July 27, 1992 | Executive Memorandum on Smart Growth
a business interest are taken out of a zone. If an entrepreneur owns all or part of a business for at least five years, only 50 percent rather than all of the proceeds would be taxable. Example: An owner or part-owner of a business in an enterprise zone sells off an interest he has held for a decade. Part of the sale reflects a $200,000 gain in the value of qualified capital assets. Thus, $100,000 of the proceeds would be subject to capital gains taxation. The Administration bill had called for a fu l l exemption from taxation on capital gains, whether or not rein- vested in a zone, with only a two-year minimum holding period. This would be a much stronger incentive, and a necessary one if investors are to risk their money in very depressed neighborhoo ds. The House bill in some measure reflects the false notion that cutting taxes on capital gains is a business giveaway. Yet capital tax relief is essential to encourage investors to support small businesses during their precarious early years.
Allow Inves tors to deduct up to $50,000 annually on the purchase of enterprise zone stock. Tinder the House bill, investors could deduct up to $25,000 annually from taxable income for the purchase of qualified enter- I prise zone stock. They may deduct up to $250,00 0 over their lifetimes for this purpose. 116 Administration bill would have established an annual cap of $50,000. The House annual cap of $25,000 i s@ too low to trigger significant investment in certain businesses. The Senate should consider a higher cap.
Avoid zone czars. Local administrators, known informally as "zone czars," would allocate up to $30 million annually per zone in tax deductions on the purchase of enterprise zone stock. These bureaucrats would de- cide which firms would be deserving of ded uctions, and in what amount. Allowing local b@reaucrats to allo- cate tax breaks for enterprise zone stock purchases would be a profound mistake. For one i@ing it assumes these officials-who so far have not been able to achieve an economic turnaround in t h e areas-are better able than would-be investors to pick the "winners" in a zone. For another, it invites favoritism and special-in- terest lobbying. Of Provide a credit to employees, rather then firms. Under the House bill, new employers in enterprise zon e s would receive an annual nonrefundable tax credit of 15 percent on the first $20,000 (or a credit of up to $3,000) of each qualified zone resident employee's wages over the fifteen-year Iffe of the ione designation. The original Administration bill would have provided a refundable 5 percent credit for employees, not em- ployers, on the first $10,500 in wages. The tax credit in the House bill would give Ems little incentive to hire low-income zone residents. This is because small businesses during their ea r ly years typically incur little or no tax liability anyway, and there- fore a credit is of no real value to them. A credit for the employee, rather than the firm, on the other hand would increase the take-home pay of employed zone residents, and give them a competitive edge in the labor market.
Focus on crime prevention In the Wood and Seed programs. A safe environment is essential for success in en- terprise zones. Yet only about 20 percent of the funds in Weed and Seed are targeted toward crime preven- tion. The bulk goes for questionable dome stic spending programs, such as Head Start and Community Development Block Grants.
Congress is close to passing federal enterprise zone legislation with tax incentives, after twelve years of dith- ering. Congress has come to understand tax breaks are neede d to energize economically depr@ssed areas. What lawmakers now need to remember is that enterprise zones will not work without a large dose of enterprise. That requires strong incentives to reward entrepreneurs. Too much of the House bill overlooks this r equirement. It is now up to the Senate to send an enterprise zone bill to President Bush that will succeed in helping to rejuvenate deteriorating sections of America's inner cities.
Carl F. Horowitz, Ph.D. Policy Analyst}}