary, loosely-little
confidence in the accuracy of the performance data. organized
associations, to long-term formalized alliances. Therefore, such findings
are not reported here.

o  	Reported findings on program activities relied entirely on the HUD
performance management system data.

o  	Home loans, measured as the loan activities per 1000 dwellings,  o  No
discussion of Home Mortgage Disclosure Act reliability were almost half as
prevalent in the 18 EZs/ECs as in their was included in the report;
however, GAO work has found corresponding Metropolitan Statistical Areas.
these data to be sufficiently reliable for similar purposes.b

o  	Report findings on commercial lending relied on Small Business
Administration data, for which there is no knowledge about the reliability
of the data. Therefore, such findings are not reported here.

o  	The researchers did not control for other factors influencing the
differences in lending activities in the 18 EZ/ECs when comparing with
corresponding Metropolitan Statistical Areas.

o  	Findings regarding ECs are based on a nonprobability sample and cannot
be generalized to ECs that were not studied.

o  Citizens in most communities were able to play a moderate to  o 
Because the study covered only the years 1994-1997,

substantial role in the governance of their community's EZ/EC insufficient
time had passed when the study was published to draw definitive
conclusions.

Initiative.

o  	In all 18 study cities, citizens had some opportunity to advise local
EZ/EC governing bodies and community development finance entities.

Appendix VI: Summary of Evaluations of the EZ/EC Program

Author/Title Purpose and scope Primary methods and data used

(Continued from last page)

Nathan, Richard P., and others.  o  To summarize community participation 
o  Collected data through document reviews in the strategic planning,
governance, of site descriptions of the strategicEmpowerment Zone
Initiative: Building a and benchmarking processes for the planning

Community Plan for Strategic Change. beginning of the program  o 
Performed a comparative analysis of types
Findings from the First Round
Assessment of the Empowerment  o  18 Round I urban EZs, ECs, of program
strategies across sites

Zone/Enterprise Community Initiative. Supplemental Empowerment Zones, and

Albany, NY: The Nelson A. Rockefeller Enhanced Enterprise Communities
Institute of Government, 1997.

Perspectiv

                         o  To make a                                    
                         preliminary                                     
                      exploration of  o                                  
Reid, J. Norman  Collected data through                               
and Karen Savoie    document reviews                                  
                                           performance data              
                                           on program and                
Murray.                                 site visits                   
"Empowering                                              o  Used USDA 
Rural                                   implementation    performance 
Communities: A                                                   data 
Paper presented                                                            
at the annual                                                         data
meeting                                                               
of the Rural                                                          
Sociological                                                          
Society,                                                              
Washington,                                                           
D.C., August                                                          
2000.                                                                 
                      o  To examine the                                  
                     extent to which  o                                  
U.S. General         Surveyed 2,380                                   
Accounting       businesses located in                                
Office.                   nine                                        

e at the Five-Year Point."  o  Round I and Round II rural EZ/ECs  o 
Performed descriptive statistical analysis of

businesses used the program's three federal designated EZs. Surveys
wereCommunity Development: Businesses' initial tax incentives and other
tax mailed to 513 large businesses and 744Use of Empowerment Zone Tax
incentives, and determine reasons why small businesses in urban EZs, and
1,123

Incentives.

in some cases the incentives were not to businesses in rural EZs

GAO/RCED-99-253, (Washington, D.C.: used  o  Analyzed the results of the
surveysSeptember 30, 1999).  o  Round I urban and rural EZs

            Appendix VI: Summary of Evaluations of the EZ/EC Program

                        Major findings Major limitations

o  	In 11 of the study cities, including all six EZs, citizens were
provided with some means of citizen participation and involvement in the
governance of various community development initiatives.

o  	There were few instances in which zone residents and stakeholders
actually controlled the allocation of EZ/EC resources.

o  	The strategic planning process often began as a city- o  Findings
regarding ECs are based on a nonprobability sample government process and
evolved into a more community-and cannot be generalized to ECs that were
not studied.

directed process headed by steering committees of 20 to100  o  Local sites
               provided self-reported data to the authors, which

members. were not independently verified.  o  The most common governance
structure was at least moderately integrated into the city government and
used one central structure to oversee the Initiative.

o  	Cities with considerable community control over plan development
tended to have an existing citizen participation structure that could be
used as a foundation to initiate planning efforts.

o  	Citizen influence was greatest in determining site strategies and
program activities.

o  	Citizen participation decreased as the initiative moved from planning
to implementation.

o  	Citizen participation was reported to be higher in the EZ/EC
Initiative than in other similar federal initiatives.

o  Most cities did not have grassroots participation.

o  	Community participation was greater in the early phases of the
benchmarking process.

o  Reported findings relied heavily on the USDA performance  o  Reviews by
USDA's Inspector General stated that they had

management system data. 	little confidence in the accuracy of the
performance data. Therefore, such findings are not reported here.

o  	The employment credit was the most frequently used tax  o  Because
more than half of the large urban businesses and incentive, especially by
the larger businesses. rural businesses did not respond to the surveys,
the survey

o  	Businesses that used the employment credit cited it as results only
reflect actual usage of the incentives. somewhat important in their hiring
decisions.  o  The estimates based on the surveys might be imprecise

o  	The most frequently cited reason for not using the credit was because
of the sampling error associated with estimate. that their employees lived
out of the zones or that they did not know about the credit.

            Appendix VI: Summary of Evaluations of the EZ/EC Program

          Author/Title Purpose and scope Primary methods and data used

Fahui Wang and Joseph A. Van o   To examine citizen   o   Collected data   
               Loo.                  participation in            through      
    "Citizen Participation in      the EC catchment area                      
the North Delta Mississippi       compared with the            participant 
Community Development Block     community development      observation and 
    Grants, Empowerment Zones      block grant catchment     document reviews
and Enterprise Communities."      area North Delta       
                                o     Mississippi EC        
      Planning Practice and                                 
    Research 13, no. 4 (1998):                              
             443-51.                                        

Appendix VI: Summary of Evaluations of the EZ/EC Program

                        Major findings Major limitations

o  	Citizen participation outreach efforts were more extensive in the  o 
The findings are specific to this EC site and cannot be EC program than in
the community development block grant generalized to ECs that were not
studied.

program.  o  The authors could not determine to what extent citizen

o  	Citizen involvement was more extensive and more meaningful
participants in each program were representative of the larger (i.e.,
participation in strategic planning and decision making) in population
living in the target areas, and therefore, to what the EC program than in
the community development block grant extent key factors, such as
socioeconomic status, might have program. influenced citizen
participation.

aThe four key principles of the EZ/EC program are strategic vision,
economic opportunity, communitybased partnerships, and sustainable
community development.

bU.S. General Accounting Office, Public Housing: HOPE VI Resident Issues
and Changes in Neighborhoods Surrounding Grant Sites, GAO-04-109,
(Washington, D.C.: November 2003).

Appendix VII: Comments from the Department of Housing and Urban Development

Appendix VII: Comments from the Department of Housing and Urban
Development

Appendix VIII: Comments from the Internal Revenue Service

Appendix IX: Comments from the U.S. Department of Agriculture

Appendix IX: Comments from the U.S. Department of Agriculture

Appendix IX: Comments from the U.S. Department of Agriculture

Appendix X: Comments from the Department of Health and Human Services

Appendix XI: GAO Contacts and Staff Acknowledgments

  GAO Contacts Acknowledgments

William Shear (202) 512-8678 Charles Wilson, Jr. (202) 512-6891

In addition to those individuals named above, Jonathan Altshul, Susan
Baker, Daniel Blair, Mark Braza, Emily Chalmers, Patricia Farrell Donahue,
David Dornisch, DuEwa Kamara, Terence Lam, Alison Martin, Grant Mallie,
John McGrail, John Mingus, Marc Molino, Gretchen Maier Pattison, Minette
Richardson, and Michael Simon made key contributions to this report.

Bibliography

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--Empowerment Zone Initiative: Building a Community Plan for Strategic
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Related GAO Products

Community Development: Businesses' Use of Empowerment Zone Tax Incentives.
GAO/RCED-99-253 (Washington, D.C.: September 1999).

Community Development: Progress on Economic Development Activities Varies
Among the Empowerment Zones. GAO/RCED-99-29 (Washington, D.C.: November
1998).

Community Development: Information on the Use of Empowerment Zone and
Enterprise Community Tax Incentives. GAO/RCED-98-203 (Washington, D.C.:
June 1998).

Community Development: Identification of Economically Distressed Areas.
GAO/RCED-98-158R (Washington, D.C.: May 1998).

Economic Development Activities: Overview of Eight Federal Programs.
GAO/RCED-97-193 (Washington, D.C.: August 1997).

Rural Development: New Approach to Empowering Communities Needs
Refinement. GAO/RCED-97-75 (Washington, D.C.: March 1997).

Community Development: Status of Urban Empowerment Zones.

GAO/RCED-97-21. (Washington, D.C.: December 1996).

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