Recently Expired Community Assistance Related Tax Provisions (“Tax Extenders”): In Brief Sean Lowry Analyst in Public Finance October 21, 2014 Congressional Research Service 7-5700 www.crs.gov R43541 Community Assistance Related “Tax Extenders”: In Brief Contents Introduction...................................................................................................................................... 1 New Markets Tax Credit .................................................................................................................. 1 Empowerment Zone Tax Incentives ................................................................................................ 3 Qualified Zone Academy Bonds—Allocation of Bond Limitation ................................................. 4 American Samoa Economic Development Credit ........................................................................... 6 Contacts Author Contact Information............................................................................................................. 7 Congressional Research Service Community Assistance Related “Tax Extenders”: In Brief Introduction The Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act (S. 2260), which would extend most expired and soon-to-expire tax provisions (commonly referred to as “Tax extenders”) through 2015, was reported on April 28, and subsequently became an amendment to H.R. 3474. The bill did not advance in the Senate, as a motion to end debate on H.R. 3474, the legislative vehicle for the tax extenders package, was voted down on May 15, 2014. This report briefly summarizes four community assistance-related tax provisions included in the EXPIRE Act, which are (1) the New Markets Tax Credit, (2) Empowerment Zone Tax Incentives, (3) allocation of bond limitations for Qualified Zone Academy Bonds, and (4) the American Samoa Economic Development Credit. The EXPIRE Act would extend each of these provisions for two years (through 2015).1 A discussion of their economic impact and related extension bills in the 113th Congress is also included. CRS Report R43449, Recently Expired Housing Related Tax Provisions (“Tax Extenders”): In Brief, by Mark P. Keightley, contains analysis of the low-income housing tax credit (LIHTC), which could also be used to encourage economic development in certain communities. For CRS coverage of other tax extenders, see • CRS Report R43124, Expired and Expiring Temporary Tax Provisions (“Tax Extenders”), by Molly F. Sherlock; • CRS Report R43510, Selected Recently Expired Business Tax Provisions (“Tax Extenders”), by Jane G. Gravelle, Donald J. Marples, and Molly F. Sherlock; • CRS Report R43517, Recently Expired Charitable Tax Provisions (“Tax Extenders”): In Brief, by Jane G. Gravelle and Molly F. Sherlock; and • CRS Report R43688, Selected Recently Expired Individual Tax Provisions (“Extenders”): In Brief, by Jane G. Gravelle. New Markets Tax Credit2 The New Markets Tax Credit (NMTC) was enacted by the Community Renewal Tax Relief Act of 2000 (P.L. 106-554) to encourage investors to make investments in low-income communities (LICs) that traditionally lack access to capital. The NMTC is a competitively awarded tax credit overseen by the Community Development Financial Institutions (CDFI) Fund, organized within the Department of the Treasury. For each NMTC round authorized by Congress, the CDFI Fund ranks all requests for NMTC allocation authority and grants awards to those CDEs that score highest. A CDE is a domestic corporation or partnership that is an intermediary vehicle for the 1 None of the four community assistance provisions discussed in this report were included for extension in the House Way and Means comprehensive tax reform discussion draft (i.e., the “Tax Reform Act of 2014”) released in February 2014. See U.S. Congress, House Committee on Ways and Means, Tax Reform Act of 2014 Discussion Draft, Sectionby-Section Summary, 113th Cong., February 2014, at http://waysandmeans.house.gov/uploadedfiles/ ways_and_means_section_by_section_summary_final_022614.pdf. 2 Internal Revenue Code (IRC) Section 45D(f). Congressional Research Service 1 Community Assistance Related “Tax Extenders”: In Brief provision of loans, investments, or financial counseling in LICs.3 All taxable investors are eligible to receive the NMTC, such as banks, venture capital firms, and other private investors. The structure of the NMTC creates incentives for CDEs and private investors to participate in the program. CDEs benefit from the NMTC because they charge fees to their investors for organizing the NMTC application and for structuring the financing for a portfolio of community development projects. The private investors benefit because they receive, each year over seven years, an annual tax credit equal to 5% to 6% of the total amount paid for the stock or capital interest in the CDE that they purchase.4 Overall, the tax credit amounts to 39% of the cost of the qualified equity investment (less the CDE’s fees) as long as the interest in the investment is retained for the entire seven-year period. Thus, even if the community development project funded by the CDE incurs some losses, the value of the tax credit could generate a positive return for the private financers. Opposition to the NMTC is partly based on the belief that corporations and higher-income investors primarily benefit from the provision or that the NMTC leads to an economically inefficient allocation of resources. For instance, while banks and other investors might benefit directly from the credit, Freedman (2009) found that benefits of the NMTC to selected lowincome communities were modest.5 The study concluded that poverty and unemployment rates fall by statistically significant amounts in tracts that receive NMTC-subsidized investment relative to similar tracts that do not. From a national economic perspective, the impact of the NMTC would be greatest in the case where the investment represents net investment in the U.S. economy rather than a shift in investment from one location to another. Gurley-Calvez et al. (2009) found that corporate NMTC investment represented a shift in investment location but a portion of individual NMTC investment (roughly $641 million in the first four years of the program from 2001 to 2004) represented new investment.6 The NMTC has been extended as a temporary tax provision since 2008, after its initial authorization expired at the end of 2007.7 In more recent years, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) extended NMTC authorization through 2011 and permitting a maximum annual amount of qualified equity investments of $3.5 billion. The American Taxpayer Relief Act of 2012 (ATRA; P.L. 112-240) extended the NMTC through 2012 and 2013 with an authority of $3.5 billion per year. The EXPIRE Act would extend the NMTC for two years (through 2015) with an annual tax credit allocation authority of $3.5 billion. The Joint Committee on Taxation (JCT) estimates the 10-year revenue loss associated with the credits offered by this provision to be $1.8 billion.8 3 As CDEs serve purposes outside the NMTC, they do not have to be for-profit organizations. However, to receive a NMTC allocation a CDE must be a for-profit organization. 4 For more details, see CRS Report RL34402, New Markets Tax Credit: An Introduction, by Donald J. Marples and Sean Lowry. 5 Matthew Freedman, “Teaching new markets old tricks: The effects of subsidized investment on low-income neighborhoods,” Journal of Public Economics, vol. 96, no. 11-12 (December 2012), pp. 1000-1014. 6 Tami Gurley-Calvez et al., “Do tax incentives affect investment? An analysis of the New Markets Tax Credit,” Public Finance Review, vol. 34, no. 4 (2009), pp. 371-398. 7 Given that some of these tax extenders have been passed retroactively, the CDFI Fund has often issued a Notice of Funds Availability (NOFA) for the NMTC in the Federal Register despite not having formal authorization of funds. 8 U.S. Congress, Joint Committee on Taxation, Estimated Budget Effects of an Amendment in the Nature of a Substitute to H.R. 3474, the “Expiring Provisions Improvement, Reform, and Efficiency ('EXPIRE’) Act of 2014,” Scheduled for (continued...) Congressional Research Service 2 Community Assistance Related “Tax Extenders”: In Brief The New Markets Tax Credit Extension Act of 2013 (S. 1133), the Invest in United States Act of 2014 (H.R. 3939), and the New Markets Tax Credit Extension Act of 2014 (H.R. 4365) would permanently extend the NMTC, among other provisions. For more information on the NMTC, see CRS Report RL34402, New Markets Tax Credit: An Introduction, by Donald J. Marples and Sean Lowry; and CRS Report R42770, Community Development Financial Institutions (CDFI) Fund: Programs and Policy Issues, by Sean Lowry. Empowerment Zone Tax Incentives Empowerment Zones (EZs) are federally designated geographic areas characterized by high levels of poverty and economic distress, where businesses and local governments may be eligible to receive federal grants and tax incentives.9 Since 1993, Congress has authorized three rounds of EZs (1993, 1997, and 1999) with the objective of revitalizing selected economically distressed communities. EZs are similar to Enterprise Communities (ECs) and Renewal Communities (RCs), which are also federally-designated areas for the purposes of tax benefits and grants. A number of studies have evaluated the effectiveness of the EZ, EC, and RC programs. The Government Accountability Office (GAO) and the Department of Housing and Urban Development (HUD) have failed to link EZ and EC designation with improvement in community outcomes.10 Other research has found modest, if any, effects and calls into question the costeffectiveness of these programs. This inability to link these programs to improvements in community level outcomes should not be interpreted as meaning that the EZ, EC, and RC programs did not aid economic development. The main conclusion from these studies is that the EZ, EC, and RC programs have not been shown to have caused a general improvement in the economic conditions of the localities. One possible cause for this inability to empirically show the program effects on a large geographic area is that the EZ tax incentives are relatively small. Another possibility is that the EZ tax incentives are targeted at business owners and do not provide direct benefits to workers in EZs. The EXPIRE Act includes six tax incentives related to EZs:11 (1) local designation of an EZ;12 (2) increased exclusion of gain;13 (3) issuance of qualified, tax-exempt zone academy bonds (QZABs) in EZs;14 (4) EZ employment credits under the Work Opportunity Tax Credit (...continued) Consideration by the Senate, committee print, 113th Cong., 2nd sess., March 15, 2014, JCX-51-14 (Washington: GPO, 2014), at https://www.jct.gov/publications.html?func=startdown&id=4601. 9 For a list of EZs, see U.S. Department of Housing and Urban Development (HUD), “List of Current Empowerment Zones and Updated Contact Information,” at http://portal.hud.gov/hudportal/HUD?src=/program_offices/ comm_planning/economicdevelopment/programs/rc/ezcontacts. 10 For more discussion, see CRS Report R41639, Empowerment Zones, Enterprise Communities, and Renewal Communities: Comparative Overview and Analysis, by Donald J. Marples. 11 For a quick reference chart with a description of each of these provisions, see U.S. Department of Housing and Urban Development (HUD), Empowerment Zone Tax Incentives Summary Chart, August 2013, at http://portal.hud.gov/hudportal/documents/huddoc?id=ez_tis_chart.pdf. 12 IRC Sections 1391(d)(1)(A)(i) and (h)(2). 13 IRC Sections 1202(a)(2) and 1391(d)(1)(A)(i). 14 IRC Sections 1394 and 1391(d)(1)(A)(i). Congressional Research Service 3 Community Assistance Related “Tax Extenders”: In Brief (WOTC);15 (5) increased expensing under IRC Section 179 for businesses located in EZs;16 and (6) non-recognition of gain on rollover of EZ investments.17 EZs were created by legislation enacted in 1993, and most zones expired at the end of 2009. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111312) extended the EZ and District of Columbia Enterprise Zone designations to December 31, 2011. ATRA (P.L. 112-240) extended EZ designations through 2013.18 The EXPIRE Act would extend the EZ provisions for two years (through 2015). The Joint Committee on Taxation (JCT) estimates the 10-year revenue loss associated with these provisions to be $498 million.19 The Growth Zones Opportunity Act (H.R. 4471) would extend the designation of EZs for tax incentives through 2020 and increase the exclusion of gain in IRC Section 1202(a)(2) through 2025. The Revitalize Our Cities Act (H.R. 3535) would extend EZ designations for three years (through 2016). For more analysis of EZs, see CRS Report R41639, Empowerment Zones, Enterprise Communities, and Renewal Communities: Comparative Overview and Analysis, by Donald J. Marples. Qualified Zone Academy Bonds—Allocation of Bond Limitation20 Typically, state and local governments can issue tax-exempt bonds to finance the construction of certain public facilities, such as schools. However, some low-income communities have found it difficult to finance new schools or rehabilitate existing schools. As one option to finance elementary and secondary schools, eligible local governments in EZs, ECs, or other designated zones can issue Qualified Zone Academy Bonds (QZABs). Proceeds from the bonds may be used for renovating school buildings, purchasing equipment, developing curricula, or training teachers or other school personnel—but not for new construction.21 The 15 IRC Sections 1396 and 1391(d)(1)(A)(i). For more information of the WOTC, see CRS Report RL30089, The Work Opportunity Tax Credit (WOTC), by Christine Scott. 16 IRC Sections 1397A and 1391(d)(1)(A)(i). For more information on Section 179 expensing, see CRS Report R43510, Selected Recently Expired Business Tax Provisions (“Tax Extenders”), by Jane G. Gravelle, Donald J. Marples, and Molly F. Sherlock, and CRS Report RL31852, Section 179 and Bonus Depreciation Expensing Allowances: Current Law, Legislative Proposals in the 113th Congress, and Economic Effects, by Gary Guenther. 17 IRC Sections 1397B and 1391(d)(1)(A)(i). 18 However, ATRA did not provide for the extension of the designation for the District of Columbia Enterprise Zone, and therefore that designation ended on Dec. 31, 2011. 19 U.S. Congress, Joint Committee on Taxation, Estimated Budget Effects of an Amendment in the Nature of a Substitute to H.R. 3474, the “Expiring Provisions Improvement, Reform, and Efficiency ('EXPIRE’) Act of 2014,” Scheduled for Consideration by the Senate, committee print, 113th Cong., 2nd sess., March 15, 2014, JCX-51-14 (Washington: GPO, 2014), at https://www.jct.gov/publications.html?func=startdown&id=4601. 20 IRC Sections 54E and 1397E. 21 For information on federal programs for new school construction or renovation, see CRS Report R41142, School (continued...) Congressional Research Service 4 Community Assistance Related “Tax Extenders”: In Brief Secretary of Education makes all allocations of QZAB bonds to school divisions or charter schools. Banks, insurance companies, or corporations actively engaged in the business of lending money are eligible to purchase the QZABs and are eligible for a tax credit equal to the dollar value of the bonds held multiplied by a credit rate determined by the Secretary of the Treasury.22 In other words, QZABs pay investors a tax credit in lieu of an interest payment from the issuer. The value of the credit is included in taxable income and can be used to reduce regular or alternative minimum income tax liability.23 The provision is intended to encourage public-private partnerships, as eligibility partly depends on a school district’s ability to attract private contributions that have a present value equal to at least 10% of the value of the bond proceeds. In effect, QZABs also shift part of the burden of financing education from state and local governments to the federal government. Although the local government issuer pays the principal on the bond, the federal government pays the interest cost associated with QZABs. The Taxpayer Relief Act of 1997 (P.L. 105-34) created QZABs. The limit for QZAB debt was $400 million annually from 1998 through 2008. The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5) increased these limits to $1.4 billion for 2009 and 2010. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) extended authority for QZABs through 2011 with a $400 million limit. Most recently, ATRA (P.L. 112-240) extended the $400 annual limit for 2012 and 2013. The EXPIRE Act would extend the tax credit for QZABs for two years (through 2015) with an annual limit of $400 million. The JCT estimates the 10-year revenue loss associated with this provision to be $284 million.24 The Rebuilding America’s Schools Act (H.R. 1629; S. 1523) would make permanent the QZAB limitation amount of $1.4 billion annually, permit private entities to waive the 10% matching requirement for QZABs, and permit QZAB proceeds to be used for constructing a new public school facility in which such an academy is established. For more information on QZABs and other tax credit bonds, see CRS Report R40523, Tax Credit Bonds: Overview and Analysis, by Steven Maguire. (...continued) Construction and Renovation: A Review of Federal Programs, by Cassandria Dortch. See the “Tax Credit Bonds” section of that report for more details on the qualifications for QZAB debt instruments. 22 The credit rate is set to approximate the current taxable market rate of bonds issued with similar risk and term. Unused credit capacity can be carried forward for up to two years. 23 For a basic discussion of how tax deductions and tax credits work, see CRS Report R42872, Tax Deductions for Individuals: A Summary, by Sean Lowry. 24 U.S. Congress, Joint Committee on Taxation, Estimated Budget Effects of an Amendment in the Nature of a Substitute to H.R. 3474, the “Expiring Provisions Improvement, Reform, and Efficiency ('EXPIRE’) Act of 2014,” Scheduled for Consideration by the Senate, committee print, 113th Cong., 2nd sess., March 15, 2014, JCX-51-14 (Washington: GPO, 2014), at https://www.jct.gov/publications.html?func=startdown&id=4601. Congressional Research Service 5 Community Assistance Related “Tax Extenders”: In Brief American Samoa Economic Development Credit25 The American Samoa economy is largely dependent on three sectors: public works and government, tuna canning, and the residual private sector (e.g., tourism and other services). From 2002 to 2007, real GDP per capita in the territory decreased by 1.9%.26 Real GDP growth ranged from -2.9% to 2.1% over the same period, largely due the changes in the exports of canned tuna (which comprise 90% of the territory’s exports).27 Two shocks disrupted the economy in the following years. First, Chicken of the Sea, one of the island’s two major tuna canneries, announced in 2007 that it was laying off over 2,000 workers in American Samoa and shifting production to a labor-efficient plant in Georgia, closer to its customer base on the mainland. Second, an 8.0+ magnitude earthquake hit the island in September 2009 and generated tsunamisized waves. President Obama declared the island a disaster zone and ordered federal aid to assist with local emergency efforts.28 Real GDP in American Samoa increased by 0.5% in 2011, but decreased by 2.4% in 2012.29 Government spending on reconstruction efforts has tapered off, but private construction spending has increased as Washington state-based Tri Marine International has built a tuna cold-storage facility and is opening a new processing plant in 2014. Still, the American Samoa economy is largely dependent on exports of canned tuna. The American Samoa economic development credit (EDC) is a credit against U.S. corporate income tax in an amount equal to the sum of certain percentages of a domestic corporation’s employee wages, employee fringe benefit expenses, and tangible property depreciation allowances for the taxable year in respect of the active conduct of a trade or business within American Samoa. The credit was available only to a U.S. corporation that, among other requirements, claimed the now-expired possession tax credit (predecessor to the EDC) with respect to American Samoa for its last taxable year beginning before January 1, 2006.30 The EXPIRE Act would modify the previous version of the EDC by making a version of the credit available to all qualifying manufacturing businesses operating in the territory, not just ones that initially claimed the now-expired possession tax credit.31 This modification was requested in a letter written by Togiola Tulafono, Governor of American Samoa.32 Media reports suggest that 25 Section 119 of P.L. 109-432, as amended by Section 756 of P.L. 111-312. U.S. Department of Commerce, “The Bureau of Economic Analysis (BEA) Releases Estimates of the Major Components of Gross Domestic Product for American Samoa,” press release, May 10, 2010, at http://www.bea.gov/ newsreleases/general/terr/2010/asgdp_051010.htm. 27 Ibid. 28 Department of Homeland Security, “Federal Emergency Management Agency (FEMA): President Declares Major Disaster For Territory of American Samoa,” press release, September 29, 2009. 29 U.S. Department of Commerce, “The Bureau of Economic Analysis (BEA) Releases 2011 and 2012 Estimates of Gross Domestic Product for American Samoa,” press release, September 10, 2013, at http://www.bea.gov/ newsreleases/general/terr/2013/asgdp_090313.pdf. 30 See Section 936 of H.Rept. 109-455. 31 For more details, see U.S. Congress, Senate Committee on Finance, Report to accompany the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act of 2014, 113th Cong., 2nd sess., April 2014, p. 97. 32 Letter from Togiola Tulafono, Governor, American Samoa, to Senators Max Baucus and Orrin Hatch, Chairman and Ranking Member, U.S. Senate Committee on Finance, June 22, 2012, at http://americansamoa.gov/index.php/newsbottom/153-gov-togiola-requests-us-senate-finance-committee-for-economic-development-credit-to-include-allqualified-businesses-in-american-samoa. 26 Congressional Research Service 6 Community Assistance Related “Tax Extenders”: In Brief the main beneficiary of the EDC, thus far, has been StarKist, which has retained its cannery operations on the island.33 The current form of the EDC was first enacted in the Tax Relief and Health Care Act of 2006 (P.L. 109-432) and originally expired at the end of 2007. The provision was extended by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) through 2011 and by the American Taxpayer Relief Act of 2012 (P.L. 112-240) through 2013. The EXPIRE Act extends the EDC for two years (through 2015). The JCT estimates the 10-year revenue loss associated with this provision to be $29 million.34 Author Contact Information Sean Lowry Analyst in Public Finance slowry@crs.loc.gov, 7-9154 33 See Congressman Eni F.H. Faleomavaega (AS), “Senate Finance Committee Passes Two-Year Extension of American Samoa Economic Development Credit,” press release, April 3, 2014, at http://faleomavaega.house.gov/ media-center/press-releases/senate-finance-committee-passes-two-year-extension-of-american-samoa. 34 U.S. Congress, Joint Committee on Taxation, Estimated Budget Effects of an Amendment in the Nature of a Substitute to H.R. 3474, the “Expiring Provisions Improvement, Reform, and Efficiency ('EXPIRE’) Act of 2014,” Scheduled for Consideration by the Senate, committee print, 113th Cong., 2nd sess., March 15, 2014, JCX-51-14 (Washington: GPO, 2014), at https://www.jct.gov/publications.html?func=startdown&id=4601. Congressional Research Service 7