Community Development: Businesses' Use of Empowerment Zone Tax Incentives
(Letter Report, 09/30/1999, GAO/RCED-99-253).

Pursuant to a congressional request, GAO provided information on the
extent to which businesses used: (1) Empowerment Zone and Enterprise
Community program's three tax incentives; and (2) three other tax
incentives that are targeted to help businesses, including those in
distressed areas.

GAO noted that: (1) large urban businesses and rural businesses were
more likely than small urban businesses to have used at least one of the
three tax incentives available to businesses in the empowerment zones;
(2) the employment credit was the most frequently used of the three tax
incentives; (3) according to the survey's responses, 42 percent of the
large urban businesses, an estimated 6 percent of the small urban
businesses, and 32 percent of the rural businesses used the employment
credit; (4) large urban businesses and rural businesses reported
claiming $9.1 million for tax year 1997; (5) the majority of the
businesses that used the employment credit reported that the credit was
at least somewhat important to making decisions about hiring employees
who live in the zones; (6) the businesses that reported they did not
claim the employment credit cited a variety of reasons, which most
frequently included that they did not qualify for the credit because
their employees lived outside of the zone or they did not know about the
credit; (7) in tax year 1997, the increased expensing deduction was used
less than the employment credit; (8) about 9 percent of the large urban
businesses, an estimated 4 percent of the small urban businesses, and 8
percent of the rural businesses used the increased expensing deduction;
(9) of the businesses that used this deduction, 18 large urban
businesses reported claiming $405,534 and 37 rural businesses reported
claiming $480,081; (10) the businesses that reported they did not claim
this deduction cited a variety of reasons; (11) few businesses have used
the tax-exempt facility bonds; (12) 10 businesses reported receiving the
proceeds from these tax-exempt facility bonds; (13) of the businesses
that did not use these bonds, the predominant reason was that they did
not know about them; and (14) most of the businesses did not use the
work opportunity credit, the welfare-to-work credit, or the
environmental cleanup tax deduction.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-99-253
     TITLE:  Community Development: Businesses' Use of Empowerment Zone
	     Tax Incentives
      DATE:  09/30/1999
   SUBJECT:  Urban economic development
	     Rural economic development
	     Tax credit
	     Community development programs
	     Economically depressed areas
	     Surveys
IDENTIFIER:  HUD Empowerment Zones and Enterprise Communities Program

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Cover
================================================================ COVER

Report to Congressional Requesters

September 1999

COMMUNITY DEVELOPMENT -
BUSINESSES' USE OF EMPOWERMENT
ZONE TAX INCENTIVES

GAO/RCED-99-253

Businesses' Use of Empowerment Zone Tax Incentives

(385779)

Abbreviations
=============================================================== ABBREV

Letter
=============================================================== LETTER

B-283591

September 30, 1999

The Honorable John Mica
Chairman, Subcommittee on Criminal Justice,
 Drug Policy, and Human Resources
Committee on Government Reform
House of Representatives

The Honorable Christopher Shays
Chairman, Subcommittee on National Security,
 Veterans Affairs, and International Relations
Committee on Government Reform
House of Representatives

The Omnibus Budget Reconciliation Act of 1993 established the
Empowerment Zone and Enterprise Community program as a comprehensive
approach to help designated communities revitalize deteriorating
areas.  The act also provided three tax incentives that, among other
things, were intended to revitalize the distressed areas by lowering
the cost of doing business in an empowerment zone.  These three tax
incentives are (1) an employment credit, (2) a $20,000 increase in
the expensing deduction for depreciable business property, and (3) a
tax-exempt facility bond.  The estimated cost of these incentives to
the government, which is periodically updated, is projected to be
about $2.5 billion over the 10-year life of this program. 

As arranged with your offices, this report discusses the extent to
which businesses in empowerment zones used the program's three tax
incentives, as well as three other tax incentives that are targeted
to help businesses, including those in distressed areas--the work
opportunity credit; the welfare-to-work credit; and an environmental
cleanup tax deduction, also known as the brownfields deduction.  This
report also discusses, where applicable, why the incentives were not
used. 

To address these objectives, we mailed a survey to about 2,400
businesses in the nine original empowerment zones, which are located
in Atlanta, Georgia; Baltimore, Maryland; Chicago, Illinois; Detroit,
Michigan; Philadelphia, Pennsylvania/Camden, New Jersey; New York,
New York; the Kentucky Highlands; the Mississippi Mid-Delta; and the
Rio Grande Valley, Texas.\1 We asked businesses about their use of
the employment credit and the increased expensing deduction for tax
year 1997, which was the most recently completed tax year for which
all of the businesses we surveyed would have filed taxes when we
initiated our work in January 1999 (see app.  I for a copy of the
survey).  Throughout the report, we provide information separately
for large urban businesses, small urban businesses, and rural
businesses because we found differences in how they responded to the
survey.  In some cases, we provide information separately for large
rural businesses and small rural businesses.\2 We also are providing
descriptive information on the businesses that responded to the
survey (see app.  II).  Because more than half of the large urban
businesses and the rural businesses did not respond to our survey,
the survey results only reflect the usage of the incentives by those
who responded and may not reflect actual usage of the incentives.\3
In addition, the estimates that are based on responses from our
random sample of the small urban businesses may be imprecise because
of the sampling error associated with the estimate.  These estimates
reflect the usage of the incentives by the businesses that would have
responded to the survey if we had mailed it to all of them.  Appendix
III contains a complete description of our scope and methodology, as
well as the sampling errors for the estimates that we report for
small urban businesses. 

--------------------
\1 The Taxpayer Relief Act of 1997 provided for a second round of
this program with revised tax incentives.  Consequently, additional
empowerment zones were designated in January 1998 and January 1999. 

\2 We defined large businesses as those with 50 or more employees and
small businesses as those with fewer than 50 employees. 

\3 For example, one survey that was returned too late to be included
in our analysis was from a business that reported claiming $700,000
in employment credits. 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Large urban businesses and rural businesses were more likely than
small urban businesses to have used at least one of the three tax
incentives available to businesses in the empowerment zones.  The
employment credit was the most frequently used of the three tax
incentives.  According to the survey's responses, 42 percent of the
large urban businesses, an estimated 6 percent of the small urban
businesses, and 32 percent of the rural businesses used the
employment credit.  Large urban businesses and rural businesses
reported claiming $9.1 million for tax year 1997.  The majority of
the businesses that used the employment credit reported that the
credit was at least ï¿½somewhat importantï¿½ to making decisions about
hiring employees who live in the zones.  The businesses that reported
they did not claim the employment credit cited a variety of reasons,
which most frequently included that they did not qualify for the
credit because their employees lived outside of the zone or they did
not know about the credit. 

In tax year 1997, the increased expensing deduction was used less
than the employment credit.  About 9 percent of the large urban
businesses, an estimated 4 percent of the small urban businesses, and
8 percent of the rural businesses used the increased expensing
deduction.  Of the businesses that used this deduction, large urban
businesses reported claiming $405,534 and rural businesses reported
claiming $480,081.  The businesses that reported they did not claim
this deduction cited a variety of reasons.  The four most frequently
cited reasons were (1) a lack of knowledge about the increased
deduction, (2) a lack of investment in ï¿½qualified zone property,ï¿½ (3)
insufficient business investments to use the deduction, and (4)
insufficient income to use the deduction. 

Few businesses have used the tax-exempt facility bonds.  Ten
businesses reported receiving the proceeds from these tax-exempt
bonds:  seven large urban businesses, one large rural business, and
two small rural businesses.  Of the businesses that did not use these
bonds, the predominant reason was that they did not know about them. 
Finally, most of the businesses did not use the work opportunity
credit, the welfare-to-work credit, or the environmental cleanup tax
deduction. 

   BACKGROUND
------------------------------------------------------------ Letter :2

On December 21, 1994, nine empowerment zones--six urban and three
rural--were designated.  The urban zones are located in Atlanta,
Georgia; Baltimore, Maryland; Chicago, Illinois; Detroit, Michigan;
Philadelphia, Pennsylvania/Camden, New Jersey; and New York, New
York.  The rural zones are located in the Kentucky Highlands; the
Mississippi Mid-Delta; and the Rio Grande Valley, Texas.\3 The
businesses in these empowerment zones may be eligible for three tax
incentives, which are (1) an employment credit, (2) a $20,000
increase in the expensing deduction for depreciable business property
authorized under section 179 of the Internal Revenue Code, and (3) a
tax-exempt facility bond.  According to officials in the empowerment
zones--including Executive Directors and others familiar with the
zones' efforts to provide information on the tax incentives, they
have disseminated information on the three empowerment zone
incentives by (1) mailing information to businesses operating in the
zones, (2) responding to individual requests for information or
assistance on operating in the zones, and/or (3) conducting seminars
and other meetings with businesses from the zones. 

The empowerment zone employment credit allows a business to claim a
credit for up to 20 percent of the first $15,000 in wages paid to
each of its employees that lives and works in the zoneï¿½up to a
maximum of $3,000 for each employee.\5 The depreciation incentive
increases by up to $20,000 the limit on expensing deductions for
qualified empowerment zone businesses, as authorized by section 179
of the Internal Revenue Code.  For example, in 1997, the limit for
these businesses was $38,000 and the limit for other businesses was
$18,000.\6 This deduction allows businesses to recover the cost of
certain depreciable property, such as equipment and machinery, by
deducting all or part of the cost in the year that the property is
placed in service rather than over several years. 

A new category of tax-exempt bonds was authorized for the program to
offer businesses lower rates than conventional financing for
borrowing money.  These bonds can be used by qualified businesses to
finance the purchase of business property and land, as well as to
finance new facilities or to expand and renovate existing ones. 
However, these bonds are subject to an annual limit that is
established for each state.\7 Additionally, the aggregate face amount
of these bonds for each qualified business cannot exceed $3 million
per zone and $20 million for the same business in all empowerment
zones and enterprise communities nationwide.  The authorizing
legislation requires, among other things, that each business that
benefits from these bonds ensures that at least 35 percent of its
employees live in the zone. 

At least three additional tax incentives are available to businesses
in the empowerment zones, as well as to other businesses.  The work
opportunity credit provides businesses with an incentive to hire
individuals from groups that have a particularly high unemployment
rate or other special employment needs.  This tax credit allows
businesses to claim a credit for wages paid to qualified employees in
their first year of employment up to a specified limit per
individual.  These employees must be certified as being in one of
eight groups of people--such as veterans, high-risk youth, and food
stamp recipients--that have high unemployment rates or other special
employment needs.  A second credit, the welfare-to-work credit, is
intended to encourage businesses to hire long-term recipients of
family assistance to ease the transition from welfare to work by
increasing access to employment, as well as providing certain
employee benefits to encourage training, health coverage, dependent
care, and better job retention.  This tax incentive provides a credit
for wages paid to qualified employees over the initial 2 years of
employment.  Finally, the environmental cleanup tax deduction, which
is also referred to as the brownfields deduction, allows businesses
to deduct the cleanup costs for certain contaminated sites in the tax
year they incur these costs.  The expenditure must be made in
connection with the abatement or control of hazardous substances at a
qualified contaminated site, with empowerment zones designated as one
of the targeted areas for this tax deduction. 

--------------------
\3 An additional 95 communities were designated as enterprise
communities in 1994.  Empowerment zones receive much larger grants
and more tax incentives than enterprise communities and are the
subject of this report. 

\5 The credit will be reduced by 5 percentage points per year
starting in 2002 for the nine initial empowerment zones. 

\6 The limit on this deduction for businesses that are not in
empowerment zones will be raised in annual increments until it
reaches $25,000 for the years after 2002. 

\7 Under current law, each state has the authority to issue
tax-exempt private activity bonds in an amount equal to $50 per
resident.  If a state's population results in the authority to issue
less than $150 million, the state's allocation is automatically
raised to $150 million. 

   BUSINESSES' USE OF THE TAX
   INCENTIVES FOR TAX YEAR 1997
   VARIED AMONG THE THREE
   RESPONDENT GROUPS
------------------------------------------------------------ Letter :3

We identified 13,590 for-profit, nonfarming businesses that operated
in the original nine empowerment zones.  These businesses ranged from
single-person operations to companies with hundreds of employees and
included manufacturing firms, wholesalers, service providers,
construction firms, retailers, and other types of businesses.  We
surveyed about 2,400 of these businesses on their usage of the three
empowerment zone tax incentives and received responses from 48
percent of the large urban businesses, 32 percent of the small urban
businesses, and 46 percent of the rural businesses that we surveyed. 

According to our survey's respondents, 46 percent of the large urban
businesses, an estimated 10 percent of the small urban businesses,
and 33 percent of the rural businesses used at least one of the three
empowerment zone tax incentives for tax year 1997 (see fig.  1).  At
the same time, 33 percent of the large urban businesses, an estimated
70 percent of the small urban businesses, and 47 percent of the rural
businesses indicated that they did not use any of the three tax
incentives that year.  The employment credit was the most frequently
used of the three tax incentives, followed by the increased expensing
deduction for depreciable business property, and the tax-exempt
facility bond.  For the businesses that did not use the tax
incentives, their reasons for not using them included not knowing
about them, not qualifying for them, and finding them too complicated
to use.  Finally, most of the businesses did not use the work
opportunity credit, the welfare-to-work credit, or the environmental
cleanup tax deduction. 

   Figure 1:  Use of the Three
   Empowerment Zone Tax Incentives

   (See figure in printed
   edition.)

Notes:  These percentages do not include the businesses that did not
provide information on their use of these incentives. 

The number of small urban businesses is an estimate based on our
sample. 

Source:  GAO's analysis of the responses to the survey. 

      USE OF THE EMPOWERMENT ZONE
      EMPLOYMENT CREDIT
---------------------------------------------------------- Letter :3.1

Large urban businesses were the most likely to use the employment
credit and small urban businesses were the least likely to use it,
according to the respondents to our survey.  As shown in figure 2,
this credit was used by 42 percent of the large urban businesses, an
estimated 6 percent of the small urban businesses, and 32 percent of
the rural businesses.  Among rural businesses, about two-thirds of
the 28 large businesses and about one-third of the 465 small
businesses reported using the employment credit.  Large urban
businesses and rural businesses reported claiming $9.1 million for
tax year 1997.\8 Of this amount, 94 large urban businesses claimed
$5.2 million, 15 large rural businesses claimed $2.9 million, and 107
small rural businesses claimed $1 million. 

While businesses of all types used the employment credit, its use
varied depending on the type of business, as shown in figure 3.  For
the large urban businesses that used the credit, 55 percent were
manufacturing firms.  For rural businesses, 40 percent of the
businesses that used the credit were in retail trade, followed by 22
percent that were involved in providing services.  For the small
urban businesses, use of the employment credit did not vary by type
of business. 

   Figure 2:  Use of the
   Employment Credit, Tax Year
   1997

   (See figure in printed
   edition.)

Notes:  These percentages do not include the businesses that did not
provide information on their use of this credit. 

The number of small urban businesses is an estimate based on our
sample. 

Source:  GAO's analysis of the responses to the survey. 

   Figure 3:  Types of Businesses
   That Used the Employment Credit

   (See figure in printed
   edition.)

Notes:  These percentages do not include the businesses that did not
provide information on their type of business. 

Other types of businesses include those related to finance,
insurance, and real estate; transportation; communications;
utilities; agriculture; and mining. 

Source:  GAO's analysis of the responses to the survey. 

Large urban businesses and rural businesses that used the employment
credit for tax year 1997 reported having proportionately more
employees living and working in the empowerment zones than other
businesses.  Specifically, among the large urban businesses, the 42
percent that reported using the credit employed 55 percent of the
employees that were reported to be living and working in the zones
for large urban businesses.  Similarly, among the rural businesses,
the 32 percent that reported using the credit employed 68 percent of
the employees reported to be living and working in the zones for
rural businesses.  The number of employees was not significantly
different between the small urban businesses that used the credit and
those that did not. 

The majority of the businesses that used the employment credit
reported that it was at least ï¿½somewhat importantï¿½ to making
decisions about hiring employees who live in the zones. 
Specifically, 79 percent of the large urban businesses, an estimated
67 percent of the small urban businesses, and 74 percent of the rural
businesses found this credit to be at least ï¿½somewhat importantï¿½ to
hiring decisions, with about half of these considering it ï¿½very
importantï¿½ or ï¿½extremely important.ï¿½ The remaining businesses
considered the credit ï¿½hardly or not at all importantï¿½ to their
decision-making. 

The businesses that reported they did not claim the employment credit
cited a variety of reasons.  As shown in figure 4, large urban
businesses and small urban businesses most frequently said that they
(1) did not qualify for the credit because their employees lived
outside of the zone or (2) did not know about the credit.  Rural
businesses most frequently said that they did not know about the
credit.  Businesses also reported that the tax credit was too
complicated to use, that they did not qualify for the credit because
their employees are family members, or that their business did not
have federal tax liability against which to claim the credit. 

   Figure 4:  Reasons for Not
   Claiming the Employment Credit

   (See figure in printed
   edition.)

Notes:  These percentages do not include the businesses that did not
provide a reason. 

Other reasons include those provided by individual respondents. 

The number of small urban businesses is an estimate based on our
sample. 

Source:  GAO's analysis of the responses to the survey. 

--------------------
\8 We could not estimate the amount claimed by small urban businesses
because too few of them provided an amount.  Also, the $9.1 million
reported by the survey's respondents may include some credits that
were not claimed.  For example, while a subchapter S corporation may
have reported the amount that the corporation could claim, the
individual owners may or may not have claimed their portion of the
credit based on their individual tax liability situation. 

      USE OF THE INCREASED
      EXPENSING DEDUCTION
---------------------------------------------------------- Letter :3.2

In tax year 1997, the increased expensing deduction generally was
used less than the employment credit.  Nine percent of the large
urban businesses, an estimated 4 percent of the small urban
businesses, and 8 percent of the rural businesses--all of which were
small businesses--used the increased expensing deduction (see fig. 
5).  Of the businesses that used this deduction, 18 large urban
businesses reported claiming deductions of $405,534, and 37 rural
businesses reported claiming $480,081.\9

   Figure 5:  Use of the Increased
   Expensing Deduction, Tax Year
   1997

   (See figure in printed
   edition.)

Notes:  These percentages do not include the businesses that did not
provide information on their use of this deduction. 

The number of small urban businesses is an estimate based on our
sample. 

Source:  GAO's analysis of the responses to the survey. 

For the businesses that used the increased expensing deduction, 16
large urban businesses and 29 small rural businesses reported that it
was at least ï¿½somewhat importantï¿½ in their decision to purchase
depreciable property; while 6 large urban businesses and 10 small
rural businesses reported that it was ï¿½hardly or not at all
importantï¿½ in those decisions.  The responses for small urban
businesses were too small to report.  No large rural businesses
reported using the deduction. 

Businesses that reported they did not claim the increased expensing
deduction cited a variety of reasons (see fig.  6).  Frequently cited
reasons included (1) they did not know about the increased deduction,
(2) they did not invest in qualified zone property, (3) their
business investments were too small or too large to use the
deduction, and (4) their income was not high enough to use the
deduction. 

   Figure 6:  Reasons for Not
   Using the Increased Expensing
   Deduction, Tax Year 1997

   (See figure in printed
   edition.)

Notes:  These percentages do not include the businesses that did not
indicate a reason. 

Other includes such reasons as the deduction was too complicated to
use, the business did not qualify as an ï¿½enterprise zone business,ï¿½
and other reasons that were provided by individual respondents. 

The number of small urban businesses is an estimate based on our
sample. 

Source:  GAO's analysis of the responses to the survey. 

--------------------
\9 We could not estimate the amount claimed by small urban businesses
because too few of them provided an amount.  Also, we could not
determine the portion of the amounts reported that was an increase
over that allowed for other businesses; therefore, the amounts
reported may include deductions that would have been allowed without
the additional expensing deduction for zone businesses. 

      USE OF TAX-EXEMPT FEDERAL
      ENTERPRISE ZONE FACILITY
      BONDS
---------------------------------------------------------- Letter :3.3

Few businesses have used the tax-exempt facility bonds.  Ten
businesses reported receiving proceeds from these tax-exempt bonds: 
7 large urban businesses, 1 large rural business, and 2 small rural
businesses.\9 We did not ask these businesses to report the dollar
value of the proceeds they received from these bonds. 

The reasons businesses reported for not using these bonds varied (see
fig.  7).  Of the businesses that did not use these bonds, 44 percent
of the large urban businesses, an estimated 67 percent of the small
urban businesses, and 59 percent of the rural businesses said that
they did not know about them.  In addition, 16 percent of the large
urban businesses said that these bonds were too complicated to use
and another 13 percent said that they did not need them. 

   Figure 7:  Reasons for Not
   Using Enterprise Zone Facility
   Bonds

   (See figure in printed
   edition.)

Notes:  These percentages do not include the businesses that did not
provide a reason. 

Other includes such reasons as the business needed a bond larger than
the $3-million limit allowed for this type of bond, the state's
volume cap had been met when the business applied for a bond, and
other answers provided by individual respondents. 

The number of small urban businesses is an estimate based on our
sample. 

Source:  GAO's analysis of the responses to the survey. 

--------------------
\9 In June 1998, we reported that eight businesses had used this bond
through April 1998.  We did not reconcile this difference.  See
Community Development:  Information on the Use of Empowerment Zone
and Enterprise Community Tax Incentives (GAO/RCED-98-203, June 30,
1998). 

      USE OF WORK OPPORTUNITY
      CREDITS, WELFARE-TO-WORK
      CREDITS, AND ENVIRONMENTAL
      CLEANUP TAX DEDUCTIONS
---------------------------------------------------------- Letter :3.4

Among the other federal tax incentives available to businesses in
empowerment zones are the work opportunity credit, the
welfare-to-work credit, and the environmental cleanup tax deduction,
which are also available to businesses in other areas.  Most of the
empowerment zone businesses did not use these tax incentives in tax
year 1997.  Seventy-six percent of the large urban businesses, an
estimated 90 percent of the small urban businesses, and 87 percent of
the rural businesses reported that they used none of these three tax
incentives.  Large businesses were more likely than small businesses
to use the work opportunity credit.  Specifically, 11 percent of the
large urban businesses and 14 percent of the large rural businesses
indicated that they used this credit, compared with an estimated 1
percent of the small urban businesses and 3 percent of the small
rural businesses.  Three percent of the large urban businesses, no
small urban businesses, and 1 percent of the rural businesses used
the welfare-to-work credit; and less than 1 percent of the businesses
in all three groups used the environmental cleanup tax deduction.\10
We did not ask the businesses to provide their reasons for not using
these incentives. 

--------------------
\10 Ten percent of the large urban businesses, an estimated 8 percent
of the small urban businesses, and 9 percent of the rural businesses
did not provide information on their use of these three tax
incentives. 

---------------------------------------------------------- Letter :3.5

We are sending copies of this report to the appropriate congressional
committees; the Honorable Andrew Cuomo, Secretary of Housing and
Urban Development; the Honorable Dan Glickman, Secretary of
Agriculture; the Honorable Lawrence H.  Summers, Secretary of the
Treasury; and the Honorable Charles O.  Rossotti, Commissioner of
Internal Revenue.  We will also make copies available to others on
request.  If you or your staff have any questions about the material
in this report, please call me at (202) 512-7631.  Key contributors
to this report were Nancy Simmons, Nancy Boardman, and Carolyn Boyce. 

Stanley J.  Czerwinski
Associate Director, Housing and
 Community Development Issues

(See figure in printed edition.)Appendix I
SURVEY OF THE USE OF TAX BENEFITS
BY BUSINESSES IN EMPOWERMENT ZONES
============================================================== Letter 

(See figure in printed edition.)

(See figure in printed edition.)

(See figure in printed edition.)

(See figure in printed edition.)

INFORMATION ON BUSINESSES THAT
RESPONDED TO THE SURVEY
========================================================== Appendix II

The businesses that responded to the survey

  -- represented various types of work;

  -- were mostly corporations;

  -- mostly were already located in the zone before its designation;

  -- employed, in total, thousands of people;

  -- considered multiple factors as important in deciding where to
     locate the business; and

  -- mostly had not considered moving out of the zone. 

Also, for the respondents that had been in their zones since their
designation, the number of employees working there has generally
increased. 

The following sections provide additional information on each of
these categories for the businesses that responded to the survey. 

   BUSINESSES DIFFERED BY TYPE OF
   WORK
-------------------------------------------------------- Appendix II:1

The businesses that responded to our survey provided descriptions of
their type of business.  We coded this information into categories
using standardized industrial classifications.  More than half of the
large urban businesses were in the manufacturing business or were
service providers, while more than half of the respondents
representing small urban businesses and rural businesses were service
providers or retailers (see fig.  II.1).  The remaining businesses in
each group included those involved in wholesale trade; construction;
finance, insurance, and real estate; transportation; communications;
utilities; agriculture; and mining. 

   Figure II.1:  Types of
   Businesses That Responded to
   the Survey

   (See figure in printed
   edition.)

Notes:  These percentages do not include the businesses that did not
provide their type of work. 

Other types of businesses include those related to finance,
insurance, and real estate; transportation; communications;
utilities; agriculture; and mining. 

The number of small urban businesses is an estimate based on our
sample. 

Source:  GAO's analysis of the responses to the survey. 

   RESPONDENTS WERE MOSTLY
   CORPORATIONS
-------------------------------------------------------- Appendix II:2

We asked businesses to identify the category in which they filed
their federal income taxes.  Most of the businesses that responded to
our survey were corporations (see fig.  II.2).  Large urban
businesses mainly were subchapter C corporations (corporations that
pay taxes as a corporate entity) and subchapter S corporations
(corporations that are not taxed as a corporate entity and that have
a limited number of owners who file taxes separately).  Small urban
businesses included nearly equal numbers of subchapter C corporations
and subchapter S corporations, but they had a greater percentage of
sole proprietors than the large urban businesses.  The large rural
businesses were mostly subchapter C corporations, followed by
subchapter S corporations.  Finally, almost half of the small rural
businesses were sole proprietorships. 

   Figure II.2:  Federal Income
   Tax Category for Businesses
   That Responded to Our Survey

   (See figure in printed
   edition.)

Notes:  These percentages do not include the businesses that did not
provide their federal income tax category. 

We classified rural businesses as large if they reported having 50 or
more employees and small if they reported having fewer than 50
employees.  Consequently, the percentages for rural businesses
exclude businesses that did not report their number of employees. 

Of the businesses that responded to the survey, 1 percent of the
large rural businesses and 3 percent of the small rural businesses
reported that they were farming operations.  Also, 7 percent of the
large urban businesses, 6 percent of the small urban businesses, 1
percent of the large rural businesses, and 6 percent of the small
rural businesses reported that they did not know their federal income
tax category. 

The number of small urban businesses is an estimate based on our
sample. 

Source:  GAO's analysis of the responses to the survey. 

   MOST RESPONDENTS WERE ALREADY
   IN THE ZONE BEFORE DESIGNATION
-------------------------------------------------------- Appendix II:3

According to the survey's respondents, the majority of the businesses
were already located in their zones on or before December 21, 1994,
the date those areas were designated as empowerment zones. 
Specifically, 90 percent of the large urban businesses, an estimated
90 percent of the small urban businesses, and 78 percent of the rural
businesses were already located in an area that was designated as an
empowerment zone.  Another 7 percent of the large urban businesses,
an estimated 3 percent of the small urban businesses, and 3 percent
of the rural businesses reported that they had moved or expanded into
the empowerment zones after December 21, 1994.  Also, 2 percent of
the large urban businesses, an estimated 5 percent of the small urban
businesses, and 17 percent of the rural businesses started as a new
business in the zones on or after December 21, 1994.  In response to
a related question, 82 percent of the large urban businesses, an
estimated 75 percent of the small urban businesses, and 61 percent of
the rural businesses indicated that they had been located in their
neighborhoods 10 years or more.  Figure II.3 shows the percentage of
the respondents by the number of years they had been in business. 

   Figure II.3:  Number of Years
   Businesses Had Been Located in
   Their Neighborhoods

   (See figure in printed
   edition.)

Notes:  These percentages do not include businesses that did not
provide information on how long they had been in their neighborhoods. 

The number of small urban businesses is an estimate based on our
sample. 

Source:  GAO's analysis of the responses to the survey. 

   BUSINESSES REPORTED EMPLOYING
   THOUSANDS OF PEOPLE
-------------------------------------------------------- Appendix II:4

We asked businesses how many full-time and part-time employees
(including owners) their businesses had that were currently working
in the empowerment zone.  The large urban businesses that answered
this question reported having a total of 29,849 employees.  Based on
the answers provided by the respondents from our sample of the small
urban businesses, we estimated that 48,797 employees are working
within the zones for small businesses that are similar to those
responding to our survey.  The rural businesses reported a total of
6,533 current employees. 

   RESPONDENTS INDICATED THAT
   MULTIPLE FACTORS WERE IMPORTANT
   IN DECIDING WHERE TO LOCATE
-------------------------------------------------------- Appendix II:5

Respondents most often included the cost of doing business, the
availability of skilled workers, the presence of specific target
markets and/or customer base, and their personal and/or business
history in a particular location as the factors that were most
important in deciding where to locate their businesses.  Other
location factors that were often selected were the state and local
taxes on business and industry, the productivity of workers, and the
efficient transportation for materials and products.  Such factors as
the availability of federal empowerment zone tax benefits and the
existence of empowerment zone projects to support business
development generally were selected less often than other factors. 
However, large urban businesses were more likely than other
businesses to select these as factors in deciding where to locate. 
Table II.1 lists the percentage of the respondents that selected each
factor. 

                               Table II.1
                
                 Most Important Factors for Selecting a
                           Business Location

                      (Percentage of respondents)

                                         Large       Small
                                         urban       urban       Rural
                                    businesses  businesses  businesses
Location factor                          (246)     (3,856)       (516)
----------------------------------  ----------  ----------  ----------
Cost of doing business at this              56          41          26
 location (e.g., utilities,
 property, and/or construction)
Availability of skilled workers             55          25          20
State and local taxes on business           43          22          13
 and industry
Productivity of workers                     39          19          15
Efficient transportation for                38          18           8
 materials and products
Presence of specific target                 34          40          30
 markets and/or customer base
Ample area or land for future               26          12          12
 expansion
Personal and/or business history            25          39          40
 in a location
Availability of federal                     21          13          15
 empowerment zone tax benefits
Empowerment zone projects that              20          13          14
 support business development
Access to capital and/or credit             16          14          10
State and local controls on                 16           7           5
 environmental impacts associated
 with the business
Other                                        8           7          10
Information not provided                     4           6           9
----------------------------------------------------------------------
Note:  The number of small urban businesses is an estimate based on
our sample. 

Source:  GAO's analysis of the responses to the survey. 

   MOST RESPONDENTS HAVE NOT
   CONSIDERED MOVING OUT OF THEIR
   ZONES
-------------------------------------------------------- Appendix II:6

Most businesses reported that they had not considered moving out of
their zones.  Specifically, 65 percent of the large urban businesses,
an estimated 74 percent of the small urban businesses, and 90 percent
of the rural businesses had not considered moving out of their zones. 
On the other hand, 34 percent of the large urban businesses, an
estimated 25 percent of the small urban businesses, and 9 percent of
the rural businesses had considered such a move.  The survey's
respondents indicated a variety of factors, including high state and
local taxes, an insufficient customer base, and the cost of doing
business, influenced them to consider moving.  Table II.2 lists the
percentage of the respondents that selected each factor. 

                               Table II.2
                
                Factors Influencing Some Respondents to
                 Consider Moving out of an Empowerment
                     Zone Percentage of respondents

                      (Percentage of respondents)

                                         Large       Small
                                         urban       urban       Rural
                                    businesses  businesses  businesses
Relocation factor                         (84)       (980)        (48)
----------------------------------  ----------  ----------  ----------
State and local taxes too high              55          38          27
Cost of doing business at this              45          36          25
 location (e.g., utilities,
 property, and/or construction)
 too high
Insufficient area or land for               35          18           6
 expansion
Skilled workers not available               27          20          19
State and local controls on                 26          10           6
 environmental impacts too
 restrictive
Low productivity of available               25          15          19
 employees
Inadequate support from                     23          33          17
 empowerment zone projects
Limited or no access to needed              12          26          19
 capital and/or credit
Insufficient customer base                   8          33          44
Inefficient transportation for               2           0           8
 materials and products
Other                                       21          28          29
----------------------------------------------------------------------
Note:  The number of small urban businesses is an estimate based on
our sample. 

Source:  GAO's analysis of the responses to the survey. 

   THE NUMBER OF EMPLOYEES WORKING
   IN EMPOWERMENT ZONES HAS
   INCREASED FOR RESPONDENTS THAT
   HAD BEEN THERE SINCE THEIR
   DESIGNATION
-------------------------------------------------------- Appendix II:7

We asked businesses to tell us the number of employees that were
working in their zones currently and in December 1994.  When we
compared these answers, we found that large urban businesses that had
been in an empowerment zone since its designation reported an average
increase of 7.6 employees since 1994.  The average increase in
employees was higher for the large urban businesses that were
involved in construction (an average increase of 19.8 employees),
wholesale trade (an average increase of 19.6 employees), or providing
services (an average increase of 14 employees).  The small urban
businesses reported an average increase of 4.1 employees; the large
rural business reported an average increase of 50.7 employees; and
the small rural businesses reported an average increase of 0.9
employees.  While the majority of the respondents that had been in an
empowerment zone since 1994 reported increases in the number of
employees, large urban businesses involved in manufacturing reported
an average decrease of 5.5 employees. 

SCOPE AND METHODOLOGY
========================================================= Appendix III

We conducted a mail survey of 2,380 businesses located in nine
federal empowerment zones that were designated on December 21, 1994. 
To identify businesses in the six urban zones--Atlanta, Baltimore,
Chicago, Detroit, New York and Philadelphia/Camden--we obtained the
list of the businesses that the Department of Housing and Urban
Development had used for a fall 1997 to winter 1998 telephone survey. 
The list was developed by Dun and Bradstreet in August 1997 and
refined by Abt Associates to include for-profit businesses that were
potentially able to use the tax incentives for empowerment zones. 
The information provided by the Department of Housing and Urban
Development included the number of employees for each business.  We
used this information to sort the businesses into two groups:  those
with fewer than 50 employees or an unrecorded number of employees
(small urban businesses) and those with 50 or more employees (large
urban businesses).  We identified 585 large urban businesses and
12,854 small urban businesses.  The list underestimates the actual
number of new businesses in the zones because it does not include
businesses that started in the zones between Dun and Bradstreet's
data preparation and our survey in 1999.  For our survey, we
eliminated as ineligible all known duplicates, government and
nonprofit businesses, firms that had gone out of business, and
businesses that told us they were not located in one of the
empowerment zones and surveyed all the remaining 513 large urban
businesses.  In addition, from our initial random sample of 800 of
the small urban businesses, we identified 7 percent (56) that were in
the ineligible categories.  Thus, we estimate that there are 11,954
small urban businesses that were potentially eligible for our survey,
and we included 744 of them. 

To identify businesses (excluding farming operations) in the three
rural zones, we contacted program officials in the Kentucky
Highlands; Mississippi Mid-Delta; and Rio Grande Valley, Texas,
empowerment zones.  These organizations provided us with lists of the
businesses in their respective zonesï¿½a total of 1,204 rural
businesses--from which, we eliminated businesses that were in the
ineligible categories.  We surveyed all of the remaining 1,123
eligible rural businesses.  In total, we included 2,380 businesses in
the survey.  We were unable to locate mailing addresses for 235
businesses or about 10 percent of the businesses. 

In developing the questionnaire for our survey, we conducted pretests
with businesses in the Baltimore, Philadelphia, Atlanta, and Kentucky
Highlands zones.  We interviewed business owners to help ensure that
our questions were clear, unbiased, and precise and that responding
to the survey did not place an undue burden on businesses.  We also
obtained reviews of our questionnaire from managers at the
departments of Treasury, Agriculture, and Housing and Urban
Development, as well as the Internal Revenue Service. 

To maximize the number of responses to our survey, we mailed a letter
to all the businesses in the survey about 1 week before we mailed the
questionnaires.  We also sent a reminder letter and replacement
questionnaire to the businesses that had not responded about a month
after mailing the questionnaires and a second follow-up letter with
another replacement questionnaire about a month after that.  We
received completed questionnaires from 48 percent of the 513 large
urban businesses, 32 percent of the 744 small urban businesses, and
46 percent of the 1,123 rural businesses (29 percent of the Rio
Grande, 54 percent of the Mid-Delta and 67 percent of the Kentucky
Highlands businesses). 

Because we used a sample (called a probability sample) to develop our
estimates for small urban businesses, each estimate has a measurable
precision, or sampling error, which may be expressed as a plus/minus
figure.  A sampling error indicates how closely we can reproduce from
a sample the results that we would obtain if we were to take a
complete count of the universe using the same measurement methods. 
By adding the sampling error to and subtracting it from the estimate,
we can develop upper and lower bounds for each estimate.  This range
is called a ï¿½confidence interval.ï¿½ Sampling errors and confidence
intervals are stated at a certain confidence level.  For example, a
confidence interval at the 95-percent confidence level means that in
95 out of 100 instances, the sampling procedure we used would produce
a confidence interval containing the universe value we are
estimating.  Table III.1 lists the sampling errors and confidence
intervals at the 95-percent confidence level for estimates we
developed for the small urban businesses. 

We also contacted officials at the nine empowerment zone offices to
discuss their efforts to inform businesses of the three empowerment
zone tax incentives.  We conducted our work from January through
September 1999 in accordance with generally accepted government
auditing standards. 

                                   Table III.1
                     
                     Sampling Errors and Confidence Intervals
                     of Estimates for Small Urban Businesses

                                                                    Confidence
                                                                     interval
                                                                  --------------
                                                          Sampli
                                                  Estima      ng
Description                                           te   error    From      To
------------------------------------------------  ------  ------  ------  ------
Percentage of the businesses that used at least       10       4       6      14
 one of the three empowerment zone tax
 incentives
Percentage of the businesses that used none of        70       6      64      76
 the empowerment zone tax incentives
Percentage of the businesses that did not know        18       5      13      23
 if they had used any of the empowerment zone
 tax incentives
Percentage of the businesses that claimed the          6       3       3       9
 employment credit in 1997
Percentage of the businesses that did not claim       81       5      76      86
 the employment credit in 1997
Percentage of the businesses that did not know        11       4       7      15
 if they had claimed the employment credit in
 1997
Of the businesses that claimed the employment         67      26      41      93
 credit, the percentage that rated it as at
 least ï¿½somewhat importantï¿½ in their decisions
 to hire employees who lived within their zones
Of the businesses that rated the employment           50      33      17      83
 credit as at least ï¿½somewhat important,ï¿½ the
 percentage that rated it as ï¿½very importantï¿½ or
 ï¿½extremely importantï¿½
Of the businesses that did not claim the
 employment credit in 1997, the percentage that                7      24      38
 reported the following reasons:                      31       7      33      47
                                                      40       4       4      12
 did not qualify for the credit because                8
 employees lived outside the zone                              3       2       8
 did not know about this credit                        5       3       1       7
 this credit was too complicated to use                4       4       5      13
 did not have federal taxes or their partners          9
 and
 shareholders had no federal taxes
 did not qualify for this credit because
 employees are family members
 other reasons
Percentage of the businesses that used the             4       2       2       6
 increased expensing deduction for 1997
Percentage of the businesses that did not use         78       5      73      83
 the increased expensing deduction for 1997
Percentage of the businesses that did not know        17       5      12      22
 if they had used the increased expensing
 deduction for 1997
Of the businesses that did not use the increased
 expensing deduction for 1997, the percentage
 that reported the following reasons:
                                                      40       7      33      47
 did not know about this deduction                    22       6      16      28
 made no investment in qualified zone property         3       2       1       5
 investments were too large                           10       4       6      14
 did not have high enough income                      16       5      11      21
 investments were too small
 this deduction was too complicated to use, did       10       4       6      14
 not qualify as a zone business, or other
 reasons
Of the businesses that had never received
 proceeds from an empowerment zone facility
 bond, the percentage that reported the
 following reasons:                                   67       6      61      73
                                                       6       3       3       9
 did not know about this type of bond                  6       3       3       9
 this bond was too complicated to use                  9       4       5      13
 did not need this bond                                4       3       1       7
 did not qualify as a zone business
 property was not qualified zone property              8       4       4      12
 state volume cap had been met when business
 applied, needed a larger bond than allowed, or
 other reasons
Percentage of the businesses that used the work        1       1       0       2
 opportunity credit
Percentage of the businesses that used the             0       0       0       0
 welfare-to-work credit
Percentage of the businesses that used none of        90       4      86      94
 the three additional credits
Percentage of the businesses in

 manufacturing                                        12       4       8      16
 services                                             30       6      24      36
 wholesale trade                                      12       4       8      16
 retail trade                                         22       5      17      27
 construction                                          4       2       2       6
 other industries                                     16       5      11      21
Percentage of the businesses that filed incomes
 taxes as
                                                      31       6      25      37
 subchapter C corporation                             30       6      24      36
 subchapter S corporation                              5       3       2       8
 partnership                                          23       5      18      28
 sole proprietor
Percentage of the businesses that did not know         6       3       3       9
 how they had filed taxes
Percentage of the businesses in the zones before      90       4      86      94
 December 21, 1994
Percentage of the businesses that moved or             3       2       1       5
 expanded into the zones on or after December
 21, 1994
Percentage of the businesses that started as new       5       3       2       8
 businesses in the zones on or after December
 21, 1994
Percentage of the businesses located in their
 neighborhoods for
                                                       5       3       2       8
 3 years or less                                      11       4       7      15
 4 to 6 years                                          8       3       5      11
 7 to 9 years                                         75       5      70      80
 10 years or more
Estimated number of employees working within the  48,797  14,741  34,056  63,538
 zone, including owners and operators
Percentage of the businesses that selected the
 following factors as most important to them in
 deciding where to locate their businesses:
                                                      41       6      35      47
 cost of doing business                               25       5      20      30
 availability of skilled workers                      22       5      17      27
 state and local taxes on business and industry       19       5      14      24
 productivity of workers                              18       5      13      23
 efficient transportation for materials and           40       6      34      46
 products                                             12       4       8      16
 presence of specific target markets and/or           39       6      33      45
 customer base                                        13       4       9      17
 ample area or land for future expansion              13       4       9      17
 personal and/or business history in location         14       3      10      18
 availability of federal empowerment zone tax          7       3       4      10
 benefits                                              7       3       4      10
 empowerment zone projects that support business
 development
 access to capital and/or credit
 state and local controls on environmental
 impacts
 other reasons
Percentage of the businesses that have                25       5      20      30
 considered moving out of their zones since
 December 21, 1994
Percentage of the businesses that have not            74       6      68      80
 considered moving out of their zones since
 December 21, 1994
Of the businesses that have considered moving
 out of their zones, the percentage that
 reported the following factors influenced
 them:                                                38      12      26      50
                                                      36      12      24      48
 state and local taxes too high                       18      10       8      28
 cost of doing business at this location              20      10      10      30
 insufficient area or land for expansion              10       8       2      18
 skilled workers not available                        15       9       6      24
 state and local controls on environmental            33      12      21      45
 impacts                                              26      11      15      37
 low productivity of available employees              33      12      21      45
 inadequate support from empowerment zone              0       1       0       0
 projects                                             28      11      17      39
 limited or no access to needed capital and/or
 credit
 insufficient customer base
 inefficient transportation for materials and
 products
 other factors
Average increase in the number of employees          4.1     2.5     1.6     6.6
 since December 1994 for businesses that had
 employees working in the zones then
Percentage of the businesses that reported            91       4      87      95
 having fewer than 50 employees
Percentage of the businesses that reported             5       3       2       8
 having 50 or more employees
--------------------------------------------------------------------------------

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