Order Code RS21220
May 17, 2002
CRS Report for Congress
Received through the CRS Web
Renewal Communities Initiative:
Background and Overview
Bruce K. Mulock
Specialist in Government and Business
Government and Finance Division
With the January 2002 designation of 40 areas located in some 20 states,1 the
Renewal Communities (RC) Initiative (P.L. 106-554) has taken on concrete form. The
concept of Renewal Communities, whose origins may be seen as stretching back more
than two decades, nevertheless represents a major new economic development initiative.
And, as with the Empowerment Zone/Enterprise Communities (EZ/EC) Program (P.L.
103-66) enacted in 1993, the RC Initiative combines tax credits and other provisions
designed to revive some of the nation’s more impoverished areas. In important respects,
however, the two programs employ different means to achieve similar goals. This report
will be updated as events warrant.
During most of the nation’s history, two key factors led to limited interaction
between federal and municipal governments. First, citizen expectations—and hence, the
policy responsibilities—of these entities have varied greatly. The federal government
concerned itself with such national policies as defense and international affairs, while
cities focused on providing local services. Second, there was no direct legal connection
between them. Legally, cities—as with other units of local government—are creatures
of the states. Thus, until the mid-20th century, cities interacted almost exclusively with
their states or other local governments, not with the federal government.
Beginning in the 1950s, however, the relationship between the federal government
and cities changed dramatically. Particularly since the mid-1960s, the federal government
has undertaken various initiatives designed to help revive distressed areas, e.g., the
Economic Opportunity Act of 1964 (a centerpiece of the War on Poverty), Community
Action Program, Model Cities, etc. In enacting these programs, Congress explicitly
recognized that the national government had a role to play in what are ostensibly local
economic development concerns.
A listing of the 40 RCs (28 urban and 12 rural) appears on page 6 of this report.
Congressional Research Service ˜ The Library of Congress
Both the federal government’s evolving role and its approach in helping distressed
urban communities—as well as rural areas—are exemplified by the Empowerment
Zone/Enterprise Communities (EZ/EC) program.2 Enacted by the 103rd Congress, the
EZ/EC program differs from previous efforts in several key respects, including: a
competition to determine designated areas, the autonomy given to EZs and ECs in
decision making, the promotion of so-called market-based economic development, and
the program’s comprehensiveness.
Conceptually, the EZ/EC program had its genesis with enterprise zone programs
initiated in the United Kingdom in the 1980s and subsequently championed in this
country by Jack Kemp, among others, while both a Member of the House of
Representatives and the Secretary of Housing and Urban Development during the Bush
Administration. The concept originally emphasized various tax incentives and efforts to
make it easier for private businesses to operate by eliminating such impediments as
restrictive zoning laws and certain other governmental regulations.
The Administration proposed a New Markets Initiative in June 1999 containing
many of the elements that were incorporated in the Consolidated Appropriations Act (P.L.
106-554). The Renewal Communities part of the new law, on the other hand, has roots
that run even deeper. Representative J. C. Watts introduced the forerunner of the RC
Initiative in the 104th Congress with “Save Our Children: The American Community
Renewal Act of 1996” (H.R. 3467). That legislation was much broader in scope,
including several controversial provisions dealing with school vouchers, low-income
educational opportunity scholarships, and family development accounts.
Brief Legislative History
At a joint appearance in Chicago in December 1999, President Clinton and House
of Representatives Speaker Dennis Hastert promised to work together to develop a
bipartisan legislative initiative which would provide tax credits and investment guarantees
designed to draw equity capital into some of the nation’s more impoverished areas. In
May 2000, the President and the Speaker announced an agreement on the basics of a
Renewal Communities and New Markets (RC/NM) initiative. Following two months of
negotiations over the specific language of the initiative, H.R. 4923 was introduced on July
24 and passed by the House under suspension of the rules the following day.
Two bills (S. 2779 and S. 2936) differing from each other and from H.R. 4923—but
containing similar core elements—were introduced in the Senate on June 22 and July 26,
respectively; neither received consideration. Then, on October 3, Senate Finance
Committee Chairman Senator William Roth introduced his community renewal initiative
(S. 3152), following several unsuccessful attempts to get committee members to agree to
limit amendments to his chairman’s mark.3 The 10-year, $38.7 billion proposal contained
For more information on the program, see CRS Report RS20381, Empowerment
Zone/Enterprise Communities Program: Overview of Rounds I, II, and III, by Bruce K. Mulock.
The technical explanation of S. 3152, the “Community Renewal and New Markets Act of
2000,” prepared by the staff of the Joint Committee on Taxation, is available at:
key provisions not contained in the House-approved version, as well as provisions
generally similar to those found in H.R. 4923.
Despite a threatened veto by President Clinton, on October 26 the House passed
legislation (H.R. 2614) that contained a host of far-reaching tax proposals, including a
freshly crafted Renewal Communities/New Markets initiative. The new RC/NM initiative
comprised Title VI (“Community Revitalization”) of “The Taxpayer Relief Act of 2000”
(H.R. 5542), which was added to an unrelated conference report on a nontax bill (H.R.
2614, “The Certified Development Company Program Improvement Act of 2000”) that
emerged from the House Small Business Committee.
In general, the conference agreement supported by House and Senate GOP
negotiators follows the provisions of H.R. 4923.4 A few provisions contained in S. 3152
were also included, and the negotiators added several provisions that had not been
contained in any of the previous RC/NM bills.
As the legislation moved through the Congress, some depicted the various RC/NM
bills as ones that combined various elements favored by the Clinton Administration and
congressional Republicans; it may be more accurate to say, however, these bills included
such elements. Months of negotiations and several legislative iterations did little to
achieve compromise, except both sides agreed to go forward with proposals that
contained approaches they favored, as well as ones they disliked.
On December 15, 2000, at the end of the post-election session, the 106th
Congress—as part of the Consolidated Appropriations Act (CAA) of 2001 (P.L. 106-554;
114 Stat. 2763-64)—passed the Community Renewal Tax Relief Act of 2000 (H.R.
5662).5 (The CAA also included the New Markets Venture Capital (NMVC) Program Act
of 2000, H.R. 5663.)6 President Clinton signed the legislation on December 21, 2000.
Renewal Community designations were awarded to 40 competitively selected
communities that met certain criteria demonstrating economic distress.7 The Act required
President Clinton, in an October 26, 2000 letter to Speaker Hastert, wrote that he could not
support the final version of the tax bill (H.R. 2614) because it was “a partisan legislative
package” developed “without any consultation with me or congressional Democrats.”
Provisions dealing with Empowerment Zones were included in H.R. 5662, the Community
Renewal Tax Relief Act of 2000, as enacted into law by Section 1(a)(7) of H.R. 4577.
NMVC program provisions were included in H.R. 5663, as enacted into law by Section 1(a)(8)
of H.R. 4577.
In order for an area to be designated as a renewal community, state and local governments were
required to submit a written course of action in which the state and local governments promised
to take at least four of the following governmental actions within the nominated area: (1) a
reduction of tax rates or fees; (2) an increase in the level of efficiency of local services; (3) crime
that at least 12 of the RCs be in rural areas. Unlike the EZ/EC program competition,
however, designations as renewal communities were based on a ranking of three
eligibility factors, with those areas having the highest average ranking winning
The Secretary of HUD was required to publish regulations describing the nomination
and selection process by April 21, 2001. Designations of RCs were to be announced no
later than December 31, 2001; in fact, however, the designation announcements were
completed on January 24, 2002. The designation of an area as an RC generally will be
effective through December 31, 2009.
To win designation, a nominated area was required to meet the following criteria:
(1) each census tract had a poverty rate of at least 20 %; (2) in the case of an urban area,
at least 70 % of households had incomes below 80 % of the median income of households
within the local government jurisdiction; (3) the unemployment rate was at least 1.5 times
the national unemployment rate; and (4) the area was one of pervasive poverty,
unemployment, and general distress. Those areas with the highest average ranking of
eligibility factors (1), (2), and (3) above were designated as RCs.
There were no geographic size limitations placed on RCs. Instead, the boundary of
an RC had to be contiguous. In addition, the RC had to have a minimum population of
4,000 if the community was located within a metropolitan statistical area (at least 1,000
in all other cases), and a maximum population of not more than 200,000. The population
limitations did not apply to any RC that was entirely within an Indian reservation.
Empowerment Zones and Enterprise Communities seeking designation were given
preference. Specifically, with respect to the first 20 designations of nominated areas as
RCs, preference was given to nominated areas that were EZs or ECs and that otherwise
met the requirements for an RC. An EZ or EC could apply for designation as an RC; in
instances where RC designations were granted, EZ and EC designations ceased.9
The 2000 Community Renewal Tax Relief Act established the Renewal Community
Initiative, which was designed to encourage public-private collaboration to generate
economic development in 40 distressed communities. These newly designated RCs can
take advantage of federal wage credits, tax deductions, capital gains exclusions, and bond
reduction strategies; (4) actions to remove or streamline governmental requirements; (5)
involvement by private entities and community groups, such as to provide jobs and job training
and financial assistance; and, (6) the gift (or sale below fair market value) of surplus realty by
the state or local government to community organizations or private companies.
In the EZ/EC program, designations were based on the quality of the areas “strategic plans,”
the areas having met minimum thresholds for poverty and unemployment.
By the same token, the Secretaries of HUD and Agriculture are authorized to designate a
replacement EZ or EC for each EZ or EC that becomes an RC. The replacement EZ or EC will
be required to have substantially the same urban or rural character as the EZ or EC that it is
financing to stimulate economic development and job growth. Each incentive is tailored
to meet the particular needs of a business and offers a significant inducement for
companies to locate and hire additional workers.
Wage credits are especially attractive to businesses looking to grow.
These businesses are able to hire and retain Renewal Community
residents and apply the credits against their federal tax liability.
Businesses operating in an RC will enjoy up to a $1,500 federal credit for
every newly hired or existing employee who lives and works in the RC.
Work Opportunity Credits provide businesses in a Renewal Community
with up to $2,400 against their federal tax liability for each employee
hired from groups with traditionally high unemployment rates or other
special employment needs, including youth who live in the RC.
Welfare to Work Credits offer RC businesses a two-year federal credit of
up to $3,500 for the first year, and $5,000 for the second year, for each
newly hired long-term welfare recipient.
Commercial Revitalization Deductions permit a state with one or more
RCs to allocate up to $12 million in deductions per RC per year (not
more than $10 million per project) for commercial or industrial buildings
developed in the RCs. Businesses that construct or rehabilitate
commercial property in RCs can deduct a portion of the costs over a
shorter period of time than permitted under standard depreciation rules.
Section 179 Deductions under the tax code allow a qualified Renewal
Community business to expense up to $35,000 of additional qualified
property such as equipment and machinery acquired each year during the
period of the RC designation, 2002 through 2009.
Environmental Cleanup Cost Deductions allow businesses to deduct
qualified cleanup costs in Brownfields.
Capital Gains Exclusions
Zero Percent Capital Gains Rate applies to an interest in, or property of,
certain businesses operating in a Renewal Community, if the asset is
acquired during the period of the RC designation and held for at least five
Qualified Zone Academy Bonds allow state and local governments to
match no-interest loans with private funding sources to finance public
school renovations and programs.10
For more information, see CRS Report RS20606, Qualified Zone Academy Bonds: A
Like all distressed communities, Renewal Communities will also be able
to take advantage of the New Markets Tax Credits that provide investors
with a credit against their federal taxes of 5 to 6 % of the amount
invested in a distressed area. Also available to Renewal Communities is
the Low-Income Housing Tax Credit11 providing credit against federal
taxes for owners of newly constructed or renovated rental housing.
Designated Renewal Communities
Black Belt Counties, AL
New Orleans, LA
Niagara Falls, NY
Orange Cove, CA
Ouachita Parish, LA
Corpus Christi, TX
El Paso, TX
San Diego, CA
San Francisco, CA
Greene-Sumter County, AL
Turtle Mountain Band of Chippewa, ND
West Central Mississippi
Los Angeles, CA
Description of Tax Credit Bonds, by Steven Maguire.
For more information, see CRS Report RL30916, Housing Issues in the 107th Congress, by
Richard E. Bourdon.