EMPOWERMENT ZONES



An "empowerment zone" is an economically distressed American community that receives tax incentives and grants from the federal government under the Empowerment Zones and Enterprise Communities Act of 1993. The act provided for the designation of 11 empowerment zones nationwide as well as 94 enterprise communities, which receive similar benefits on a smaller scale. The term "empowerment zone" comes from the program's goal of providing resources and opportunities that will empower poor persons to become self-sufficient. A second round of designations were announced in 1999, with 20 additional urban and rural areas sharing an estimated $3.8 billion in federal grants and tax-exempt bonding authority to finance economic revitalization efforts over the ensuing decade. The new rural empowerment zones are Cordele, Georgia; Fargo, North Dakota; Riverside County, California; Ullin, Illinois; and the Oglala Sioux Indian Reservation in Pine Ridge, South Dakota. The new urban zones are Boston, Massachusetts; Bridgeton and Vineland, New Jersey; Cincinnati, Ohio; Columbia and Sumter, South Carolina; Columbus, Ohio; El Paso, Texas; Gary and East Chicago, Indiana; Huntington, West Virginia; Ironton, Ohio; Knoxville, Tennessee; Miami, Florida; Minneapolis, Minnesota; New Haven, Connecticut; Norfolk and Portsmouth, Virginia; Santa Ana, California; St. Louis, Missouri; and neighboring East St. Louis, Illinois.

In order to be designated as an empowerment zone, a community has to meet a series of eligibility criteria based on its level of economic distress and its development potential. It then has to apply for consideration by submitting a detailed strategic plan outlining the coordinated public and private efforts that would contribute to its renewal and growth. The initial empowerment zones received a number of federal tax incentives designed to stimulate employment and business investment in the region. In addition, each zone received a block grant of $100 million over ten years toward social service and economic development programs. Finally, some designated areas received waivers of certain federal regulations.

About 500 communities applied for a coveted spot in the $3.8 billion empowerment zone program by the June 1994 deadline. When the review process was completed, the first urban areas selected for "empowerment zone" assistance were Atlanta, Baltimore, Chicago, Detroit, New York City, and a joint effort between Philadelphia and Camden, New Jersey (Cleveland and Los Angeles were designated supplemental empowerment zones a short time later). In addition, three rural regions—in the Kentucky highlands, the mid-delta region of Mississippi, and the Rio Grande valley in Texas—received empowerment zone designation.

The main ideas behind empowerment zones—using tax incentives to encourage business investment, improve employment opportunities, and stimulate economic growth in certain geographical areas—originated in the late 1970s. Sir Geoffrey Howe, a member of the British Parliament, announced the first "enterprise zones" in 1978 to help improve economic conditions in the dock districts of London. The system implemented in England reduced government restrictions in order to encourage the formation of new businesses in impoverished areas. It met with limited success, however, because it did not include provisions for improving the infrastructure of the urban areas, which was found to be necessary for the new businesses to succeed.

In the United States, the empowerment zone concept first gained currency in the early 1980s. By mid-decade, the idea had significant support from both conservative and liberal political constituencies. The first enterprise zone legislation enacted in the United States came in 1987, with the passage of Title VII of the Housing and Community Development Act. Rather than providing tax incentives, the act was intended to relax federal regulations and coordinate the efforts of existing programs in the designated zones. Although the Department of Housing and Urban Development (HUD) received applications from 270 distressed communities for assistance under the program, political considerations and maneuvering prevented the designation of any enterprise zones during the 1980s.

In the meantime, many states adopted the enterprise zone idea and started their own programs. According to Marilyn Marks Rubin in Public Administration Review, 37 states had enacted some variation of the enterprise zone concept by July 1993, and 25 of these states claimed that their programs had created jobs. The state programs all differed in their eligibility criteria, types of incentives, and methods for measuring success or failure. Consequently, evaluating and comparing the state programs was problematic.

President Bill Clinton supported the idea of empowerment zones during his campaign, but he proposed several changes to the plans put forth by previous administrations. Most significantly, the Clinton plan combined tax incentives, to lure new businesses to the zones, with grants—or "targeted government investment"—to help improve the zones' social and economic infrastructure. The Clinton plan also differed in that it provided for two tiers of assistance by designating nine empowerment zones and 95 enterprise communities. The Democrat-controlled Congress passed the Empowerment Zones and Enterprise Communities Act in May 1993.

SPECIFICS OF THE EMPOWERMENT ZONE PLAN

For a community to be considered for designation as an empowerment zone under the act, it had to demonstrate economic distress. Some of the measures of economic distress include high levels of unemployment, a poverty rate of at least 20 percent, a declining population, and a pattern of disinvestment by businesses. In addition, an empowerment zone community had to show the potential for economic development and the capacity to build public-private partnerships. Communities could meet this requirement by having public and private resources available to aid in the renewal process, and by involving various community groups and other interested parties in developing and implementing the strategic plan.

Once a community met the economic distress and development potential criteria, it had to apply for the program with the help of its local and state governments. The application for the empowerment zone designation required communities to submit a strategic development plan—incorporating the input of all affected members of the community, from business and government to church groups and community organizations—and identify sources of private funds and support for the renewal effort. Finally, the community had to develop baseline measurements and benchmark goals to evaluate the success of the program.

The nine communities that were designated as empowerment zones received a number of tax incentives to help stimulate business activity. In order to create jobs for area residents, employers received a 20 percent wage credit for the first $15,000 paid to a resident of the empowerment zone, in addition to tax breaks for any expenses incurred to train these workers. The credits could be applied to full-or part-time workers, but not to workers who were closely related to the business owner, who owned part of the business themselves, or who worked for golf courses, massage parlors, liquor stores, gambling facilities, or other ineligible business enterprises.

In order to encourage investment in the zones, the act allowed businesses to exclude from taxation 50 percent of any capital gains from such investments. It also provided tax-exempt bond financing for the purchase of certain properties within the zones, and increased the allowance for depreciating such properties by $10,000 to $20,000 in the first year (which had the effect of reducing taxes). In contrast to empowerment zones, which receive all of these benefits, enterprise communities are eligible only for tax-exempt bond financing.

Each empowerment zone also received a block grant of $100 million to help it institute the economic development programs included in its strategic plan. These programs focused on a variety of issues, including reducing drug abuse and crime, providing affordable housing, attracting industry, expanding day care facilities, and expanding mass transit operations. Each enterprise community, meanwhile, received a block grant of $2.8 million. Another provision of the act was to establish a Specialized Small Business Investment Company (SSBIC) in each empowerment zone. An SSBIC is a private lender that receives matching funds from the Small Business Association (SBA) for its investments in empowerment zone businesses. The SSBICs were intended to become "one-stop capital shops" and distribute millions in loans and equity investments to zone businesses over a five-year period.

Given the various tax and financing advantages they contained, empowerment zones proved an attractive alternative for many entrepreneurs and small business owners. In many cases, this faith proved well-founded, for the zones have helped create jobs, boost socioeconomic fortunes in depressed neighborhoods, and increase community efforts to address regional social problems. But business owners and federal, state, and municipal officials all agree that such a designation is not a magic pill that eradicates all of a community's problems (studies suggest that the success of empowerment zones in sparking urban and/or rural revitalization varies considerably from zone to zone). Rather, empowerment zone benefits are tools that can help address and treat serious problems, if used judiciously, with appropriate community input, and as part of an overall program of commercial and neighborhood regeneration.

FURTHER READING:

Bates, Timothy. "A Bad Investment." Inc. January 1995.

"Empowerment Zones: High Hopes, Mixed Results." States News Service. March 5, 1999.

James, Jeffrey K. "Empowerment Zones, Enterprise Communities, and Rural Development Investment Areas." CPA Journal. July 1994.

Lloyd, Fonda Marie. "Time to Live Up to the Hype." Black Enterprise. June 1994.

Rubin, Marilyn Marks. "Can Reorchestration of Historical Themes Reinvent Government? A Case Study of the Empowerment Zones and Enterprise Communities Act of 1993" Public Administration Review. March/April 1994.



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