(Archived Content)
Mr. Chairman, Mr. Coyne, and Members of the Subcommittee:
I appreciate the opportunity to discuss with you today tax incentives designed to foster the revitalization of economically disadvantaged communities. I would like to start by thanking the Chairman and the Subcommittee for holding a hearing on this important issue.
The Administration is firmly committed to helping Americans in economically distressed communities. However, because there are limits on what the Federal government alone can accomplish, a more comprehensive approach is necessary. This approach calls for initiatives to encourage further involvement by individuals, businesses, and community-based and faith-based organizations in working to eliminate conditions of economic distress in this country.
Thanks in large part to the leadership shown by the Ways and Means Committee, many of the Administration’s tax proposals in this area have already been enacted. Administration tax proposals benefiting low-income individuals or distressed communities that have already been enacted include the following: (1) extension of the work opportunity tax credit through 2003; (2) extension of the welfare to work credit through 2003; (3) extension of authority to issue qualified zone academy bonds through 2003; (4) authorization of tax-exempt private activity bonds to finance reconstruction in the area surrounding the World Trade Center in New York City devastated by the September 11, 2001 terrorist attacks; (5) creation of a new 10 percent income tax bracket; and (6) doubling of the child tax credit to $1,000.
The President’s Budget for FY 2003 contains additional proposals on both the spending and tax side. The tax proposals include creation of a new tax credit, similar in design to the low-income housing tax credit, for developers of affordable single-family housing, and making the brownfields tax incentive permanent. These will be discussed in more detail below.
We look forward to working with this Subcommittee as it considers the remainder of the Administration’s initiatives related to encouraging community renewal.
The remainder of my testimony will provide a more detailed discussion of current law and the Administration’s budget proposals.
INCENTIVES FOR DISTRESSED COMMUNITIES
Current law tax incentives for distressed communities
The Internal Revenue Code of 1986 currently includes numerous incentives to encourage the development of economically distressed areas. They include tax incentives for businesses located in empowerment zones, enterprise communities and renewal communities, the new markets tax credit, qualified zone academy bonds, certain categories of tax-exempt bonds, special incentives for investment and employment on Indian reservations, the low-income housing tax credit, the work opportunity tax credit, and the deductibility of brownfields remediation costs.
Empowerment Zones
The Omnibus Budget Reconciliation Act of 1993 (OBRA 93) authorized a project under which nine empowerment zones, six in urban areas and three in rural areas, were designated through a competitive application process. State and local governments nominated distressed geographic areas, which were selected on the strength of their strategic plans for economic and social revitalization. The urban areas were designated by the Secretary of the Department of Housing and Urban Development. The rural areas were designated by the Secretary of the Department of Agriculture. The Taxpayer Relief Act of 1997 added two urban Round I zones and authorized 20 Round II zones (15 urban and five rural). The Community Renewal Tax Relief Act of 2000 authorized nine Round III zones (seven urban and two rural). There are currently 30 urban zones and 10 rural zones. Designation of Round I, Round II or Round III status generally will apply until December 31, 2009.
Qualifying businesses in empowerment zones are eligible for certain tax benefits. These benefits include the following: (1) a 20-percent wage credit for qualifying wages; (2) additional expensing for qualified zone property; and (3) tax-exempt financing for certain qualifying zone facilities. In addition, taxpayers may elect to defer capital gains from certain sales and re-investments in qualified empowerment zone assets. Taxpayers may also exclude certain gain from the sale of qualifying empowerment zone stock that is held for more than five years.
The wage credit provides a 20 percent subsidy on the first $15,000 of annual wages paid to residents of empowerment zones by businesses located in these communities, if substantially all of the employee’s services are performed within the zone. By lowering the cost of labor, the wage credit encourages new businesses to locate in zones, and encourages those businesses already there to expand, providing jobs and opportunities for self-sufficiency for zone residents.
Enterprise zone businesses are allowed to expense the cost of certain property up to an additional $35,000 above the amounts generally available under section 179 of the Internal Revenue Code. In addition, only 50 percent of the cost of such property counts toward the aggregate annual limit on section 179 expensing. This incentive is designed to increase investment in machines, computers and other tangible business property within empowerment zones by small businesses.
Enterprise zone businesses are also permitted access to a special class of tax-exempt private activity bonds. Limits are placed on the amount of such financing available to each zone. Rural zones are allowed $60 million of such financing, urban zones with less than 100,000 residents are allowed $130 million of such financing and urban zones with at least 100,000 residents are allowed $230 million of such financing. These bonds are not subject to the State’s volume cap on private activity bonds.
The Community Renewal Tax Relief Act of 2000 added two provisions to limit capital gains taxation on certain investments within empowerment zones to encourage greater private investment in the zones. Taxpayers are allowed to roll over the capital gain from the sale of qualified empowerment zone assets held more than one year, if a replacement qualified empowerment zone asset is purchased in the same zone as the asset sold. Qualified empowerment zone assets include certain stock and partnership interests in an enterprise zone business and certain tangible property used in an enterprise zone business. This provision applies to assets acquired after December 21, 2000.
In addition, taxpayers other than corporations are allowed to exclude 60 percent of the gain on the sale or trade of qualified small business stock held more than 5 years, if the business also qualifies as an enterprise zone business. Taxpayers are normally allowed to exclude 50 percent of the gain on the sale of qualified small business stock. This provision applies to stock acquired after December 21, 2000.
Enterprise Communities
In addition to empowerment zones, OBRA 93 provided for the designation of 95 enterprise communities, 65 in urban areas and 30 in rural areas. Qualified businesses in these communities are entitled to the same favorable tax-exempt financing benefits as those in empowerment zones. Many of these enterprise communities have subsequently been re-designated as part of an empowerment zone or a renewal community and are no longer designated as an enterprise community. Currently, 66 enterprise communities qualify for tax-exempt financing, 40 in urban areas and 26 in rural areas. A second round of rural enterprise communities were authorized under the Food and Drug Administration and Related Agencies Appropriations Act, 1999 (Agriculture Appropriations Act 1999), but this second round of rural enterprise communities were not entitled to the tax-exempt financing benefits.
Renewal Communities
The Community Renewal Tax Relief Act of 2000 authorized 40 renewal communities, at least 12 of which must be in rural areas. The renewal communities were chosen through a competitive application process similar to that used for empowerment zones. The 40 communities were designated by the Department of Housing and Urban Development at the beginning of this year and that designation continues through 2009.
Taxpayers may utilize the renewal community tax benefits beginning this year. These benefits include the following: (1) a 15-percent wage credit for qualifying wages; (2) additional section 179 expensing for qualified renewal property; (3) a commercial revitalization deduction; and (4) an exclusion for capital gains on qualified community assets held more than 5 years.
The wage credit and increased section 179 expensing operate in a similar fashion as in empowerment zones. The primary difference is that the wage credit is smaller, equal to 15 percent for the first $10,000 of wages.
The commercial revitalization deduction is designed to foster the development or rehabilitation of commercial real estate in renewal communities. This deduction is applicable to certain nonresidential real property or other property functionally related to nonresidential real property. A taxpayer may elect to either: (1) deduct one-half of any qualified revitalization expenditures that would otherwise be capitalized for any qualified revitalization building in the tax year the building is placed in service, or (2) amortize all such expenditures over a 120-month period beginning with the month the building is placed in service. A qualified revitalization building is any building and its structural components placed in service by the taxpayer in a renewal community. If the building is new, the original use of the building must begin with the taxpayer. If the building is not new, the taxpayer must substantially rehabilitate the building and then place it in service. The total amount of qualified revitalization expenditures for any building cannot be more than the smaller of $10 million or the amount allocated to the building by the commercial revitalization agency for the state in which the building is located. A $12 million dollar cap on allowed commercial revitalization expenditures is placed on each renewal community annually.
In order to help stimulate private investment in renewal communities, qualified capital gain earned on qualified community assets is excluded from gross income. A qualified community asset includes stock or a partnership interest in a qualified renewal community business and certain tangible property used in a renewal community business. To qualify for the capital gain exclusion, the asset must be purchased after December 31, 2001 and before January 1, 2010, and it must be held for at least five years.
District of Columbia Incentives
A special set of incentives was enacted in 1997 to help redevelop the District of Columbia. The Taxpayer Relief Act of 1997 included tax incentives for both residents and businesses to locate in the District of Columbia. A $5,000 income tax credit for first-time home purchasers was designed to attract new homeowners to the District. A second set of incentives, similar to those provided in empowerment zones, was intended to encourage the establishment of new businesses in the District as well as new investment in existing enterprises.
Subject to certain income restrictions, the $5,000 credit is available to first-time purchasers of a principal residence in the District of Columbia who have not owned houses in the District during the year preceding the purchase. Although the credit was initially available for property purchased through the end of 2000, subsequent legislation extended the incentive through the end of 2003.
Other tax incentives offer a range of economic inducements to businesses operating in the more economically disadvantaged parts of the District. With the exception of a provision related to the sale of capital assets, these incentives are available only to businesses located either within the boundaries of the D.C. Enterprise Community, or located in census tracts elsewhere in the District where the poverty rate exceeds 20 percent. These areas are collectively known as the DC Zone. With certain minor adjustments, businesses in the DC Zone may claim the same wage credit, expensing of certain capital investment, and tax exempt bond financing as businesses in an empowerment zone. In addition, as in renewal communities, capital gains realized from the sale of certain assets are excludable from the income of the seller. For the purposes of this provision alone, the DC Zone is expanded to include all census tracts in the District in which the poverty rate exceeds 10 percent.
New York Liberty Zone
While the area around the World Trade Center in New York City would not have been described as an economically distressed community prior to the extraordinary events of September 11, 2001, the horrible destruction of life and property in that area due to the terrorist attacks prompted both the Administration and the Congress to support tax incentives targeted to helping New York City recover economically. I commend you, Mr. Chairman, and other members of the Ways and Means Committee for the leadership you exhibited in helping to enact the Job Creation and Worker Assistance Act of 2002.
Some of the tax incentives provided in the New York Liberty Zone are similar to the tax incentives offered in empowerment zones, while others were designed to meet the unique challenges facing New York City in the aftermath of the September 11 terrorist attacks. As in empowerment zones, qualified businesses are allowed a wage credit, increased section 179 expensing, and access to tax-exempt financing. Provisions specific to the New York Liberty Zone include 30 percent expensing of certain property, accelerated depreciation of qualified leasehold improvement property, extension of the replacement period for certain property involuntarily converted, and an additional advance refunding of bonds for facilities located in New York City.
The wage credit is allowed for certain employees who work in New York City through an extension of the work opportunity tax credit (WOTC). The new targeted group for the WOTC includes employees of businesses located in the New York Liberty Zone if substantially all of the employee’s services for the business are performed within the New York Liberty Zone.
In addition, the new targeted group includes employees of businesses that relocated from the New York Liberty Zone due to the physical destruction or damage of their workplaces by the September 11, 2001 terrorist attacks to another location within New York City, provided that substantially all of the employee’s services are performed within New York City. Only businesses with an average of 200 or less employees during the taxable year are eligible for the credit. The credit is effective for wages paid or incurred for work performed during calendar year 2002 or 2003.
An increase in section 179 expensing of $35,000 is allowed for property placed in service by taxpayers after September 10, 2001, and before January 1, 2007, if the original use of the property in the New York Liberty Zone commences with the taxpayer after September 10, 2001 and substantially all of the use of the property is in the New York Liberty Zone. As in empowerment zones and renewal communities, only 50 percent of the value of such property counts toward the aggregate annual limit on section 179 expensing.
The Governor of New York State and the Mayor of New York City are each given an allowance to issue up to $4 billion of tax-exempt private activity bonds before January 1, 2005. The bonds may be used to finance the acquisition, construction, rehabilitation and renovation of nonresidential real property, residential rental real property, and public utility property in the New York Liberty Zone. The Governor and the Mayor may each designate up to $1 billion of such bonds for the acquisition, construction, rehabilitation and renovation of certain commercial real property located outside the New York Liberty Zone and within New York City. These bonds are not subject to the State’s volume cap on private activity bonds.
A taxpayer is allowed an additional first-year depreciation deduction equal to 30 percent of the adjusted basis of qualified New York Liberty Zone property. In order to qualify for this partial expensing, the property must be (1) a property with a MACRS recovery period of 20 years or less, (2) computer software other than computer software covered by section 197, (3) water utility property, or (4) certain nonresidential real property and residential rental property. Nonresidential real property and residential rental property is eligible for the partial expensing only to the extent such property rehabilitates real property damaged, or replaces real property destroyed or condemned, as a result of the terrorist attacks of September 11, 2001. This provision applies neither to property that would otherwise qualify for 30 percent expensing under section 168(k), nor to qualified New York Liberty Zone leasehold improvement property. Furthermore, to qualify for the partial expensing, substantially all of the use of the property must be in the New York Liberty Zone and the original use of the property in the New York Liberty Zone must commence with the taxpayer after September 10, 2001 (except for certain leased property). Finally, qualified property must be purchased by the taxpayer after September 10, 2001, and placed in service before January 1, 2007, or for nonresidential property and residential rental property, January 1, 2009.
Qualified New York Liberty Zone leasehold improvement property placed in service after September 10, 2001 and before January 1, 2007 is treated as 5-year property for the purposes of section 168 depreciation rules, with deductions taken using the straight-line method. Under the alternative depreciation system (section 168(g)), such property has a class life of 9 years.
Qualified New York Liberty Zone leasehold improvement property is qualified leasehold improvement property as defined in section 168(e)(6) that is placed in service in the New York Liberty Zone.
When property used in a trade or business is damaged or destroyed, the taxpayer may deduct any loss sustained to the extent that the loss is not compensated by insurance or otherwise. When insurance or other compensation results in a gain from the damage or destruction of property, then the taxpayer may elect to reduce the current recognition of gain by purchasing a replacement property within a specific time period which is similar or related in use to the damaged or destroyed property (section 1033(a)). For property in the New York Liberty Zone that was involuntarily converted as a result of the terrorist attacks on September 11, 2001, the replacement period is extended from 2 years to 5 years if substantially all of the use of the replacement property is in New York City.
Finally, certain bonds for facilities located in New York City are given one additional advance refunding. There is an aggregate limit of $9 billion advance refunding bonds that may be issued before January 1, 2005.
New Markets Tax Credit
The new markets tax credit was created by the Community Renewal Tax Relief Act of 2000 to encourage capital investments in businesses that are located in low-income communities. The new markets tax credit provides a tax credit to investors who make "qualified equity investments" in privately-managed investment vehicles called "community development entities," or "CDEs." The CDEs are required to invest substantially all of the proceeds of the qualified equity investments in low-income communities. For example, CDEs may make loans or capital investments in companies that operate in low-income communities.
Eligible investors in a CDE are entitled to claim tax credits over a seven-year period beginning on the date of the initial investment. The value of the credits to investors will be about 30 percent of the amount of the qualified equity investment on a present value basis.
In order for an entity to qualify as a CDE, it must meet three requirements. First, the primary mission of the entity must be to serve or provide investment capital for low-income communities or low-income persons. Second, the entity must maintain accountability to residents of low-income communities through their representation on the entity’s governing or advisory board. Third, the entity must be certified as a CDE by the Treasury Department’s Community Development Financial Institutions Fund (CDFI Fund).
In order for a CDE to issue qualified equity investments with respect to which new markets tax credits may be claimed, the CDE must apply for and receive from the CDFI Fund an allocation of credit authority for those investments. A total of $15 billion of equity investments will be able to qualify for this authority on a phased-in basis between 2001 and 2007. The CDFI Fund will allocate this authority among CDEs based on a competitive application process.
In making these allocations, the CDFI Fund is required to give priority to any entity (1) with a record of having successfully provided capital or technical assistance to disadvantaged businesses or communities, or (2) which intends to invest substantially all of the proceeds of the qualified equity investments in one or more businesses in which persons unrelated to the entity hold the majority equity interest.
The Treasury Department has issued temporary and proposed tax regulations regarding the new markets tax credit and is currently accepting and reviewing comments on the regulations.
Qualified Zone Academy Bonds
State and local governments can issue qualified zone academy bonds (QZABs) to fund the improvement of certain eligible public schools. Instead of receiving interest payments, an eligible holder of a QZAB receives annual Federal income tax credits. These annual credits compensate the holder for lending money and, therefore, are treated like taxable interest payments for Federal tax purposes. Eligible holders are banks, insurance companies, and corporations actively engaged in the business of lending money. The credit rate for a QZAB is set on its day of sale by reference to credit rates established by the Department of the Treasury. The maximum term of a QZAB issued during any month is determined by reference to the adjusted applicable Federal rate (AFR) published by the Internal Revenue Service for the month in which the bond is issued.
This provision was enacted in the Taxpayer Relief Act of 1997, which established authority to issue $400 million of QZABs per year for 1998 and 1999. This authority was extended to 2000 and 2001 by the Ticket to Work and Work Incentives Improvement Act of 1999. The Administration proposed that this authority be extended through 2003, which was accomplished in the recently enacted Job Creation and Worker Assistance Act of 2002. The annual cap is allocated among the States in proportion to their respective populations of individuals with incomes below the poverty line. Unused authority to issue QZABs may be carried forward for two years (three years for authority arising in 1998 and 1999) after the year for which the authority was established.
A number of requirements must be met for a bond to be treated as a QZAB. First, the bond must be issued pursuant to an allocation of bond authority from the issuer's State educational agency. Second, at least 95 percent of the bond proceeds must be used for an eligible purpose at a qualified zone academy. Eligible purposes include rehabilitating school facilities, acquiring equipment, developing course materials, or training teachers. A qualified zone academy is a public school (or an academic program within a public school) that is designed in cooperation with business and is either (1) located in an empowerment zone or enterprise community, or (2) attended by students at least 35 percent of whom are estimated to be eligible for free or reduced-cost lunches under the Richard B. Russell National School Lunch Act. Third, private entities must have promised to contribute to the qualified zone academy certain property or services with a present value equal to at least 10 percent of the bond proceeds.
Tax-exempt Bonds
States and local governments may issue tax-exempt bonds to revitalize economically disadvantaged communities so long as: (1) no more than ten percent of the bond proceeds is used by private entities in a trade or business if payments or security associated with that use are available to pay principal or interest on the bonds; and (2) no more than five percent of the bond proceeds is loaned to private businesses or individuals. If these private activity requirements are not met, the following types of tax-exempt private activity bonds may nonetheless be issued, subject to per-State volume limits, for revitalization purposes: mortgage revenue bonds ("MRBs"), bonds for qualified residential rental projects, and qualified redevelopment bonds.
MRBs may be issued to finance the purchase, or qualifying rehabilitation or improvement, of single-family, owner-occupied homes located within the jurisdiction of the issuer of the bonds. Interest on MRBs is excluded from gross income if they meet the requirements for "qualified mortgage bonds" or "qualified veterans’ mortgage bonds." In addition, in some circumstances, "mortgage credit certificates" may be issued as an alternative to qualified mortgage bonds.
In general, qualified mortgage bonds must finance residences for first-time home buyers; the purchase price of the residence may not exceed certain amounts; and the purchaser must satisfy certain income limitations. In addition, certain special rules apply with respect to "targeted areas." A targeted area is defined as (1) a census tract in which 70 percent or more of the families have incomes that are 80 percent or less of the Statewide median family income, or (2) an area of chronic economic distress designated by the State and approved by the Secretary of the Treasury and the Secretary of Housing and Urban Development.
Exempt facility bonds may be used to fund qualified residential rental projects, if at least 95 percent of the net bond proceeds are used to provide a qualified residential rental project. A qualified residential rental project is a multifamily rental project in which one of the following two requirements is met at all times during the qualified project period: (1) 20 percent or more of the residential units in such project are occupied by individuals whose income is 50 percent or less of area median gross income; or (2) 40 percent or more of the residential units in such project are occupied by individuals whose income is 60 percent or less of area median gross income.
Qualified redevelopment bonds are bonds for which at least 95 percent of the net bond proceeds are used for redevelopment purposes in a locally designated blighted area. The payment of principal and interest must be primarily secured by taxes of general applicability imposed by a general purpose government, or by incremental property tax revenues that are reserved exclusively for debt service on such issue (and similar issues). Blighted areas are designated by a local governing body based on the substantial presence of factors such as excessive vacant land on which structures were previously located, abandoned or vacant buildings, substandard structures, vacancies, and delinquencies in payment of real property taxes.
The volume of certain tax-exempt private activity bonds, including qualified mortgage bonds, bonds for qualified residential rental projects, and qualified redevelopment bonds, that States and local governments may issue in each calendar year is limited by State-wide volume limits. The current annual volume limits are $75 per resident of the State or $225 million if greater. These dollar limits are indexed for inflation for years after 2002.
Indian Employment Credit
Unfortunately, many residents of Native American communities continue to struggle economically. The Indian Employment Credit provides an incentive for job growth in these communities. Employers may claim an Indian Employment Credit on the qualified wages and employee health insurance costs paid to an enrolled member of an Indian tribe in compensation for services performed on or near a reservation. The credit amount is equal to 20 percent of the excess of the employer’s current year qualified wages and employee health insurance costs over the sum of the corresponding amounts paid or incurred by the employer during calendar year 1993. The aggregate amount of qualified wages and health insurance costs may not exceed $20,000 per person per year. This incentive was due to expire at the end of 2003, but has been extended through 2004 by the recently enacted Job Creation and Worker Assistance Act of 2002.
Depreciation of Property Used on Indian Reservations
Another tax incentive that encourages economic development on Indian reservations is the accelerated depreciation of qualified Indian reservation property. This accelerated depreciation is accomplished through the use of shorter recovery periods for certain property. In order to qualify for this provision, a property must (1) be used by the taxpayer predominantly in the active conduct of a trade or business within an Indian reservation, (2) not be used outside the Indian reservation on a regular basis, (3) not be acquired from a person related to the taxpayer, and (4) not be used for the purpose of certain gaming activities. In addition, property for which the alternative depreciation system is applied is not eligible for this provision. This provision was scheduled to expire for property placed in service after 2003, but was extended through 2004 by the recently enacted Job Creation and Worker Assistance Act of 2002.
Low-income Housing Tax Credit
Taxpayers who invest in qualified low-income rental units are eligible for the low-income housing tax credit (LIHTC). The LIHTC may be claimed over a 10-year period for a portion of the cost of rental housing occupied by tenants having incomes below specified levels. The credit percentage for newly constructed housing that is not federally subsidized is adjusted monthly by the Internal Revenue Service so that generally the 10 annual credit amounts have a present value of 70 percent of qualified basis. The credit percentage for new buildings that are federally subsidized and for existing buildings is calculated to have a present value of 30 percent of qualified basis. In general, the aggregate first-year credit authority allocated to each State is $1.75 per capita in 2002 and will be indexed for inflation in following years. Tax credits are allocated to particular projects by State or local housing agencies pursuant to publicly announced plans for allocation. Authority to allocate credits may be carried forward by agencies to the following calendar year.
Unused credit allocations may be returned to an agency for reallocation. Credit allocations may revert to the agency if less than 10 percent of the taxpayer's reasonably expected qualifying basis is expended within 6 months after receiving the allocation. Authority not used in a timely manner reverts to a national pool for distribution to States requesting additional authority. Generally, a qualifying building must be placed in service in the year the credit is allocated unless at least 10 percent of the taxpayer's reasonably expected basis in the property is expended in the year of allocation or within 6 months after the allocation date. Rules are provided for the allocation of costs to individual units in multi-unit projects and to property that is part of a project but used for purposes other than rental housing. The tax credit period begins with the taxable year in which a qualified building is placed in service (or, in certain circumstances, the succeeding taxable year). Credits are recaptured if the required number of units is not rented to qualifying tenants for a period of 15 years.
In certain geographic areas designated by the Secretary of Housing and Urban Development, LIHTC amounts awarded to projects may be increased by up to 30 percent. These areas are: Difficult Development Areas, defined as metropolitan areas and nonmetropolitan counties where development costs are high relative to area incomes (limited to 20 percent of U.S. metropolitan and nonmetropolitan populations); and Qualified Census Tracts, census tracts, containing not more than 20 percent of their metropolitan area or State nonmetropolitan populations, where either at least 50 percent of households have incomes below 60 percent of area median income, or the poverty rate is at least 25 percent.
Work Opportunity Tax Credit
Employers are generally entitled to the work opportunity tax credit (WOTC) for the first $6,000 of wages paid to several targeted groups of economically disadvantaged workers or workers with disabilities. For workers employed between 120 and 400 hours per year, the credit rate is 25 percent of qualified wages. For workers employed over 400 hours per year, the credit rate is 40 percent. Employers must reduce their deduction for wages paid by the amount of the credit claimed. Current WOTC target groups include qualified: (1) recipients of Temporary Assistance to Needy Families; (2) veterans; (3) ex-felons; (4) high-risk youth; (5) participants in State-sponsored vocational rehabilitation programs; (6) summer youth; (7) food stamp recipients; and (8) Supplemental Security Income recipients.
A qualified high-risk youth employee listed above is an individual at least 18 years old but less than 25, who lives within an empowerment zone, enterprise community, or renewal community. A qualified summer youth employee works for the employer between May 1 and September 15, is 16 or 17 years old, and resides within an empowerment zone, enterprise community, or renewal community. The limit on the wages of a summer youth employee that qualify for the credit is reduced to $3,000.
At the time the Administration proposed the FY 2003 budget, the WOTC was scheduled to expire at the end of 2001. The Administration proposed that the WOTC be extended through 2003. This was accomplished by the Job Creation and Worker Assistance Act of 2002.
The House is considering the Encouraging Work and Supporting Marriage Act of 2002. The bill would combine the WOTC and the welfare to work (WTW) credit by making persons eligible for WTW a WOTC target group with special rules. The WTW credit enables employers to claim a tax credit for eligible wages paid to certain long-term welfare recipients. The changes contained in the House bill will simplify the computation of the credit for employers that hire members of the economically disadvantaged targeted groups. We commend the proposed tax simplification.
Brownfields Remediation Costs
A brownfield site is real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant. Because lenders, investors, and developers fear the high and uncertain costs of cleanup, they avoid developing contaminated sites. Blighted areas of brownfields hinder the redevelopment of affected communities and create safety and health risks for residents. The obstacles in cleaning these sites, such as regulatory barriers, lack of private investment, and contamination and remediation issues, are being addressed through a wide range of Federal programs, including the tax incentive for brownfields remediation.
To encourage the cleanup of contaminated sites, the brownfields tax incentive permits the current deduction of certain environmental remediation costs. Environmental remediation costs qualify for current deduction if the expenditures would otherwise be capitalized (generally costs incurred to clean up land and groundwater that increase the value of the property) and are paid or incurred in connection with the abatement or control of hazardous substances at a qualified contaminated site. A qualified contaminated site generally is any property (1) that is held for use in a trade or business, for the production of income, or as inventory; (2) at or on which there has been a release, threat of release, or disposal of a hazardous substance; and (3) that is certified by the appropriate State environmental agency as to the release, threat of release, or disposal of a hazardous substance. Sites that are identified on the national priorities list under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) do not qualify as qualified contaminated sites. The brownfields tax incentive applies to expenditures paid or incurred before January 1, 2004.
Administration budget proposals
The President’s Budget for FY 2003 includes two proposals to improve upon these tax incentives and further encourage development in economically distressed communities. In addition, there are other Administration proposals that would help low-income individuals, such as the creation of Individual Development Accounts, increased incentives for charitable giving, and a refundable tax credit for the purchase of health insurance, which are not discussed in this testimony.
The President’s Budget for FY 2003 includes two proposals to improve upon these tax incentives and further encourage development in economically distressed communities. In addition, there are other Administration proposals that would help low-income individuals, such as the creation of Individual Development Accounts, increased incentives for charitable giving, and a refundable tax credit for the purchase of health insurance, which are not discussed in this testimony.
Single-Family Housing Tax Credit
The Administration believes that quality of life in distressed neighborhoods can be improved by increasing home ownership. Existing buildings in these neighborhoods often need extensive renovation. Renovation may not occur because the costs involved exceed the prices at which the housing units could be sold. Similarly, the costs of new construction may exceed their market value. Properties will sit vacant and neighborhoods will remain blighted unless the gap between development costs and market prices can be filled. The Administration has proposed the creation of a single-family housing tax credit (SFHTC) to expand the possibility of home ownership for low-income families.
First-year credit authority of $1.75 per resident would be made available annually to States (including U.S. possessions) beginning in calendar year 2003. The per capita amount would be indexed for inflation beginning in 2004. Pursuant to a plan of allocation, State or local housing credit agencies would award first-year credits to housing units comprising a project for the development of single-family housing in certain low-income census tracts. Rules similar to the current law rules for the LIHTC would apply regarding carry forward and return of unused credits and a national pool for unused credits. Units in condominiums and cooperatives could qualify as single-family housing. Credits would be awarded as a fixed amount for individual units comprising a project. The present value of the credits with respect to a unit could not exceed 50 percent of the qualifying costs of the unit. For these purposes, present value would be determined based on the mid-term Applicable Federal Rate in effect for the date the agency allocated credits to the project. Rules similar to the current law rules for the LIHTC would apply to determine eligible costs of individual units. The Treasury Department would have the authority to promulgate necessary reporting requirements.
The taxpayer (developer or investor partnership) owning the housing unit immediately prior to the date of sale to a qualified buyer would be eligible to claim SFHTCs over a 5-year credit period beginning on that date. No credits with respect to a housing unit would be available unless the unit was sold within a 1-year period after the construction or rehabilitation was completed.
Eligible homebuyers would have incomes at 80 percent (70 percent for families with less than 3 members) or less of applicable median family income. They would not have to be first-time homebuyers. Homebuyers would be subject to recapture provisions in certain circumstances. In particular, recapture rules would apply if the homebuyer (or a subsequent buyer) sold the property to a nonqualified buyer within 3 years after the date of initial sale of the unit. No recapture provision would apply to taxpayers eligible to claim SFHTCs. If a housing unit for which any credit is claimed were converted to rental property by the initial homebuyer within the first 3 years following the purchase, expenses relating to the unit would not be allowed as a deduction with respect to that unit during that time period.
The proposal would be effective beginning with first-year credit allocations for calendar year 2003. The revenue cost of this proposal is expected to be $2.4 billion over FY 2003-2007.
Brownfields Remediation Costs
The Administration believes that encouraging environmental remediation is an important national goal. The brownfields provision encourages the cleanup of contaminated brownfields, thereby enabling them to be brought into productive use in the economy and mitigating potential harms to public health. The current-law incentive was made temporary to encourage faster cleanup of brownfields. Experience has shown, however, that many taxpayers are unable to take advantage of the incentive because environmental remediation often extends over a number of years. For that reason, the President’s budget proposed a permanent extension of the brownfields tax incentive. Extending the special treatment accorded to brownfields on a permanent basis would remove doubt among taxpayers as to the future deductibility of remediation expenditures and would promote the goal of encouraging environmental remediation. The Administration’s brownfields proposal was introduced by Mr. Coyne and Mr. Weller as H.R. 1439.
The revenue cost of the proposal is estimated to be $1.1 billion over FY 2003-2007. Treasury estimates that the proposal, at a $300 million annual cost, will leverage approximately $2 billion per year in private investment.
CONCLUSION
I would like to thank you, Mr. Chairman, Mr. Coyne and the members of the Subcommittee for providing the chance today to discuss these important issues. I hope that, working together, we can ensure that all Americans share in our country’s prosperity and have even greater opportunity in the future. While this concludes my prepared testimony, I would be pleased to respond to your questions.