oversight

Community Development: Limited Information on the Use and Effectiveness of Tax Expenditures Could Be Mitigated through Congressional Attention

Published by the Government Accountability Office on 2012-02-29.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States Government Accountability Office

GAO             Report to Congressional Requesters




February 2012
                COMMUNITY
                DEVELOPMENT
                Limited Information
                on the Use and
                Effectiveness of Tax
                Expenditures Could
                Be Mitigated through
                Congressional
                Attention




GAO-12-262
                                               February 2012

                                               COMMUNITY DEVELOPMENT
                                               Limited Information on the Use and Effectiveness of
                                               Tax Expenditures Could Be Mitigated through
                                               Congressional Attention
Highlights of GAO-12-262, a report to
congressional requesters




Why GAO Did This Study                         What GAO Found
Tax expenditures—exclusions, credits,          GAO identified 23 community development tax expenditures available in fiscal
deductions, deferrals, and preferential        year 2010. For example, five ($1.5 billion) targeted economically distressed
tax rates—are one tool the government          areas, and nine ($8.7 billion) supported specific activities such as rehabilitating
uses to promote community                      structures for business use. The design of each community development tax
development. Multiple tax expenditures         expenditure appears to overlap with that of at least one other tax expenditure in
contribute to community development.           terms of the areas or activities funded. Federal tax laws and regulations permit
                                               use of multiple tax expenditures or tax expenditures with other federal spending
GAO (1) identified community
development tax expenditures and               programs, but often with limits. For instance, employers cannot claim more than
potential overlap and interactions             one employment tax credit for the same wages paid to an individual. Besides
among them; (2) assessed the data              IRS, administering many community development tax expenditures involves
and performance measures available             other federal agencies as well as state and local governments. For example, the
and used to assess their performance;          National Park Service oversees preservation standards for the 20 percent historic
and (3) determined what previous               rehabilitation tax credit. Fragmented administration and program overlap can
studies have found about selected tax          result in administrative burden, such as applications to multiple federal agencies
expenditures’ performance.                     to fund the needs of a distressed area or finance a specific project.
GAO identified community                       Limited data and measures are available to assess community development tax
development activities using criteria          expenditures’ performance. IRS only collects information needed to administer
based on various federal sources and           the tax code or otherwise required by law, and IRS data often do not identify the
compared them with authorized uses             specific communities assisted. Other federal agencies helping administer
of tax expenditures. GAO reviewed              community development tax expenditures also collect limited information on
agency documents and interviewed               projects and associated outcomes. GAO has long recommended that the
officials from the Internal Revenue            Executive Branch improve its ability to assess tax expenditures, but little
Service (IRS) and five other agencies.         progress has been made in developing an evaluation framework. Generally,
GAO also reviewed empirical studies            neither these agencies, nor the Department of the Treasury or the Office of
for selected tax expenditures, including
                                               Management and Budget (OMB) have assessed or plan to assess community
the New Markets Tax Credit and
                                               development tax expenditures individually or as part of a crosscutting review.
Empowerment Zone program which
expired in 2011.                               The Government Performance and Results Act Modernization Act of 2010
                                               (GPRAMA) calls for a more coordinated approach to focusing on results and
What GAO Recommends                            improving performance. OMB is to select a limited number of long-term,
                                               outcome-oriented crosscutting priority goals and assess whether the relevant
Congress may wish to provide OMB               federal agencies and activities—including tax expenditures—are contributing to
guidance on whether community
                                               these goals. These assessments could help identify data needed to assess tax
development should be among OMB’s
                                               expenditures and generate evaluations of tax expenditures’ effect on community
long-term crosscutting priority goals,
stress the need for evaluations, and           development. Through related GPRAMA consultations agencies are to have with
focus attention on addressing                  Congress, Congress has a continuing opportunity to say whether it believes
community development tax                      community development should be among the limited number of
expenditure performance issues                 governmentwide goals. While community development was not on the interim
through its oversight activities. Two          priority list, Congress also can urge more evaluation and focus attention on
agencies questioned the matters for            community development performance issues through oversight activities.
congressional consideration or
                                               In part due to data and methodological limitations, previous studies have not
findings. GAO believes its analysis and
                                               produced definitive results about the effectiveness of the New Markets Tax
matters remain valid as discussed in
the report.
                                               Credit, Empowerment Zone tax incentives, historic rehabilitation tax credits, and
                                               tax aid for certain disaster areas. A key methodological challenge is
                                               demonstrating a causal relationship between community development efforts and
View GAO-12-262. For more information,         economic growth in a specific community. As a result, policymakers have limited
contact Michael Brostek at (202) 512-9110 or
brostekm@gao.gov.
                                               information about the tax expenditures reviewed, including those that expired
                                               after 2011, and ways to increase effectiveness.
                                                                                       United States Government Accountability Office
Contents


Letter                                                                                     1
               Background                                                                  5
               Overlap Exists in the Design of Community Development Tax
                 Expenditures                                                              7
               Limited Information and Measures Are Available to Assess the
                 Performance of Community Development Tax Expenditures                   26
               Previous Studies Provide Limited Information on the Effectiveness
                 of Select Tax Expenditures in Promoting Community
                 Development                                                             40
               Conclusions                                                               48
               Matters for Congressional Consideration                                   49
               Agency Comments and Our Evaluation                                        49

Appendix I     Objectives, Scope, and Methodology                                        55
               Identification of Community Development Tax Expenditures and
                 Interactions                                                            55
               Tax Expenditure Information and Performance Measures                      64
               Previous Studies of Selected Tax Expenditures                             65

Appendix II    Universe of Community Development Tax Expenditures and Estimates of
               Revenue Losses and Outlays for Fiscal Year 2010                   67



Appendix III   Multiple Tax Expenditures Fund Community Development, Fiscal Year
               2010                                                              71



Appendix IV    Community Development Tax Expenditures by Description, and Targeted
               Geographies and Populations                                       73



Appendix V     Community Development Tax Expenditures by Volume Caps, Other
               Allocation Limits, and Administration                                     82




               Page i                       GAO-12-262 Community Development Tax Expenditures
Appendix VI            Tax Provisions and Special Rules Available for Disaster Relief and
                       Recovery in Specific Presidentially Declared Disaster Areas               93



Appendix VII           Potential Duplication, Overlap, and Fragmentation among Economic
                       Development Spending Programs                                            113



Appendix VIII          Comments from the Department of the Treasury                             115



Appendix IX            GAO Contact and Staff Acknowledgments                                    118



Bibliography                                                                                    119



Related GAO Products                                                                            122



Tables
                       Table 1: Four Tax Expenditures Promoting Community
                                Development in Distressed Areas Resemble Grants with an
                                Entity Selecting Who Receives the Limited Allocation
                                Available                                                        12
                       Table 2: Tax Expenditures Supporting Community Development
                                and Other Mission Areas—Statutory Limits and
                                Involvement of Entities outside IRS                              17
                       Table 3: Tax Law and Regulatory Limits on Combining Community
                                Development Tax Expenditures and Federal Spending
                                Programs                                                         22
                       Table 4: Examples of IRS Data Collection and Potential Gaps and
                                Limitations in Information for Specific Community
                                Development Tax Expenditures                                     28
                       Table 5: Community Development Tax Expenditure Federal
                                Information Collection                                           31




                       Page ii                      GAO-12-262 Community Development Tax Expenditures
         Table 6: Limitations and Methodological Challenges in Evaluating
                  Select Community Development Tax Expenditures                   41
         Table 7: Summary Definition of Community Development                     56
         Table 8: List of Tax Expenditures Reported by Treasury and JCT
                  under the Community and Regional Development Budget
                  Function for Fiscal Year 2010                                   57
         Table 9: List of Tax Expenditures Reported by Treasury Outside
                  the Community and Regional Development Budget
                  Function That Support Community Development (Fiscal
                  Year 2010)                                                      59
         Table 10: Overview of Community Development Tax Expenditures
                  by Category                                                     61
         Table 11: Tax Expenditures Reported under the Community and
                  Regional Development Budget Function but Excluded
                  from Final Universe                                             62
         Table 12: Economic Development Programs by Agency                       113


Figure
         Figure 1: Multiple Tax Expenditures Fund Community
                  Development, Fiscal Year 2010                                     8




         Page iii                    GAO-12-262 Community Development Tax Expenditures
Abbreviations

AMGI              area median gross income
BAB               Build America Bond
CDBG              Community Development Block Grant
CDE               community development entity
CDFI Fund         Community Development Financial Institutions Fund
CFDA              Catalog of Federal Domestic Assistance
CIIS              Community Investment Impact System
CRA               Community Revitalization Act
CRD               Commercial Revitalization Deduction
CRS               Congressional Research Service
EPA               Environmental Protection Agency
EZ/RC             Empowerment Zones/Renewal Communities
GO Zone           Gulf Opportunity Zone
GPRAMA            Government Performance and Results Act Modernization
                  Act of 2010
HFA               housing finance agency
HUD               Department of Housing and Urban Development
IRS               Internal Revenue Service
JCT               Joint Committee on Taxation
LIHTC             Low-Income Housing Tax Credit
NMTC              New Markets Tax Credit
NPS               National Park Service
OMB               Office of Management and Budget
PART              Program Assessment Rating Tool
PERMS             Performance Measurement System
QZAB              Qualified Zone Academy Bond
RZEDB             Recovery Zone Economic Development Bond
RZFB              Recovery Zone Facility Bond
SBA               Small Business Administration
SHPO              state historic preservation office
TCAP              Tax Credit Assistance Program
USDA              U.S. Department of Agriculture

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Page iv                             GAO-12-262 Community Development Tax Expenditures
United States Government Accountability Office
Washington, DC 20548




                                   February 29, 2012

                                   Congressional Requesters

                                   Community development programs, if designed and administered
                                   efficiently and effectively, can contribute to citizens’ well-being at the least
                                   cost to taxpayers. Community development encompasses a wide range
                                   of activities, including certain economic development activities such as
                                   strategies for reducing unemployment as well as constructing roads and
                                   sewer systems to attract industry. Community development programs
                                   may also fund construction and rehabilitation of commercial structures. In
                                   addition to tens of billions of dollars annually in grants, loans, and loan
                                   guarantees, the federal government provides community development
                                   funding channeled through the tax code. As we reported in March 2011,
                                   tax expenditures—exclusions, credits, deductions, deferrals, and
                                   preferential tax rates—and the wide range of other policy tools used can
                                   contribute to mission fragmentation and program overlap. 1

                                   Federal agencies do not have a standard definition of what constitutes
                                   community or economic development. For our May 2011 report on
                                   potential overlap and fragmentation in economic development programs,
                                   we identified programs—largely in the form of grants, loan guarantees, or
                                   direct loans—using a list of nine activities most often associated with
                                   economic development. 2 Our work involving 80 economic development
                                   programs at four agencies— the Departments of Commerce (Commerce),
                                   Housing and Urban Development (HUD), and Agriculture (USDA) and the
                                   Small Business Administration (SBA)—indicates that the design of each



                                   1
                                     GAO, Opportunities to Reduce Potential Duplication in Government Programs, Save Tax
                                   Dollars, and Enhance Revenue, GAO-11-318SP (Washington, D.C.: Mar. 1, 2011). An
                                   interactive, web-based version of the report is available at
                                   http://www.gao.gov/ereport/gao-11-318SP.
                                   2
                                     GAO, Efficiency and Effectiveness of Fragmented Economic Development Programs
                                   Are Unclear, GAO-11-477R (Washington, D.C.: May 19, 2011). Economic development
                                   activities include, but are not limited to, planning and developing strategies for job creation
                                   and retention, developing new markets for existing products, building infrastructure by
                                   constructing roads and sewer systems to attract industry to undeveloped areas, and
                                   establishing business incubators to provide facilities for new businesses’ operations. For a
                                   fuller description of economic development activities, see GAO, Rural Economic
                                   Development: More Assurance Is Needed That Grant Funding Information Is Accurately
                                   Reported, GAO-06-294 (Washington, D.C.: Feb. 24, 2006).




                                   Page 1                                GAO-12-262 Community Development Tax Expenditures
of these programs appeared to overlap with that of at least one other
program in terms of the economic development activities that they are
authorized to fund. Our May 2011 work did not include tax expenditures
aimed at economic development.

Given your interest in community development and the effectiveness of
federal tax expenditures, we (1) identified tax expenditures that promote
community development and areas of potential overlap and interactions
among them, (2) assessed data and performance measures available
and used to assess performance for community development tax
expenditures, and (3) determined what previous studies have found about
the effectiveness of selected tax expenditures in promoting community
development.

To identify community development tax expenditures, we developed a list
of community development activities based on various federal sources
and compared these activities to the authorized uses of tax expenditures.
We identified community development activities from the federal budget
definition of community and regional development, the Catalog of Federal
Domestic Assistance’s descriptions of spending programs under the
community and regional development budget function, and descriptions of
allowable uses under the Community Development Block Grant program.
Finally, we identified certain tax expenditures that banks can use to meet
their community development investment tests under the Community
Reinvestment Act (CRA). 3 We compiled the tax expenditures for fiscal
year 2010 reported by the Department of the Treasury (Treasury) and the
Joint Committee on Taxation (JCT) under the community and regional
development budget function, and we included other tax expenditures
listed by Treasury that appeared to be at least partially intended to
support activities we had identified as community development activities.
We discussed our preliminary universe and selection rationale with
officials from Treasury, the Internal Revenue Service (IRS), and the Office
of Management and Budget (OMB) and other federal agencies
knowledgeable about these tax expenditures, and we refined the universe



3
 The Community Reinvestment Act (CRA) requires regulators to evaluate periodically
each insured depository institution’s record in helping meet the credit needs of its entire
community. That record is taken into account in considering an institution’s application for
deposit facilities, including mergers and acquisitions. Investing in certain community
development projects that qualify for tax incentives can help banks earn positive
consideration toward their CRA regulatory ratings.




Page 2                               GAO-12-262 Community Development Tax Expenditures
as needed. 4 For fiscal year 2010, we identified 23 community
development tax expenditures, including six legislative packages that
supported disaster relief and recovery. 5 Additionally, we used JCT and
IRS documents to identify specific tax provisions available for certain
disaster areas.

To identify areas of potential overlap among the community development
tax expenditures, we used the definitions from our March 2011 report on
duplication in government programs:

•     Overlap occurs when multiple agencies or programs have similar
      goals, similar activities or strategies to achieve them, or similar target
      beneficiaries;
•     Fragmentation refers to circumstances where multiple agencies or
      offices are involved in serving the same broad area of national need;
      and
•     Duplication occurs when two or more agencies or programs are
      engaged in the same activities or provide the same services to the
      same beneficiaries. The presence of overlap and fragmentation can
      suggest the need to look closer at the potential for unnecessary
      duplication. 6

We compiled publicly available information about each tax expenditure’s
design and implementation, including descriptions, target geographies or
beneficiaries, volume caps and other allocation limits, and roles of
agencies involved in administration. We reviewed the Internal Revenue
Code and IRS regulations to identify allowable interactions or limits on
using community development tax expenditures together; where specified
in tax law and regulations, we also identified limits on using tax




4
 These agencies included the Congressional Research Service (CRS); Community
Development Financial Institutions Fund (CDFI Fund); Department of Housing and Urban
Development (HUD); and National Park Service (NPS).
5
  Appendix II lists the 23 tax expenditures. We counted, as one tax expenditure, an entry
from the Treasury and JCT tax expenditures lists. Some tax expenditures include multiple
provisions, and in those cases, we identified the specific provisions as well. Appendix IV
details the multiple provisions available for Empowerment Zones and Renewal
Communities, and appendix VI lists multiple provisions included in the six legislative
packages supporting disaster relief and recovery.
6
    GAO-11-318SP.




Page 3                              GAO-12-262 Community Development Tax Expenditures
expenditures with other federal spending programs. 7 Based on the
information we collected and the clarifications that the agencies provided,
we determined that the tax expenditure descriptive data were sufficiently
reliable for identifying potential overlap, duplication, and fragmentation.

To determine what data and performance measures are available for
community development tax expenditures, we identified the data
elements and types of information that IRS and federal agencies collect.
We also reviewed tax forms, instructions, and other guidance and
interviewed IRS officials. For certain community development tax
expenditures where other federal agencies help with administration, we
also reviewed our prior work and interviewed and collected information
from the Community Development Financial Institutions Fund (CDFI
Fund) within Treasury; HUD; and National Park Service (NPS). We
interviewed officials and reviewed documentation from OMB, Treasury,
IRS, HUD, and NPS about efforts to assess performance for community
development tax expenditures and any crosscutting reviews of related tax
and spending programs.

To determine what is known about effectiveness for selected tax
expenditures, we selected the Empowerment Zone/Renewal Community
(EZ/RC) tax programs, the New Markets Tax Credit (NMTC), and tax
expenditures temporarily available for certain disaster areas. We selected
these because they accounted for most of the 2010 revenue loss for tax
expenditures that primarily promote community development. Some
expired as of December 31, 2011. 8 We also selected the rehabilitation tax
credits because they can be used in combination with other community
development tax expenditures. We reviewed studies with original data
analysis or empirical or peer-reviewed research that attempted to
measure impact, such as changes in poverty and unemployment. We
also summarized our prior findings about the selected tax expenditures.


7
 We did not search documentation from all federal agencies carrying out community and
economic development programs, and regulations for related spending may also
document interactions between those programs and the community development tax
expenditures.
8
  The EZ tax incentives and NMTC expired after December 31, 2011; the RC tax
incentives expired after December 31, 2009. On occasion, Congress has chosen to
extend retroactively tax provisions that have expired. For example, a law that was signed
in December of 2010, retroactively extended the EZ tax incentives which had expired on
December 31, 2009, until December 31, 2011. Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, § 753.




Page 4                              GAO-12-262 Community Development Tax Expenditures
             Findings from the studies and our prior reports are not generalizable to
             the universe of community development tax expenditures. Appendix I
             contains more details about our scope and methodology.

             We conducted this performance audit from January 2011 through
             February 2012 in accordance with generally accepted government
             auditing standards. Those standards require that we plan and perform the
             audit to obtain sufficient, appropriate evidence to provide a reasonable
             basis for our findings and conclusions based on our audit objectives. We
             believe that the evidence obtained provides a reasonable basis for our
             findings and conclusions based on our audit objectives.


             Tax expenditures are preferential provisions in the tax code, such as
Background   exemptions and exclusions from taxation, deductions, credits, deferral of
             tax liability, and preferential tax rates that result in forgone revenue for the
             federal government. The revenue that the government forgoes is viewed
             by many analysts as spending channeled through the tax system.
             However, tax expenditures and their relative contributions toward
             achieving federal missions and goals are often less visible than spending
             programs, which are subject to more systematic review. Many tax
             expenditures—similar to mandatory spending programs—are governed
             by eligibility rules and formulas that provide benefits to all those who are
             eligible and wish to participate. Tax expenditures do not compete overtly
             with other priorities in the annual budget, and spending embedded in the
             tax code is effectively funded before discretionary spending is considered.
             Tax expenditures generally are not subject to congressional
             reauthorization and, therefore, lack the opportunity for regular review of
             their effectiveness.

             We have long recommended greater scrutiny of tax expenditures. 9 Some
             tax expenditures may be ineffective at achieving their social or economic
             purposes, and information about their performance as well as periodic
             evaluations can help policymakers make more informed decisions about
             resource allocation and the most effective or least costly methods to
             deliver federal support. Performance measurement is the ongoing


             9
              See GAO, Government Performance and Accountability: Tax Expenditures Represent a
             Substantial Federal Commitment and Need to Be Reexamined, GAO-05-690
             (Washington, D.C.: Sept. 23, 2005), and Tax Policy: Tax Expenditures Deserve More
             Scrutiny, GAO/GGD/AIMD-94-122 (Washington, D.C.: June 3, 1994).




             Page 5                          GAO-12-262 Community Development Tax Expenditures
monitoring and reporting that focuses on whether programs have
achieved objectives in terms of the types and levels of activities or
outcomes of those activities. Program evaluations typically examine a
broader range of information on program performance and its context
than is feasible to monitor on an ongoing basis. A “program” may be any
activity, project, function, or policy that has an identifiable purpose or set
of objectives, including tax expenditures. In the context of community
development programs, impact evaluations can be a useful tool to assess
the net effect of a program by comparing program outcomes with an
estimate of what would have happened in the absence of the program.
This form of evaluation is employed when external factors are known to
influence the program’s outcomes, in order to isolate the program’s
contribution to achievement of its objectives. 10 Importantly, challenges in
performance measurement and evaluation are not unique to tax
expenditures as agencies have encountered difficulties in measuring the
performance of spending programs as well.

The Government Performance and Results Act (GPRA) Modernization
Act of 2010 (GPRAMA) establishes a new framework aimed at taking a
more crosscutting and integrated approach to focusing on results and
improving government performance. 11 It requires OMB, in coordination
with agencies, to develop—every 4 years—long-term, outcome-oriented
goals for a limited number of crosscutting policy areas. On an annual
basis, OMB is to provide information on how these long-term crosscutting
goals will be achieved. Most of the enhanced planning and reporting
requirements at both the governmentwide and agency levels are to be
implemented in 2012 and beyond. GPRAMA also significantly enhances
requirements for agencies to consult with Congress when establishing or
adjusting governmentwide and agency goals. OMB and agencies are to
consult with relevant committees, obtaining majority and minority views,
about proposed goals at least once every 2 years. GPRAMA makes clear
that tax expenditures are to be included in identifying the range of federal
agencies and activities that contribute to crosscutting goals. Moving
forward, effective GPRAMA implementation can help inform tough




10
  GAO, Performance Measurement and Evaluation: Definitions and Relationships,
GAO-11-646SP (Washington, D.C.: May 2, 2011).
11
  Pub. L. No. 111-352, 124 Stat. 3866 (2011). GPRAMA amends the Government
Performance and Results Act of 1993, Pub. L. No. 103-62, 107 Stat. 285 (1993).




Page 6                            GAO-12-262 Community Development Tax Expenditures
                            choices in setting priorities as government policymakers address the
                            rapidly building fiscal pressures facing our national government.



Overlap Exists in the
Design of Community
Development Tax
Expenditures
Multiple Tax Expenditures   For fiscal year 2010, we identified 23 tax expenditures that fund
Fund Community              community development activities. 12 Appendix II lists each tax
Development Activities      expenditure with information on its estimated cost, type, and taxpayer
                            group, as well as enactment and expiration dates. Five tax expenditures
                            primarily promote community development in economically distressed
                            areas, including Indian reservations; these programs cost the federal
                            government approximately $1.5 billion in fiscal year 2010. 13 Nine tax
                            expenditures both support community development and address other
                            federal mission areas, such as rehabilitating historic or environmentally
                            contaminated properties for business use as well as constructing a range
                            of transportation facilities, such as airports and docks, and water and
                            hazardous waste systems. These multipurpose tax expenditures cost the
                            federal government approximately $8.7 billion in fiscal year 2010. 14 Two
                            large state and local bond tax expenditures also may support community
                            development, although community development activities account for only
                            a portion of the total costs of those tax expenditures. Finally, the federal
                            government has periodically offered temporary tax relief following certain
                            disasters, including six packages of tax provisions focused on specific
                            areas as well as one provision available for any presidentially declared
                            disaster area. Figure 1 illustrates the mix of various tax expenditures that
                            support community development.




                            12
                                 See appendix I for details on our scope and methodology.
                            13
                                 This figure includes $1.46 billion in estimated revenue losses and $60 million in outlays.
                            14
                                 This figure includes $8.68 billion in estimated revenue losses and $10 million in outlays.




                            Page 7                                 GAO-12-262 Community Development Tax Expenditures
Interactive graphic       Figure 1: Multiple Tax Expenditures Fund Community Development, Fiscal Year 2010


                          Directions:
                          Mouse over                  buttons for additional breakdown information



               Tax relief for certain                       Tax expenditures primarily promoting community
               presidentially                               development in distressed areas:
               declared disaster                            $1.5 billion
               areas
                                                                                       Empowerment Zones and Renewal Communities: $730 million
                                                                                       Other: $70 million
                                                                                       New Markets Tax Credit: $720 million




                                                                                                                                         Infrastructure
                                                                                                                                         improvement:
                                                                                                                                         $1.5 billion


                                                                                                                     Rehabilitation of older structures:
                                                                                                                     $410 million
                                                                                                                     Brownfields development: $80 million
                                                                                                                     Affordable housing: $6.7 billion

 Tax expenditures supporting community development
 and other federal mission areas:
 $8.7 billion                                                                                                      Build            Exclusion of interest on
                                      Bond tax expenditures that may                                             America            public purpose state
                                      support community developmenta                                               Bonds               and local bonds

                            Source: GAO analysis of Treasury and Joint Committee on Taxation (JCT) information.

                            aWhile these bond tax expenditures may support community development, community development
                            	 activities account for only a portion of the bond provisions’ costs.



     Print instructions     To print full text version of this graphic, go to appendix III

                                      Page 8                                                               GAO-12-262 Community Development Tax Expenditures
Five Community Development      The federal government has five tax expenditures primarily to promote
Tax Expenditures Target         community development in economically distressed areas, such as low-
Economically Distressed Areas   income communities and Indian reservations. 15 As noted below, all but
                                one of these programs have expired. 16

                                •    The Empowerment Zones and Renewal Communities (EZ/RC)
                                     programs ($730 million in revenue losses in fiscal year 2010) were
                                     established to reduce unemployment and generate growth in
                                     economically distressed communities that were designated through a
                                     competitive process. 17 Initially, the EZ program offered a mix of grants
                                     and tax incentives for community and economic development, but
                                     later EZ rounds and the RC program offered primarily tax incentives
                                     for business development. 18 While eligibility varied slightly by program
                                     and round, the 40 EZ- and 40 RC-designated communities were
                                     selected largely on the basis of poverty and unemployment rates,
                                     population, and other area statistics based on Decennial Census
                                     data. 19 The RC tax provisions expired at the end of 2009, and the EZ
                                     tax provisions expired at the end of 2011.

                                •    The New Markets Tax Credit (NMTC) ($720 million in revenue losses
                                     in fiscal year 2010) encourages investment in impoverished, low-
                                     income communities that traditionally lack access to capital. Whereas
                                     the EZ/RC programs target designated communities, the NMTC
                                     targets Census tracts where the poverty rate is at least 20 percent or
                                     where median family incomes do not exceed 80 percent of such
                                     incomes within a state or a metropolitan area. In January 2010, we
                                     reported that 39 percent of the Census tracts qualified for the NMTC



                                15
                                   Appendix IV contains descriptions of each tax expenditure as well as information about
                                the geographies and populations targeted.
                                16
                                  We included expired tax expenditures listed by Treasury or JCT which had estimated
                                revenue losses or outlays in fiscal year 2010. See appendix II for specific expiration dates.
                                17
                                  GAO, Revitalization Programs: Empowerment Zones, Enterprise Communities, and
                                Renewal Communities, GAO-10-464R (Washington, D.C.: Mar. 12, 2010).
                                18
                                  Appendix IV lists seven EZ and six RC tax incentives available in designated
                                communities.
                                19
                                  The 40 EZs include 30 urban and 10 rural communities, and the 40 RCs include 28
                                urban and 12 rural communities. In most cases, the EZ/RC designation requirements were
                                based on 1990 Census data. The RC designations expired at the end of 2009, and the EZ
                                designations expired at the end of 2011.




                                Page 9                               GAO-12-262 Community Development Tax Expenditures
      program and 36 percent of the U.S. population lived in these Census
      tracts. 20 The NMTC expired at the end of 2011.

•     Two tax expenditures—Tribal Economic Development Bonds and
      Indian employment credit—target Indian tribal reservations. 21 Indian
      tribes are among the most economically distressed groups in the
      United States, and tribal reservations often lack basic infrastructure
      commonly found in other American communities, such as water and
      sewer systems as well as telecommunications lines. 22 Created under
      the American Recovery and Reinvestment Act of 2009 (the Recovery
      Act), the temporary bond authority ($10 million in revenue losses in
      fiscal year 2010) provided tribal governments with greater flexibility to
      use tax-exempt bonds to finance economic development projects. 23
      The $2 billion bond authority was to be allocated by February 2010,
      but Treasury and IRS have extended deadlines to reallocate unused
      bond authority. 24 The Indian employment credit expired at the end of
      2011. 25

•     The Recovery Act also created temporary Recovery Zone bonds—
      including Recovery Zone Economic Development Bonds and


20
  See GAO, New Markets Tax Credit: The Credit Helps Fund a Variety of Projects in
Low-Income Communities, but Could Be Simplified, GAO-10-334 (Washington, D.C.:
Jan. 29, 2010).
21
   The Indian reservation depreciation provision also permitted taxpayers to accelerate
their depreciation for certain property used by businesses on Indian reservations. This
provision expired at the end of 2011. While the Indian reservation depreciation provision
supported community development, we did not include the provision in the universe
because it is not listed in either the Treasury or JCT tax expenditure lists we reviewed. For
more information on the provision, see GAO, Tax Expenditures: Available Data Are
Insufficient to Determine the Use and Impact of Indian Reservation Depreciation,
GAO-08-731 (Washington, D.C.: June 26, 2008).
22
  See GAO, Telecommunications: Challenges to Assessing and Improving
Telecommunications For Native Americans on Tribal Lands, GAO-06-189 (Washington,
D.C.: Jan. 11, 2006).
23
  We previously reported on restrictions on Indian tribal governments’ use of tax-exempt
bonds; see GAO, Federal Tax Policy: Information on Selected Capital Facilities Related to
the Essential Governmental Function Test, GAO-06-1082 (Washington, D.C.: Sept. 13,
2006).
24
   According to Treasury, tribal bonds issued as of November 2011 represented less than
3 percent of the available authority.
25
     JCT estimated fiscal year 2010 revenue losses were less than $50 million.




Page 10                               GAO-12-262 Community Development Tax Expenditures
     Recovery Zone Facility Bonds allocated among the states and
     counties and large municipalities within the states based on
     unemployment losses in 2008. These bond authorities ($60 million in
     outlays in fiscal year 2010) expired at the end of 2010.

Four of the five community development tax expenditures targeted to
economically distressed areas have a statutory limit, such as a specified
number of community designations, volume cap, or allocation amount, as
shown in table 1. Although the allocation processes varied, these tax
expenditures resemble grants in that an agency—either a federal agency
or a state or local government—selects the qualifying communities,
community development entities (CDE), or projects to receive the limited
allocation available. 26

•    For the EZ/RC program, communities nominated by their state and
     local governments had to submit a strategic plan showing how they
     would meet key EZ program principles or a written “course of action”
     with commitments to carry out specific legislatively mandated RC
     activities. In selecting the designated communities, HUD and USDA
     were required to rank EZ nominees based on the effectiveness of
     their plans, but HUD was required to designate RCs based in part on
     poverty, unemployment, and, in urban areas, income statistics. 27 For
     designated EZs and RCs, state and local governments were
     responsible for allocating certain tax provisions with specified limits,
     including the RC Commercial Revitalization Deduction and EZ Facility
     bonds.

•    For the NMTC program, the annual tax credit allocation limit was $3.5
     billion for fiscal years 2010 and 2011. The CDFI Fund awards tax
     credit allocations to winning CDE applicants based on application
     scoring by peer review panels. The CDEs, in turn, invest in qualified
     low-income community investments. As of November 1, 2011, the
     CDFI Fund had allocated $29.5 billion in NMTC authority available
     from 2001 to 2010 and announced $3.6 billion in 2011 tax credit
     allocations on February 23, 2012.



26
   See appendix V for details on volume caps and other allocation limits, and federal and
non-federal entities involved in the administration of the tax expenditures.
27
  For more on the selection process, see GAO, Community Development: Federal
Revitalization Programs Are Being Implemented, but Data on the Use of Tax Benefits Are
Limited, GAO-04-306 (Washington, D.C.: Mar. 5, 2004).




Page 11                             GAO-12-262 Community Development Tax Expenditures
                                       •     For the Recovery Zone bond programs, the national volume cap was
                                             $10 billion for Recovery Zone Economic Development Bonds and $15
                                             billion for Recovery Zone Facility Bonds. State and local governments
                                             were responsible for allocating bond issuance authority to specific
                                             projects. Tribal Economic Development Bonds had a national volume
                                             cap of $2 billion. Tribal governments applied for allocations to issue
                                             bonds for specific projects.

Table 1: Four Tax Expenditures Promoting Community Development in Distressed Areas Resemble Grants with an Entity
Selecting Who Receives the Limited Allocation Available

                                                               Volume caps or           Involvement of
                                                               other allocation         federal entities         Involvement of
Tax expenditure                                                limits?                  outside IRS?             nonfederal entities?
                                                                     a
Empowerment Zones and Renewal Communities (EZ/RC)              Yes                      Yes                      Yes
New Markets Tax Credit (NMTC)                                  Yes                      Yes                      Yes
                    b
Recovery Zone bonds                                            Yes                      Yes                      Yes
Tribal Economic Development Bonds                              Yes                      Yes                      Yes
Indian employment credit                                       No                       No                       No
                                       Source: GAO analysis.

                                       Note: See appendix V for more information on volume caps or other allocation limits for each tax
                                       expenditure, as well as involvement of federal and nonfederal entities in administering such tax
                                       expenditures.
                                       a
                                        EZ/RC program had limits on the numbers of community designations. Certain EZ/RC tax incentives
                                       also had volume caps or allocation limits: the Commercial Revitalization Deduction (RC), Facility
                                       Bond (EZ), and Qualified Zone Academy Bond (EZ/RC).
                                       b
                                       Includes Recovery Zone Economic Development Bonds and Recovery Zone Facility Bonds.


                                       Other tax expenditures available in economically distressed communities
                                       are comparable to entitlement programs for which spending is determined
                                       by statutory rules for eligibility, benefit formulas, and other parameters
                                       rather than by Congress appropriating specific dollar amounts each
                                       year. 28 Such tax expenditures typically make funds (through reduced
                                       taxes) available to all qualified claimants, regardless of how many
                                       taxpayers claim the tax expenditures, how much they claim collectively, or
                                       how much federal revenue is reduced by these claims. For example,
                                       businesses may claim Indian employment tax credits for employing Indian
                                       tribal members and their spouses without limit on the numbers or total


                                       28
                                          Entitlement statutes provide the authority to make payments to any person or
                                       government if, under the provisions of the law containing that authority, the United States
                                       is obligated to make such payments to persons or governments who meet the
                                       requirements established by that law.




                                       Page 12                                    GAO-12-262 Community Development Tax Expenditures
                        amounts of claims. Similarly, businesses located in EZs and RCs may
                        claim the EZ/RC Employment Credit and the Work Opportunity Tax Credit
                        for employing eligible residents within an EZ or RC area without an
                        aggregate limit on such tax credits. 29

Some Tax Expenditures   The tax expenditures that promote community development as well as
Support Community       other federal mission areas—such as producing affordable housing or
Development and Other   redeveloping brownfields 30—all fund certain types of properties and
Federal Mission Areas   infrastructure, as illustrated above in figure 1. Seven of these tax
                        expenditures have no expiration date and thus are not subject to regular
                        reauthorization. 31

                        •    Four tax expenditures contribute to community development by
                             revitalizing certain properties for business use. Two tax incentives are
                             available for rehabilitating older structures—a tax credit applied to 20
                             percent of eligible costs for rehabilitating certified historic structures
                             and a tax credit applied to 10 percent of eligible costs for rehabilitating
                             other structures built before 1936. 32 Two brownfields tax expenditures
                             were intended to reduce costs to clean up environmentally damaged
                             property. The exclusion of gain or loss on the sale or exchange of
                             certain brownfield sites reduces the cost of remediating and reselling
                             brownfields by tax-exempt organizations. The expensing of
                             environmental remediation costs subsidizes environmental cleanup
                             costs and may help revitalize areas depressed due to environmental
                             contamination. The exclusion of gain or loss on the sale or exchange
                             of certain brownfield sites applies only to properties acquired by the


                        29
                            Businesses may claim up to $3,000 or $1,500 of employment credits for each employee
                        living and working for the employer in an EZ or RC area, respectively. Also, businesses
                        may claim a Work Opportunity Tax Credit of up to $2,400 for each new employee age 18
                        to 39 living in an EZ or RC area, or up to $1,200 for a youth summer hire. These two tax
                        credits cannot be claimed together for the same employee. The aggregate value of these
                        credits taken by taxpayers is not limited.
                        30
                           The term "brownfield site" means 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.
                        31
                          See appendix II for estimated costs, types, and taxpayer groups for individual tax
                        provisions, as well as enactment and expiration dates.
                        32
                           Both tax credits cannot be claimed for a single rehabilitation project. Eligible
                        expenditures include costs incurred for rehabilitation and reconstruction of certain older
                        buildings. Rehabilitation includes renovation, restoration, and reconstruction and does not
                        include expansion or new construction.




                        Page 13                             GAO-12-262 Community Development Tax Expenditures
     end of 2009, and the expensing of environmental remediation costs
     expired at the end of 2011. 33

•    Two tax expenditures fund production of affordable rental housing for
     low-income households—the Low-Income Housing Tax Credit
     (LIHTC) and tax-exempt rental housing bonds. Under the LIHTC, a 9
     percent tax credit is available for new construction or substantial
     rehabilitation projects not otherwise subsidized by the federal
     government, and a 4 percent tax credit is available for the projects
     receiving other federal subsidies including rental bond financing. 34
     Affordable housing projects must satisfy one of two income-targeting
     requirements: 40 percent or more of the units must be occupied by
     households whose incomes are 60 percent or less of the area median
     gross income, or 20 percent or more of the units are occupied by
     households whose incomes are 50 percent or less of the area median
     gross income. For fiscal year 2010, two grant programs also helped
     provide gap financing for LIHTC housing development following
     disruption of the tax credit market in 2008. 35

Federally tax-exempt and tax credit bonds issued by state and local
governments also contribute to community development and other federal
mission areas by financing infrastructure improvements and other




33
   We included the expired exclusion provision because it was listed by Treasury with
estimated revenue losses in fiscal year 2010.
34
  LIHTCs are claimed annually over a 10-year period and subject to a 15-year
compliance period to avoid tax credit recapture.
35
   The Recovery Act established two temporary funding programs that provided capital
investments to LIHTC projects: (1) the Tax Credit Assistance Program (TCAP)
administered by HUD and (2) the Grants to States for Low-Income Housing Projects in
Lieu of Low-Income Housing Credits Program under Section 1602 of the Recovery Act
(Section 1602 Program) administered by Treasury. TCAP provided gap financing to be
used by state housing finance agencies (HFA) in the form of grants or loans for capital
investment in LIHTC projects that were awarded tax credits in fiscal year 2007, 2008, or
2009; project owners were to spend all TCAP funds by February 2012. Designed to be
used in lieu of tax credits, the Section 1602 Program allowed state HFAs to exchange a
portion of their 2009 ceiling (up to 100 percent of unused 2008 LIHTC and 40 percent of
their 2009 allocation) for grant funds from Treasury at the rate of 85 cents for every tax
credit dollar, and then award proceeds to finance the construction or acquisition and
rehabilitation of qualified low-income buildings.




Page 14                              GAO-12-262 Community Development Tax Expenditures
projects. 36 For example, state and local governments may issue private
activity bonds to finance airports, docks, and other transportation
infrastructure; large business projects tied to the employment of residents
in Empowerment Zones; and water or wastewater facilities that enable
communities to meet community facilities needs and support
development. 37 Qualified Zone Academy Bonds (QZAB)—the authority for
which expired at the end of 2011—may be used for renovating school
facilities, purchasing equipment, developing course materials, or training
personnel at qualified public schools in economically distressed areas
including designated EZs or RCs. 38 Whereas private activity bonds are
used to support specific private activities and facilities often intended to
generate economic development, state and local governments may also
issue tax-exempt public-purpose state and local bonds and Build America
Bonds (BAB) to help finance public infrastructure and facilities. 39 In 2008,
we reported that a majority of state and local bonds issued in 2006 were
allocated for education or general purposes; for the latter category, it was
not clear what activities or facilities were funded by the bonds. 40 Given
that community development activities comprise only a portion of
governmental bonds, we did not sum the revenue losses for the two



36
   In the case of tax-exempt bonds, investors are allowed to exclude interest earned on
the bonds from their federal taxable income during each year that they receive interest
payments. The tax exemption lowers the bond issuer’s borrowing costs and may provide
equivalent or higher after-tax yields to investors than alternative investments that are not
tax-exempt. For tax credit bonds, investors receive a tax credit or direct reduction in tax
liability, equal to a percentage of the bond’s face value for a certain number of years.
Issuers may also have the option to receive a direct payment from the U.S. Treasury of
equal value to the tax credit.
37
   Private activity bonds can be either taxable or tax-exempt. For example, interest paid
on bonds can qualify as tax-exempt if the bonds are used by 501(c)(3) nonprofit
organizations or by governmental authorities specifically established to support qualified
private activities, such as airports, docks, wharves, and other facilities often intended to
generate economic development.
38
   Schools are also eligible for QZABs if 35 percent or more of students are eligible for
free or reduced-price school meals. No allocation of QZAB tax credits is permitted after
2011, though claimants are allowed to carry forward the provisions for 2 years.
39
    BABs were enacted under the American Recovery and Reinvestment Act of 2009, and
the authority to issue BABs expired at the end of 2010. We included this tax expenditure
listed by Treasury and JCT because it had estimated outlays in fiscal year 2010.
40
  See GAO, Tax Policy: Tax-Exempt Status of Certain Bonds Merits Reconsideration,
and Apparent Noncompliance with Issuance Cost Limitations Should Be Addressed,
GAO-08-364 (Washington, D.C.: Feb. 15, 2008).




Page 15                              GAO-12-262 Community Development Tax Expenditures
general bond provisions to avoid overstating federal support for
community development.

As shown in table 2, all of the multipurpose community development tax
expenditures involve other entities in addition to IRS in administering the
tax benefits. 41 Five multipurpose tax expenditures resemble grants in that
state and local governments oversee the allocation process to select
qualifying projects to receive the limited allocation available. For the
LIHTC for example, state housing finance agencies (HFA) award 9
percent credits to developers for low-income housing projects based on
each state’s qualified allocation plan, which generally establishes a
state’s funding priorities and selection criteria. Although the federal
government does not set specific limits for general-purpose state and
local bonds and BABs, private activity bond financing—including for rental
housing and water systems—is generally subject to an annual volume
cap for each state, and QZABs and bond financing for certain
transportation facilities also have statutory allocation limits. 42




41
  See appendix V for a list of volume caps and other allocation limits, and federal and
nonfederal entities involved in the administration of the tax expenditure provisions.
42
   For 2010, the private activity bond volume cap for each state was equal to the greater
of $90 per capita or about $273.8 million.




Page 16                             GAO-12-262 Community Development Tax Expenditures
Table 2: Tax Expenditures Supporting Community Development and Other Mission Areas—Statutory Limits and Involvement
of Entities outside IRS

                                                                                       Volume caps
                                                                                       or other              Involvement of         Involvement of
                                                                                       allocation            federal entities       nonfederal
Tax expenditure                                                                        limits?               outside IRS?           entities?
                                                                                                                  a
Low-Income Housing Tax Credit (LIHTC)                                                   Yes                  No                     Yes
20 percent credit for rehabilitation of historic structures                            No                    Yes                    Yes
10 percent credit for rehabilitation of structures (other than historic)               No                    Yes                    Yes
                                                                                                                      b
Exclusion of gain or loss on sale or exchange of certain brownfield sites              No                    Yes                    Yes
                                                                                                                      b
Expensing of environmental remediation costs                                           No                    Yes                    Yes
                                                                                              c
Exclusion of interest on rental housing bonds                                           Yes                  No                     Yes
                                                                                              d
Exclusion of interest for airport, dock, and similar bonds                             Yes                   No                     Yes
                                                                                              c
Exclusion of interest on bonds for water, sewage, and hazardous waste                   Yes                  No                     Yes
facilities
Credit for holders of qualified zone academy bonds (QZAB)                               Yes                  Yes                    Yes
Exclusion of interest on public purpose State and local bonds                          No                    No                     Yes
Build America Bonds                                                                     No                   No                     Yes
                                                Source: GAO analysis.

                                                Notes: See appendix V for more information on volume caps or other allocation limits for each tax
                                                expenditure, as well as involvement of federal and nonfederal entities in administering such tax
                                                expenditures.
                                                a
                                                 While no federal entity besides IRS is responsible for administering the LIHTC, HUD maintains a
                                                LIHTC database with information on the number of units and low-income units, number of bedrooms,
                                                year the credit was allocated, year the project was placed in service, whether the project was new
                                                construction or rehabilitation, type of credit provided, and other sources of project financing.
                                                b
                                                 EPA maintains a National Priority List of properties; such listed properties are ineligible for the tax
                                                incentive.
                                                c
                                                 Subject to private activity bond annual volume cap for each state.
                                                d
                                                 Limits varied for specific facilities. Bonds for the construction of mass commuting facilities, and 25
                                                percent of bond issues for privately owned intercity rail facilities, are included in the private activity
                                                bond annual state volume cap (government-owned facilities are exempted). Bonds for airports, docks
                                                and wharves are not subject to the private-activity bond volume cap or other restrictions.


                                                The rehabilitation and brownfields tax expenditures resemble entitlement
                                                programs in that these tax incentives have no allocation limits and are
                                                available to all eligible claimants. In addition to IRS’s role in administering
                                                tax law, other federal and state agencies play a role in certifying that the
                                                properties are eligible for tax benefits. For the 20 percent rehabilitation tax
                                                credit for certified historic structures, the NPS, with the assistance of
                                                State Historic Preservation Offices, certifies historic structures, approves
                                                rehabilitation applications, and confirms that completed rehabilitation
                                                projects meet the Secretary of Interior’s Standards of Rehabilitation. For




                                                Page 17                                    GAO-12-262 Community Development Tax Expenditures
                                the brownfields tax expenditures, state environmental agencies certify
                                eligible properties.

Temporary Tax Relief Provided   The federal government has offered various mixes of temporary tax
for Certain Disaster Areas      incentives and special rules to stimulate business recovery and provide
                                relief to individuals after certain major disasters. 43 See appendix VI for a
                                detailed list of 45 tax benefits made available for specific disaster areas. 44
                                Business recovery is a key element of a community’s recovery after a
                                major disaster. To assist New York in recovering from the September 11,
                                2001, terrorist attacks, Congress passed a 2002 package with seven tax
                                benefits targeted to the Liberty Zone in lower Manhattan. 45 In the
                                aftermath of the 2005 Gulf Coast hurricanes, Congress enacted the Gulf
                                Opportunity Zone Act of 2005 (GO Zone Act) offering 33 tax benefits in
                                part to promote business recovery and provide debt relief for states. 46 A
                                2007 Kansas disaster relief package provided 13 tax benefits for 24
                                counties in Kansas affected by storms and tornadoes that began on May
                                4, 2007. 47 A 2008 midwest disaster relief package targeted 26 tax
                                benefits for selected counties in 10 states affected by tornadoes, severe
                                storms, and flooding from May 20 through July 31, 2008. 48 Also in 2008,
                                Congress enacted a package offering eight tax benefits available to any




                                43
                                   Some tax expenditures are regularly available for losses attributable to disasters.
                                Whereas net operating losses are typically carried back 2 years or carried forward 20
                                years, small businesses and farming businesses may carry back casualty losses
                                attributable to presidentially declared disasters for 3 years. Additionally, taxpayers
                                generally may claim itemized deductions for casualty or theft losses exceeding $100 per
                                event and 10 percent of adjusted gross income.
                                44
                                  Appendix II has revenue loss estimates for the disaster tax expenditures for fiscal year
                                2010. Revenue loss estimates are based on data about tax benefits claimed. Appendix VI
                                has revenue estimates for each disaster package as projected at time of enactment.
                                Revenue estimates were based on projections of taxpayer use of tax benefits available,
                                and actual use of some provisions may have been lower than anticipated at time of
                                enactment.
                                45
                                     Job Creation and Worker Assistance Act of 2002 (Pub. L. No. 107-147, 116 Stat. 21).
                                46
                                  Pub. L. No. 109-135, 119 Stat. 2577 (Dec. 21, 2005). The Katrina Emergency Tax
                                Relief Act of 2005 (Pub. L. No. 109-73, 119 Stat. 126), enacted in August 2005, initially
                                provided 19 tax incentives for the Hurricane Katrina disaster area.
                                47
                                     Food, Conservation, and Energy Act of 2008 (Pub. L. No. 110-246, 122 Stat. 1651).
                                48
                                  Tax Extenders and the Alternative Minimum Tax Relief Act of 2008 (Div. C of Pub. L.
                                No. 110-343, 122 Stat. 3861).




                                Page 18                              GAO-12-262 Community Development Tax Expenditures
                            individual or business located in any presidentially declared disaster area
                            during calendar years 2008 and 2009.

                            The preponderance of the disaster tax incentives offered in the six
                            legislative packages we examined were modifications of existing tax
                            expenditures, including increased allocations for the NMTC, LIHTC,
                            rehabilitation tax credits, and tax-exempt bond financing. 49 Several tax
                            packages have offered accelerated first-year depreciation allowing
                            businesses to more quickly deduct costs of qualified property, as well as
                            partial expensing for qualified disaster cleanup and environmental
                            remediation costs. Other tax incentives available for individuals in disaster
                            areas included increased tax credits for higher education expenses and
                            relief from the additional 10 percent tax on early withdrawals of retirement
                            funds. An eligible disaster area may encompass communities that were
                            economically distressed before the disaster as well as other communities,
                            and taxpayers in the qualified area may be eligible for some tax
                            incentives even if they did not necessarily sustain losses in the disaster.
                            For those disaster tax incentives available to individuals and businesses
                            as long as they meet specified federal requirements, the full cost to the
                            federal government depends on how many taxpayers claim the provisions
                            on their tax returns.


Community Development       For community development, tax expenditures are not necessarily an
Tax Expenditures Overlap    either/or alternative, and they may be combined to support certain
in Design with Some         community development activities. The design of each community
                            development tax expenditure we reviewed appears to overlap with that of
Limits on Combining         at least one other tax expenditure, as the following examples illustrate.
Multiple Tax and Spending
Programs                    •    Five tax expenditures targeted similar geography—economically
                                 distressed areas including tribal areas—although the specific areas
                                 served varied. Within the EZ- and RC-designated communities, a
                                 variety of tax incentives were available to help reduce unemployment
                                 and stimulate business activity.




                            49
                               We did not sum disaster revenue loss estimates to avoid double-counting amounts
                            already included in estimates for specific tax expenditures.




                            Page 19                           GAO-12-262 Community Development Tax Expenditures
•    Seven bond tax expenditures share a common goal to finance
     infrastructure development. 50 The various bond authorities are not
     necessarily duplicative in that they allow flexibility in tax-exempt bond
     financing for similar projects with different ownership characteristics.
     For example, water and sewer facilities can be financed through
     public-purpose governmental bonds if a governmental entity is the
     owner and operator or through private activity bonds if the owner and
     operator is a private business.

•    Multiple tax expenditures—including the NMTC, several EZ/RC
     incentives, as well as the rehabilitation and brownfields tax
     expenditures—can be used to fund commercial buildings. 51 Within this
     broad area of overlap, the tax expenditures are not necessarily
     duplicative in that some target certain types of buildings. The various
     tax expenditures that can be used to fund commercial buildings have
     geographic or other targets that sometimes coincide and sometimes
     do not. Therefore, for example, the 20 percent rehabilitation tax credit
     targets certified historic structures and the 10 percent rehabilitation
     credit is available for other older structures, but these eligible
     structures may or may not fall within the low-income communities
     eligible for NMTC assistance.

•    Various tax benefits made available for certain disaster areas were
     largely modifications of existing tax expenditures.
The community development tax expenditures we reviewed also may
potentially overlap with federal spending programs. As discussed above,
our May 2011 report identified overlap among 80 economic development
spending programs administered by four agencies—Commerce, HUD,
SBA, and USDA. 52 Appendix VII discusses areas of overlap among the
economic development spending programs that are similar to the areas of
community development tax expenditure overlap discussed above.


50
   Recovery Zone bonds and Tribal Economic Development Bonds target economically
distressed areas.
51
  EZ/RC provisions intended to finance costs for commercial buildings include the RC
Commercial Revitalization Deduction and EZ Facility Bonds.
52
   See GAO-11-477R. For our findings to date on overlap and fragmentation among the
53 economic development programs that support entrepreneurial efforts, see GAO, 2012
Annual Report: Opportunities to Reduce Duplication, Overlap, and Fragmentation;
Achieve Savings; and Enhance Revenue, GAO-12-342SP (Washington, D.C.: Feb. 28,
2012).




Page 20                            GAO-12-262 Community Development Tax Expenditures
Disaster tax aid may also potentially overlap with federal financial
assistance offered through disaster assistance grants and loans.



Areas of overlap with multiple tax expenditures funding the same
community development project may not represent unnecessary
duplication, in part, because some tax expenditures are designed to be
used in combination. As an example, the 4 percent LIHTC is designed to
be used in combination with rental housing bonds. In another example,
the 20 percent historic preservation tax credit may be used in combination
with other community development tax expenditures, including the NMTC
and LIHTC. Under the Housing and Economic Recovery Act of 2008,
state HFAs are allowed to consider historic preservation as a selection
factor in their qualified allocation plans to promote redeveloping historic
structures as affordable housing.

As shown in table 3, federal tax laws and regulations impose limits on
how community development tax expenditures can be combined with
each other and spending programs to fund the same individual or project.
For example, employers cannot double dip by claiming two employment
tax credits for the same wages paid to an individual. Whereas business
investors may claim accelerated depreciation for LIHTC and NMTC
projects, businesses generally may not claim accelerated depreciation for
private facilities financed with tax-preferred bonds. 53 For the rehabilitation
tax credits and brownfield tax incentives, taxpayers may not claim costs
funded by federal or state grants. Also, rehabilitation costs claimed for the
20 percent credit cannot be counted towards the adjusted basis of a
property for the purposes of calculating the amount of other federal tax
credits claimed for the same project; as a result, the effective tax savings
on using the 20 percent credit with other federal tax credits are less than
the sum of tax savings provided by each of the credits and deductions if
they could be used together without this restriction. The information on
tax law and regulatory limits listed in table 3 is not exhaustive; additional
limits may apply in other federal laws and regulations.



53
   The Internal Revenue Code requires taxpayers to use the Alternative Depreciation
System, which is straight-line depreciation with a longer recovery period, for property
financed by tax-exempt bonds as defined under 103(a). Qualified residential rental
projects which contain a certain proportion of lower-income tenants (under 142(a)(7)) are
excluded from the definition of tax-exempt bond-financed property.




Page 21                             GAO-12-262 Community Development Tax Expenditures
Table 3: Tax Law and Regulatory Limits on Combining Community Development Tax Expenditures and Federal Spending
Programs

                                    Limits on combining with other community Limits on combining with federal spending
Tax expenditure                     development federal tax provisions       programs
Tax Expenditures primarily promoting community development
Empowerment Zones and Renewal       Employers may not claim the same wages for         The EZ provisions, under the Internal
Communities (EZ/RC)                 both the EZ/RC employment credit and the           Revenue Code, allow IRS to issue regulations
                                    EZ/RC Work Opportunity Tax Credit for an           to limit EZ tax incentives in circumstances in
                                                        a
                                    individual employee.                               which such incentives, in combination with
                                                                                       benefits provided under other federal
                                                                                       programs, would result in an activity being
                                                                                       100 percent or more subsidized by the federal
                                                                                                     b
                                                                                       government.
New Markets Tax Credit (NMTC)       NMTCs cannot be used with LIHTCs for the           None identified in federal tax laws and
                                    same project.                                      regulations.
Recovery Zone bonds                 Facilities financed with the bonds are not         None identified in federal tax laws and
                                    eligible for accelerated depreciation.             regulations.
Tribal Economic Development Bonds   Facilities financed with the bonds are not         None identified in federal tax laws and
                                    eligible for accelerated depreciation.             regulations.
Indian employment credit            Employers of qualified American Indians         None identified in federal tax laws and
                                    cannot count any wages paid during the 1-       regulations.
                                    year period beginning with the day an
                                    individual begins work with the employer if any
                                    portion of those wages were taken into
                                    account for the Work Opportunity Tax Credit.




                                        Page 22                                  GAO-12-262 Community Development Tax Expenditures
                                          Limits on combining with other community Limits on combining with federal spending
Tax expenditure                           development federal tax provisions       programs
Tax expenditures supporting community development and other federal mission areas
Low-Income Housing Tax Credit             The 9 percent credit not available for a low-     A low-income housing project’s eligible basis
(LIHTC)                                   income housing project receiving other federal    does not include any costs financed with
                                          housing subsidies. The 4 percent credit is        federally-funded grants. In turn, this reduces
                                          available for projects financed with rental       the amount of LIHTCs to which an owner
                                          housing bonds.                                    would otherwise be entitled to claim.
                                          LIHTCs may not be claimed with NMTCs for          Project funding with Community Development
                                          the same project.                                 Block Grant (CDBG) loans may still be eligible
                                                                                            for 9 percent LIHTCs, without a reduction in
                                                                                            basis. Additionally, projects receiving HUD
                                                                                            HOME loans with below-market interest rates
                                                                                            may claim the 9 percent LIHTC.
                                                                                            The Recovery Act established two temporary
                                                                                            funding programs that provided capital
                                                                                            investments to LIHTC projects. The Tax
                                                                                            Credit Assistance Program (TCAP),
                                                                                            administered by HUD, provided gap financing
                                                                                            to be used by HFAs in the form of grants or
                                                                                            loans for capital investment in LIHTC projects
                                                                                            that were awarded tax credits in fiscal year
                                                                                            2007, 2008, or 2009. The Grants to States for
                                                                                            Low-Income Housing Projects in Lieu of Low-
                                                                                            Income Housing Credits Program under
                                                                                            Section 1602 of the Recovery Act (Section
                                                                                            1602 Program), administered by Treasury,
                                                                                            allowed state HFAs to exchange a portion of
                                                                                            their 2009 ceiling (up to 100 percent of
                                                                                            unused 2008 LIHTCs and 40 percent of their
                                                                                            2009 allocation) for grant funds from Treasury
                                                                                            at the rate of 85 cents for every tax credit
                                                                                            dollar, and then award proceeds to finance
                                                                                            the construction or acquisition and
                                                                                            rehabilitation of qualified low-income
                                                                                            buildings. HFAs are responsible for returning
                                                                                            funds to HUD or Treasury if a project is not
                                                                                            placed in service or fails to comply with
                                                                                            LIHTC requirements.
20 percent credit for preservation of     Costs claimed using the tax credit reduce the     Taxpayers may only claim the tax credit
historic structures                       adjusted basis of projects used for calculating   based on costs incurred by the taxpayer and
                                          other federal tax benefits, such as the LIHTC.    not from funding provided from other sources,
                                                                                            including federal or state grant programs such
                                                                                            as federal CDBG grants or state preservation
                                                                                            grants.
10 percent credit for rehabilitation of   Costs claimed using the tax credit reduce the     Taxpayers may only claim the tax credit
structures (other than historic)          adjusted basis of projects used for calculating   based on costs incurred by the taxpayer and
                                          other federal tax benefits, such as the LIHTC.    not from funding provided from other sources,
                                                                                            including federal or state grant programs such
                                                                                            as CDBG grants or state preservation grants.




                                              Page 23                               GAO-12-262 Community Development Tax Expenditures
                                           Limits on combining with other community Limits on combining with federal spending
Tax expenditure                            development federal tax provisions       programs
Exclusion of gain or loss on sale or       Not applicable.                                                 501(c) organizations may not count funding
exchange of certain brownfield sites                                                                       from federal, state, or local governments
                                                                                                           toward the minimum qualified expenditures
                                                                                                           needed to qualify for the tax exclusion.
Expensing of environmental                 Not applicable.                                                 Taxpayers may only claim the tax credit
remediation costs                                                                                          based on costs incurred by the taxpayer and
                                                                                                           not from funding provided from other sources,
                                                                                                           such as state forgivable loan and brownfield
                                                                                                           remediation grant programs.
Exclusion of interest on rental housing Rental housing bonds may not be combined                           None identified in federal tax laws and
bonds                                   with the 9 percent LIHTC for a low-income                          regulations.
                                        housing project.
Exclusion of interest for airport, dock,   Facilities financed with the bonds are not                      None identified in federal tax laws and
and similar bonds                          eligible for accelerated depreciation.                          regulations.
Exclusion of interest on bonds for         Facilities financed with the bonds are not                      None identified in federal tax laws and
water, sewage, and hazardous waste         eligible for accelerated depreciation.                          regulations.
facilities
Credit for holders of qualified zone       Facilities financed with the bonds are not                      None identified in federal tax laws and
academy bonds (QZAB)                       eligible for accelerated depreciation.                          regulations.
Exclusion of interest on public            Facilities financed with the bonds are not                      None identified in federal tax laws and
purpose state and local bonds              eligible for accelerated depreciation.                          regulations.
Build America Bonds (BAB)                  Facilities financed with the bonds are not                      None identified in federal tax laws and
                                           eligible for accelerated depreciation.                          regulations.
                                               Source: GAO analysis of Internal Revenue Code, IRS regulation, and documentation from HUD, IRS and NPS.

                                               Notes: We identified limitations in combining tax expenditures with related federal tax provisions or
                                               spending programs based on information located in the Internal Revenue Code and IRS regulations,
                                               and documentation on specific tax provisions and spending programs from federal agencies,
                                               including HUD, IRS, and NPS. Additional limitations may apply in other federal laws and regulations.
                                               There may also be limits on combining community development tax expenditures with state tax
                                               incentives or spending programs.
                                               a
                                                For example, an employer may hire an employee who qualifies for both the Work Opportunity Tax
                                               Credit and EZ employment credit and pay that employee $20,000 of wages during the year. The
                                               employer could apply the Work Opportunity Tax Credit to the first $6,000 of qualifying wages at a 40
                                               percent rate and then the EZ employment credit for the remaining $14,000 of qualifying wages at a 20
                                               percent rate.
                                               b
                                                Internal Revenue Code 1397F applies to tax-exempt bonds, EZs, and enterprise communities, and
                                               additional incentives for EZs. The regulations governing EZs implement these limitations. 26 CFR
                                               1.1394-1, 26 CFR 1.1396-1.


                                               An area of potential overlap also exists among the tax expenditures
                                               subsidizing community development activities and CRA regulatory
                                               requirements for depository institutions in helping to meet the credit




                                               Page 24                                           GAO-12-262 Community Development Tax Expenditures
needs of the communities in which they operate. 54 Banks earn positive
consideration toward their CRA regulatory ratings by investing in projects
also receiving certain tax benefits. 55 In 2007, we reported that investors
used NMTC and LIHTC to meet their CRA requirements. 56 At that time,
over 40 percent of NMTC investors reported that they used the tax credit
to remain compliant with CRA. NMTC investors using the tax credit to
meet CRA requirements also viewed it as very or somewhat important in
their decision to make the investment. Nearly half of NMTC investors we
surveyed in 2007 reported that they made other investments eligible for
LIHTC, and nearly three-quarters of those investors using both tax credits
were also required to comply with the CRA. 57

Federal community development financing is fragmented with multiple
federal agencies administering related spending programs as well as with
multiple federal, state, and local agencies helping administer certain tax
expenditures. 58 As we have previously reported, mission fragmentation
and program overlap may sometimes be necessary when the resources
and expertise of more than one agency are required to address a
complex public need. 59 For example, IRS, NPS, and state historic
preservation offices are involved in administering the 20 percent historic
preservation tax credit for rehabilitating historic structures. NPS oversees
compliance with technical standards for historic preservation, and IRS
oversees financial aspects of the tax credit. NPS and IRS have partnered



54
  We have other work ongoing to examine fragmentation and potential overlap among
federal tax, spending, and regulatory programs supporting affordable housing and
homeownership.
55
  CRA requires regulators to periodically evaluate each insured depository institution’s
record in helping meet the credit needs of its entire community. That record is taken into
account in considering an institution’s application for deposit facilities, including mergers
and acquisitions.
56
   GAO, Tax Policy: New Markets Tax Credit Appears to Increase Investment by Investors
in Low-Income Communities, but Opportunities Exist to Better Monitor Compliance,
GAO-07-296 (Washington, D.C.: Jan. 31, 2007).
57
  Investors may claim both tax credits, but the NMTC and LIHTC may not be used for the
same project.
58
   As discussed above, fragmentation refers to circumstances where multiple agencies or
offices are involved in serving the same broad area of national need.
59
  GAO, Economic Development: Multiple Federal Programs Fund Similar Economic
Development Activities, GAO/RCED/GGD-00-220 (Washington, D.C.: Sept. 29, 2000).




Page 25                               GAO-12-262 Community Development Tax Expenditures
                      with IRS providing guidance including frequently asked questions about
                      the tax credit on the NPS website. At the same time, fragmentation can
                      sometimes result in administrative burdens, duplication of efforts, and
                      inefficient use of resources. Applicants may need to apply for tax
                      expenditures and spending programs at multiple agencies to address the
                      needs of a distressed area or finance a specific project. For example,
                      owners and developers seeking to restore an historic structure for use as
                      affordable rental housing would need to apply separately to NPS for the
                      20 percent historic rehabilitation credit as well as to the state HFA for a
                      LIHTC allocation.


                      Achieving results for the nation increasingly requires that federal agencies
Limited Information   work together to identify ways to deliver results more efficiently and in a
and Measures Are      way that is consistent with limited budgetary resources. Agencies and
                      programs working collaboratively can often achieve more public value
Available to Assess   than when they work in isolation. To address the potential for overlap and
the Performance of    fragmentation among federal programs, we have previously identified
Community             collaborative practices agencies should consider implementing in order to
                      maximize the performance and results of federal programs that share
Development Tax       common outcomes. 60 These practices include defining common
Expenditures          outcomes; agreeing on roles and responsibilities for collaborative efforts;
                      establishing compatible policies and procedures; and developing
                      mechanisms to monitor, assess, and report on performance results.

                      We have previously reported that data availability has been a challenge in
                      assessing tax expenditure performance. 61 For community development
                      tax expenditures where administration is fragmented across multiple
                      agencies, coordination is essential to identify the data needed to measure
                      and assess use of the tax benefits and associated outcomes as well as
                      cost-effective means of collecting, analyzing, and reporting such data. To




                      60
                        GAO, Results-Oriented Government: Practices That Can Help Enhance and Sustain
                      Collaboration among Federal Agencies, GAO-06-15 (Washington, D.C.: Oct. 21, 2005).
                      61
                           GAO-11-318SP.




                      Page 26                           GAO-12-262 Community Development Tax Expenditures
                             the extent possible, data sharing is a way to reduce collection costs and
                             paperwork burdens imposed on the public. 62


IRS Does Not Collect Basic   In general, IRS only collects information necessary for tax administration
Information for Some         or for other purposes required by law. As a result, IRS does not collect
Community Development        basic information about the numbers of taxpayers using some community
                             development tax expenditures. 63 We have consistently reported that IRS
Tax Expenditures and Has
                             does not have data on the use of various expensing and special
Some Information for Tax     depreciation incentives available to encourage investment in EZ/RC
Credits and Bonds            communities, tribal reservations, and disaster areas. For tax credits, IRS
                             has data on the numbers of taxpayers and aggregate amounts claimed,
                             but data often do not tie use of the tax credits to specific communities.
                             Location information is critical to identifying the community where an
                             incentive is used and determining the effect of the tax benefit on local
                             economic development. For bonds, IRS collects data on the amount of
                             bonds issued and broad purpose categories for governmental bonds and
                             allowable uses for qualified private activity bonds. As we reported in
                             2008, while the information collected is useful for presenting summary
                             information, it provides only a broad picture of the facilities and activities
                             for which the bonds are used. 64 Though the information collected may be
                             sufficient for IRS to administer the tax code, it provides little information
                             for use in measuring performance. As a result, information often has not
                             been available to help Congress determine the effectiveness of some tax
                             expenditures or even identify the numbers of taxpayers using some
                             provisions. Table 4 summarizes the types of information, including
                             limitations and potential gaps, IRS collects for different types of
                             community development tax expenditures.




                             62
                               Federal tax information—tax returns and return information—are kept confidential under
                             Section 6103 of the Internal Revenue Code except as specifically authorized by Congress.
                             Section 6103 specifies what federal tax information can be disclosed, to whom, and for
                             what purposes.
                             63
                                In part because of the Paperwork Reduction Act, IRS generally avoids collecting
                             information not directly needed for tax administration because both taxpayers and IRS
                             incur costs and other burdens associated with any information-reporting requirements.
                             64
                                  GAO-08-364.




                             Page 27                            GAO-12-262 Community Development Tax Expenditures
Table 4: Examples of IRS Data Collection and Potential Gaps and Limitations in Information for Specific Community
Development Tax Expenditures

Tax expenditure                   Types of information IRS collects and examples of data limitations
NMTC                              IRS generally collects information on the number of claimants and total amounts claimed for tax
LIHTC                             credits. Additional information about specific locations and projects vary, however.
EZ/RC employment tax credits      •   For the NMTC, IRS collects information from taxpayers claiming the credit about the name
                                      and address of the CDE allocated the credit authority and date each investment was made
                                      for use in tracking the 7-year tax credit claim period. This information does not identify the
                                      locations and types of projects in which the CDE invests.
                                  •   For the LIHTC, IRS Form 8609 Part I is used by state housing finance agencies to notify IRS
                                      of a tax credit award. The form identifies the project street address, whether the project is
                                      new construction or an existing building, whether the project has tax-exempt bond financing,
                                                                                                        a
                                      as well as whether the building is in a difficult to develop area. Form 8609 Part II is used by
                                      the owner to identify when the 10-year credit period begins and the taxpayer’s elected
                                      minimum set-aside for low-income housing units in the project. The filing is a one-time
                                      submission separate from the owner’s tax return. IRS does not collect information on unit size
                                      and numbers of bedrooms that is not necessary for tax enforcement purposes.
                                  •   For EZ employment tax credits, IRS collects some information on EZ businesses’ use of tax
                                      credits for employing EZ residents. However, the data cannot be separated to show how
                                      much was claimed for specific EZ communities. In 2010, IRS noted that a change to IRS
                                      Form 8844 would require legislative direction or a formal request from an agency to obtain
                                      certain information from the form.
Deductions for depreciation and   IRS uses Form 4562 to collect information about depreciation, and taxpayers can combine
brownfields                       multiple depreciation schedules and group properties in reporting their total depreciation
                                  deduction. As a result, data are not sufficient to identify which taxpayers are using a specific
                                  depreciation incentive, the amount invested, or location of the investment.
                                  •   Available data are insufficient to identify users of special depreciation rules targeted for
                                      Indian reservations. In 2008, we suggested that Congress consider enacting additional
                                      requirements for taxpayers to report whether they are claiming the special tribal depreciation
                                      and the reservation where the property is placed in service; no action had been taken as of
                                                        b
                                      December 2011.
                                  •   As we reported previously, IRS does not have data on use of the EZ/RC increased Section
                                      179 deduction or the RC Commercial Revitalization Deduction, because taxpayers do not
                                                                                                                               c
                                      report these benefits separately from non EZ/RC depreciation items on their returns.
                                  The Brownfields Tax Incentive allows a taxpayer to fully deduct the costs of eligible environmental
                                  cleanup costs at qualified properties in the year incurred, rather than capitalizing as longer-term
                                  assets. Large and midsize corporations and partnerships separately report this deduction on
                                                 d
                                  Schedule M-3. However, smaller businesses claim this deduction as “other expenses” or “other
                                  deductions” on tax returns. IRS does not collect data to identify the numbers or location of
                                  cleanup sites.




                                          Page 28                              GAO-12-262 Community Development Tax Expenditures
Tax expenditure                     Types of information IRS collects and examples of data limitations
Liberty Zone and Gulf Opportunity IRS collects limited information on the use of temporary disaster relief tax expenditures. IRS
Zone disaster tax aid             typically uses existing forms to administer disaster relief modifications and expansions to existing
                                  tax expenditures and taxpayers do not report disaster-related benefits as separate items on their
                                  returns.
                                  •    We previously reported that for the Liberty Zone tax benefits for response and recovery to
                                       New York after the September 11, 2001, terrorist attacks, IRS did not collect or report
                                       information about the use of six of the seven tax benefits or the revenue loss associated with
                                                       e
                                       those benefits. For example, taxpayers added the amount of depreciation they were allowed
                                       under the Liberty Zone disaster allowance benefit to other depreciation expenses and
                                       reported their total depreciation expenses on their returns. Special depreciation and
                                       expensing provisions were also offered in five other disaster tax packages.
                                  •    For the rehabilitation tax credits, IRS collects information necessary for administering higher
                                       tax credit rates available in specific disaster areas. In lieu of the standard 20 percent credit
                                       rate, taxpayers may claim a 26 percent credit for rehabilitating certified historic structures
                                       located in the Gulf Opportunity and Midwest disaster zones. IRS Form 3468 has separate
                                       lines for the standard credit as well as the two zone credits.
Tax-exempt bond provisions          Bond issuers file IRS Form 8038-G for governmental bonds and Form 8038 for tax-exempt private
                                    activity bonds. These information returns provide limited information on the specific uses of
                                    funded projects.
                                    •    Form 8038-G has eight broad categories, including education, health and hospital,
                                         transportation, public safety, environment, housing, utilities, and other. Governmental bonds
                                         and private activity bonds are often used to fund a wide range of projects, and IRS data do
                                         not identify specific bond-financed projects. For example, IRS publishes statistical information
                                         about the amount of governmental bonds funding transportation, but IRS does not have
                                         information on specific improvements and communities affected.
                                    •    Form 8038 captures the numbers and amount of bonds issued by state and local
                                         governments for specific tax-exempt private activity bond provisions. However, it can be
                                         difficult to tie the bond use to specific communities. For EZ facilities bonds, if a city or state
                                         government entity with more than one EZ/EC located in its jurisdiction issues these bonds,
                                         IRS data cannot identify which EZ or EC benefited from the bond issue.
                                            Source: GAO analysis.
                                            a
                                            Difficult to develop areas, where construction, land, and utility costs are high relative to the area’s
                                            median income, are eligible for an additional credit amount.
                                            b
                                                GAO-08-731.
                                            c
                                            GAO-10-464R and GAO, Empowerment Zone and Enterprise Community Program: Improvements
                                            Occurred in Communities, but the Effect of the Program is Unclear, GAO-06-727 (Washington, D.C.:
                                            Sept. 22, 2006).
                                            d
                                             Corporations and partnerships with consolidated assets of $10 million or more that are required to
                                            file IRS Form 1120 corporate income tax return or IRS Form 1065 partnership income tax return,
                                            must also file Schedule M-3. Schedule M-3 requires companies to reconcile financial accounting net
                                            income (or loss) with taxable net income and expense and deduction items.
                                            e
                                             GAO, Tax Administration: Information is Not Available to Determine Whether $5 Billion in Liberty
                                            Zone Tax Benefits Will be Realized, GAO-03-1102 (Washington, D.C.: Sept. 30, 2003).


                                            IRS generally does not collect information on the frequency of use or
                                            types of businesses claiming tax benefits unless legislatively mandated to
                                            do so. Collecting additional data to identify users and specific properties
                                            would require changes in IRS forms and information processing
                                            procedures. To some extent, the increasing number of taxpayers filing


                                            Page 29                                   GAO-12-262 Community Development Tax Expenditures
                            electronically could make it easier for IRS to collect additional data
                            without expensive transcription costs. As we previously reported, in
                            considering additional data requirements, Congress would need to weigh
                            the need for more information with IRS’s other priorities because such
                            requirements likely would increase, to some degree, the administrative
                            costs for IRS and the compliance burden on taxpayers. 65 If policymakers
                            conclude that additional data would facilitate examining a particular tax
                            expenditure, decisions would be required on what data are needed, who
                            should provide the data, who should collect the data, how to collect the
                            data, what it would cost to collect the data, and whether the benefits of
                            collecting additional data warrant the cost of doing so.


Other Federal Agencies      Federal agencies helping administer specific community development tax
Collect Some Project Data   expenditures also collect some information on the uses and outcomes of
for Certain Community       the projects, although data limitations hamper efforts to measure
                            performance. As we have previously reported, HUD was unable to
Development Tax             validate performance information on the use of some EZ/RC incentives,
Expenditures, but           and HUD tracks only a portion of the EZ employment credits. The CDFI
Fragmented                  Fund is taking steps to collect additional information on individual NMTC
Administration of           projects. For the 20 percent historic preservation tax credit, NPS surveys
Overlapping Tax             property owners but does not verify the reliability of the data received for
Expenditures Complicates    performance measurement purposes. Table 5 provides an overview of
Efforts to Measure          the types of information that HUD, CDFI Fund, and NPS collect for the tax
                            expenditures they help administer.
Performance




                            65
                                 GAO-08-731.




                            Page 30                       GAO-12-262 Community Development Tax Expenditures
Table 5: Community Development Tax Expenditure Federal Information Collection

Agency/tax program          Data collected/performance measures
HUD                         HUD uses its Performance Measurement System (PERMS) to evaluate progress and determine
EZ/RC                       continued eligibility for each designee. Annual performance reports provide both narrative and
                            quantitative data on activities underway in EZ communities. As we previously reported, HUD collected
                            data on the use of EZ Facilities Bonds and the RC Community Revitalization Deduction from local
                            administrators allocating those tax benefits to specific projects and businesses. HUD was unable to
                            systematically validate the PERMS data they received from users of the spending and tax benefits.
                            HUD reports that the one programwide performance measure is the annual dollar amount of EZ and
                            RC employment credits claimed by sole proprietors. This measure does not capture other business
                            organizational forms, such as partnerships and corporations. Corporate tax filer data are difficult to
                            connect to specific EZs or RCs because corporations may hire EZ/RC employees in locations other
                            than their corporate tax filing address. Thus, HUD is tracking only a portion of credits used, and it is
                            not an outcome oriented performance measure that attempts to measure any benefits resulting from
                            use of the credit in a given area.
CDFI Fund                   CDFI Fund uses its Community Investment Impact System (CIIS) to collect outcome data from CDEs
NMTC                        on NMTC projects, including the number of jobs by type, projected real estate square footage,
                            numbers of rental and for sale housing units, and the capacity of educational, childcare, and
                            healthcare facilities developed using NMTC financing. CDEs used different methodologies to estimate
                            the number of jobs, and these techniques vary in their reliability. Although self-reported jobs data to
                            the CDFI Fund represents a solid step in tracking the use and accountability of federal resources, the
                            CDE data may not reliably identify the number of jobs associated with NMTC financing. As we
                            previously reported, self-reported performance information that is not reported accurately could
                            provide data that are less reliable for decision making.
                            Although the CDFI Fund collects project-level data on the self-reported estimates of outcomes, the
                            data collection method they used did not always allow them to clearly identify the estimated outcomes
                            for each individual project. According to the CDFI Fund, this problem occurred due to software
                            problems with CIIS and the agency worked with a contractor to fix these problems. In cases where
                            multiple CDEs contribute NMTC funds to the same project, the CDEs often all report outcome data on
                            the project in CIIS. Our 2010 analysis indicated that this occurred for about 18 percent of the projects
                            in the CIIS database. In such cases, CDEs could report duplicate and inconsistent data for a single
                            project which can result in the overcounting or undercounting of estimated project outcomes.
                            According to CDFI Fund officials, the current iteration of CIIS allows CDEs to report multiple
                            investments, and work is under way to eliminate the ability of private vendors to change project
                            numbers and to enforce reporting options for multiple CDEs contributing NMTC funds to the same
                            project. In addition, CDFI Fund officials said that they held a series of focus groups with NMTC CDEs
                            to identify how to ensure coordination and consistency among CDEs in their reporting.
                            As we recommended in 2010, CDFI Fund is collecting additional information on the amount of residual
                            value to be left in qualified active low-income community businesses at the end of the 7-year credit
                            period. Collecting this information may make it more feasible to identify with better precision the net
                            benefits flowing to such businesses in relation to the cost of the program to the government program
                            in forgone tax revenue.




                                         Page 31                              GAO-12-262 Community Development Tax Expenditures
Agency/tax program         Data collected/performance measures
NPS                        NPS collects information on the amount of private investment leveraged, the number of low and
20 percent historic        moderate income housing units created, and the number of jobs created per project. NPS also collects
preservation tax credit
                       a   some information on the use of additional incentives and funding assistance that rehabilitation tax
                           credit projects receive. NPS administers a mail survey to property owners certified to receive the 20
                           percent credit to collect the information. NPS does not verify the data and noted a response rate of 16-
                           19 percent for its recent mail surveys.
                           NPS also collects information on the projects through the application and certification process. Before
                           obtaining approval of proposed rehabilitation projects, applicants estimate the level of private-sector
                           investment for the project. Upon NPS certifying the completion of rehabilitation projects, project users
                           report the amount actually claimed as qualifying costs associated with the rehabilitation.
                                        Source: GAO analysis.
                                        a
                                         NPS does not collect data for the 10 percent rehabilitation tax credit for nonhistoric structures, and its
                                        role is limited to decertifying that 10 percent rehabilitation credit projects are not historically
                                        significant.


                                        IRS and federal agencies helping administer tax expenditures have some
                                        efforts underway to coordinate and share data. For example, CDFI Fund
                                        shares data with IRS for tax compliance purposes. IRS selected a sample
                                        of NMTC investors using CDFI Fund data to assess whether investors
                                        were claiming the proper amount of tax credits on their returns. NPS
                                        forwards approvals of completed certified rehabilitation projects to IRS for
                                        tax enforcement. HUD has collaborated with IRS to attempt to measure
                                        the use of the EZ/RC employment credits within ZIP codes around EZ/RC
                                        areas, but data reliability questions prevented its use for performance
                                        measurement. In response to our 2004 recommendation, IRS and HUD’s
                                        Office of Community Renewal established a partnership for IRS to share
                                        aggregate information on the use of the EZ/RC employment tax credits. 66
                                        HUD used IRS data to estimate the number of jobs generated or
                                        supported by EZ/RC employment credits, but the aggregate data could
                                        not be tied to specific areas. IRS also expressed concerns about the
                                        assumptions used in the job estimation exercise as well as the underlying
                                        assumed cause-and-effect relationship between the credits and jobs.
                                        Although progress in identifying data on the use of EZ/RC tax benefits
                                        has been limited, the HUD and IRS efforts represent a step in the right
                                        direction for agency collaboration in measuring performance of a
                                        community development tax expenditure.



                                        66
                                           In 2004, we recommended that HUD, USDA, and IRS collaborate to (1) identify the data
                                        needed to assess the use of the EZ/RC tax benefits and the various means of collecting
                                        such data; (2) determine the cost-effectiveness of collecting these data; (3) document the
                                        findings of their analysis; and, if necessary, (4) seek the authority to collect the data, if a
                                        cost-effective means was available. See GAO-04-306.




                                        Page 32                                   GAO-12-262 Community Development Tax Expenditures
While this report focuses on federal agencies helping administer
community development tax expenditures, state and local entities may
also retain information that could be useful for measuring uses of certain
tax expenditures. For example, state HFAs collect data on LIHTC
projects, such as the numbers of units placed in service and other
sources of funding obtained by the projects. 67 In addition to filing
information returns reporting bond issuance amounts and general uses as
required by law, state and local governments issuing bonds have
information about the projects and activities financed with tax-exempt and
tax credit bonds. For our prior work on the GO Zone, we obtained
information from state and local officials to determine how much of the tax
incentives were used and for what purpose. 68

Limitations in federal agency efforts to collect reliable data for measuring
performance for community development programs are not unique to tax
expenditures. For the EZ program, we previously reported that HUD and
other agencies had not collected data on the amount of program grant
funds spent to implement specific activities. 69 In our work to date on the
potential for duplication among 80 economic development spending
programs, we found that the agencies appeared to collect only limited
information on program outcomes. 70 This information is needed to
determine whether the potential for overlap and fragmentation is resulting
in ineffective or inefficient programs.

The overlapping nature of community development tax expenditures with
administration fragmented across multiple agencies complicates
collecting data and measuring performance. A single community
development project can use multiple tax expenditures—within limits


67
   HUD also maintains a LIHTC database with information on the number of units and low-
income units, number of bedrooms, year the credit was allocated, year the project was
placed in service, whether the project was new construction or rehab, type of credit
provided, and other sources of project financing.
68
  GAO, Gulf Opportunity Zone: States Are Allocating Federal Tax Incentives to Finance
Low-Income Housing and a Wide Range of Private Facilities, GAO-08-913 (Washington,
D.C.: July 16, 2008).
69
   GAO, Empowerment Zone and Enterprise Community Program: Improvements
Occurred in Communities, but the Effect of the Program is Unclear, GAO-06-727
(Washington, D.C.: Sept. 22, 2006).
70
  GAO, Economic Development: Efficiency and Effectiveness of Fragmented Programs
Are Unclear, GAO-11-872T (Washington, D.C.: July 27, 2011).




Page 33                           GAO-12-262 Community Development Tax Expenditures
specified in tax law and regulation—which in turn may be administered by
different agencies, each collecting data for its own program. For example,
a mixed-use commercial real estate project that rehabilitates an historic
structure could be supported by the NMTC and the 20 percent
rehabilitation tax credit. Both the CDFI Fund and NPS would collect jobs
data on the project, but it is not clear that each agency would attempt to
measure its unique contribution to the project’s employment outcome.
Although there are difficulties in accurately prorating the results of
community development projects with multiple funding streams, CDFI
Fund is taking steps to improve its collection of outcome information on a
project level to provide an analytical basis to isolate NMTC contributions
to project outcomes. CDFI Fund officials noted that further data collection
on other project funding sources would add to the reporting burden and
require OMB review under the Paperwork Reduction Act. NPS collects
jobs data reported by projects receiving the 20 percent rehabilitation tax
credit, but NPS does not attempt to isolate the extent to which the
projects benefit from other federal programs. Duplicate or inconsistent
data for a single project can result in the overcounting or undercounting of
estimated project outcomes.

Given that community development tax expenditures are designed to be
used in combination with one another and also may be used in
combination with other federal spending programs as discussed above,
basic financial information about the multiple federal sources and
amounts—from both tax and spending programs—received by a
community development project could be useful in identifying areas for
agencies to coordinate in measuring performance for overlapping
programs. As we reported in 2008, while HUD and Treasury reported
leverage measures that described the ratio of all other funds (federal,
state, local, and private funds) compared to a specific program’s funds,
alternative measures describing total federal investment provided
considerably different results and could be of potential value to
policymakers. 71 At the time, there was no agency-specific or
governmentwide guidance on what agencies should disclose about the


71
   GAO, HUD and Treasury Programs: More Information on Leverage Measures’
Accuracy and Linkage to Program Goals is Needed in Assessing Performance,
GAO-08-136 (Washington, D.C.: Jan. 18, 2008). The report examined HUD’s Community
Development Block Grant (CDBG), HOME Investment Partnerships (HOME), and HOPE
VI programs and Treasury’s Community Development Financial Institutions (CDFI) Fund
Financial Assistance, Low-Income Housing Tax Credit, and New Markets Tax Credit
programs.




Page 34                          GAO-12-262 Community Development Tax Expenditures
                             leverage measures they report or how they calculate them for specific
                             programs. 72 To provide more accurate, relevant, and useful information to
                             Congress and others, our 2008 report recommended that OMB provide
                             guidance to help agencies determine how to calculate, describe, and use
                             leverage measures in a manner consistent with their programs’ design,
                             and reevaluate the use of such measures and disclose their relevance to
                             program goals and in future performance reviews of federal housing and
                             community and economic development programs. 73 Although OMB has
                             used leveraging as a program output measure in the past, as of February
                             2012, OMB has not taken action to issue guidance for agencies
                             calculating leverage measures. Better measures of the total federal
                             support and mix of federal funding would be helpful in better
                             understanding how tax expenditures contribute to community
                             development project outcomes and identifying areas of overlap for further
                             coordination.


Past Collaborative Efforts   Periodic reviews could help determine how well specific tax expenditures
to Assess Performance of     work to achieve their goals and how their benefits and costs compare to
Community Development        those of programs, including spending programs, with similar goals.
                             Comparing related programs’ performance could then help inform
Tax Expenditures Have        judgments about the most effective and economical means of achieving
Been Limited, but            desired outcomes, which could include reducing redundancy in related
GPRAMA Calls for             tax and spending programs.
Crosscutting Reviews
                             We recommended in 1994 and again in 2005 that OMB design and
                             implement a structure for conducting reviews of tax expenditures’
                             performance. 74 We also recommended in 2005 that OMB include tax
                             expenditures in budget and performance review processes so that they
                             are considered along with related outlay programs in determining the


                             72
                               As we reported in 2007, leveraging can be defined in two ways: (1) using a relatively
                             small amount of federal funds to attract private investment and (2) combining or layering
                             program funds with other federal, state, local, and private sources of funds. See GAO,
                             Leveraging Federal Funds for Housing, Community, and Economic Development,
                             GAO-07-768R (Washington, D.C.: May 25, 2007).
                             73
                                We also recommended that HUD and Treasury disclose information on the
                             completeness and accuracy of the data and the methods used to calculate leverage
                             measures, and if used as a performance indicator, the extent to which such measures link
                             to program goals and core activities.
                             74
                                  GAO/GGD/AIMD-94-122 and GAO-05-690.




                             Page 35                             GAO-12-262 Community Development Tax Expenditures
adequacy of federal efforts to achieve national objectives. Since their
initial efforts in the 1997 GPRA report and 1999 budget to outline a
framework for evaluating tax expenditures and preliminary performance
measures, OMB and Treasury largely ceased to make progress and
retreated from setting a schedule for evaluating tax expenditures.
According to the President’s Fiscal Year 2012 Budget, the Administration
said that developing an evaluation framework was a significant challenge
and that the current focus was on addressing challenges with data
availability and analytical constraints so that the Administration can work
towards crosscutting analyses examining the effectiveness of tax
expenditures alongside related spending programs. The President’s
Fiscal Year 2013 Budget did not provide an update on these efforts.

While incorporating tax expenditures into crosscutting reviews presents
significant analytical challenges, we previously reported that the
challenges were not insurmountable. 75 Under the Bush Administration, for
the fiscal year 2006 budget request, OMB used its Program Assessment
Rating Tool (PART) initiative to review the NMTC program as part of a
crosscutting assessment alongside 18 community and economic
development spending programs. 76 While the current Administration is no
longer using PART assessment tools, OMB officials agreed that the
PART review of NMTC demonstrated the feasibility of applying a common
framework for assessing a tax expenditure with a specific tax credit
allocation awarded through a competitive application process similar to a
grant program. To date, OMB has not made further progress in examining
the performance of other community development tax expenditures. In its
fiscal year 2012 budget guidance, OMB instructed agencies, where
appropriate, to analyze how to better integrate tax and spending policies
that have similar objectives and goals. Such analysis could be useful in
identifying redundancies.




75
  GAO, 21st Century Challenges: How Performance Budgeting Can Help,
GAO-07-1194T (Washington, D.C.: Sept. 20, 2007).
76
   OMB described PART as a diagnostic tool meant to provide a consistent approach to
assessing federal programs as part of the executive budget formulation process. It applied
25 questions to all “programs” under four broad topics: (1) program purpose and design,
(2) strategic planning, (3) program management, and (4) program results (i.e., whether a
program is meeting its long-term and annual goals) as well as additional questions that
are specific to one of seven mechanisms or approaches used to deliver the program.




Page 36                             GAO-12-262 Community Development Tax Expenditures
For federal community development programs, a crosscutting review
would need to involve OMB and Treasury as well as the departments and
agencies helping administer the tax expenditures as well as related
spending programs. As of January 2012, Treasury’s Office of Tax
Analysis had no evaluations ongoing or planned for the community
development tax expenditures we reviewed. In December 2011, Treasury
issued a report with its recommendations to Congress for Indian tribal
government tax-exempt bond financing. 77 As discussed above, HUD,
NPS, and CDFI Fund have taken steps to collect performance information
for specific community development tax expenditures. As of January
2012, HUD had no plans to assess EZ tax incentives which expired
December 31, 2011. For the 20 percent rehabilitation tax credit, NPS
funded development of a model to estimate economic impacts, such as
job creation and shared statistical information with outside researchers. 78
As of January 2012, NPS had no plans for additional evaluations or
research collaboration with other agencies. The CDFI Fund has
contracted out for an independent evaluation of the NMTC (discussed
further below) and sought funding to develop a community development
impact measurement estimator. According to CDFI Fund, the proposed
tool could help standardize data collection and performance reporting for
community development investments. Given that some community
development tax expenditures target overlapping geographic areas, such
as the NMTC and EZ/RC, any comprehensive approach to reviewing the
performance of programs in such communities would involve
collaboration among multiple agencies.




77
   See U.S. Department of the Treasury, Report and Recommendations to Congress
reqarding Tribal Economic Development bond provision under Section 7871 of the Internal
Revenue Code (Washington, D.C.: Dec. 19, 2011). This study was mandated under
Section 1402(b) of Title I of Division B of the Recovery Act. Treasury recommended
repealing the essential governmental function standard for Indian tribal governmental tax-
exempt bond financing and allowing Indian tribal governments to issue tax-exempt private
activity bonds for the same types of projects and activities as are allowed for state and
local governments subject to a national volume cap and certain other limitations. The
President’s Fiscal Year 2013 Budget included a proposal to implement the report
recommendations.
78
  See David Listokin, et al., Second Annual Report on the Economic Impact of the
Federal Historic Tax Credit, Rutgers University Edward J. Bloustein School of Planning
and Public Policy (New Brunswick, N.J.: 2011).




Page 37                             GAO-12-262 Community Development Tax Expenditures
Moving forward, GPRAMA—if effectively implemented—should result in
crosscutting reviews of federal efforts to achieve intended outcomes,
such as developing communities. The act requires OMB, in coordination
with agencies, to select a limited number of long-term, outcome-oriented
crosscutting priority goals for the federal government. On an annual
basis, OMB is to identify the federal agencies, organizations, program
activities, tax expenditures, regulations, policies, and other activities that
contribute to each goal along with crosscutting performance measures
and quarterly performance targets. Concurrent with the President’s Fiscal
Year 2013 Budget, the Administration announced 14 interim crosscutting
federal priority goals in February 2012. 79 In addition to the five
management function goals required under GPRAMA, nine interim goals
address crosscutting policy areas, and some goals specifically identify tax
expenditures as contributing programs. According to the Administration,
the interim goals reflect areas where cross-agency collaboration and
regular review are expected to yield progress.

One interim goal touches on an aspect of community development—the
Entrepreneurship and Small Business goal is to increase federal services
to entrepreneurs and small businesses with an emphasis on startups and
growing firms as well as underserved markets. Strategies to accomplish
this goal include improving alignment and communication between
agency programs that assist small businesses and increasing access to
financing programs for entrepreneurs and small businesses. The goal
identifies the NMTC as a contributing program, and other programs with
the potential to contribute may be identified over time.

On a quarterly basis beginning in June 2012, OMB is to assess whether
the relevant federal agencies and program activities, including any related
tax expenditures, are contributing to achieving each goal. The new
crosscutting planning and reporting requirements could lead to the
development of performance information in areas that are currently
incomplete. On August 17, 2011, OMB issued guidance to agencies on
implementing GPRAMA and updated Circular A-11 with information on
how GPRAMA will affect performance planning and reporting. Although
neither of these documents explicitly addresses tax expenditures, OMB
plans to develop guidance on examining tax expenditures’ contribution as


79
   The Administration called these Cross-Agency Priority (CAP) Goals. A complete list of
the CAP goals is available on Performance.gov; see
http://goals.performance.gov/goals_2013.




Page 38                             GAO-12-262 Community Development Tax Expenditures
part of cross-agency and agency priority goal reporting that would be put
in place in fall 2012.

GPRAMA significantly enhances requirements for agencies to consult
with Congress in establishing and adjusting governmentwide and agency
goals. As we recently reported, these consultations provide important
opportunities for Congress to provide input on what results agencies
should seek to achieve, how those results will be achieved, how to
measure progress, and how to report on results. 80 For example, Congress
has a continuing opportunity to provide input on its priorities for which
areas should be selected as outcome-oriented crosscutting priority goals
for the federal government. The federal priority goals are to be revised or
updated at least every 4 years, starting with the fiscal year 2015 budget
due in February 2014. Consultations also provide Congress an
opportunity to better understand challenges confronting particular
programs, such as any data limitations and methodological issues in
measuring and assessing tax expenditure performance. Consultations are
not necessarily one-time events, and Congress could reach out to
agencies to provide input at any time.

Beyond providing input to the agencies and OMB during the consultations
to shape their performance goals, Congress can foster results-oriented
cultures in the federal government by using performance information in its
decision making processes. For the community development tax
expenditures, Congress can focus Executive Branch attention on
addressing performance issues through myriad oversight activities, such
as oversight agendas, hearings, letters to agencies, and formal and
informal meetings with agency officials responsible for administering and
evaluating these tax expenditures. Given the overlap and fragmentation
across community development tax and spending programs, coordinated
congressional efforts, such as joint hearings, may facilitate crosscutting
reviews and ensure Executive Branch efforts are mutually reinforcing.




80
  GAO, Managing for Results: Opportunities for Congress to Address Government
Performance Issues, GAO-12-215R (Washington, D.C.: Dec. 9, 2011).




Page 39                          GAO-12-262 Community Development Tax Expenditures
Previous Studies
Provide Limited
Information on the
Effectiveness of
Select Tax
Expenditures in
Promoting
Community
Development
Scarcity of Literature for   Our systematic review of literature for select community development tax
Select Tax Expenditures’     expenditures generally found few studies that attempted to assess the
Effectiveness                effectiveness of programs in promoting certain measures of community
                             development, such as reducing poverty or unemployment rates. We
                             reviewed government studies and academic literature on the following
                             community development tax expenditures: the NMTC, EZ tax program,
                             disaster relief tax provisions, and the rehabilitation tax credits. 81 In
                             reviewing this literature, we focused on studies that attempted to analyze
                             the impact of the tax expenditures on community development through
                             empirical methods. We also summarized our prior observations and
                             recommendations on options to improve tax expenditure design and
                             considerations in authorizing similar community development tax
                             programs. For the NMTC, we did not identify any empirical studies issued
                             since our last report in January 2010. 82 For the EZ program, we identified
                             several studies published since our most recent report in March 2010 83
                             that attempted to measure the effect of the program on some measure of
                             community development, as described below. We identified one study on



                             81
                               See appendix I for our methodology in selecting these tax expenditures for the literature
                             review. A bibliography of studies we reviewed is included at the end of this report.
                             82
                               GAO-10-334; GAO-07-296; and GAO, New Markets Tax Credit Program: Progress
                             Made in Implementation, but Further Actions Needed to Monitor Compliance, GAO-04-326
                             (Washington, D.C.: Jan. 30, 2004).
                             83
                                GAO-10-464R; GAO-06-727; and GAO, Community Development: Federal
                             Revitalization Programs Are Being Implemented, but Data on the Use of Tax Benefits Are
                             Limited,GAO-04-306 (Washington, D.C.: Mar. 5, 2004).




                             Page 40                             GAO-12-262 Community Development Tax Expenditures
                                          the rehabilitation tax credits that attempted to measure one aspect of
                                          community development. We did not identify any empirical studies on
                                          disaster tax relief provisions. The scarcity of literature on some tax
                                          expenditures may be due to the fact that establishing that a community
                                          development tax expenditure or spending program has causal impact on
                                          economic growth in a specific community can be challenging. Table 6
                                          below summarizes key methodological issues in attempting to measure
                                          effectiveness of the tax expenditures we selected.

Table 6: Limitations and Methodological Challenges in Evaluating Select Community Development Tax Expenditures

                                                                  Limitation or challenge in evaluation
                                Small relative                                                                 Difficult to establish
                              to total economic                Limited data to                                      geographic
Tax expenditure                 activity in area            establish causal link      Temporary incentive      comparison area
NMTC                                  X                                X                        X
EZ/RC                                 X                                X                        X
Disaster relief                       X                                X                        X                        X
Historic rehabilitation tax
credits                               X                                X                                                 X
                                          Source: GAO analysis.




Various Challenges Inhibit                As we reported in 2010, making definitive assessments about the extent
Evaluations of the New                    to which benefits flow to targeted communities as a direct result of NMTC
Markets Tax Credit                        investments presented challenges. 84 For example, the small size of the
                                          NMTC projects relative to the total economic activity within an area made
                                          it difficult to detect the separate effect of a particular project. Many of the
                                          eligible communities may already have significant business activities that
                                          could mask NMTC impacts. Limitations associated with available data
                                          also made it difficult to determine whether benefits generated in a low-
                                          income community outside the scope of a particular project are the direct
                                          result of the NMTC program. As discussed above, CDFI Fund is
                                          collecting additional data on the use of the NMTC that may provide further
                                          insights into its use and impact on communities. For example, CDFI Fund
                                          is now collecting data on the amount of equity that CDEs estimate will be
                                          left in the businesses at the end of the 7-year period in which tax credits




                                          84
                                               GAO-10-334.




                                          Page 41                                   GAO-12-262 Community Development Tax Expenditures
can be claimed. Collecting this information may provide CDFI Fund with
additional information on the credit’s cost-effectiveness.

Our 2007 NMTC report used statistical methods to attempt to measure
the credit’s effectiveness, but determined that further analysis is needed
to determine whether the economic costs of shifting investment are
justified. 85 Our analysis did find that the credit may be increasing
investment in low-income communities, although this finding was not, in
and of itself, sufficient to determine that the credit was effective.
Increased investment in low-income communities can occur when NMTC
investors increase their total funds available for investment or when they
shift funds from other uses. A complete evaluation of the program’s
effectiveness would require determining the costs of the program,
including any behavioral changes by taxpayers that may be introduced by
shifted investment funds. Neither our statistical analysis nor the results of
a survey we administered allowed us to determine definitively whether
shifted investment funds came from higher-income communities or from
other low-income community investments.

In our 2010 NMTC report, we offered two redesign options to potentially
increase the credit’s effectiveness in dispensing funds to low-income
businesses—replacing the tax credit with a grant or making changes to
the related entities test. 86 Converting the credit to a grant would likely
increase the equity that could be placed in low-income businesses. In
commenting on our 2010 report, CDFI Fund expressed concern that a
grant may not channel a greater portion of the federal subsidy to intended
recipients than the tax credit and that a grant program could have
administrative costs or other effects that would reduces its desirability.
Though the grant approach would involve considering a number of design
issues, Congress has turned to grant programs in other cases where tax
credits had formerly been used. For example, to fill funding gaps in LIHTC
projects, Congress offered state HFAs the option to exchange LIHTCs for
Recovery Act Section 1602 federal grants to subsidize low-income rental
housing development. As we suggested in 2010, Congress should
consider offering grants in lieu of credits if it chooses to extend the




85
     GAO-07-296.
86
  The related entities test requires that the CDE have no more than a 50 percent
ownership stake in a qualified low-income community business.




Page 42                            GAO-12-262 Community Development Tax Expenditures
program which expired at the end of 2011. 87 If it does so, Congress
should require Treasury’s CDFI Fund to gather data to assess whether
and to what extent the grant program increases the amount of federal
subsidy provided to low-income community businesses compared to the
NMTC; how costs for administering the program incurred by the CDFI
Fund; CDEs, and investors would change; and whether the grant program
otherwise affects the success of efforts to assist low-income communities.

We did not identify any empirical studies on the effectiveness of the
NMTC since our last report, but CDFI Fund has contracted with the Urban
Institute for an evaluation of the NMTC that may lead to additional
insights into the program’s effectiveness. In 2010, the Urban Institute
published a literature review to inform a forthcoming evaluation, including
challenges inherent in evaluating economic and community development
programs in general. 88 CDFI Fund reports that the Urban Institute is
primarily relying on surveys to CDEs and businesses to conduct the
evaluation. The Urban Institute conducted a preliminary briefing on the
study's results with CDFI Fund in January 2012. After submitting a draft
report to CDFI Fund, the Urban Institute will issue a final report in the
spring 2012.




87
   The President's Fiscal Year 2012 Budget proposed extending the NMTC program to the
end of 2012, with a maximum amount of $5 billion for qualified equity investments in 2012.
The President’s Fiscal Year 2013 Budget proposed extending the program through 2013
with $5 billion available for allocation in both 2012 and 2013.The 2012 and 2013 budgets
also proposed modifying the NMTC to offset alternative minimum tax (AMT) liability. The
Joint Committee on Taxation estimates that the 2012 proposal would cost $2.95 billion
over 2011 through 2021, and the estimate for the 2013 proposal was not available as of
February 28, 2012. In 2010, we reported that if such an AMT allowance increased the pool
of investors and the price investors are willing to pay for the credit, it might have the
beneficial effect of ensuring that a larger portion of the subsidy ended up in qualified active
low-income community businesses. However, such an allowance would increase federal
revenue losses to the extent that investors subject to the AMT who are not currently
investing in NMTCs become NMTC investors and claim credits that would otherwise go
unclaimed.
88
  Martin D. Abravanel, Nancy M. Pindus, Brett Theodus, Evaluating Community and
Economic Development Programs: A Literature Review to Inform Evaluation of the New
Markets Tax Credit Program, The Urban Institute, September 2010.




Page 43                               GAO-12-262 Community Development Tax Expenditures
While Some Studies Have   Our prior work has found improvements in certain measures of
Found Improvements in     community development in EZ communities, but data and methodological
EZ Communities,           challenges make it difficult to establish causal links. Our 2006 report
                          found that Round 1 EZs that received a combination of grant and tax
Establishing Clear        benefits did show improvements in poverty and unemployment, but we
Program Results Is        did not find a definitive connection between these changes and the EZ
Difficult                 program. 89 Our 2010 report on the EZ/RC program reviewed seven
                          academic studies of Round 1 projects and found that the evaluations
                          used different methods and reported varying results with regard to
                          poverty and unemployment. 90 For example, one study concluded that the
                          program reduces poverty and unemployment, while another study found
                          that the program did not improve those measures of community
                          development. As with the NMTC, our prior EZ/RC work has demonstrated
                          challenges in measuring the effects of the program. 91 For example, data
                          limitations make it difficult to thoroughly evaluate the program’s
                          effectiveness in that use of the EZ/RC Employment Credit cannot be tied
                          to specific communities. Demonstrating what would have happened in the
                          absence of the credit is difficult. External factors, such as national and
                          local economic trends, can make it difficult to isolate the effects of the
                          EZ/RC tax incentives.

                          Since our 2010 EZ/RC report, we noted that more recent studies
                          comparing employment, housing values, and poverty rates in EZ
                          communities with similarly economically distressed areas have yielded
                          mixed results. Two studies have found lower unemployment in the
                          designated areas where the provisions have been used relative to similar
                          non-EZ areas. Specifically, one study reviewed federal and state
                          enterprise zones and found positive impacts on local labor markets in
                          terms of the unemployment rate and poverty rate. 92 In addition, the
                          researchers found positive, but statistically insignificant, spillover effects
                          to neighboring Census tracts. The second study focused on Round 1 of
                          the EZ program and found that the EZ designation substantially increased



                          89
                               GAO-06-727.
                          90
                               GAO-10-464R.
                          91
                               GAO-06-727.
                          92
                             John C. Ham, et al., “Government Programs Can Improve Local Labor Markets:
                          Evidence from State Enterprise Zones, Federal Empowerment Zones and Federal
                          Enterprise Community,” Journal of Public Economics, vol. 95, no. 7-8 (2011): 779-797.




                          Page 44                            GAO-12-262 Community Development Tax Expenditures
employment in zone neighborhoods, particularly for zone residents. 93
Importantly, the researchers examined Round 1 of the program that relied
on a mix of tax benefits and grant funding. In addition, another study
found that EZ program results seem to vary among different types of
businesses within the designated zones. 94 For example, researchers
found that EZ tax incentives increase the share of retail and service
sector establishments but decreases the share of transportation, finance,
and real estate industries. They noted that the effectiveness of the EZ
wage credit may be affected by the types of industries that are located in
the designated area. However, while these studies have found that
certain economic outcomes are associated with an area being eligible for
EZ incentives, due to data limitations the studies cannot estimate the
extent to which these outcomes vary with the amount of incentives
actually used in an area.

Both JCT and the Congressional Research Service (CRS) conducted
literature reviews and reported modest effects and methodological
limitations in making any definite assessments on the effectiveness of
EZs. 95 JCT reported that studies generally found modest effects overall
with relatively high costs. In addition, it is difficult to determine whether
the spending or tax incentives were responsible for any increases in
economic activity. CRS’s review of academic literature found modest, if
any, effects of the program and called into the question their cost-
effectiveness. According to CRS, one persistent issue in evaluating the
potential impact of EZs is the inherent difficulty of identifying the effect of
the programs apart from overall economic conditions.




93
   Matias Busso, Jesse Gregory, and Patrick M. Kline, “Assessing the Incidence and
Efficiency of a Prominent Place Based Policy,” National Bureau of Economic Research
Working Paper No. 16096 (2010).
94
   Andrew Hanson and Shawn Rohlin, “The Effect of Location-Based Tax Incentives on
Establishment Location and Employment across Industry Sectors,” Public Finance Review
vol. 39, no. 2 (2011): 195-225.
95
  Joint Committee on Taxation, Incentives for Distressed Communities: Empowerment
Zones and Renewal Communities, JCX-38-09 (Oct. 5, 2009): 22-23; and Congressional
Research Service, Empowerment Zones, Enterprise Communities, and Renewal
Communities: Comparative Overview and Analysis (Feb. 14, 2011): 18.




Page 45                           GAO-12-262 Community Development Tax Expenditures
                             With the expiration of the RCs at the end of 2009 and EZs at the end of
                             2011, we have made observations in prior work that Congress can
                             consider if these or similar programs are authorized in the future. 96
                             Without adequate data on the use of program grant funds or tax benefits,
                             neither the responsible federal agencies nor we could determine whether
                             the EZ/EC funds had been spent effectively or that the tax benefits had in
                             fact been used as intended. If Congress authorizes similar programs that
                             rely heavily on tax benefits in the future, it would be prudent for federal
                             agencies responsible for administering the programs to collect information
                             necessary for determining whether the tax benefits are effective in
                             achieving program goals. 97 In 2010, the U.S. Census Bureau began
                             releasing more frequent poverty and employment updates at the Census
                             tract level than it has traditionally provided. This information could be a
                             useful tool in determining the effects of such programs on poverty and
                             employment in designated Census tracts.


Limited Data Collection      Though we identified literature that discussed use of disaster tax
and Methodological           provisions and their design, none of the articles attempted to measure
Challenges in Establishing   empirically the impact the incentives had on promoting community
                             development. A potential challenge in designing tax relief for disaster
Comparison Areas May         areas is that those communities within the zones most affected by the
Inhibit Evaluations of       disaster may be slower to respond to the incentives than other areas
Effectiveness on Disaster    within the zone. Our prior work on the GO Zone reported that bonds were
Provisions                   awarded on a first-come, first-served basis that led to awarding bond
                             allocation to projects in less damaged areas in the zone because
                             businesses in these areas were ready to apply for and issue bonds before
                             businesses in more damaged areas could make use of the incentive. 98



                             96
                                The President’s Fiscal Year 2012 and 2013 Budgets proposed designating 20 new
                             Growth Zones (14 urban areas and 6 rural areas). The Joint Committee on Taxation
                             estimates that the 2012 proposal (effective for 2012 through the end of 2016) would cost
                             $2.4 billion from 2011 through 2021, and the estimate for the 2013 proposal (effective for
                             2014 through the end of 2018) was not available as of February 28, 2012. The Secretary
                             of Commerce would select the zones in consultation with HUD and USDA through a
                             competitive application process. The proposed growth zones would offer two tax
                             incentives—an employment credit and accelerated depreciation. The Secretary of the
                             Treasury would be given authority to collect data from taxpayers on the use of such tax
                             incentives by zone.
                             97
                                  GAO-06-727.
                             98
                                  GAO-08-913.




                             Page 46                             GAO-12-262 Community Development Tax Expenditures
                             Thus, assessing the impact of disaster relief on an entire zone may not
                             reflect how the provisions affected specific areas within the zone. Another
                             key challenge in evaluating disaster relief tax expenditures is the difficulty
                             in establishing a comparison area where a “comparable” disaster has
                             taken place but government programs or tax provisions were not
                             available. Moreover, evaluations of disaster relief tax expenditures may
                             be difficult because IRS collects limited information on the use of
                             temporary disaster aid, as discussed above.


Literature on the            While we identified numerous articles focused on historic restoration
Rehabilitation Tax Credits   funded with the federal rehabilitation tax credits and the potential benefits
Has Often Not Focused on     of historic preservation in adapting currently vacant or underused
                             property, we identified only one study that attempted to empirically
Community Development        measure the impact of the tax credit on community development. The
Aspects                      study analyzed rehabilitation investment in the Boston office building
                             market between 1978 and 1991 and found that the percentage of
                             investment spending that would have occurred without the tax credit
                             varied over time from about 60 to 90 percent. 99 Another study we
                             reviewed used economic modeling to quantify some community
                             development outputs associated with the 20 percent rehabilitation tax
                             credit, such as estimated jobs and projected income data. 100 However,
                             the study did not assess whether a rehabilitation project would have
                             occurred in the absence of the credit nor did it compare community
                             development in a project community with development in similar
                             communities. As we previously reported, a complete evaluation of a
                             credit’s effectiveness also requires determining the costs of the program
                             and an assessment of the program’s economic and social benefits.

                             A challenge in attempting to evaluate how the rehabilitation tax credits
                             affect measures of community development is that the credits have a dual
                             purpose and are not solely intended to promote community development.
                             Evaluators may have difficulty reviewing the program’s effectiveness
                             because they lack specific data on the geographic locations of the



                             99
                                James D. Schilling, et al, “How Tax Credits Have Affected the Rehabilitation of the
                             Boston Office Market,” Journal of Real Estate Research, vol. 28, no. 4 (2006): 321-348.
                             100
                                David Listokin, et al, Second Annual Report on the Economic Impact of the Federal
                             Historic Tax Credit, Rutgers University Edward J. Bloustein School of Planning and Public
                             Policy (New Brunswick, N.J.: 2011).




                             Page 47                             GAO-12-262 Community Development Tax Expenditures
              projects. In addition, the small size of the rehabilitation tax credit projects
              relative to the total activity in the area’s economy makes it difficult to
              isolate the economic effects of the credit.


              The annual federal commitment to community development is substantial,
Conclusions   with revenue losses from community development-related tax
              expenditures alone totaling many billions of dollars. However, all too often
              even basic information is not available about who claims tax benefits from
              community development tax expenditures and which communities benefit
              from the activities supported by the tax expenditures. Further, relatively
              few evaluations of the effectiveness of community development tax
              expenditures have been done and when they have been done, results
              have often been mixed about their effects. These issues are familiar and
              long-standing for tax expenditures generally. We have made
              recommendations to OMB in 1994 and 2005 to move the Executive
              Branch forward in obtaining and using information to evaluate tax
              expenditures’ performance, which can help in comparing their
              performance to that of related federal efforts.

              GPRAMA offers a new opportunity to make progress on these issues. For
              those limited areas where OMB sets long-term, outcome-oriented,
              crosscutting priority goals for the federal government, a more coordinated
              and focused effort should ensue to identify, collect, and use the
              information needed to assess how well the government is achieving the
              goals and how those efforts can be improved. We look forward to
              progress in achieving GPRAMA’s vision for a more robust basis for
              judging how well the government is achieving its priority goals. The
              Administration’s interim crosscutting policy goals include some that
              identify tax expenditures among the contributing programs and activities.
              OMB’s forthcoming guidance should be helpful in further drawing tax
              expenditures into the GPRAMA crosscutting performance framework.

              Clearly, community development is but one of many areas where OMB
              could choose to set priority goals, and the interim goals to date
              encompass 1 of the 23 tax expenditures we reviewed. In this regard,
              Congress has a continuing opportunity to express its priorities about the
              goals that should be selected, including whether community development
              should be among the next cycle of goals. Whether or not OMB selects
              community development as a priority goal area, Congress also has the
              opportunity to urge more evaluation and focus Executive Branch efforts
              on addressing community development performance issues through
              oversight activities, such as hearings and formal and informal meetings


              Page 48                         GAO-12-262 Community Development Tax Expenditures
                     with agency officials. Given the overlap and fragmentation across
                     community development tax and spending programs, coordinated
                     congressional efforts, such as joint hearings, may facilitate crosscutting
                     reviews and ensure Executive Branch efforts are mutually reinforcing.

                     While GPRAMA provides a powerful opportunity to review how tax
                     expenditures contribute to crosscutting goals, progress is likely to be
                     incremental and require sustained focus. Evaluating the impact of
                     community development efforts is inherently difficult and definitive
                     performance conclusions often cannot be drawn. Data limitations are not
                     easy or inexpensive to overcome, and resources to evaluate programs
                     must compete with other priorities even as the federal government copes
                     with significant fiscal challenges. Thus, judicious choices will need to be
                     made as efforts to improve tax expenditure performance information
                     available to policymakers continue.


                     Congress may wish to use GPRAMA’s consultation process to provide
Matters for          guidance on whether community development should be among OMB’s
Congressional        long-term crosscutting priority goals as well as stress the need for
                     evaluations whether or not community development is on the crosscutting
Consideration        priority list. Congress may also wish to focus attention on addressing
                     community development tax expenditure performance issues through its
                     oversight activities.


                     We provided a draft of this report for review and comment to the Director
Agency Comments      of OMB, the Secretary of the Treasury, the Commissioner of Internal
and Our Evaluation   Revenue, as well as representatives of three federal agencies helping
                     administer certain community development tax expenditures—the
                     Director of the CDFI Fund, the Secretary of Housing and Urban
                     Development (HUD), and the Secretary of the Interior (Interior). The
                     Deputy General Counsel of OMB, the Director of HUD’s Office of
                     Community Renewal, the GAO Audit Liaison of Interior, and the Director
                     of the CDFI Fund provided general comments. The first three provided
                     email comments and the last provided a comment letter which is reprinted
                     in appendix VIII. Only the HUD comments addressed our matters for
                     congressional consideration directly, stating that the report provided
                     minimal justification for them. Although the Secretary of the Treasury and
                     Commissioner of Internal Revenue did not provide written comments,
                     Treasury’s Office of Tax Analysis and IRS’s Office of Legislative Affairs
                     provided technical changes, which we incorporated where appropriate.




                     Page 49                       GAO-12-262 Community Development Tax Expenditures
While not commenting on our matters for congressional consideration,
OMB staff reiterated the view that the Administration has made significant
progress in addressing tax expenditures. 101 OMB staff cited assorted
Fiscal Year 2013 budget proposals which it estimated would save billions
of dollars by eliminating certain spending through the tax code and
modifying other tax provisions. Some of the budget proposals relate to tax
expenditures covered in this report, and we updated the text to reflect the
President’s latest proposals. We also updated our report to reflect the
release of new interim crosscutting priority goals and that the
Administration has identified some tax expenditures that contribute to
these goals, as required under GPRAMA. OMB staff said that this is a
significant step forward and will be important for broader GPRAMA
implementation over 2012 and 2013. We agree that this inclusion of tax
expenditures along with related other programs in the GPRAMA goals is
an important step toward providing policymakers with the breadth of
information needed to understand the full federal effort to accomplish
national objectives. Finally, OMB staff expressed concern that we were
suggesting that tax expenditures be addressed through a “one size fits
all” framework. We do not believe this report or earlier products suggest
that assessing the performance of tax expenditures be done in only one
way. We have emphasized the need for greater scrutiny of tax
expenditures and more transparency over how well they work and how
they compare to other related federal programs.

In its comments, HUD described the report as substantive and
comprehensive in addressing community development tax incentives with
accurate information about the EZ/RC tax expenditures and HUD’s role in
their administration. However, HUD expressed the view that we had
minimal justification for our matters for Congress to consider using the
GPRAMA consultation process to express congressional priorities related
to community development and to focus attention on community
development tax expenditures’ performance through its oversight
activities. We disagree. The basic issues we found in this review—the all
too often lack of even basic information about tax expenditures’ use and


101
    OMB expressed this view in reviewing the tax expenditure discussion in a draft of
GAO, Follow-up on 2011 Report: Status of Actions Taken to Reduce Duplication, Overlap,
and Fragmentation, Save Tax Dollars, and Enhance Revenue, GAO-12-453SP
(Washington, D.C.: Feb. 28, 2012). For that report, we determined that as of January 2012
the Executive Branch had not made progress in implementing our 2005 recommendations
to review tax expenditures’ performance and include tax expenditures along with related
programs in budget presentations and Executive Branch performance management
processes. See GAO-05-690 and GAO-11-318SP.




Page 50                            GAO-12-262 Community Development Tax Expenditures
the relative paucity of evaluations of their performance—are among the
key issues that could be mitigated through GPRAMA crosscutting goals
and Congress’s oversight activities. HUD also said we had skirted the
issue of identifying programs with the greatest probability for elimination
due to duplication, fragmentation, and overlap. This was not among our
review’s objectives and we believe the type of information we present can
assist Congress in understanding what information is available to support
such decisions. As we have previously reported, agencies engaging
Congress in identifying which issues to address and what to measure are
critical, and GPRAMA significantly enhances requirements on the
consultation process. 102 With the release of the interim crosscutting goals,
we believe that Congress has a continuing opportunity to express its
priorities regarding community development ahead of the next goal cycle
due in February 2014. HUD also noted the expiration of some tax
expenditures and sought clarification about their inclusion in the report.
Our report includes recently expired tax expenditures and where
applicable discusses our prior findings and suggestions for Congress to
consider if it wishes to extend the tax expenditures that have expired or
create similar new ones. HUD also provided technical and editorial
comments which we incorporated as appropriate.

In its comments, Interior disagreed with several findings. Interior
characterized our report as expressing the view that unwarranted overlap,
fragmentation, or duplication existed involving the 20 percent historic
rehabilitation credit that Interior’s NPS helps administer. Interior agreed
that the tax credit—which has a primary purpose to preserve and
rehabilitate historic buildings—has a two-fold mission to also promote
community development by revitalizing historic districts and
neighborhoods. However, Interior disagreed that the historic rehabilitation
tax credit overlaps or duplicates with other community development tax
expenditures. Interior stated that only the tax credit has a specific purpose
to preserve historic buildings, that the tax credit is not targeted to certain
census tracts or low-income areas, and that Congress generally did not
exclude historic tax credit users from also using other federal programs.
In addition, Interior said that the administration of the historic rehabilitation
tax credit was not fragmented, but instead was an example of joint
administration that effectively draws upon the best resources of two
federal agencies in a coordinated way to implement the law. Finally,


102
    See GAO, Government Performance: GPRA Modernization Act Provides Opportunities
to Help Address Fiscal, Performance, and Management Challenges, GAO-11-466T
(Washington, D.C.: Mar. 16, 2011).




Page 51                         GAO-12-262 Community Development Tax Expenditures
Interior disagreed with our finding that limited information is available
about the effectiveness of the 20 percent historic rehabilitation tax credit.

Our report does not characterize any overlap, fragmentation, or
duplication as “unwarranted.” Rather, we provide a factual description
based on standard definitions used in many GAO reports of the
relationships between the various tax expenditures that have at least a
partial purpose of supporting community development. We make the
same point that Interior raises as well—that Congress was aware of and
often designed rules to govern the interrelationships among these tax
expenditures. Accordingly, our report says these interrelationships do not
necessarily represent unnecessary duplication. Based on Interior’s
comments, however, we further clarified our text to note that one of the
differences between the historic rehabilitation credit and the other
community development tax expenditures is that the rehabilitation credit
targets certain older structures. Regarding Interior’s comment about
fragmentation in the credit’s administration, our report describes the roles
of IRS and NPS and says fragmentation may sometimes be necessary
when the resources and expertise of more than one agency are required,
such as in the case of NPS overseeing technical standards for historic
preservation. As we reported, however, fragmentation can result in
administrative burdens when an applicant needs to apply at multiple
agencies to finance a specific project, such as restoring a historic building
as low-income housing. Finally, regarding Interior’s comments on the
effectiveness of the rehabilitation tax credit, we continue to note that little
is known about the effectiveness of the credit as a community
development program given that we identified only one empirical analysis
of the effect of the tax credit on community development. Interior pointed
specifically to reports based on an economic model NPS helped fund.
However, as our report states, the modeling reports did not assess what
would have happened in the absence of the historic rehabilitation tax
credits or compare development in tax credit project communities to
similar communities.

In its comment letter (reprinted in app. VIII), the CDFI Fund said that it
appreciated GAO’s ongoing efforts to improve and strengthen
performance measurement and evaluation of community and economic
development programs. The CDFI Fund said that it has committed
resources to systematically evaluate the impacts of the NMTC program
and proposed to develop tools that would have provided standard
benchmarking and estimation techniques for measuring outcomes and
coordinating reporting for projects with multiple sources of funding. Our
literature review for this report drew on a study contracted by the CDFI
Fund that provided an overview of the inherent challenges in evaluating


Page 52                        GAO-12-262 Community Development Tax Expenditures
community development programs. The literature review will inform a
forthcoming independent evaluation of the NMTC to be issued later this
spring. The CDFI Fund also provided technical comments which we
incorporated as appropriate.

The CDFI Fund said that it continued to have strong reservations with our
2010 option for Congress to consider offering grants in lieu of NMTC tax
credits if it extends the NMTC program. As stated in our 2010 report and
reiterated as a cost saving option in our 2011 duplication report, our
analysis suggests that converting the NMTC to a grant program would
increase the amount of the equity investment that could be placed in low-
income businesses and make the federal subsidy more cost-effective. 103
Our 2010 report addressed both concerns that the CDFI Fund reiterated
in its comments on this report.


As arranged with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days after the
date of this report. At that time, we will send copies of this report to the
Director of the Office of Management and Budget, the Secretary of the
Treasury, the Commissioner of Internal Revenue, and other interested
parties. In addition, the report will be available at no charge on the GAO
website at http://www.gao.gov.

If you or your staff have questions about this report, please contact me at
(202) 512-9110 or brostekm@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. Other key contributors to this report are listed in appendix
IX.




Michael Brostek
Director, Strategic Issues




103
      See GAO-10-334 and GAO-11-318SP.




Page 53                         GAO-12-262 Community Development Tax Expenditures
List of Requesters

The Honorable Sander Levin
Ranking Member
Committee on Ways and Means
House of Representatives

The Honorable Lloyd Doggett
Ranking Member
Subcommittee on Human Resources
Committee on Ways and Means
House of Representatives

The Honorable Jim McDermott
Ranking Member
Subcommittee on Trade
Committee on Ways and Means
House of Representatives

The Honorable Richard E. Neal
Ranking Member
Subcommittee on Select Revenue Measures
Committee on Ways and Means
House of Representatives

The Honorable Earl Blumenauer
House of Representatives

The Honorable Ron Kind
House of Representatives

The Honorable Bill Pascrell, Jr.
House of Representatives

The Honorable Linda Sánchez
House of Representatives




Page 54                       GAO-12-262 Community Development Tax Expenditures
Appendix I: Objectives, Scope, and
                    Appendix I: Objectives, Scope, and
                    Methodology



Methodology

                    Our objectives were to (1) identify tax expenditures that promote
                    community development, and areas of potential overlap and interactions
                    among them; (2) assess data and performance measures available and
                    used to assess performance for community development tax
                    expenditures; and (3) determine what previous studies have found about
                    the effectiveness of selected tax expenditures in promoting community
                    development.


                    While both the U.S. Department of the Treasury (Treasury) and the Joint
Identification of   Committee on Taxation (JCT) annually compile a list of tax expenditures
Community           and estimates of their cost, the Treasury and JCT lists differ somewhat in
                    terms of what is listed as a tax expenditure and how many specific
Development Tax     provisions may be combined in a listed tax expenditure. Our count of
Expenditures and    community development tax expenditures is based on the Treasury and
Interactions        JCT published tax expenditure lists, detailed below. Where a single tax
                    expenditure listing encompasses more than one tax code provision, we
                    separately describe those provisions to provide a more detailed
                    perspective of the mix of tax assistance available for community
                    development.

                    Federal agencies do not have a standard definition of what constitutes
                    community or economic development. To identify community
                    development tax expenditures, we developed a list of community
                    development activities based on various federal sources and compared
                    these activities to the authorized uses of tax expenditures. As a starting
                    point for developing the list of activities, we used the definition of the
                    community and regional development budget function and its three
                    subfunctions—urban community development, rural and regional
                    development, and disaster relief and insurance. 104 Both Treasury and
                    JCT list tax expenditures by budget function.

                    We also used descriptions of spending programs under the community
                    and regional development budget function as detailed in the 2010 Catalog
                    of Federal Domestic Assistance (CFDA). 105 We further reviewed



                    104
                      GAO, A Glossary of Terms Used in the Federal Budget Process, GAO-05-734SP
                    (Washington, D.C.: Updated Sept. 2005), 136-137.
                    105
                      General Services Administration, 2010 Catalog of Federal Domestic Assistance
                    (Washington, D.C.: Oct. 2010).




                    Page 55                              GAO-12-262 Community Development Tax Expenditures
                                           Appendix I: Objectives, Scope, and
                                           Methodology




                                           descriptions of allowable uses under the Community Development Block
                                           Grant (CDBG)—the largest single spending program in the budget
                                           function. 106 Finally, we reviewed the community development definition for
                                           the Community Reinvestment Act (CRA) and identified certain tax
                                           expenditures that banks can use in meeting CRA community investment
                                           tests. 107 We included tax expenditures targeted to certain geographies,
                                           such as low-income areas or designated disaster areas, or specific
                                           populations, such as Native Americans. Table 7 summarizes the
                                           definition of community development for purposes of this report.

Table 7: Summary Definition of Community Development
                                                                          a
Category                                       Activities included
Community development in urban and rural       Development of physical and financial infrastructure designed to promote viable
     b
areas                                          community economies, including communication infrastructure facilities developed as
                                               an integral part of a community development program.
                            b
Disaster relief and insurance                  Programs intended to help communities and families recover from natural disasters.
Assistance to specific geographies and         Activities that revitalize or stabilize certain geographies (e.g. low- or moderate-income
           c
populations                                    geographies; Appalachia) or provide economic development assistance to specific
                                               populations, such as Native Americans.
                                           Source: GAO analysis of descriptions of spending programs under the community and regional development budget function, and as
                                           detailed in the 2010 Catalog of Federal Domestic Assistance (CFDA), descriptions of allowable uses under the Community
                                           Development Block Grant (CDBG), and the community development definition for the Community Reinvestment Act (CRA).
                                           a
                                            Activities are those we compiled from descriptions of spending programs under the community and
                                           regional development budget function, and as detailed in the 2010 CFDA, descriptions of allowable
                                           uses under CDBG, and the community development definition for CRA.
                                           b
                                            The category is derived from the description of the Community and Regional Development budget
                                           function and related subfunctions. See GAO, A Glossary of Terms Used in the Federal Budget
                                           Process, GAO-05-734SP (Washington, D.C.: Updated Sept. 2005).
                                           c
                                            The category is derived from descriptions of spending programs detailed in the 2010 CFDA,
                                           descriptions of allowable uses under CDBG, and the community development definition for CRA.


                                           We compiled a preliminary list of tax expenditures for fiscal year 2010
                                           listed under community and regional development budget function by



                                           106
                                             U.S. Department of Housing and Urban Development, Economic Development Toolkit
                                           (Washington, D.C.: April 2010).
                                           107
                                               12 CFR Parts 25, 228, 345 and 563e (as listed on Feb. 10, 2011). The Community
                                           Reinvestment Act (CRA) requires regulators to evaluate periodically each insured
                                           depository institution’s record in helping meet the credit needs of its entire community.
                                           That record is taken into account in considering an institution’s application for deposit
                                           facilities, including mergers and acquisitions. Investing in certain community development
                                           projects eligible for tax incentives can help banks earn positive consideration toward their
                                           CRA regulatory ratings.




                                           Page 56                                            GAO-12-262 Community Development Tax Expenditures
                                               Appendix I: Objectives, Scope, and
                                               Methodology




                                               Treasury and JCT. Our universe included expired tax expenditures listed
                                               by either Treasury or JCT which had estimated revenue losses or outlays
                                               in fiscal year 2010. While the tax expenditure lists published by Treasury
                                               and JCT are generally similar, specific tax expenditures reported by each
                                               under the community and regional development budget function differed,
                                               as shown in table 8. Four tax expenditures were listed by both under the
                                               community and regional development budget function. Another four tax
                                               expenditures were reported by both Treasury and JCT but appeared
                                               under community and regional development function on one list and
                                               under a different budget function on the other list. Fourteen tax
                                               expenditures were reported under the community and regional
                                               development budget function by either Treasury or JCT, including eight
                                               tax expenditures supporting disaster relief and recovery. 108

Table 8: List of Tax Expenditures Reported by Treasury and JCT under the Community and Regional Development Budget
Function for Fiscal Year 2010

                                                                                                                   Tax expenditure list
Tax expenditure                                          Budget function                                         Treasury      JCT
Listed by both under the community and regional development budget function
Empowerment Zones and Renewal Communities                Community and Regional Development                      Yes           Yes
        a
(EZ/RC)
New Markets Tax Credit (NMTC)                            Community and Regional Development                      Yes           Yes
                       b
Recovery Zone bonds                                      Community and Regional Development                      Yes           Yes
Tribal Economic Development Bonds                        Community and Regional Development                      Yes           Yes
Listed by both but either Treasury or JCT listed under another budget function
Build America Bonds (BAB)                                Community and Regional Development (JCT); General       Yes           Yes
                                                         Purpose Fiscal Assistance (Treasury)
Exclusion of interest on bonds for water, sewage,        Community and Regional Development (JCT); Natural        Yes          Yes
and hazardous waste facilities                           Resources and Environment (Treasury)
Exclusion of interest for airport, dock, and similar     Community and Regional Development (Treasury);          Yes            Yes
bonds                                                    Transportation (JCT)
10 percent credit for rehabilitation of structures       Community and Regional Development (Treasury);          Yes            Yes
(other than historic)                                    Commerce and Housing (JCT)




                                               108
                                                  We also identified one tax expenditure supporting disaster relief and recovery—the
                                               employee retention credit for employers in certain federal disaster areas—which is listed
                                               by Treasury under the education, training, employment, and social services budget
                                               function.




                                               Page 57                              GAO-12-262 Community Development Tax Expenditures
                                             Appendix I: Objectives, Scope, and
                                             Methodology




                                                                                                                                             Tax expenditure list
Tax expenditure                                          Budget function                                                                    Treasury           JCT
Listed by only one under the community and regional development budget function
Credit to holders of Gulf and Midwest tax credit         Community and Regional Development                                                 Yes                No
      c
bonds
District of Columbia tax incentives                      Community and Regional Development                                                 No                 Yes
Eliminate requirement that financial institutions    Community and Regional Development                                                     No                 Yes
allocate interest expense attributable to tax-exempt
interest
Employee retention credit for employers in certain       Community and Regional Development                                                 Yes                No
                      c
federal disaster areas
Exemption of certain mutuals’ and cooperatives’          Community and Regional Development                                                 Yes                No
income
Expensing of environmental remediation costs             Community and Regional Development                                                 Yes                No
Five-year carryback period for certain net operating Community and Regional Development                                                     No                 Yes
losses of electric utility companies
                         c
Gulf Opportunity Zone                                    Community and Regional Development                                                 No                 Yes
Indian employment credit                                 Community and Regional Development                                                 No                 Yes
                             c
Katrina Emergency Act                                    Community and Regional Development                                                 No                 Yes
                       c
Kansas disaster relief                                   Community and Regional Development                                                 No                 Yes
                         c
Midwest disaster relief                                  Community and Regional Development                                                 No                 Yes
                         c
National disaster relief                                 Community and Regional Development                                                 No                 Yes
                           c
New York Liberty Zone                                    Community and Regional Development                                                 No                 Yes
Three-year carryback of small businesses’ and            Community and Regional Development                                                 No                 Yes
farmers’ casualty losses attributable to
                                 c
presidentially declared disasters
                                             Sources: OMB, Analytical Perspectives, Budget of the United States Government, Fiscal Year 2012 (Washington, D.C.: 2011); JCT,
                                             Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014, JCS-3-10 (Washington, D.C.: Dec. 15, 2010).
                                             a
                                                 JCT listed Empowerment Zones and Renewal Communities separately.
                                             b
                                              Includes Recovery Zone Economic Development Bonds (RZEBD) and Recovery Zone Facility Bonds
                                             (RZFB).
                                             c
                                              The tax expenditure is intended to support disaster relief and recovery.


                                             Whereas JCT lists six disaster tax packages as tax expenditures,
                                             Treasury officials told us that disaster-related revenue losses were
                                             included in Treasury estimates for specific tax expenditures made
                                             available in disaster areas. For example, revenue losses from additional
                                             allocations of the Low-Income Housing Tax Credit for the GO Zone were
                                             incorporated into Treasury’s Low-Income Housing Tax Credit estimate.
                                             To avoid double-counting, we dropped two tax expenditures—credit to
                                             holders of Gulf and Midwest tax credit bonds, and employee retention
                                             credit for employers in certain federal disaster areas—listed separately by
                                             Treasury that were included in the JCT disaster package estimates. We



                                             Page 58                                             GAO-12-262 Community Development Tax Expenditures
                                           Appendix I: Objectives, Scope, and
                                           Methodology




                                           used JCT and Internal Revenue Service (IRS) documents to identify
                                           specific tax code provisions within the disaster relief tax expenditures on
                                           JCT’s list. 109 Appendix VI lists 45 tax provisions and special rules in the
                                           six disaster relief tax expenditures included in JCT’s list. We did not sum
                                           disaster revenue loss estimates to avoid double counting amounts
                                           already included in estimates for specific tax expenditures.

                                           Using our list of community development activities as criteria, we also
                                           identified tax expenditures reported by Treasury under other budget
                                           functions that appeared to be at least partially intended to support
                                           activities we had identified as community development activities. Table 9
                                           includes six tax expenditures reported by Treasury under other budget
                                           functions and our rationale for inclusion.

Table 9: List of Tax Expenditures Reported by Treasury Outside the Community and Regional Development Budget Function
That Support Community Development (Fiscal Year 2010)

Tax expenditure                   Budget function              Rationale for inclusion
Credit for holders of qualified   Education, training,         The tax credit is targeted towards public schools in Empowerment
zone academy bonds (QZAB)         employment, and social       Zones and Renewal Communities (which are listed under the
                                  services                     community and regional development budget function). Also, banks
                                                               may generally receive positive consideration under Community
                                                               Reinvestment Act (CRA) requirements for bond purchases to provide
                                                               community services to low- or moderate-income individuals and
                                                               revitalize and/or stabilize low- or moderate-income areas.
Exclusion of gain or loss on sale Natural resources and        The exclusion funds redevelopment of brownfields similar to the
or exchange of certain            environment                  expensing of environmental remediation cost tax expenditure listed
brownfield sites                                               by Treasury under the community and regional development budget
                                                               function.




                                           109
                                               Documents used include, but are not limited to: IRS, Tax Law Changes Related to
                                           Hurricanes Katrina, Rita and Wilma (FS-2006-12), Jan. 2006; JCT, General Explanation of
                                           Tax Legislation Enacted in the 110th Congress, JCS-1-09 (Washington, D.C.: Mar. 18,
                                           2009); JCT, Technical Explanation of H.R. 3768, the “Katrina Emergency Tax Relief Act of
                                           2005,” as Passed by the House and the Senate on September 21, 2005, JCX-69-05
                                           (Washington, D.C.: Sep. 22, 2005); JCT, Technical Explanation of the “Job Creation and
                                           Worker Assistance Act of 2002,” JCX-12-02 (Washington, D.C.: Mar. 6, 2002); and JCT,
                                           Technical Explanation of the Revenue Provisions of H.R. 4440, the “Gulf Opportunity
                                           Zone Act of 2005,” as Passed by the House of Representatives and the Senate, JCX-88-
                                           05 (Washington, D.C.: Dec. 16, 2005).




                                           Page 59                              GAO-12-262 Community Development Tax Expenditures
                                            Appendix I: Objectives, Scope, and
                                            Methodology




Tax expenditure                   Budget function                   Rationale for inclusion
Exclusion of interest on public   General purpose fiscal            Tax-exempt bonds finance public infrastructure and can be used to
purpose state and local bonds     assistance                        finance transportation and water system improvements similar to
                                                                    private activity bond tax expenditures listed under the community
                                                                    and regional development budget function. This public purpose bond
                                                                    tax expenditure is similar to the Build America Bonds tax expenditure
                                                                    listed by JCT under the community and regional development budget
                                                                    function.
Exclusion of interest on rental   Commerce and housing              The tax-exempt bonds finance affordable rental housing activities
housing bonds                                                       which are also eligible activities under the Community Development
                                                                    Block Grant (CDBG). Banks may receive positive consideration
                                                                    under CRA requirements for investing in rental housing bonds to
                                                                    support affordable housing.
Low-Income Housing Tax Credit Commerce and housing                  The tax credit funds affordable rental housing activities, which are
(LIHTC)                                                             also eligible activities under CDBG. Banks also may receive positive
                                                                    consideration under CRA requirements for investing in LIHTC
                                                                    projects.
20 percent credit for             Natural resources and             This credit is similar to the 10 percent nonhistoric rehabilitation tax
rehabilitation of historic        environment                       credit listed by Treasury under the community and regional
structures                                                          development budget function. Historic preservation activities are also
                                                                    eligible under CDBG. Banks may receive positive consideration
                                                                    under CRA requirements for investing in historic preservation
                                                                    projects using the tax credit.
                                            Source: GAO analysis.



                                            Table 10 shows how we categorized the community development tax
                                            expenditures as primarily promoting community development versus
                                            supporting community development and other federal mission areas.




                                            Page 60                                 GAO-12-262 Community Development Tax Expenditures
                                        Appendix I: Objectives, Scope, and
                                        Methodology




Table 10: Overview of Community Development Tax Expenditures by Category

                                                                                                                          Number of tax
Category                   Basis for categorization                                                                        expenditures
Primarily promoting        We included tax expenditures listed by Treasury or JCT only under the                                          12
community development      community and regional development budget function and not any other
                           budget function.
                           In part to avoid potential double counting of revenue losses for disaster tax
                           aid, we further categorized seven tax expenditures supporting disaster
                           relief and recovery in certain areas from tax expenditures. Five tax
                           expenditures primarily promoting community development are targeted to
                           economically distressed areas.
Supporting community       We included tax expenditures listed by both Treasury and JCT, with either                                      11
development and other      Treasury or JCT listing the tax expenditure under a budget function other
federal mission areas      than community and regional development. We also included the tax
                           expenditures listed by Treasury under budget functions other than
                           community and regional development whose description and intended
                           purposes align with our list of community development activities. Based on
                           external feedback, we categorized both tax expenditures brownfields
                                                                                  a
                           redevelopment as supporting community development.
                           Based on external feedback, we distinguished large government bond tax
                           expenditures that also may support community development, but
                           community development activities account for only a portion of the bonds.
                           To avoid overstating federal support for community development, we did
                           not sum the revenue losses for the two general bond provisions.
                                        Source: GAO analysis.
                                        a
                                         Treasury listed expensing of environmental remediation costs under the community and regional
                                        development budget function but listed the exclusion of gain or loss on the sale or exchange of
                                        certain brownfield sites under the natural resources and environment budget function.


                                        We shared the preliminary universe of community development tax
                                        expenditures with Treasury, IRS, Office of Management and Budget
                                        (OMB) and CRS. We also shared the preliminary universe with federal
                                        agencies helping administer specific community development tax
                                        expenditures, including the Community Development Financial
                                        Institutions (CDFI) Fund which administers the New Markets Tax Credit;
                                        the Department of Housing and Urban Development (HUD) which helps
                                        administer the Empowerment Zones and Renewal Communities
                                        programs; and the National Park Service (NPS) which helps administer
                                        rehabilitation tax credits. We asked these agencies to review the
                                        preliminary universe and confirm that the tax expenditures could be used
                                        to promote community development, delete tax expenditures that were
                                        listed incorrectly or are duplicative, or add tax programs that we had
                                        omitted.

                                        Based on feedback from federal agencies, we refined the universe of
                                        community development tax expenditures as appropriate. We excluded



                                        Page 61                                GAO-12-262 Community Development Tax Expenditures
                                              Appendix I: Objectives, Scope, and
                                              Methodology




                                              six tax expenditures reported under the community and regional budget
                                              function, as shown in table 11. As discussed above, we excluded two
                                              disaster tax expenditures listed by Treasury to avoid double counting
                                              disaster aid packages listed by JCT. Similarly, we excluded a District of
                                              Columbia tax expenditure listed by JCT to avoid duplication with
                                              Treasury’s estimate for Empowerment Zones and Renewal Communities.
                                              We excluded three tax expenditures listed by Treasury or JCT under the
                                              community and regional development budget function that were not
                                              specifically linked to community development activities. Our final universe
                                              does not include various energy tax expenditures that may be claimed for
                                              bank investments used to meet CRA regulatory requirements nor tax
                                              expenditures for deductible charitable contributions. Although certain
                                              charitable contributions may fund organizations or activities that
                                              contribute to community development, we excluded charitable
                                              contribution tax deductions from the universe based on external feedback
                                              that it is not feasible to isolate the community development portion of the
                                              large charitable contributions tax expenditures or link the charitable aid to
                                              specific communities.

Table 11: Tax Expenditures Reported under the Community and Regional Development Budget Function but Excluded from
Final Universe

Tax expenditure                             Rationale for exclusion
Credit to holders of Gulf and Midwest       The tax credit was excluded to avoid duplication with the Gulf opportunity zone and
Tax Credit Bonds                            Midwest disaster relief tax expenditures.
District of Columbia tax incentives         The JCT tax expenditure estimate for the mix of tax incentives targeted to the District of
                                            Columbia as excluded to avoid duplication with Treasury’s Empowerment Zones and
                                            Renewal Communities estimate.
Eliminate requirement that financial        According to officials we interviewed, the tax expenditure is not specifically tied to
institutions allocate interest expense      community development activities.
attributable to tax-exempt interest
Employee retention credit for employers     The tax credit was excluded to avoid duplication with the Katrina Emergency Act, Gulf
in certain federal disaster areas           opportunity zone, Kansas disaster relief, and Midwest disaster relief tax expenditures.
Exemption of certain mutuals’ and           According to officials we interviewed, the tax expenditure is not specifically tied to
cooperatives’ income                        community development activities.
Five-year carryback period for certain net According to officials we interviewed, the tax expenditure is not specifically tied to
operating losses of electric utility       community development activities.
companies
                                              Sources: GAO analysis.



                                              See appendix II for our final universe of 23 community development tax
                                              expenditures. This count reflects the number of tax expenditures as
                                              reported on the Treasury or JCT lists. Whereas appendix II lists the
                                              Empowerment Zones and Renewal Communities (EZ/RC) as a single tax



                                              Page 62                               GAO-12-262 Community Development Tax Expenditures
Appendix I: Objectives, Scope, and
Methodology




expenditure consistent with Treasury’s list, appendix IV details the various
tax incentives available in EZs and RCs. We used Treasury revenue loss
estimates for each tax expenditure except in cases where only JCT
reported a tax expenditure. Where appropriate, we summed revenue loss
estimates to approximate the total federal revenue forgone through tax
expenditures that support community development. 110 Certain tax
expenditures, including tax credit and direct payment bonds, also have
associated outlays, and we included those outlays in presenting total
costs. While sufficiently reliable as a gauge of general magnitude, the
sum of the individual tax expenditure estimates does not take into
account interactions between individual provisions.

To identify areas of potential overlap among the tax expenditures, we
used the definitions from our March 2011 report on duplication in
government programs:

•     Overlap occurs when multiple agencies or programs have similar
      goals, similar activities or strategies to achieve them, or similar target
      beneficiaries;
•     Fragmentation refers to circumstances where multiple agencies or
      offices are involved in serving the same broad area of national need;
      and
•     Duplication occurs when two or more agencies or programs are
      engaged in the same activities or provide the same services to the
      same beneficiaries. 111

Using information from prior GAO products, publications from CRS, IRS,
JCT, Office of the Comptroller of Currency (OCC), and OMB; as well as
documentation from other federal agencies helping administer specific tax
expenditures, we compiled publicly available information about each tax
expenditure’s design and implementation, including descriptions; specific
geographies or populations targeted; volume caps and other allocation
limits; and roles of entities within and outside the federal government in



110
   We did not sum JCT estimates for disaster tax expenditures to avoid double counting
amounts included in estimates for Treasury tax expenditures we identified as promoting
community development. Also, we did not sum the total costs for two large bond tax
expenditures to avoid overstating federal support for community development.
111
   GAO, Opportunities to Reduce Potential Duplication in Government Programs, Save
Tax Dollars, and Enhance Revenue, GAO-11-318SP (Washington, D.C.: Mar. 1, 2011).




Page 63                              GAO-12-262 Community Development Tax Expenditures
                  Appendix I: Objectives, Scope, and
                  Methodology




                  administration. 112 Based on the information we collected and the
                  clarifications that the agencies provided, we determined that this
                  descriptive information was sufficiently reliable for the purposes of this
                  engagement to identify potential duplication, overlap, and fragmentation.
                  We reviewed the Internal Revenue Code and IRS regulations to identify
                  allowable interactions or limits on using community development tax
                  expenditures together. Where specified in tax law and regulations, we
                  also identified interactions and limits on using tax expenditures with other
                  federal spending programs. The review of allowable interactions and
                  limits was not exhaustive—we did not search documentation from all
                  federal agencies carrying out community development programs, and
                  regulations for related spending programs may also document
                  interactions between those programs and the community development
                  tax expenditures.


                  To determine what data and performance measures are available and
Tax Expenditure   used to assess community development tax expenditures, we identified
Information and   the data elements and types of information that IRS and federal agencies
                  collect. We also reviewed tax forms, instructions, and other guidance and
Performance       interviewed IRS officials to determine the types of information that IRS
Measures          collects on how the tax expenditures in our universe are used. For certain
                  community development tax expenditures in our universe where other
                  federal agencies help with administration—the New Markets Tax Credit,
                  Empowerment Zone/Renewal Community tax incentives, and the
                  rehabilitation tax credits—we reviewed prior GAO reports, and
                  interviewed and collected information from the CDFI Fund, HUD, and
                  NPS to identify their roles in helping administer the tax expenditures and
                  any measures the agencies use to review tax expenditure performance.
                  We also interviewed officials and reviewed documentation from OMB,
                  Treasury, IRS, HUD, and NPS about efforts to assess performance for
                  community development tax expenditures and any crosscutting reviews of
                  related tax and spending programs. For the purposes of this report, we
                  focused on information collected by federal agencies. State and local
                  entities also collect information on some of the tax expenditures included
                  in our universe. For example, housing finance agencies collect data on
                  low-income housing tax credit projects. Similarly, state and local bond


                  112
                     This report includes a list of Related GAO Products. See also CRS, Tax Expenditures:
                  Compendium of Background on Individual Provisions, S. Prt. 111-58 (Washington, D.C.:
                  Dec. 28, 2010).




                  Page 64                              GAO-12-262 Community Development Tax Expenditures
                      Appendix I: Objectives, Scope, and
                      Methodology




                      financing authorities may have additional data on specific projects and
                      activities funded with federally subsidized bond financing.


                      To determine what previous studies have found about effectiveness for
Previous Studies of   selected tax expenditures, we conducted a literature review for selected
Selected Tax          tax expenditures—the Empowerment Zone/Renewal Community tax
                      programs, the New Markets Tax Credit program, and tax expenditures
Expenditures          available for certain disaster areas. We selected these tax expenditures
                      because they account for most of the 2010 revenue loss for the tax
                      expenditures that primarily promote community development. The EZ tax
                      incentives and the NMTC expired after December 31, 2011. 113 For the
                      EZ/RC and NMTC programs, we focused on literature published since our
                      2010 reports on these programs. 114 We also selected the rehabilitation
                      tax credits; 115 these multipurpose tax expenditures support community
                      development as well another federal mission area, and they can be used
                      in combination with other community development tax expenditures. We
                      searched databases, such as Proquest, Google Scholar, and Econlit, for
                      studies through May 2011. To target our literature review on
                      effectiveness, we identified studies that attempted to measure the impact
                      of the incentives on certain measures of community development, such
                      as the poverty and unemployment rate. We reviewed studies that met the
                      following criteria:

                      •     studies that include original data analysis,
                      •     studies based on empirical or peer-reviewed research, and
                      •     studies not derived from or sponsored by associations representing
                            industry groups and other organizations that may benefit from
                            adjustments to laws and regulations concerning community
                            development tax expenditures.

                      Using these criteria, we identified and reviewed eight studies on the
                      EZ/RC programs published since our most recent report on the topic. For
                      NMTC, although we did not identify any new studies meeting our criteria,


                      113
                            The set of RC tax incentives had expired after December 31, 2009.
                      114
                            GAO-10-464R and GAO-10-334.
                      115
                         A 20 percent tax credit applies for rehabilitating certified historic structures, and a 10
                      percent tax credit applies for rehabilitating noncertified structures placed into service
                      before 1936.




                      Page 65                               GAO-12-262 Community Development Tax Expenditures
Appendix I: Objectives, Scope, and
Methodology




we included a literature review study contracted by CDFI Fund that was
intended to provide the groundwork for a forthcoming evaluation and
provides an overview of inherent challenges in evaluating community
development programs. 116 Additionally, we summarized our prior findings
about the selected tax expenditures, and these findings are not
generalizable to the universe of community development tax
expenditures. For the rehabilitation tax credits, we identified one study
that used empirical methods to measure one aspect of community
development. We also included an academic study prepared with
assistance from NPS that highlights some limitations in attempting to
evaluate the effectiveness of the rehabilitation tax credits. For disaster
relief incentives, we identified peer reviewed articles that made potentially
useful qualitative points, but the articles did not use rigorous or empirical
methods to examine effectiveness. 117 See the bibliography for a listing of
the studies we reviewed in detail. 118

We conducted this performance audit from January 2011 through
February 2012 in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the
audit to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives. We
believe that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.




116
   Martin D. Abravanel, Nancy M. Pindus, and Brett Theodos, Evaluating Community and
Economic Development Programs: A Literature Review to Inform Evaluation of the New
Markets Tax Credit Program. Prepared by the Urban Institute at the request of the U.S.
Department of the Treasury Community Development Financial Institutions (CDFI) Fund
(Washington, D.C.: 2010).
117
   David Listokin; et al., Second Annual Report on the Economic Impact of the Federal
Historic Tax Credit, Rutgers University Edward J. Bloustein School of Planning and Public
Policy (New Brunswick, N.J.: 2011).
118
   See the Related GAO Products section of this report for a list of previously issued
products we reviewed.




Page 66                              GAO-12-262 Community Development Tax Expenditures
Appendix II: Universe of Community
                                                Appendix II: Universe of Community Development Tax Expenditures and Estimates of
                                                Revenue Losses and Outlays for Fiscal Year 2010



Development Tax Expenditures and Estimates of
Revenue Losses and Outlays for Fiscal Year 2010

(Dollars in millions)
                                                                        Fiscal year
                                                         Fiscal year          2010
                                                     2010 estimated      estimated                                                   Taxpayer                               Expiration date
                                                                                                                                                                        a                  a
Number Tax expenditure                               revenue losses        outlays     Budget function(s)         Type               group            Enactment date        (if applicable)
Tax expenditures primarily promoting community development
1.         Empowerment Zones and Renewal                       $730             N/A    Community and regional     Multiple           Individual and   8/10/1993 (EZ);       12/31/2009 (RC);
                               b                                                                                                                                                           c
           Communities (EZ/RC)                                                         development                                   corporate        12/21/2000 (RC)       12/31/2011 (EZ)
2.         New Markets Tax Credit                              $720             N/A    Community and regional     Credit             Individual and   12/21/2000            12/31/2011
                                                                                       development                                   corporate
                                  d                                                                                          e
3.         Recovery Zone bonds                                   $0             $60    Community and regional     Multiple           Individual and   2/17/2009             12/30/2010
                                                                                       development                                   corporate
                                                                                                                                 e                                             f
4.         Tribal Economic Development                          $10             N/A    Community and regional     Exclusion          Individual and   2/17/2009             N/A
           Bonds                                                                       development                                   corporate
                                      g                            h
5.         Indian employment credit                                             N/A    Community and regional     Credit             Individual and   8/10/1993             12/31/2011
                                                                                       development                                   corporate
Tax expenditures supporting community development and other federal mission areas
6.         Low-Income Housing Tax Credit                     $5,650             N/A    Commerce and housing       Credit             Individual and   10/22/1986            N/A
                   i
           (LIHTC)                                                                                                                   corporate
7.         20 percent credit for rehabilitation of             $390             N/A    Natural resources and      Credit             Individual and   11/5/1990             N/A
           historic structures                                                         environment (Treasury);                       corporate
                                                                                       commerce and housing
                                                                                       (JCT)
8.         10 percent credit for rehabilitation of              $20             N/A    Community and regional     Credit             Individual and   11/5/1990             N/A
           structures (other than historic)                                            development (Treasury);                       corporate
                                                                                       commerce and housing
                                                                                       (JCT)




                                                Page 67                            GAO-12-262 Community Development Tax Expenditures
                                                Appendix II: Universe of Community Development Tax Expenditures and Estimates of
                                                Revenue Losses and Outlays for Fiscal Year 2010




(Dollars in millions)
                                                                        Fiscal year
                                                        Fiscal year           2010
                                                    2010 estimated       estimated                                                 Taxpayer                            Expiration date
                                                                                                                                                                   a                  a
Number Tax expenditure                              revenue losses         outlays     Budget function(s)         Type             group            Enactment date     (if applicable)
                                                                                                                                                                                    j
9.         Exclusion of gain or loss on sale or                 $70             N/A    Natural resources and      Exclusion        Individual and   10/22/2004         12/31/2009
           exchange of certain brownfield sites                                        environment (Treasury);                     corporate
                                                                                       commerce and housing
                                                                                       (JCT)
10.        Expensing of environmental                           $10             N/A    Community and regional     Deferral         Individual and   8/5/1997           12/31/2011
           remediation costs                                                           development                                 corporate
11.        Exclusion of interest on rental                   $1,050             N/A    Commerce and housing       Exclusion        Individual and   12/5/1980          N/A
           housing bonds                                                                                                           corporate
12.        Exclusion of interest for airport,                  $840             N/A    Community and regional     Exclusion        Individual and   6/28/1968          N/A
           dock, and similar bonds                                                     development (Treasury);                     corporate
                                                                                       Transportation (JCT)
13.        Exclusion of interest on bonds for                  $460             N/A    Natural resources and      Exclusion        Individual and   6/28/1968 (water N/A
           water, sewage, and hazardous                                                environment (Treasury);                     corporate        and sewage
           waste facilities                                                            community and regional                                       facilities);
                                                                                       development (JCT)                                            10/22/1986
                                                                                                                                                    (hazardous
                                                                                                                                                    waste facilities)
                                                                                                                           e                                                        k
14.        Credit for holders of qualified zone                $190             $10    Education, training,       Credit           Corporate        8/5/1997           12/31/2011
           academy bonds (QZAB)                                                        employment, and social
                                                                                       services
                                                                                                                                                               l
15.        Exclusion of interest on public                  $30,440             N/A    General purpose fiscal     Exclusion        Individual and   8/16/1954          N/A
                                           l
           purpose state and local bonds                                               assistance                                  corporate
                                 l                                                                                         e
16.        Build America Bonds                                   $0          $1,850    General purpose fiscal     Credit           Individual and   2/17/2009          12/31/2010
                                                                                       assistance (Treasury);                      corporate
                                                                                       community and regional
                                                                                       development (JCT)




                                                Page 68                            GAO-12-262 Community Development Tax Expenditures
                                               Appendix II: Universe of Community Development Tax Expenditures and Estimates of
                                               Revenue Losses and Outlays for Fiscal Year 2010




(Dollars in millions)
                                                                                 Fiscal year
                                                           Fiscal year                 2010
                                                       2010 estimated             estimated                                                            Taxpayer                          Expiration date
                                                                                                                                                                                     a                  a
Number Tax expenditure                                 revenue losses               outlays            Budget function(s)               Type           group            Enactment date   (if applicable)
                                                      g
Disaster relief and recovery tax expenditures
                                                                          n                                                                        o
17.        New York Liberty Zone                                                            N/A        Community and regional           Multiple       Individual and   3/9/2002         Varied
                                                                                                       development                                     corporate
                                                                          n                                                                        o
18.        Katrina Emergency Act                                                            N/A        Community and regional           Multiple       Individual and   9/23/2005        Varied
                                                                                                       development                                     corporate
                                                                                                                                                   o
19.        Gulf Opportunity Zone                                    $700                    N/A        Community and regional           Multiple       Individual and   12/22/2005       Varied
                                                                                                       development                                     corporate
                                                                          n                                                                        o
20.        Kansas disaster relief                                                           N/A        Community and regional           Multiple       Individual and   6/18/2008        Varied
                                                                                                       development                                     corporate
                                                                                                                                                   o
21.        Midwest disaster relief                                $1,100                    N/A        Community and regional           Multiple       Individual and   10/3/2008        Varied
                                                                                                       development                                     corporate
                                                                                                                                                   o
22.        National disaster relief                                 $400                    N/A        Community and regional           Multiple       Individual and   10/3/2008        Varied
                                                                                                       development                                     corporate
                                                                          p
23.        Three-year carryback of small                                                    N/A        Community and regional           Deduction      Individual       8/5/1997         N/A
           businesses’ and farmers’ casualty                                                           development
           losses attributable to presidentially
           declared disasters
                                               Sources: GAO analysis of Congressional Budget Office , IRS, JCT and OMB documentation.

                                               Notes: Revenue losses and outlay effects reflect Treasury estimates from the President’s Fiscal Year 2012 budget unless otherwise specified. Treasury
                                               rounds revenue losses to the nearest $10 million. JCT rounds revenue losses to the nearest $100 million and does not report an estimated amount for
                                               revenue losses of less than $50 million. Revenue loss estimates do not incorporate any behavioral responses and thus do not necessarily represent the
                                               exact amount of revenue that would be gained if a specific tax expenditure were repealed.
                                               N/A: Not applicable.
                                               a
                                                Enactment dates reflect the original enactment. Some tax expenditures originally due to expire may have been extended over time. Expiration date as
                                               of February 17, 2012.
                                               b
                                                   The EZ and RC programs offered packages of tax incentives in specific designated communities. Appendix IV lists seven EZ and six RC tax incentives.




                                               Page 69                                           GAO-12-262 Community Development Tax Expenditures
Appendix II: Universe of Community Development Tax Expenditures and Estimates of
Revenue Losses and Outlays for Fiscal Year 2010




c
  According to HUD officials, all RC tax programs expired and are no longer available to RC designees as of December 31, 2009. All EZ tax programs
expired and are no longer be available to EZ designees after December 31, 2011.
d
    Includes both Recovery Zone Economic Development Bonds and Recovery Zone Facility Bonds.
e
 For certain tax credit bonds, state, local, and tribal government issuers had the option of receiving a direct payment from the U.S. Treasury in the
amount of the tax credit. Appendix IV describes these bond tax expenditures in more detail.
f
All $2 billion in available Tribal Economic Development bond volume was to be allocated by February 28, 2010, but Treasury and IRS have extended
deadlines in order to reallocate unused bond authority. According to Treasury, tribal bonds issued as of November 2011 represented less than 3 percent
of the available authority.
g
    Tax expenditure listed only by JCT.
h
    JCT indicated a revenue loss of less than $50 million.
i
The American Recovery and Reinvestment Act (Recovery Act) established two funding programs that provide capital investments to LIHTC projects: (1)
the Tax Credit Assistance Program (TCAP) administered by HUD and (2) the Grants to States for Low-Income Housing Projects in Lieu of Low-Income
Housing Credits Program under Section 1602 of the Recovery Act (Section 1602 Program) administered by Treasury. The administration of the TCAP
and Section 1602 programs is entirely separate from the administration of the LIHTC program. For fiscal year 2010, HUD outlayed about $1.05 billion of
TCAP funds and Treasury had outlayed about $1.9 billion of Section 1602 Program funds.
j
In order to use the tax exclusion, brownfield properties must be purchased by December 31, 2009.
k
    No allocation of QZAB tax credits is permitted after this date, though claimants are allowed to carry forward the provisions for 2 years.
l
While this bond provision may support community development, community development activities account for only a portion of the bond provisions’
costs.
m
  The exclusion of interest on public-purpose state and local bonds has been in effect, in one form or another, since the enactment of the Revenue Act of
1913, ch. 16, 38 Stat. 114.
n
    JCT indicated a revenue loss of less than $50 million in fiscal year 2010.
o
 Appendix VI lists the specific tax provisions and special rules available for certain presidentially declared disaster areas as well as projected revenue
estimates at the time of enactment. Whereas revenue loss estimates are based on data about tax benefits claimed, projected revenue estimates for
each package at time of enactment were based on projections of taxpayer use of tax benefits available; actual use of and resulting revenue losses for
some provisions may have been lower than anticipated at time of enactment.
p
    JCT did not quantify revenue losses for this tax expenditure.




Page 70                                      GAO-12-262 Community Development Tax Expenditures
Appendix III: Multiple Tax Expenditures
                                              Appendix III: Multiple Tax Expenditures Fund
                                              Community Development, Fiscal Year 2010



Fund Community Development, Fiscal Year
2010

(Dollars in millions)
                                                                                                                                    Fiscal year 2010
                                                                                                                                                    a
Category                                Specific tax expenditure                                                                         total costs
Tax expenditures primarily              Empowerment Zones and Renewal Communities                                                               $730
promoting community development
                                        New Markets Tax Credit                                                                                  $720
in distressed communities
                                        Other, subtotal                                                                                          $70
                                                                           b                                                                          c
                                        •   Recovery Zone bonds                                                                                 $60
                                        •   Tribal Economic Development Bonds                                                                    $10
                                                                                                                                                     d
                                        •   Indian employment credit
Total – tax expenditures primarily promoting community development in distressed areas                                                        $1,520
                                                                                                                                                     e
Tax relief for certain presidentially   See Appendix VI for tax provisions and special rules available for disaster
                          e
declared disaster areas                 relief and recovery for specific presidentially declared disaster areas
Tax expenditures supporting             Affordable housing, subtotal                                                                          $6.700
community development and other             Low-Income Housing Tax Credit
                                                                                          f
                                        •                                                                                                     $5,650
federal mission areas
                                        •   Exclusion of interest on rental housing bonds                                                     $1,050
                                        Rehabilitation of older structures, subtotal                                                            $410
                                        •   20 percent credit for rehabilitation of historic structures                                         $390
                                        •   10 percent credit for rehabilitation of structures (other than historic)                             $20
                                        Brownfields development, subtotal                                                                        $80
                                        •   Exclusion of gain or loss on sale or exchange of certain brownfield sites                            $70
                                        •   Expensing of environmental remediation costs                                                         $10
                                        Infrastructure improvement, subtotal                                                                  $1,500
                                        •   Exclusion of interest for airport, dock, and similar bonds                                          $840
                                        •   Exclusion of interest on bonds for water, sewage, and hazardous waste                               $460
                                            facilities
                                                                                                                                                     g
                                        •   Credit for holders of qualified zone academy bonds                                                 $200
Total – tax expenditures supporting community development and other federal mission areas                                                     $8,690
Bond tax expenditures that may          Exclusion of interest on public purpose state and local bonds                                        $30,440
                               h
support community development           Build America Bonds                                                                                  $1,850
                                                                                                                                                      i


Total – bond tax expenditures that may support community development                                                                         $32,290
                                              Source: GAO analysis of Treasury and Joint Committee on Taxation (JCT) information.
                                              a
                                                  Total costs include revenue losses and outlays estimated by Treasury unless otherwise specified.
                                              b
                                                  Includes both Recovery Zone Economic Development Bonds and Recovery Zone Facility Bonds.
                                              c
                                               Total includes $60 million in outlays for fiscal year 2010.
                                              d
                                                  JCT indicated a revenue loss of less than $50 million.
                                              e
                                               We did not sum total costs of disaster package tax expenditures listed by JCT to avoid double
                                              counting estimated revenue losses for Treasury tax expenditures we identified as promoting
                                              community development.




                                              Page 71                                            GAO-12-262 Community Development Tax Expenditures
Appendix III: Multiple Tax Expenditures Fund
Community Development, Fiscal Year 2010




f
 The American Recovery and Reinvestment Act (Recovery Act) established two funding programs
that provide capital investments to LIHTC projects: (1) the Tax Credit Assistance Program (TCAP)
administered by HUD and (2) the Grants to States for Low-Income Housing Projects in Lieu of Low-
Income Housing Credits Program under Section 1602 of the Recovery Act (Section 1602 Program)
administered by Treasury. The administration of the TCAP and Section 1602 programs is entirely
separate from the administration of the LIHTC program. For fiscal year 2010, HUD outlayed about
$1.05 billion of TCAP funds and Treasury had outlayed about $1.9 billion of Section 1602 Program
funds.
g
    Total includes $190 million in revenue losses, and $10 million in outlays for fiscal year 2010.
h
 While these bond tax expenditures may support community development, community development
activities account for only a portion of the bond provisions’ costs.
i
    Total includes $1,850 million in outlays for fiscal year 2010.




Page 72                                       GAO-12-262 Community Development Tax Expenditures
Appendix IV: Community Development Tax
                                           Appendix IV: Community Development Tax Expenditures by Description, and Targeted
                                           Geographies and Populations



Expenditures by Description, and Targeted
Geographies and Populations

Number   Tax expenditure                         Description                                                    Targeted geographies and populations
Tax expenditures primarily promoting community development
1.       Empowerment Zones and Renewal           Businesses in designated Empowerment Zones (EZ) or             30 urban EZs, 10 rural EZs, 28 urban RCs and 12 rural RCs
         Communities (EZ/RC)                     Renewal Communities (RC) are eligible to claim various tax     located throughout the United States. These areas consist of
                                                                          a
                                                 incentives, listed below. These incentives may help reduce     Census tracts that are economically depressed and meet
                                                 unemployment, generate economic growth, and stimulate          statutory or regulatory requirements (based on 1990 Census
                                                 community development and business activity.                   data) for (1) poverty level, (2) overall unemployment, (3) total
                                                                                                                population, and (4) maximum required area of EZs or RCs.
                                                                                                                Additionally, the boundaries of RCs were expanded based on
                                                                                                                2000 Census data.
                                                                                                                The eligibility requirements differed by round, by program, and
                                                                                                                between urban and rural nominees; for example, round I urban
                                                                                                                EZs (selected in 1993) were selected using 6 indicators of
                                                                                                                general distress, including incidence of crime and narcotics
                                                                                                                use and amount of abandoned housing, while urban and rural
                                                                                                                ECs (selected in 2000) were selected using 17 indicators,
                                                                                                                including number of persons on welfare and high school
                                                                                                                dropout rates.
         •   Employment credit (EZ/RC)           Businesses may claim an annual tax credit of up to $3,000 or    Businesses in EZs and RCs, and employees living and
                                                 $1,500 for each employee living and working for the employer in working for the employer in EZs or RCs.
                                                 an EZ or RC area, respectively.
         •   Work Opportunity Tax Credit         Businesses may claim a tax credit of up to $2,400 for each new Businesses in EZs and RCs, and employees living and
             (EZ/RC)                             employee age 18 to 39 living in an EZ/RC, or up to $1,200 for a working for the employer in EZs or RCs aged 18-39, or youth
                                                 youth summer hire ages 16 or 17 living in an EZ or RC.          summer hires ages 16 or 17 living in an EZ or RC.
         •   Commercial Revitalization           Businesses may claim an accelerated method of depreciation to New construction and rehabilitation projects in RCs.
             Deduction (RC)                      recover certain business costs of new or substantially
                                                 rehabilitated commercial buildings located in an RC; states may
                                                 allocate up to $12 million annually per RC for the provision.
         •   Increased Section 179 deduction Businesses may claim an increased deduction of up to the           Businesses incurring costs for tangible personal property, such
             (EZ/RC)                         smaller of $35,000 or the cost of eligible property purchases      as equipment and machinery, for use in EZs or RCs.
                                             (including equipment and machinery) for businesses in an
                                             EZ/RC.




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                                          Geographies and Populations




Number   Tax expenditure                        Description                                                          Targeted geographies and populations
         •   Facility Bonds (EZ)                State and local governments can issue tax-exempt bonds to            Large business projects tied to the employment of residents in
                                                provide loans to qualified businesses to finance construction        EZs.
                                                costs in EZs. State and local government entities can issue up
                                                to $60 million for each rural EZ, $130 million for each urban EZ
                                                with a population of less than 100,000, and $230 million for
                                                each urban EZ with a population greater than or equal to
                                                100,000. These bonds are not subject to state volume caps.
         •   Rollover of capital gains (EZ)     Owners of businesses located in EZs may be able to postpone          Businesses located in EZs.
                                                part or all of the gain from the sale of a qualified EZ asset that
                                                they hold for more than 1 year.
         •   Increased exclusion of capital     Taxpayers can exclude 60 percent of their gain from the sale of      Enterprise zone businesses located in EZs.
             gains (EZ)                         small business stock in a corporation that qualifies as an
                                                enterprise zone business.
         •   Exclusion of capital gains (RC)    Owners of businesses located in RCs can exclude qualified            Businesses located in RCs.
                                                capital gains from the sale or exchange of a qualified
                                                community asset held more than 5 years.
2.       New Markets Tax Credit (NMTC)          Investors are eligible to claim a tax credit for investing in        Low-income communities defined as Census tracts (1) in
                                                certified Community Development Entities (CDE) for 39 percent        which the poverty rate is at least 20 percent, or (2) outside a
                                                of the investment over 7 years. CDEs, in turn, invest in qualified   metropolitan area in which the median family income does not
                                                low-income community investments such as mixed-use                   exceed 80 percent of median statewide family income or within
                                                facilities, housing developments, and community facilities,          a metropolitan area in which the median family income does
                                                which may contribute to employment in low-income                     not exceed 80 percent of the greater statewide or metropolitan
                                                communities.                                                         area median family income. Low-income communities also
                                                                                                                     include certain areas not within Census tracts, tracts with low
                                                                                                                     population, and Census tracts with high-migration rural
                                                                                                                     counties.




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                                      Geographies and Populations




Number   Tax expenditure                     Description                                                           Targeted geographies and populations
3.       Recovery Zone bonds                 State and local governments issuing Recovery Zone Economic            RZEDBs and RZFBs target any area designated “recovery
                                             Development Bonds (RZEDB) allow investors to claim a tax              zones”, including (1) areas having significant poverty,
                                             credit (equal to 45 percent of the interest rate established          unemployment, rate of home foreclosures, or general distress;
                                             between the buyer and the issuer of the bond). States and             (2) areas that are economically distressed by reason of the
                                             localities also had the option of receiving a direct payment from     closure or realignment of a military installation pursuant to the
                                             the U.S. Treasury of equal value to the tax credit. Bond              Defense Base Closure and Realignment Act of 1990; or is (3)
                                             proceeds were to be used to fund (1) capital expenditures paid        any area for which an Empowerment Zone or Renewal
                                             or incurred with respect to property located in the designated        Community was in effect as of February 17, 2009.
                                             recovery zone (e.g., Empowerment Zones or Renewal
                                             Communities); (2) expenditures for public infrastructure and
                                             construction of public facilities; and (3) expenditures for job
                                             training and educational programs.
                                             Individuals and corporations can exclude Recovery Zone
                                             Facility Bond (RZFB) interest income from their taxable income.
                                             Bond proceeds are used by state and local governments to
                                             finance projects pertaining to any trade or business, aside from
                                             exceptions listed below. More specifically, RZFBs may be
                                             issued for any depreciable property that (1) was constructed,
                                             reconstructed, renovated, or acquired after the date of
                                             designation of a “recovery zone;” (2) the original use of which
                                             occurs in the recovery zone; and (3) substantially all of the use
                                             of the property is in the active conduct of a “qualified business,”
                                             which is defined to include any trade or business except for
                                             residential rental facilities or other specifically listed projects
                                             under Internal Revenue Code 144(c)(6)(B), including golf
                                             courses, massage parlors, and gambling facilities.
4.       Tribal Economic Development Bonds   Purchasers of Tribal Economic Development Bonds, a               Indian reservations.
                                             temporary category of tax-exempt bonds, could exclude that
                                             interest income from their taxable income.. Indian tribal
                                             governments were allowed greater flexibility to use the bonds to
                                             finance economic development projects, which in turn were to
                                             promote development on Indian reservations. Previously, Indian
                                             tribal governments could only issue tax-exempt bonds for
                                                                            b
                                             essential government services.




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                                         Geographies and Populations




Number   Tax expenditure                       Description                                                           Targeted geographies and populations
5.       Indian employment credit              Businesses on Indian reservations are eligible to claim a tax         Businesses on Indian reservations, and Indian tribal members
                                               credit for employing Indian tribal members and their spouses.         and spouses.
                                               The credit is for 20 percent of the first $20,000 in wages and
                                               health benefits paid to tribal members and spouses. This credit
                                               is intended to provide businesses with an incentive to hire
                                               certain individuals living on or near an Indian reservation.
Tax expenditures supporting community development and other federal mission areas
6.       Low-Income Housing Tax Credit         State housing finance agencies (HFA) award the tax credits to         Households with income at or below 60 percent of an area’s
                                                                                                                                                       d
         (LIHTC)                               owners of qualified rental properties who reserve all or a portion    median gross income (AMGI).
                                               of their units for occupancy for low-income tenants. Once             Qualified Census tracts and difficult development areas are
                                               awarded LIHTCs, project owners typically attempt to obtain            eligible for additional credits. In a qualified Census tract, 50
                                               funding for their projects by attracting third-party investors that   percent or more of the households have incomes of less than
                                               contribute equity to the projects. These investors can then claim     60 percent of the area’s median income. In a difficult
                                               the tax credits. This arrangement of providing LIHTCs in return       development area, construction, land, and utility costs are high
                                               for an equity investment is generally referred to as “selling” the    relative to the area’s median income.
                                               tax credits. The credit is claimed over a 10-year period, but a
                                               project must comply with LIHTC requirements for 15 years. A 9
                                               percent tax credit—intended to subsidize 70 percent of the
                                               qualified basis in present value terms—is available for the costs
                                               for new construction or substantial rehabilitation projects not
                                               otherwise subsidized by the federal government. An
                                               approximately 4 percent tax credit—intended to subsidize about
                                               30 percent of the qualified basis in present value terms—is
                                                                                                          c
                                               available for the acquisition costs for existing buildings. The 4
                                               percent credit is also used for housing financed with tax-exempt
                                               rental housing bonds. The low-income housing tax credit
                                               program is intended to stimulate the production of affordable
                                               rental housing nationwide for low-income households.




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                                            Geographies and Populations




Number   Tax expenditure                           Description                                                            Targeted geographies and populations
7.       20 percent credit for rehabilitation of   Building owners and private investors may qualify to claim a 20        Certified historic buildings either listed individually in the
         historic structures                       percent tax credit for costs to substantially rehabilitate buildings   National Register of Historic Places, or located in a registered
                                                   that are on the National Register of Historic Places or are            historic district and certified by NPS as contributing to the
                                                   otherwise certified as historic by the National Park Service           historic significance of that district.
                                                   (NPS). To be eligible for the credit, buildings must be used for
                                                   offices; rental housing; or commercial, industrial, or agricultural
                                                   enterprises. Building owners must hold the building for 5 years
                                                   after completing the rehabilitation or pay back at least a portion
                                                   of the credit. The credit is intended to attract private investment
                                                   to the historic cores of cities and towns. The credit is also
                                                   intended to generate jobs, enhance property values, and
                                                   augment revenues for state and local governments through
                                                   increased property, business and income taxes.
8.       10 percent credit for rehabilitation of   Individuals or corporations may claim a 10 percent tax credit for Nonresidential buildings placed into service before 1936;
         structures (other than historic)          costs to substantially rehabilitate nonhistoric, nonresidential     especially those located in older neighborhoods and central
                                                   buildings placed into service before 1936. These structures         cities.
                                                   must retain specified proportions of the buildings’ external and
                                                   internal walls and internal structural framework. To be eligible
                                                   for the credit, buildings must be used for offices or commercial,
                                                   industrial, or agricultural enterprises. Qualified spending must
                                                   exceed the greater of $5,000 or the adjusted basis (cost less
                                                   depreciation taken) of the building spent in any 24-month
                                                   period. The credit is intended to attract private investment to the
                                                   historic cores of cities and towns. The credit is also intended to
                                                   generate jobs, enhance property values, and augment revenues
                                                   for state and local governments through increased property,
                                                   business and income taxes.
9.       Exclusion of gain or loss on sale or      Tax-exempt organizations may exclude gains or losses from the          Environmentally contaminated sites identified as brownfields
         exchange of certain brownfield sites      unrelated business income tax when they acquire and sell               held for use in a trade or business on which there has been an
                                                   brownfield properties on which there has been an actual or             actual or threatened release or disposal of certain hazardous
                                                   threatened release of certain hazardous substances. This               substances. The exclusion does not target specific
                                                   exclusion reduces the total cost of remediating environmentally        geographies or populations.
                                                   damaged property and may attract the capital and enterprises
                                                   needed to rebuild and redevelop polluted sites.




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                                            Geographies and Populations




Number   Tax expenditure                            Description                                                      Targeted geographies and populations
10.      Expensing of environmental                 Firms may deduct expenses related to controlling or abating      Environmentally contaminated sites identified as brownfields
         remediation costs                          hazardous substances in a qualified brownfield property. This    held for use in a trade or business on which there has been an
                                                    deduction subsidizes environmental cleanup and may help          actual or threatened release or disposal of certain hazardous
                                                    develop and revitalize urban and rural areas depressed from      substances. The deduction does not target specific
                                                    environmental contamination.                                     geographies or populations.
11.      Exclusion of interest on rental            Individuals and corporations can exclude private activity bond  Households with incomes at or below 60 percent of an area’s
         housing bonds                              interest income from their taxable income. Bond proceeds are    median gross income (AMGI).
                                                    used by state and local governments to finance the construction
                                                    of multifamily residential rental housing units for low- and
                                                    moderate-income families. Low-income housing construction
                                                    partly financed with the tax-exempt bonds may be used with the
                                                    4 percent low-income housing tax credit.
12.      Exclusion of interest for airport, dock,   Individuals and corporations can exclude private activity bond  Infrastructure such as airports, docks, wharves, mass
         and similar bonds                          interest income from their taxable income. Bond proceeds are    commuting facilities, and intercity rail facilities. The bond
                                                    used by state and local governments to finance the construction provision does not target specific geographies or populations.
                                                    of government-owned airports, docks, and wharves; mass
                                                    commuting facilities such as bus depots and subway stations;
                                                    and high-speed rail facilities and government-owned sport and
                                                    convention facilities.
13.      Exclusion of interest on bonds for Individuals and corporations can exclude private activity bond  Infrastructure such as water treatment plants, sewer systems
         water, sewage, and hazardous waste interest income from their taxable income. Bond proceeds are    and hazardous waste facilities; the bond provision does not
         facilities                         used by state and local governments to finance the construction target specific geographies or populations.
                                            of water, sewage, and hazardous waste facilities.




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                                           Geographies and Populations




Number   Tax expenditure                         Description                                                        Targeted geographies and populations
14.      Credit for holders of qualified zone    Banks, insurance companies, and other lending corporations         Public schools below the college level that (1) are located in an
         academy bonds (QZAB)                    that purchase qualified zone academy bonds are eligible to         Empowerment Zone, Enterprise Community or Renewal
                                                 claim a tax credit equal to the dollar value of their bonds        Community, or (2) have at least 35 percent of their student
                                                 multiplied by a Treasury-set credit rate. Or, issuers had the      body eligible for free or reduced-cost lunches.
                                                 option for qualified zone academies to receive a direct payment
                                                 from the Treasury of equal value to the tax credit. School
                                                 districts with qualified zone academies issue the bonds and use
                                                 at least 95 percent of the bond proceeds to renovate facilities,
                                                 provide equipment, develop course materials, or train personnel
                                                 in such academies. Business or nonprofit partners must also
                                                 provide at least a 10 percent match of QZAB funds, either in
                                                 cash or in-kind donations, to qualified zone academies. The
                                                 bond program helps school districts reduce the burden of
                                                 financing school renovations and repairs.
15.      Exclusion of interest on public         Individuals and corporations can exclude governmental bond         Capital facilities owned and operated by governmental entities
         purpose state and local bonds           interest income from their taxable income. State and local         that serve the public interest. The bond provision does not
                                                 governments generally use bond proceeds to build capital           target specific geographies or populations.
                                                 facilities such as highways, schools, and government buildings.
16.      Build America Bonds (BAB)               Individuals and corporations could claim a tax credit equal to 35 No specific geographies or populations are targeted.
                                                 percent of the interest rate established between the buyer and
                                                 the issuer of the bond. State and local governments issuing
                                                 BABs also had the option of receiving a direct payment from the
                                                 Treasury of equal value to the tax credit. Bond proceeds were
                                                 intended to be used for stimulating development of public
                                                 infrastructure in communities, as well as to aid state and local
                                                 governments. If issuers choose to receive a direct payment,
                                                 then they must use bond proceeds for capital expenditures.




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                                         Geographies and Populations




Number    Tax expenditure                       Description                                                         Targeted geographies and populations
Disaster relief and recovery tax expenditures
17.       New York Liberty Zone                 Individuals and corporations affected by the September 11,      Areas of Lower Manhattan affected by terrorist attacks
                                                2001, terrorist attacks were eligible for seven tax provisions. occurring on September 11, 2001.
                                                These provisions included tax-exempt bonds targeted toward
                                                reconstruction and renovation; a special depreciation allowance
                                                for certain property that was damaged or destroyed; and a tax
                                                credit for businesses to hire and retain employees in the New
                                                                    e
                                                York Liberty Zone.
18.       Katrina Emergency Act                 Individuals and corporations affected by Hurricane Katrina,         Hurricane Katrina disaster area (consisting of the states of
                                                which struck in August 2005, were eligible to claim 19 tax          Alabama, Florida, Louisiana, Mississippi), including core
                                                provisions for relief and recovery. These provisions included       disaster areas determined by the President to warrant
                                                exemptions for housing displaced individuals; employee              individual or individual and public assistance from the federal
                                                retention tax credits for affected businesses; and suspensions      government following Hurricane Katrina in August 2005.
                                                on limitations for corporate charitable contributions towards
                                                                          e
                                                hurricane relief efforts.
19.       Gulf Opportunity Zone (GO Zone)       Individuals and corporations affected by hurricanes Katrina,        Counties and parishes in Alabama, Florida, Louisiana,
                                                Rita, and Wilma, which struck between August-October 2005,          Mississippi and Texas that warranted additional, long-term
                                                were eligible to claim 33 GO Zone tax provisions. These             federal assistance following Hurricanes Katrina, Rita and
                                                provisions include tax-exempt bond financing, expensing for         Wilma in 2005 were designated as Katrina, Rita and/or Wilma
                                                certain clean-up and demolition costs, and additional allocations   GO Zones.
                                                of the New Markets Tax Credit for investments that served the
                                                           e
                                                GO Zone.
20.       Kansas disaster relief                Individuals and corporations in the Kansas disaster zone          Twenty-four counties in Kansas affected by storms and
                                                affected by severe storms and tornadoes beginning on May 4,       tornadoes that began on May 4, 2007.
                                                2007 could have claimed 13 tax provisions for relief and
                                                recovery. These provisions included suspensions of limitations
                                                on claiming personal casualty losses, employee retention tax
                                                credits for affected businesses, and expensing for certain clean-
                                                                          e
                                                up and demolition costs.




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                                            Geographies and Populations




Number   Tax expenditure                              Description                                                                            Targeted geographies and populations
21.      Midwest disaster relief                      Individuals and corporations affected by severe storms,                                Selected counties in 10 states affected by tornadoes, severe
                                                      tornadoes or flooding in 10 states from May 20-July 31, 2008                           storms and flooding occurring from May 20-July 31, 2008.
                                                      were eligible for a package of 26 tax benefits, including tax-
                                                      exempt bond financing, increased rehabilitation tax credits for
                                                      damaged or destroyed structures, and suspensions of
                                                                                                        e
                                                      limitations on claiming personal casualty losses.
22.      National disaster relief                     Individuals and corporations situated in any federally declared   Individuals and businesses located in any geography declared
                                                      disaster area during 2008 and 2009 were able to claim eight       a disaster area in the United States during tax years 2008 and
                                                      disaster relief and recovery tax provisions, including deductions 2009.
                                                      for abatement or control of hazardous substances released on
                                                      account of disasters, a 5-year carryback period for net operating
                                                      losses from qualified disaster losses, and a special depreciation
                                                                                                 e
                                                      allowance for qualified disaster property.
23.      Three-year carry back of small               Qualified small or farming businesses affected by disasters in                         Qualified small businesses and farming businesses located in
         businesses’ and farmers’ casualty            federally declared disaster areas are eligible to claim a net                          any federally declared disaster area. Qualified small
         losses attributable to presidentially        operating loss for up to 3 years after the loss was incurred,                          businesses are sole proprietorships or partnerships with
         declared disasters                           instead of the usual 2 years generally permitted. This credit may                      average annual gross receipts (reduced by returns and
                                                      allow small and farming businesses in communities declared                             allowances) of $5 million or less during the 3-year period
                                                      disaster areas to recoup a portion of their losses following a                         ending with the tax year of the net operating loss.
                                                      disaster.
                                            Sources: GAO analysis of CRS, Environmental Protection Agency (EPA), JCT, NPS and OMB documentation.
                                            a
                                                EZ and RC tax benefits also included tax credits for holders of Qualified Zone Academy Bonds (QZAB); see listing for QZAB tax expenditure.
                                            b
                                             For more information on the bond financing by Indian tribal governments, see GAO, Federal Tax Policy: Information on Selected Capital Facilities
                                            Related to the Essential Governmental Function Test, GAO-06-1082 (Washington, D.C.: Sept.13, 2006) and U.S. Department of the Treasury, Report
                                            and Recommendations to Congress reqarding Tribal Economic Development Bond provision under Section 7871 of the Internal Revenue Code
                                            (Washington, D.C.: Dec. 19, 2011).
                                            c
                                             For new buildings that are not federally subsidized and placed in service after July 30, 2008, and before December 31, 2013, the present value factor
                                            (applicable percentage) is no less than 9%. Otherwise, the applicable percentage is based on federal mid-term and long-term interest rates and
                                            fluctuates on a monthly basis.
                                            d
                                                A taxpayer may elect to provide housing for households with income at or below 50 percent of AMGI.
                                            e
                                                In addition to the tax provisions highlighted here, appendix VI lists all tax provisions and special rules available under each disaster tax package.




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Appendix V: Community Development Tax
                                         Appendix V: Community Development Tax Expenditures by Volume Caps, Other Allocation
                                         Limits, and Administration



Expenditures by Volume Caps, Other
Allocation Limits, and Administration

                                             Volume cap or other allocation Involves administration by a federal                   Involves administration by nonfederal
Number    Tax expenditure                    limits?                        agency outside IRS?                                    entity?
Tax expenditures primarily promoting community development
1.        Empowerment Zones and              Varied. Five EZ and four RC tax       Yes; HUD oversaw EZ programs in urban           Yes; state and local governments nominate
          Renewal Communities (EZ/RC)        incentives did not have any           areas, and the USDA oversaw EZ programs         communities for EZ and RC designation.
                                                                               a
                                             volume caps or allocation limits.     in rural areas.                                 Nominated EZ communities had to submit a
                                                                                   HUD is responsible for outreach efforts and     strategic plan showing how they would meet
                                                                                   serves as a promoter for EZs and RCs. HUD       key program principles, while nominated RCs
                                                                                   and IRS established a partnership regarding     had to submit a written “course of action” with
                                                                                   the EZ/RC tax incentives, where both HUD        commitments to carry out specific legislatively
                                                                                   and IRS provide representation at workshops     mandated activities.
                                                                                   and conferences.
          •   RC Commercial Revitalization Limit of up to an annual total of       No; IRS has sole federal responsibility for the Yes; state governments allocate CRD authority
              Deduction (CRD)              $12 million per RC.                     administration of the CRD program. HUD          to eligible businesses engaged in commercial
                                                                                   collected data from local administrators used projects within RCs.
                                                                                   for commercial projects in RCs.
          •   EZ Facility Bonds              Limits on issuing EZ facility bond    No; IRS has sole federal responsibility for the Yes; state and local governments issue EZ
                                             volume were up to $60 million for     administration of EZ facility bond program.     facility bonds to finance construction costs.
                                             each rural EZ, up to $130 million     HUD collected information from local
                                             for each urban EZ with a              administrators of EZs on the use of facility
                                             population of less than 100,000,      bonds used for construction projects in EZs.
                                             and $230 million for each urban
                                             EZ with a population greater than
                                             or equal to 100,000.




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                                     Limits, and Administration




                                         Volume cap or other allocation Involves administration by a federal                 Involves administration by nonfederal
Number   Tax expenditure                 limits?                        agency outside IRS?                                  entity?
2.       New Markets Tax Credit (NMTC)   Yes; the maximum amount of         Yes; the Treasury Community Development          Yes; once a CDE receives an allocation of tax
                                         annual investment eligible for     Financial Institutions (CDFI) Fund certifies     credits, the CDE can offer the tax credits to
                                         NMTCs was $3.5 billion each        organizations as community development           investors, who in turn acquire stock or a capital
                                         year in calendar years 2010 and    entities (CDE), CDFI Fund also provides          interest in the CDE. The investor can gain a
                                         2011.                              allocations of NMTCs to CDEs through a           potential return for a “qualified equity
                                                                            competitive process.                             investment” in the CDE. In return for providing
                                                                            The CDFI Fund is responsible for monitoring      the tax credit to the investor, the CDE receives
                                                                            CDEs to ensure that CDEs are compliant with      proceeds from the offer and must invest
                                                                            their allocation agreements through the New      “substantially all” of such proceeds into qualified
                                                                            Markets Compliance Monitoring System and,        low-income community investments.
                                                                            on a more limited basis, by making site visits
                                                                            to selected CDEs. The CDFI Fund also
                                                                            provides IRS with access to CDFI data for
                                                                            monitoring CDEs’ compliance with NMTC
                                                                            laws and regulations.
3.       Recovery Zone bonds             Yes; the Recovery Zone             Yes; Treasury determined the amount of           Yes; each state was responsible for allocating
                                         Economic Development Bond          RZEDB and RZFB volume cap allocations            shares of RZEDB and RZFB volume caps to
                                         (RZEDB) and Recovery Zone          received by each state and the District of       counties and large municipalities based on
                                         Facility Bond (RZFB) programs      Columbia based on declines in employment         declines in employment levels for such areas
                                         had national volume caps of $10    levels for each state and the District during    during 2008 relative to declines in employment
                                         billion and $15 billion,           2008 relative to declines in national            levels for all counties and municipalities in such
                                                      b
                                         respectively. These volume         employment levels during the same period.        states during the same period. State and local
                                         caps were allocated among the                                                       governments issued RZEDBs, and had the
                                         states and counties and large                                                       option of allowing investors to claim a tax credit
                                         municipalities within the states                                                    for the bonds. States and localities also had the
                                         based on relative declines in                                                       option of receiving a direct payment from the
                                         employment in 2008.                                                                 Treasury of equal value to the tax credit.




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                                         Limits, and Administration




                                            Volume cap or other allocation Involves administration by a federal                        Involves administration by nonfederal
Number    Tax expenditure                   limits?                        agency outside IRS?                                         entity?
4.         Tribal Economic Development      Yes; the bond program had a $2         Yes; Treasury allocated bond capacity to            Yes; Indian tribal governments applied for Tribal
                                                                        c
           Bonds                            billion national volume cap.           Indian tribal governments in consultation with      Economic Development Bonds, issued the
                                                                                   the Secretary of Interior, and the Department       bonds, and used proceeds from bond sales to
                                                                                   of Interior (Interior) maintains updated lists of   finance economic development projects or
                                                                                   Indian tribal entities that are eligible to apply   nonessential governmental activities.
                                                                                   for allocations of bond volume. Interior may        Indian tribal governments had the option of
                                                                                   also issue letters to Indian tribal entities        allowing investors to claim a tax credit for the
                                                                                   indicating federal recognition of such entities     bonds. Indian tribal governments also had the
                                                                                   in order to demonstrate eligibility for the bond    option of receiving a direct payment from the
                                                                                   program.                                            Treasury of equal value to the tax credit.
5.         Indian employment credit         No                                     No                                                  No
Tax expenditures supporting community development and other federal mission areas
6.         Low-Income Housing Tax Credit    Yes; in 2010, the allocation limit     No; the IRS has sole federal responsibility for     Yes; state housing finance agencies (HFA)
           (LIHTC)                          was the greater of $2.10 per-          the administration of LIHTC program.                award LIHTCs to owners of qualified low-
                                            capita or $2.43 million for each       However, the program is closely coordinated         income housing projects based on each state’s
                                            state, U.S. territory, and the         with HUD housing programs for the                   qualified allocation plan, which generally
                                            District of Columbia. The per          computation of the area median gross income         establishes a state’s selection criteria for how its
                                            capita amount is subject to cost       (AMGI) used to determine household                  LIHTCs will be awarded. Additionally, state
                                            of living adjustments.                 eligibility and maximum rents, as well as the       HFAs monitor LIHTC properties for compliance
                                                                                   definition of income. he IRS also uses HUD’s        with Internal Revenue Code requirements, such
                                                                                   Uniform Physical Condition Standards to             as rent ceilings and income limits for tenants,
                                                                                                                                                                               e
                                                                                   determine whether the low-income housing is         and report noncompliance to the IRS.
                                                                                                           d
                                                                                   suitable for occupancy.
                                                                                   HUD also maintains a LIHTC database with
                                                                                   information on the project address, number of
                                                                                   units and low-income units, number of
                                                                                   bedrooms, year the credit was allocated, year
                                                                                   the project was placed in service, whether the
                                                                                   project was new construction or rehabilitation,
                                                                                   type of credit provided, and other sources of
                                                                                   project financing.




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                                           Appendix V: Community Development Tax Expenditures by Volume Caps, Other Allocation
                                           Limits, and Administration




                                                Volume cap or other allocation Involves administration by a federal                Involves administration by nonfederal
Number   Tax expenditure                        limits?                        agency outside IRS?                                 entity?
7.       20 percent credit for preservation     No                              Yes; the Secretary of Interior sets Standards      Yes; state historic preservation offices (SHPO)
         of historic structures                                                 of Rehabilitation for claiming the tax credit.     review applications and forward
                                                                                Within Interior, NPS maintains a National          recommendations for historic designation of
                                                                                Register of Historic Places; approves              structures to NPS, provide program information
                                                                                applications for rehabilitation projects           and technical assistance to applicants, and
                                                                                proposing use of the 20 percent rehabilitation     conduct site visits. SHPOs may also inspect a
                                                                                tax credit; and certifies whether completed        rehabilitated property at any time during a five-
                                                                                projects meet the Secretary’s standards and        year period following completion of a
                                                                                are eligible for the tax credit.                   rehabilitation project using the tax credit.
                                                                                NPS may inspect a rehabilitated property at
                                                                                any time during the five-year period following
                                                                                certification of rehabilitation for claiming the
                                                                                20 percent preservation tax credit, and NPS
                                                                                may revoke certification if work was not done
                                                                                according to standards set by the agency.
                                                                                NPS also notifies the IRS of such revocations
                                                                                or dispositions so the tax credit may be
                                                                                recaptured.
8.       10 percent credit for rehabilitation   No                              Yes; NPS determines whether buildings in           Yes; SHPOs review decertification applications
         of structures (other than historic)                                    historic districts do not contribute to such       and forward recommendations to NPS, provide
                                                                                districts and, consequently, are not deemed        program information and technical assistance to
                                                                                to be historic structures. Such decertification    applicants.
                                                                                is required before owners of such structures
                                                                                can claim for the 10 percent tax credit.
9.       Exclusion of gain or loss on sale      No                              Yes; EPA maintains a National Priority List of Yes; state environmental agencies certify
         or exchange of certain brownfield                                      properties; such listed properties are ineligible brownfield properties on which there has been
         sites                                                                  for the tax incentive.                            an actual or threatened release or disposal of
                                                                                                                                  certain hazardous substances. Following
                                                                                                                                  certification, taxpayers may incur eligible
                                                                                                                                  remediation expenditures and claim the tax
                                                                                                                                  provision.




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                                              Limits, and Administration




                                                 Volume cap or other allocation Involves administration by a federal               Involves administration by nonfederal
Number   Tax expenditure                         limits?                        agency outside IRS?                                entity?
10.      Expensing of environmental              No                                Yes; EPA maintains a National Priority List of Yes; state environmental agencies certify
         remediation costs                                                         properties; such listed properties are ineligible brownfield properties on which there has been
                                                                                   for the tax incentive.                            an actual or threatened release or disposal of
                                                                                                                                     certain hazardous substances. Following
                                                                                                                                     certification, site owners may claim the tax
                                                                                                                                     deduction, including for some expenditures
                                                                                                                                     incurred from prior tax years.
11.      Exclusion of interest on rental         Yes, the bond provision is      No                                                Yes; state and local governments, typically
         housing bonds                           subject to the private activity                                                   housing finance agencies, may issue bonds and
                                                 bond annual volume cap for each                                                   use proceeds from bond sales to finance the
                                                        f
                                                 state.                                                                            construction of multifamily residential rental
                                                                                                                                   housing units for low- and moderate-income
                                                                                                                                   families.
12.      Exclusion of interest for airport,      Varied; bond for the construction No                                              Yes; state and local governments may issue
         dock, and similar bonds                 of mass commuting facilities, and                                                 bonds, and use proceeds from bond sales to
                                                 25 percent of bond issues for                                                     finance construction of airports, docks, wharves,
                                                 privately-owned intercity rail                                                    mass commuting facilities and intercity rail
                                                 facilities, are included in the                                                   facilities.
                                                 private activity bond annual state
                                                 volume cap (government-owned
                                                                            f
                                                 facilities are exempted).
                                                 Bonds for airports, docks and
                                                 wharves are not subject to the
                                                 private-activity bond volume cap
                                                 or other restrictions.
13.      Exclusion of interest on bonds for      Yes, the bond provisions are    No                                                Yes; state and local governments may issue
         water, sewage, and hazardous            subject to the private activity                                                   bonds, and then use proceeds from bond sales
         waste facilities                        bond annual volume cap for each                                                   to finance capital improvements for water,
                                                        f
                                                 state.                                                                            sewer and hazardous waste facilities.




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                                           Limits, and Administration




                                              Volume cap or other allocation Involves administration by a federal                    Involves administration by nonfederal
Number   Tax expenditure                      limits?                        agency outside IRS?                                     entity?
14.      Credit for holders of qualified zone Yes; the bond provision has           Yes; Treasury determines the credit rate of      Yes; state education agencies determine the
         academy bonds (QZAB)                 national volume caps of $1.4          QZABs and allocates shares of QZAB volume        share of QZAB volume allocated to qualified
                                              billion in 2010, and $400 million     to state education agencies on the basis of      zone academies, and issues QZABs following
                                              in 2011.                              the states’ respective populations of            approval by local education agencies.
                                                                                    individuals below the poverty line (as defined   Local education agencies issue QZABs after
                                                                                    by OMB).                                         applying for and obtaining permission from
                                                                                                                                     states.
                                                                                                                                     Business or nonprofit partners provide at least a
                                                                                                                                     10 percent match of QZAB funds, either in cash
                                                                                                                                     or in-kind donations, to qualified zone
                                                                                                                                     academies.
15.      Exclusion of interest on public      No                                    No                                               Yes; state, and local governments may issue
         purpose state and local bonds                                                                                               bonds, and then use proceeds from bond sales
                                                                                                                                     to finance eligible projects—primarily public
                                                                                                                                     infrastructure projects such as highways,
                                                                                                                                                                         g
                                                                                                                                     schools, and government buildings.
16.      Build America Bonds (BAB)            No                                    No                                               Yes; state and local governments issued the
                                                                                                                                     bonds, and then use proceeds from bond sales
                                                                                                                                     to finance expenditures typically funded by tax-
                                                                                                                                     exempt governmental bonds (excluding private
                                                                                                                                     activity bonds), such as for schools,
                                                                                                                                     transportation infrastructure, and water and
                                                                                                                                     sewer systems. State and local governments
                                                                                                                                     had the option of allowing investors to claim a
                                                                                                                                     tax credit for the bonds. States and localities
                                                                                                                                     also had the option of receiving a direct
                                                                                                                                     payment from the Treasury of equal value to the
                                                                                                                                     tax credit.




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                                            Limits, and Administration




                                                Volume cap or other allocation Involves administration by a federal                Involves administration by nonfederal
Number     Tax expenditure                      limits?                        agency outside IRS?                                 entity?
Disaster relief and recovery tax expenditures
                                                       h
17.        New York Liberty Zone                Varied. Authority to designate       No                                            Yes; the Governor of the State of New York and
                                                up to $8 billion in tax-exempt                                                     the Mayor of New York City were allowed to
                                                private activity bonds (New York                                                   issue tax-exempt New York Liberty bonds, and
                                                Liberty bonds) and $9 billion in                                                   use proceeds to finance reconstruction and
                                                advance refunding bonds.                                                           renovation projects within the New York Liberty
                                                                                                                                   Zone. The Governor and Mayor were allowed to
                                                                                                                                   issue advance refunding bonds to pay principal,
                                                                                                                                   interest, or redemption price on certain prior
                                                                                                                                   issues of bonds issued for facilities located in
                                                                                                                                   New York City (and certain water facilities
                                                                                                                                   located outside of New York City).
18.        Katrina Emergency Act                No                                   No                                            No
                                                       h
19.        Gulf Opportunity Zone (GO Zone)      Varied. Multiple provisions          Varied; multiple provisions within the tax    Varied; multiple provisions within the tax
                                                within the tax expenditure           expenditure package involved administration   expenditure package involved administration by
                                                package have volume caps or          by federal agencies besides IRS.              state and local governments and other entities.
                                                other revenue loss limitations.
           Advance refunding of state and       The maximum amount of                No                                            State and local governments in the GO Zone—
           local tax-exempt bonds               advance refunding for certain                                                      Alabama, Louisiana, and Mississippi—issued
                                                governmental and qualified                                                         advance refunding bonds.
                                                501(c)(3) bonds that may have
                                                been issued was capped at $4.5
                                                billion in the case of Louisiana,
                                                $2.25 billion in the case of
                                                Mississippi, and $1.125 billion in
                                                the case of Alabama.
           Tax credit bonds                     Gulf Tax Credit Bonds had a          Yes; Treasury determines the credit rate of   State and local governments in the GO Zone—
                                                volume cap of $200 million for       Gulf Tax Credit Bonds.                        Alabama, Louisiana, and Mississippi—issued
                                                Louisiana, $100 million for                                                        Gulf Tax Credit Bonds to help pay principal,
                                                Mississippi, and $50 million for                                                   interest, and premiums on outstanding state
                                                Alabama.                                                                           and local government bonds.




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                                         Limits, and Administration




                                              Volume cap or other allocation Involves administration by a federal          Involves administration by nonfederal
Number   Tax expenditure                      limits?                        agency outside IRS?                           entity?
         Tax-exempt bond financing            The maximum aggregate face         No                                        State and local governments in the GO Zone—
         beyond state volume caps             amount of GO Zone Bonds that                                                 Alabama, Louisiana, and Mississippi—issued
                                              may have been issued in                                                      bonds, though state governments approved
                                              Alabama, Louisiana or                                                        projects for bond financing.
                                              Mississippi was capped at
                                              $2,500 multiplied by the
                                              population of the respective state
                                              within the GO Zone; no other
                                              states were eligible for tax-
                                              exempt bond financing.
         Increased credit cap and other       A special allocation of the LIHTC No                                         See above description of the LIHTC regarding
         modified provisions for use of the   was issued for each of three                                                 the involvement of state housing finance
         Low-Income Housing Tax Credit        years (2006, 2007 and 2008) to                                               agencies (HFA).
         (LIHTC)                              each of the States within the GO
                                              Zone. Each year’s special
                                              allocation was capped at $18.00
                                              multiplied by the population of
                                              the respective state in the GO
                                              Zone. In addition, the otherwise
                                              applicable LIHTC ceiling amount
                                              was increased for Florida and
                                              Texas by $3,500,000 per State.
         New Markets Tax Credit (NMTC) - An additional allocation of the   See above description of the NMTC regarding See above description of the NMTC regarding
         additional allocations for low- New Markets Tax Credit (NMTC) involvement of the Community Development the involvement of CDEs.
         income community investments    in amounts equal to $300 million Financial Institutions (CDFI) Fund.
                                         for 2005 and 2006, and $400
                                         million for 2007, were to be
                                         allocated among qualified
                                         community development entities
                                         (CDE) to make qualified low-
                                         income community investments
                                         within the Gulf Opportunity Zone.
20.      Kansas disaster relief               No                                No                                         No




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                                     Limits, and Administration




                                        Volume cap or other allocation Involves administration by a federal                 Involves administration by nonfederal
Number   Tax expenditure                limits?                        agency outside IRS?                                  entity?
                                               h
21.      Midwest disaster relief        Varied. Multiple provisions           Varied; multiple provisions within the tax    Varied; multiple provisions within the tax
                                        within the tax expenditure            expenditure package involved administration   expenditure package involved administration by
                                        package have volume caps or           by federal agencies besides IRS.              state and local governments.
                                        other revenue loss limitations.
         Tax credit bonds               The maximum amount of               Yes; Treasury determines the credit rate of     State governments in the Midwest disaster area
                                        Midwestern Tax Credit Bonds         Midwestern Tax Credit Bonds.                    issued Midwestern tax credit bonds to help pay
                                        that may have been issued was                                                       principal, interest and premiums on outstanding
                                        capped at: (1) $100 million for                                                     state and local government bonds.
                                        any state with an aggregate
                                        population located in all Midwest
                                        disaster areas within the state of
                                        at least 2,000,000; (2) $50 million
                                        for any state with an aggregate
                                        population located in all Midwest
                                        disaster areas within the state of
                                        at least 1,000,000 but less than
                                        2,000,000; and (3) $0 for any
                                        other state.
         Tax-exempt bond financing      The maximum aggregate face            No                                            State and local governments in the Midwest
         beyond state volume caps       amount of Midwestern disaster                                                       disaster area issued bonds.
                                        zone bonds that may have been
                                        issued in any state in which a
                                        Midwestern disaster area was
                                        located, was capped at $1,000
                                        multiplied by the population of
                                        the respective state within the
                                        Midwestern disaster zone; no
                                        other states were eligible for tax-
                                        exempt bond financing.




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                                         Limits, and Administration




                                                Volume cap or other allocation Involves administration by a federal                                       Involves administration by nonfederal
Number   Tax expenditure                        limits?                        agency outside IRS?                                                        entity?
         Increased credit cap and other         A special allocation of the LIHTC No                                                                      See above description of the LIHTC regarding
         modified provisions for use of the     was issued for each of three                                                                              the involvement of state housing finance
         Low-Income Housing Tax Credit          years (2008, 2009, and 2010) to                                                                           agencies (HFA).
         (LIHTC)                                any state in which a Midwest
                                                disaster area was located. Each
                                                year’s special allocation was
                                                capped at $8.00 multiplied by the
                                                population of the respective state
                                                in a Midwest disaster area.
22.      National disaster relief               No                                              No                                                        Yes; for the provision allowing expensing of
                                                                                                                                                          environmental remediation costs from disasters,
                                                                                                                                                          state environmental agencies certify brownfield
                                                                                                                                                          properties on which there has been an actual or
                                                                                                                                                          threatened release or disposal of certain
                                                                                                                                                          hazardous substances as a result of a federally
                                                                                                                                                          declared disaster.
23.      Three-year carry back of small        No                                               No                                                        No
         businesses’ and farmers’ casualty
         losses attributable to presidentially
         declared disasters
                                         Sources: GAO analysis of CRS, EPA, IRS, JCT, Office of the Comptroller of Currency (OCC), and OMB information.
                                         a
                                             EZ/RC also included tax credits for holders of qualified zone academy bonds (QZAB); see listing for QZAB tax expenditure.
                                         b
                                             State and local governments had the authority to issue RZEDBs and RZFBs from February 17, 2009 through December 31, 2010.
                                         c
                                          All $2 billion in available Tribal Economic Development bond volume was to be allocated by February 28, 2010, but Treasury and IRS have extended
                                         deadlines in order to reallocate unused bond authority. According to Treasury, tribal bonds issued as of November 2011 represented less than 3 percent
                                         of the available authority.




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Limits, and Administration




d
 The American Recovery and Reinvestment Act (Recovery Act) established two temporary funding programs that provided capital investments LIHTC
projects: (1) the Tax Credit Assistance Program (TCAP) administered by the Department of Housing and Urban Development (HUD) and (2) the Grants
to States for Low-Income Housing Projects in Lieu of Low-Income Housing Credits Program under Section 1602 of the Recovery Act (Section 1602
Program) administered by the Department of the Treasury (Treasury). The administration of the TCAP and Section 1602 programs is entirely separate
from the administration of the LIHTC program by IRS. HUD obligated Recovery Act Tax Credit Assistance Program (TCAP) funds to provide gap
financing to State Housing Finance Agencies (HFA) for capital investment in LIHTC projects that were awarded tax credits in fiscal year 2007, 2008 or
2009, and was able to recapture such funds from any HFA whose projects do not comply with TCAP requirements. Under the Recovery Act Section
1602 program, whose funds were designed for use in lieu of LIHTCs, Treasury provided payments to HFAs in exchange for a portion of their 2009
ceiling (up to 100 percent of unused 2008 LIHTCs and 40 percent of their 2009 allocation) for grant funds at the rate of 85 cents for every tax credit
dollar, and can recapture such funds from any HFA whose projects do not comply with Section 1602 requirements.
e
 For information on the activities of state HFAs in administering the Recovery Act TCAP and Section 1602 programs, see GAO, Recovery Act:
Opportunities to Improve Management and Strengthen Accountability over States’ and Localities’ Uses of Funds, GAO-10-999 (Washington, D.C.: Sept.
20, 2010).
f
 In 2010, the private activity bond annual volume cap for each state was equal to the greater of $90 per-capita or about $273.8 million. The volume cap is
tied to inflation by legislation and is adjusted annually.
g
 Tribal governments are authorized to issue tax-exempt bonds only if substantially all of the proceeds are used for essential governmental functions or
certain manufacturing facilities.
h
    Appendix VI lists the specific tax provisions and special rules available from this package of disaster relief and recovery tax expenditures.




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Appendix VI: Tax Provisions and Special Rules
                                                 Appendix VI: Tax Provisions and Special Rules Available for Disaster Relief and Recovery in
                                                 Specific Presidentially Declared Disaster Areas



Available for Disaster Relief and Recovery in
Specific Presidentially Declared Disaster Areas

                                                                                                           Tax packages supporting disaster relief and recovery
                                                                                                                                                                     Number of
                                                                                                                                                                     packages
                                                                                        New York      Katrina     Gulf              Kansas     Midwest    National     where
Tax provision                                                                            Liberty     Emergency Opportunity          disaster   disaster   disaster   provision
                                                                                               a           b           c                   d          e          f
or special rule         Description                                                      Zone          Act       Zone                relief     relief     relief     is used
Bond provisions
Bonds issued by state and local governments
1. Advance              Legislation targeted towards the New York Liberty Zone              X                            X                                              2
refunding of state      and the Gulf Opportunity Zones (GO Zone) allowed an
and local tax-          additional advance refunding to redeem certain prior tax-
exempt bonds            exempt bond issuances from state and local
                        governments. The provision allowed state and local
                        governments to refund, or refinance, bonds that are not
                        redeemed within 90 days after the refunding bonds are
                        issued.
2. Determination        Residential rental property may be financed with tax-                                            X              X         X                     3
of income eligibility   exempt facility bonds issued by state and local
for residential         governments, if the financed project is a “qualified
rental project          residential rental project” with required ratios of residents
requirements to         with certain income limitations. Under the provision, the
qualify for tax-        operator of a qualified residential rental project may rely
exempt facility         on the representations of prospective tenants displaced
bond financing          by reason of certain disasters to determine whether such
                        individual satisfies the income limitation for a qualified
                        residential rental project.




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                                            Appendix VI: Tax Provisions and Special Rules Available for Disaster Relief and Recovery in
                                            Specific Presidentially Declared Disaster Areas




                                                                                                      Tax packages supporting disaster relief and recovery
                                                                                                                                                                Number of
                                                                                                                                                                packages
                                                                                  New York       Katrina     Gulf              Kansas     Midwest    National     where
Tax provision                                                                      Liberty      Emergency Opportunity          disaster   disaster   disaster   provision
                                                                                         a            b           c                   d          e          f
or special rule     Description                                                    Zone           Act       Zone                relief     relief     relief     is used
3. Special rules for Mortgage revenue bonds are tax-exempt bonds issued by                           X              X                        X           X         4
mortgage revenue state and local governments to make mortgage loans to
bonds                qualified mortgagors for the purchase, improvement, or
                     rehabilitation of owner-occupied residences, and are
                     typically required to exclusively finance mortgages for
                     “first-time homebuyers.” Qualified mortgage revenue
                     bonds, may be issued in targeted disaster areas without a
                     first-time homebuyer financing requirement. Additionally,
                     the permitted amount of qualified home-improvement
                     loans increases from $15,000 to $150,000 for residences
                     in a disaster zone.
4. Tax credit       State and local governments in GO Zones and the                                                 X                        X                     2
bonds               Midwest disaster area may have issued tax credit bonds
                    in areas affected by certain disasters. 95 percent of these
                    bonds must be used to (1) pay principal, interest, or
                    premium on outstanding bonds (other than private activity
                    bonds) issued by state and local governments, or (2)
                    make a loan to any political subdivision (e.g., local
                    government) of such state to pay principal, interest, or
                    premium on bonds (other than private activity bonds)
                    issued by such political subdivision. These bonds differed
                    from tax-exempt bonds in that rather than receiving tax-
                    exempt interest payments, bondholders were entitled to a
                    federal tax credit equal to a certain percentage of their
                    investment.




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                                              Appendix VI: Tax Provisions and Special Rules Available for Disaster Relief and Recovery in
                                              Specific Presidentially Declared Disaster Areas




                                                                                                        Tax packages supporting disaster relief and recovery
                                                                                                                                                                  Number of
                                                                                                                                                                  packages
                                                                                    New York       Katrina     Gulf              Kansas     Midwest    National     where
Tax provision                                                                        Liberty      Emergency Opportunity          disaster   disaster   disaster   provision
                                                                                           a            b           c                   d          e          f
or special rule      Description                                                     Zone           Act       Zone                relief     relief     relief     is used
5. Tax-exempt        In certain disaster areas, tax-exempt bonds for qualified          X                             X                        X                     3
bond financing       private activities may have been issued and were not
beyond state         restricted by aggregate annual state private activity bond
volume caps          limits. These bonds allow state and local governments to
                     finance the construction or rehabilitation of properties
                     following a disaster.
Bonds issued by Treasury
6. Gulf Coast        Treasury named Series I inflation-indexed savings bonds                                          X                                              1
Recovery Bonds       purchased through financial institutions as “Gulf Coast
                     Recovery Bonds” from March 29-December 31, 2006, in
                     order to encourage public support for recovery and
                     rebuilding efforts in areas devastated by Hurricanes
                     Katrina, Rita, and Wilma. Proceeds from the sale of the
                     bonds were not specifically designated for hurricane relief
                     and recovery efforts.
Credits
7. Credit for     The provision provided a temporary tax credit of 30                                                 X                        X                      2
employer-provided percent to qualified employers for the value of employer-
housing           provided lodging to qualified employees affected by
                  certain disasters. The amount taken as a credit was not
                  deductible by the employer.
8. Employee          Certain disaster relief tax packages included a credit of 40                      X              X              X         X                     4
retention credit for percent of the qualified wages (up to a maximum of
employers            $6,000 in qualified wages per employee) paid by an
                     eligible employer that conducted business in a disaster
                     zone and whose operations were rendered inoperable by
                     the disaster.




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                                             Appendix VI: Tax Provisions and Special Rules Available for Disaster Relief and Recovery in
                                             Specific Presidentially Declared Disaster Areas




                                                                                                       Tax packages supporting disaster relief and recovery
                                                                                                                                                                 Number of
                                                                                                                                                                 packages
                                                                                    New York      Katrina     Gulf              Kansas     Midwest    National     where
Tax provision                                                                        Liberty     Emergency Opportunity          disaster   disaster   disaster   provision
                                                                                           a           b           c                   d          e          f
or special rule     Description                                                      Zone          Act       Zone                relief     relief     relief     is used
9. Expansion of     For 2005, the Hope Scholarship Credit rate was 100                                               X                        X                     2
Hope Scholarship    percent on the first $1,000 of qualified tuition and related
Credit              expenses, and 50 percent on the next $1,000 of qualified
                    tuition and related expenses. For 2005, the Hope credit
                    was temporarily increased for students attending eligible
                    educational institutions in the GO Zone to 100 percent of
                    the first $2,000 in qualified tuition and related expenses
                    and 50 percent of the next $2,000 of qualified tuition and
                    related expenses, for a maximum credit of $3,000 per
                    student. For 2006, this provision increased the tax credit
                    again to 100 percent of the first $2,200 of qualified tuition
                    and related expenses (instead of $1,100 under standard
                    law in 2006), and 50 percent of the next $2,200 of
                    qualified tuition and related expenses (instead of $1,100)
                    for a maximum credit of $3,300 per student (instead of
                    $1,650). For 2008 and 2009, the Hope scholarship credit
                    was extended to students attending eligible educational
                    institutions in the Midwestern disaster area, based on
                    increased credit rates enacted in 2006.
10. Expansion of    Individual taxpayers are typically allowed to claim a                                            X                        X                     2
Lifetime Learning   nonrefundable credit, the Lifetime Learning Credit, equal
Credit              to 20 percent of qualified tuition and related expenses of
                    up to $10,000 (resulting in a total credit of up to $2,000)
                    incurred during the taxable year on behalf of the taxpayer,
                    the taxpayer’s spouse, or any dependents. The Lifetime
                    Learning Credit rate was temporarily increased from 20
                    percent to 40 percent for students attending institutions in
                    certain disaster areas.




                                             Page 96                                GAO-12-262 Community Development Tax Expenditures
                                                Appendix VI: Tax Provisions and Special Rules Available for Disaster Relief and Recovery in
                                                Specific Presidentially Declared Disaster Areas




                                                                                                          Tax packages supporting disaster relief and recovery
                                                                                                                                                                    Number of
                                                                                                                                                                    packages
                                                                                       New York      Katrina     Gulf              Kansas     Midwest    National     where
Tax provision                                                                           Liberty     Emergency Opportunity          disaster   disaster   disaster   provision
                                                                                              a           b           c                   d          e          f
or special rule        Description                                                      Zone          Act       Zone                relief     relief     relief     is used
11. Increase in        The provision increased from 20 to 26 percent, and from                                          X                        X                     2
rehabilitation tax     10 to 13 percent, respectively, the preservation credits
credits with           with respect to any certified historic structure or qualified
respect to certain     rehabilitated building located in certain disaster areas,
property               provided the qualified rehabilitation expenditures with
                       respect to such buildings or structures were incurred
                       during an established period of time following the disaster.
12. Increased          The LIHTC cap amount increased for affected states                                               X                        X                     2
credit cap and         within the GO Zones and the Midwestern disaster area.
other modified         Also, rules concerning implementation of the LIHTC were
provisions for use     modified for the GO Zone; in the case of property placed
of the Low-Income      in service from 2006-2008 in a nonmetropolitan area
Housing Tax            within the GO Zone, LIHTC income targeting rules are
Credit (LIHTC)         applied by using a national nonmetropolitan median gross
                       income standard instead of the area median gross income
                       standard typically applied to low-income housing projects.
13. New Markets        The provision allowed an additional allocation of NMTCs                                          X                                               1
Tax Credit             in an amount equal to $300 million for 2005 and 2006,
(NMTC)—                and $400 million for 2007, to be allocated among qualified
additional             community development entities to make qualified low-
allocations for low-   income community investments within the Katrina GO
income community       Zone.
investments




                                                Page 97                                GAO-12-262 Community Development Tax Expenditures
                                               Appendix VI: Tax Provisions and Special Rules Available for Disaster Relief and Recovery in
                                               Specific Presidentially Declared Disaster Areas




                                                                                                         Tax packages supporting disaster relief and recovery
                                                                                                                                                                   Number of
                                                                                                                                                                   packages
                                                                                      New York      Katrina     Gulf              Kansas     Midwest    National     where
Tax provision                                                                          Liberty     Emergency Opportunity          disaster   disaster   disaster   provision
                                                                                             a           b           c                   d          e          f
or special rule       Description                                                      Zone          Act       Zone                relief     relief     relief     is used
14. Special look-     Individuals whose principle residence were in certain                             X              X                        X                     3
back rule for         disaster areas or were otherwise displaced from their
determining           homes by disasters may have elected to calculate their
Earned Income         Earned Income Tax Credit and Refundable Child Credit
Tax Credit and        for the taxable year when the disaster occurred using their
Refundable Child      earned income from the prior taxable year.
Credit
15. Work              Employers hiring and retaining individuals who worked in            X             X                                                             2
Opportunity Tax       certain disaster areas were eligible to claim up to $2,400
Credit—expansion      in Work Opportunity Tax Credits per employee (or 40
to certain disaster   percent of up to the first $6,000 of wages). Employees in
areas                 other targeted categories for the tax credit (e.g., qualified
                      veterans or families receiving food stamps) are typically
                      required to provide certification from a designated local
                      agency of their inclusion in such groups on or before they
                      begin work, or their employer provides documentation to
                      said agencies no later than 28 days after the employee
                      begins work. However, employees who worked and/or
                      lived in certain disaster areas do not require certification
                      from such agencies for employers to qualify for the tax
                      credit.




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                                                 Specific Presidentially Declared Disaster Areas




                                                                                                           Tax packages supporting disaster relief and recovery
                                                                                                                                                                     Number of
                                                                                                                                                                     packages
                                                                                       New York       Katrina     Gulf              Kansas     Midwest    National     where
Tax provision                                                                           Liberty      Emergency Opportunity          disaster   disaster   disaster   provision
                                                                                              a            b           c                   d          e          f
or special rule      Description                                                        Zone           Act       Zone                relief     relief     relief     is used
Deductions
                                             g
Carryback of net operating losses (NOL)
16. Carryback of     Under present law, a net operating loss (NOL) is,                                                                                        X         1
NOLs— special 5-     generally, the amount by which a taxpayer’s business
year carryback for   deductions exceed its gross income. In general, an NOL
qualified disaster   may be carried back 2 years and carried over 20 years to
losses               offset taxable income in such years. NOLs offset taxable
                     income in the order of the taxable years to which the NOL
                     may be carried. This provision provided a special 5-year
                     carryback period for NOLs to the extent of qualified
                     disaster losses in any presidentially declared disaster
                     area during 2008 and 2009.
17. Five-year NOL    Individuals and corporations affected by certain disasters                                          X              X         X                     3
carryback for        may have carried back NOLs, for a period of 5 years, of
aggregate amount     the sum of the aggregate amount of deductions from such
of certain           disasters, including deductions for qualified casualty
deductions           losses; certain moving expenses; certain temporary
                     housing expenses; depreciation deductions with respect
                     to qualified property in disaster areas for the taxable year
                     the property was placed into service; and certain repair
                     expenses resulting from applicable disasters.
18. Five-year NOL    A NOL to a farming business may have been carried back                                              X                                              1
carryback of         for five years if such loss was attributable to any portion of
certain timber       qualified timber property which was located in the Katrina
losses               or Rita GO Zones.




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                                                Specific Presidentially Declared Disaster Areas




                                                                                                          Tax packages supporting disaster relief and recovery
                                                                                                                                                                    Number of
                                                                                                                                                                    packages
                                                                                       New York      Katrina     Gulf              Kansas     Midwest    National     where
Tax provision                                                                           Liberty     Emergency Opportunity          disaster   disaster   disaster   provision
                                                                                              a           b           c                   d          e          f
or special rule        Description                                                      Zone          Act       Zone                relief     relief     relief     is used
19. Five-year NOL      The provision provided an election for taxpayers who                                             X              X                               2
carryback of public    incurred casualty losses attributable to certain disasters
utility casualty       with respect to public utility property located in applicable
losses                 disaster zones. Under the election, such losses may be
                       carried back 5 years immediately preceding the taxable
                       year in which the loss occurred. If the application of this
                       provision resulted in the creation or increase of a NOL for
                       the year in which the casualty loss is taken into account,
                       the NOL may be carried back or carried over as under
                       present law applicable to NOLs for such year.
20. Special rule for   The provision provided an election for taxpayers to treat                                        X                                              1
NOLs from public       any GO Zone public utility casualty loss caused by
utility casualty       Hurricane Katrina as a specified liability loss to which the
losses                 present-law 10-year carryback period applies. The
                       amount of the casualty loss is reduced by the amount of
                       any gain recognized by the taxpayer from involuntary
                       conversions of public utility property (e.g. physical
                       destruction of such property) located in the GO Zone
                       caused by Hurricane Katrina. Taxpayers who elect to use
                       this provision are not eligible to treat the loss as part of
                       the 5-year net operating loss carryback provided under
                       another provision of the GO Zone Act (see 5-year NOL
                       carryback of public utility casualty losses mentioned
                       above).




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                                              Specific Presidentially Declared Disaster Areas




                                                                                                        Tax packages supporting disaster relief and recovery
                                                                                                                                                                  Number of
                                                                                                                                                                  packages
                                                                                     New York      Katrina     Gulf              Kansas     Midwest    National     where
Tax provision                                                                         Liberty     Emergency Opportunity          disaster   disaster   disaster   provision
                                                                                            a           b           c                   d          e          f
or special rule       Description                                                     Zone          Act       Zone                relief     relief     relief     is used
Casualty loss tax provisions
21. Suspension of     The provision suspended two limitations on personal                              X              X              X         X                     4
certain limitations   casualty or theft losses to the extent those losses arise in
on personal           certain disaster areas and are attributable to such
casualty losses       disasters. First, personal casualty or theft losses meeting
                      the above requirements needed not exceed $100 per
                      casualty or theft; present law at the time contained a
                      required threshold of $100. Second, such losses were
                      deductible without regard to whether aggregate net losses
                      exceed 10 percent of a taxpayer’s adjusted gross income,
                      which was standard under present law at the time the
                      disasters took place. The provision treats personal
                      casualty or theft losses from the pertinent disaster as a
                      deduction separate from other casualty losses.




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                                                Specific Presidentially Declared Disaster Areas




                                                                                                          Tax packages supporting disaster relief and recovery
                                                                                                                                                                    Number of
                                                                                                                                                                    packages
                                                                                        New York     Katrina     Gulf              Kansas     Midwest    National     where
Tax provision                                                                            Liberty    Emergency Opportunity          disaster   disaster   disaster   provision
                                                                                               a          b           c                   d          e          f
or special rule       Description                                                        Zone         Act       Zone                relief     relief     relief     is used
22. Casualty          The provision removed one limitation on personal casualty                                                                              X         1
losses attributable   or theft losses to the extent those losses arise in federally
to federally          declared disaster areas during 2008 and 2009. More
declared disasters    specifically, losses were deductible without regard to
                      whether aggregate net losses exceed 10 percent of a
                      taxpayer’s adjusted gross income, which was standard
                      under present law at the time the disasters took place.
                      The provision treats personal casualty or theft losses from
                      federally declared disasters as a deduction separate from
                      other casualty losses. However, present law at the time
                      contained a required threshold of $100 for meeting
                      requirements to claim losses, and this provision increases
                      the threshold to $500. These rules are in effect for all
                      federally declared disaster areas in 2008 and 2009 aside
                      from those areas declared “Midwestern disaster areas”
                      from flooding, tornadoes, and storms in 2008. The portion
                      of the provision increasing the limitation per casualty to
                      $500 only applies to 2009.
Charitable contribution tax provisions
23. Charitable        Under present law, a taxpayer’s deduction for charitable                           X                                                             1
deduction for         contributions of inventory generally is limited to the
contributions of      taxpayer’s basis (typically cost) in the inventory, or if less,
book inventories      the fair market value of the inventory. Under this
                      provision, a C Corporation was eligible to claim an
                      enhanced deduction for qualified book donations. An
                      enhanced deduction is equal to the lesser of (1) basis plus
                      one-half of the item’s appreciation (basis plus one-half of
                      fair market value in excess of basis) or (2) two times
                      basis.




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                                                 Specific Presidentially Declared Disaster Areas




                                                                                                           Tax packages supporting disaster relief and recovery
                                                                                                                                                                     Number of
                                                                                                                                                                     packages
                                                                                         New York     Katrina     Gulf              Kansas     Midwest    National     where
Tax provision                                                                             Liberty    Emergency Opportunity          disaster   disaster   disaster   provision
                                                                                                a          b           c                   d          e          f
or special rule        Description                                                        Zone         Act       Zone                relief     relief     relief     is used
24. Charitable         Under present law, a taxpayer’s deduction for charitable                           X                                                             1
deduction for          contributions of inventory generally is limited to the
contributions of       taxpayer’s basis (typically cost) in the inventory, or if less,
food inventories       the fair market value of the inventory. Under this
                       provision, any taxpayer, whether or not a C corporation,
                       engaged in a trade or business was eligible to claim an
                       enhanced deduction for donations of food inventory. An
                       enhanced deduction is equal to the lesser of (1) basis plus
                       one-half of the item’s appreciation (i.e., basis plus one-
                       half of fair market value in excess of basis) or (2) two
                       times basis. For taxpayers other than C corporations, the
                       total deduction for donations of food inventory in a taxable
                       year generally may not exceed 10 percent of the
                       taxpayer’s net income for such taxable year from which
                       contributions of apparently wholesome food are made.
25. Increase in        The provision allowed a taxpayer using a vehicle while                             X                                       X                     2
standard mileage       donating services to charity for the provision of relief
rate for charitable    related to certain disasters to compute charitable mileage
use of vehicles        deduction using a rate equal to 70 percent of the business
                       mileage rate in effect on the date of the contribution,
                       rather than the charitable standard mileage rate generally
                       in effect under law.
26. Temporary          The provision allowed for qualified contributions up to the                        X              X                        X                     3
suspension of          amount by which an individual’s contribution base
limits on charitable   (adjusted gross income without regard to any NOL
contributions          carryback) or corporation’s taxable income exceeds the
                       deduction for other charitable contributions. Contributions
                       in excess of this amount are carried over to succeeding
                       taxable years subject to limitations under law.




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                                              Specific Presidentially Declared Disaster Areas




                                                                                                        Tax packages supporting disaster relief and recovery
                                                                                                                                                                  Number of
                                                                                                                                                                  packages
                                                                                    New York       Katrina     Gulf              Kansas     Midwest    National     where
Tax provision                                                                        Liberty      Emergency Opportunity          disaster   disaster   disaster   provision
                                                                                           a            b           c                   d          e          f
or special rule      Description                                                     Zone           Act       Zone                relief     relief     relief     is used
                               g
Depreciation and expensing
27. Additional first- The provision allowed an additional first-year depreciation       X                             X              X                     X         4
year depreciation deduction equal to a percentage of the adjusted basis of
for property          qualified property; the percentage varies depending on
                      the disaster area where the property is located, e.g., 30
                      percent for New York Liberty Zone, 50 percent for GO
                      Zones, Kansas Disaster Zone, and other areas in the U.S.
                      declared disaster areas under national disaster relief.
28. Expensing for A taxpayer was permitted a deduction for 50 percent of                                              X              X         X           X         4
certain demolition qualified disaster clean-up costs, such as removal of
and clean-up costs debris or demolition of structures, paid or incurred for an
                   established period of time following certain disasters.
29. Expensing of    Under the provision, a taxpayer may have elected to treat                                                                              X         1
repair of business- any repair of business-related property affected by
related property    presidentially declared disasters, including repairs that are
                    paid or incurred by the taxpayer, as a deduction for the
                    taxable year in which paid or incurred.




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                                              Specific Presidentially Declared Disaster Areas




                                                                                                        Tax packages supporting disaster relief and recovery
                                                                                                                                                                  Number of
                                                                                                                                                                  packages
                                                                                    New York       Katrina     Gulf              Kansas     Midwest    National     where
Tax provision                                                                        Liberty      Emergency Opportunity          disaster   disaster   disaster   provision
                                                                                           a            b           c                   d          e          f
or special rule       Description                                                    Zone           Act       Zone                relief     relief     relief     is used
30. Extension of      Taxpayers may typically elect to deduct (or “expense”)                                          X                        X           X         3
expensing for         certain environmental remediation expenditures that
environmental         would otherwise be chargeable to a capital account, in the
remediation costs     year paid or incurred. The deduction applies for both
                      regular and alternative minimum tax purposes. The
                      expenditure must be incurred in connection with the
                      abatement or control of hazardous substances at a
                      qualified contaminated site. The provision was extended
                      beyond present law for qualified contaminated sites
                      located in the GO Zone and Midwestern disaster zones,
                      as well as federally declared disaster areas in 2008 and
                      2009. The length of such extensions depended on the
                      applicable disaster zone.
31. Five-year         Qualified improvements made on leasehold property in              X                                                                            1
depreciation of       the New York Liberty Zone could have been depreciated
qualified leasehold   over a 5-year period using the straight-line method of
improvement           depreciation, instead of the 39-year period standard under
property              present law. Qualified leasehold property improvements
                      included improvements to nonresidential real property,
                      such as additional walls and plumbing and electrical
                      improvements made to an interior portion of a building.




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                                           Specific Presidentially Declared Disaster Areas




                                                                                                     Tax packages supporting disaster relief and recovery
                                                                                                                                                               Number of
                                                                                                                                                               packages
                                                                                  New York      Katrina     Gulf              Kansas     Midwest    National     where
Tax provision                                                                      Liberty     Emergency Opportunity          disaster   disaster   disaster   provision
                                                                                         a           b           c                   d          e          f
or special rule   Description                                                      Zone          Act       Zone                relief     relief     relief     is used
32. Increased     In lieu of depreciation, a taxpayer with a sufficiently small       X                            X              X                     X         4
Section 179       amount of annual investment may elect to expense
expensing         qualified property placed in service for the taxable year
                  under section 179 of the Internal Revenue Code.
                  Taxpayers in certain disaster areas were eligible to
                  increase the maximum dollar amount of Section 179
                  expensing for qualified property, which is generally
                  defined as depreciable tangible personal property that is
                  purchased for use in the active conduct of a trade or
                  business. Taxpayers in the New York Liberty Zone could
                  deduct an additional amount up to the lesser of $35,000
                  or the cost of the qualified Section 179 property put into
                  service during the calendar year. Taxpayers in the GO
                  Zone, Kansas Disaster Zone or disaster zones covered
                  under “National Disaster Relief” could deduct an
                  additional amount up to the lesser of $100,000 or the cost
                  of the qualified Section 179 property put into service
                  during the calendar year.
33. Increased     The provision doubled, for certain taxpayers, the present-                                       X                                               1
expensing for     law expensing limit of $10,000 for reforestation
reforestation     expenditures paid or incurred by such taxpayers for
expenditures of   certain periods of time with respect to qualified timber
small timber      property in the Katrina, Rita and Wilma GO Zones. For
producers         example, single taxpayers may have claimed $20,000
                  instead of $10,000 for eligible reforestation expenditures.




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                                             Specific Presidentially Declared Disaster Areas




                                                                                                       Tax packages supporting disaster relief and recovery
                                                                                                                                                                 Number of
                                                                                                                                                                 packages
                                                                                   New York       Katrina     Gulf              Kansas     Midwest    National     where
Tax provision                                                                       Liberty      Emergency Opportunity          disaster   disaster   disaster   provision
                                                                                          a            b           c                   d          e          f
or special rule      Description                                                    Zone           Act       Zone                relief     relief     relief     is used
34. Treasury         The Internal Revenue Code allowed an additional first-                                          X                                               1
authority to grant   year depreciation deduction equal to 30 or 50 percent of
bonus                the adjusted basis of qualified property, including (1)
depreciation         property to which the modified accelerated cost recovery
placed-in-service    system applies with an applicable recovery period of 20
date relief          years or less, (2) water utility property, (3) certain
                     computer software, or (4) qualified leasehold improvement
                     property placed in service by December 31, 2005. Under
                     this provision, the Secretary of Treasury had authority to
                     further extend the placed-in-service date (beyond Dec. 31,
                     2005), on a case-by-case basis, for up to 1 year for
                     certain property eligible for the December 31, 2005
                     placed-in-service date under present law. The authority
                     extended only to property placed in service or
                     manufactured in the Katrina, Rita or Wilma GO Zones. In
                     addition, the authority extended only to circumstances in
                     which the taxpayer was unable to meet the December 31,
                     2005 deadline as a result of Hurricanes Katrina, Rita,
                     and/or Wilma.
Exemptions
35. Additional       The provision provided an additional exemption of $500                           X                                                             1
exemption for        for each displaced individual of a taxpayer affected by
housing displaced    certain disasters. The taxpayer may have claimed the
individuals          additional exemption for no more than four individuals;
                     thus the maximum additional exemption amount was
                     $2,000.




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                                             Appendix VI: Tax Provisions and Special Rules Available for Disaster Relief and Recovery in
                                             Specific Presidentially Declared Disaster Areas




                                                                                                       Tax packages supporting disaster relief and recovery
                                                                                                                                                                 Number of
                                                                                                                                                                 packages
                                                                                   New York       Katrina     Gulf              Kansas     Midwest    National     where
Tax provision                                                                       Liberty      Emergency Opportunity          disaster   disaster   disaster   provision
                                                                                          a            b           c                   d          e          f
or special rule     Description                                                     Zone           Act       Zone                relief     relief     relief     is used
Exclusions and deferrals
36. Exclusion of    Individuals whose principal residence was located in the                          X                                       X                     2
certain             Hurricane Katrina core disaster area or certain portions of
cancellations of    the Midwestern disaster area on the date that a disaster
indebtedness        was declared may generally exclude any nonbusiness
                    debt from gross income, such as a mortgage, that is
                    discharged by an applicable entity on or after the
                    applicable disaster date for an established time period. If
                    the individual’s primary residence was located in the
                    Hurricane Katrina disaster area (outside the core disaster
                    area) or other portions of the Midwestern disaster area,
                    the individual must also have had an economic loss
                    because of the disaster.
37. Extension of    A taxpayer may have elected not to recognize gain with             X              X                             X         X                     4
replacement         respect to property that was involuntarily converted, or
period for          destroyed, if the taxpayer acquired qualified replacement
nonrecognition of   property within an applicable period, which is typically 2
gain                years. The replacement period for property that was
                    involuntarily converted in certain disaster areas is 5 years
                    after the end of the taxable year in which a gain is
                    realized. Substantially all of the use of the replacement
                    property must be within the affected area.




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                                              Appendix VI: Tax Provisions and Special Rules Available for Disaster Relief and Recovery in
                                              Specific Presidentially Declared Disaster Areas




                                                                                                        Tax packages supporting disaster relief and recovery
                                                                                                                                                                  Number of
                                                                                                                                                                  packages
                                                                                    New York       Katrina     Gulf              Kansas     Midwest    National     where
Tax provision                                                                        Liberty      Emergency Opportunity          disaster   disaster   disaster   provision
                                                                                           a            b           c                   d          e          f
or special rule      Description                                                     Zone           Act       Zone                relief     relief     relief     is used
38. Housing relief   The provision provided a temporary income exclusion for                                          X                        X                     2
for individuals      the value of in-kind lodging provided for a month to a
through employer-    qualified employee (and the employee’s spouse or
provided housing     dependents) affected by certain disasters by or on behalf
exclusion            of a qualified employer. The amount of the exclusion for
                     any month for which lodging is furnished could not have
                     exceeded $600. The exclusion did not apply for purposes
                     of Social Security and Medicare taxes or unemployment
                     tax.
39. Mileage          Under the provision, reimbursement by charitable                                  X                                       X                     2
reimbursement to     organizations to a volunteer for the costs of using a
charitable           passenger automobile in providing donated services to
volunteers           charity for relief of certain disasters was excludable from
excluded from        the gross income of the volunteer. The reimbursement
gross income         was allowed up to an amount that did not exceed the
                     business standard mileage rate prescribed for business
                     use.
Special rules for use of retirement funds
40. Tax-favored      The provision provided an exception to the 10 percent                             X              X              X         X                     4
withdrawals from     early withdrawal tax in the case of a qualified distribution
retirement plans     of up to $100,000 from a qualified retirement plan, such
                     as a 401(k) plan), a 403(b) annuity, or an IRA. Income
                     from a qualified distribution may have been included in
                     income ratably over 3 years, and the amount of a qualified
                     distribution may have been recontributed to an eligible
                     retirement plan within 3 years.




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                                               Appendix VI: Tax Provisions and Special Rules Available for Disaster Relief and Recovery in
                                               Specific Presidentially Declared Disaster Areas




                                                                                                         Tax packages supporting disaster relief and recovery
                                                                                                                                                                   Number of
                                                                                                                                                                   packages
                                                                                      New York      Katrina     Gulf              Kansas     Midwest    National     where
Tax provision                                                                          Liberty     Emergency Opportunity          disaster   disaster   disaster   provision
                                                                                             a           b           c                   d          e          f
or special rule        Description                                                     Zone          Act       Zone                relief     relief     relief     is used
41.                    In general, under the provision, a qualified distribution                        X              X              X         X                     4
Recontributions of     received from certain retirement plans in order to
withdrawals for        purchase a home in certain disaster areas may be
cancelled home         recontributed to such plans in certain circumstances. The
purchases              provision applies to an individual who receives a qualified
                       distribution that was to be used to purchase or construct a
                       principal residence in a disaster area, but the residence is
                       not purchased or constructed on account of the disaster.
42. Loans from         Under this provision, residents whose principal residence                        X              X              X         X                     4
qualified plans to     was located in designated disaster areas and who
individuals            suffered economic loss as a result of such disasters may
sustaining an          borrow up to $100,000 from their employer plan. In
economic loss          addition to increasing the aggregate plan loan limit from
                       the usual $50,000, the provision also relaxed other
                       requirements relating to plan loans.
43. Plan               The provision permits certain retirement plan                                    X              X              X         X                     4
amendments             amendments made pursuant to changes made under
relating to disaster   Section 1400Q of the Internal Revenue Code, or
relief                 regulations issued there under, to be retroactively
                       effective. In order for this treatment to apply, the plan
                       amendment is required to be made on or before the last
                       day of the first plan year beginning on or after January 1,
                       2007, or such later date as provided by the Secretary of
                       the Treasury. Governmental plans are given an additional
                       2 years in which to make required plan amendments.




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                                             Appendix VI: Tax Provisions and Special Rules Available for Disaster Relief and Recovery in
                                             Specific Presidentially Declared Disaster Areas




                                                                                                                             Tax packages supporting disaster relief and recovery
                                                                                                                                                                                                          Number of
                                                                                                                                                                                                          packages
                                                                                                 New York            Katrina     Gulf                           Kansas              Midwest    National     where
Tax provision                                                                                     Liberty           Emergency Opportunity                       disaster            disaster   disaster   provision
                                                                                                        a                 b           c                                d                   e          f
or special rule      Description                                                                  Zone                Act       Zone                             relief              relief     relief     is used
Miscellaneous provisions
44. Required         The Secretary of the Treasury was required to provide                                                  X                   X                                                            2
exercise of IRS      certain administrative relief to taxpayers affected by
administrative       certain presidentially declared disasters. Such relief
authority            allows for postponement of actions required by law, such
                     as filing tax returns, paying taxes, or filing a claim for
                     credit or refund of tax, for an applicable period of time
                     following a disaster.
45. Secretarial      The provision authorized the Secretary of the Treasury to                                              X                   X                                       X                    3
authority to make    make such adjustments in the application of federal tax
adjustments          laws to ensure that taxpayers did not lose any deduction
regarding taxpayer   or credit or experience a change of filing status by reason
and dependency       of temporary relocations caused by applicable disasters.
status               Any adjustments made under this provision must insure
                     that an individual is not taken into account by more than
                     one taxpayer with respect to the same tax benefit.
Total provisions by disaster relief packages                                                            7                  19                  33                   13                  26        8          (h)
                                             Sources: GAO analysis based on IRS and JCT documentation; see appendix I for a more detailed explanation of our methodology and sources.
                                             a
                                              The New York Liberty Zone package of tax provisions was enacted by the Job Creation and Worker Assistance Act of 2002 (Pub. L. No. 107-147), and
                                             targeted areas of Lower Manhattan affected by terrorist attacks occurring on September 11, 2001. On enactment, CBO and JCT projected total revenue
                                             effects of $5,029 million for the disaster provisions for fiscal years 2002 through 2012.
                                             b
                                              The Katrina Emergency Act package was enacted by the Katrina Emergency Tax Relief Act of 2005 (Pub. L. No. 109-73), and targeted the Hurricane
                                             Katrina disaster area (consisting of the states of Alabama, Florida, Louisiana, and Mississippi), including core disaster areas determined by the
                                             President to warrant individual or individual and public assistance from the federal government following Hurricane Katrina in August 2005. On
                                             enactment, JCT projected total budget effects of $6,109 million for fiscal years 2006 through 2015.




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Appendix VI: Tax Provisions and Special Rules Available for Disaster Relief and Recovery in
Specific Presidentially Declared Disaster Areas




c
 The Gulf Opportunity Zone package was enacted by the Gulf Opportunity (GO) Zone Act of 2005 (Pub. L. No. 109-135). Counties and parishes in
Alabama, Florida, Louisiana, Mississippi and Texas that warranted additional, long-term federal assistance following Hurricanes Katrina, Rita and Wilma
in 2005 were designated as Katrina, Rita and/or Wilma GO Zones. Portions of the Katrina and Rita GO Zones overlapped with counties and parishes
eligible for relief under the Katrina Emergency Tax Relief Act. The Gulf Opportunity Zone tax package also included some nondisaster-related tax
provisions: election to treat combat pay as earned income for purposes of the Earned Income Tax Credit; modifications of suspension of interest and
penalties where IRS fails to contact taxpayer; authority for undercover operations; disclosure of tax information to facilitate combined employment tax
reporting; disclosure of return information regarding terrorist activities; disclosure of return information to carry out contingent repayment of student
loans; and various tax technical corrections. On enactment, JCT projected total budget effects of $8,715 million for the disaster provisions for fiscal years
2006 through 2015.
d
 The Kansas disaster relief package was enacted by the Food, Conservation, and Energy Act of 2008 (Pub. L. No. 110-246). The Kansas disaster relief
package targeted 24 counties in Kansas affected by storms and tornadoes that began on May 4, 2007. On enactment, JCT projected total revenue
effects of $63 million for the disaster provisions for fiscal years 2008 though 2018.
e
 The Midwest disaster relief package was enacted by the Emergency Economic Stabilization Act of 2008, Energy Improvement and Extension Act of
2008, and Tax Extenders and the Alternative Minimum Tax Relief Act of 2008 (Pub. L. No. 110-343). The Midwest disaster relief package targeted
selected counties in 10 states affected by tornadoes, severe storms and flooding occurring from May 20-July 31, 2008. The listed components
associated with the Midwest disaster relief package do not include rules outlining IRS reporting requirements for contributions to disaster relief; these
rules apply for tax returns due after December 31, 2008. On enactment, JCT projected total revenue effects of $4,576 million for the Midwest disaster
provisions for fiscal years 2009 through 2018.
f
 The National disaster relief package was enacted by the Emergency Economic Stabilization Act of 2008, Energy Improvement and Extension Act of
2008, and Tax Extenders and the Alternative Minimum Tax Relief Act of 2008 (Pub. L. No. 110-343). The National disaster relief package targeted
individuals and businesses located in any geography declared a disaster area in the United States during tax years 2008 and 2009. Certain provisions of
the National Disaster Relief Act of 2008 do not apply to the Midwest disaster areas because the Heartland and Hurricane Ike Disaster Relief Act, part of
the same legislation that resulted in the National Disaster Relief Act, provides other tax benefits. On enactment, JCT projected total revenue effects of
$8,091 million for fiscal years 2009 through 2018.
g
 The provisions relating to additional first-year depreciation, increased expensing under section 179, and the 5-year carryback of net operating losses
attributable to casualty losses, depreciation, or amortization did not apply with respect to certain property. Specifically, the provisions did not apply with
respect to any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, or any store the principal business of
which is the sale of alcoholic beverages for consumption off premises. The provisions also did not apply with respect to any gambling or animal racing
property.
h
 The numbers of provisions across the six disaster relief packages exceeds the total number of provisions because some tax provisions and special
rules were part of more than one disaster package.




Page 112                                  GAO-12-262 Community Development Tax Expenditures
Appendix VII: Potential Duplication, Overlap,
                                     Appendix VII: Potential Duplication, Overlap,
                                     and Fragmentation among Economic
                                     Development Spending Programs


and Fragmentation among Economic
Development Spending Programs
                                     In March 2011 and more recently in May 2011, we reported on the
                                     potential for duplication among 80 federal economic development
                                     programs at four agencies—the Departments of Commerce (Commerce),
                                     Housing and Urban Development (HUD), and Agriculture (USDA) and the
                                     Small Business Administration (SBA). 119 According to the agencies,
                                     funding provided for these 80 programs in fiscal year 2010 amounted to
                                     $6.2 billion, of which about $2.9 billion was for economic development
                                     efforts, largely in the form of grants, loan guarantees, and direct loans.
                                     Some of these 80 programs can fund a variety of activities, including such
                                     noneconomic development activities as rehabilitating housing and
                                     building community parks.

                                     Our work as of May 2011 suggested that the design of each of these 80
                                     economic development programs appears to overlap with that of at least
                                     one other spending program in terms of the economic development
                                     activity that they are authorized to fund, as shown in table 12. For
                                     example, 35 programs can fund infrastructure, and 27 programs can fund
                                     commercial buildings. Some of the 80 economic development programs
                                     are targeted to economically distressed areas.

Table 12: Economic Development Programs by Agency

                                                               Number of programs by agency
                                                                   a                                       b
Activity                           Commerce                  HUD                     SBA            USDA                   Total
Entrepreneurial efforts                        9                 12                   19                 14                   54
Infrastructure                                 4                 12                    1                 18                   35
Plans and strategies                           7                 13                   13                  7                   40
Commercial buildings                           4                 12                    4                  7                   27
New markets                                    6                 10                    6                  6                   28
Telecommunications                             3                 11                    2                  8                   24
Business incubators                            5                 12                                       7                   24
Industrial parks                               5                 11                                       5                   21
Tourism                                        5                 10                                       4                   19
                                     Source: GAO-11-477R.
                                     a
                                     HUD did not identify Empowerment Zones among its economic development programs.



                                     119
                                         See GAO-11-318SP and GAO-11-477R. The latter provides additional details on each
                                     of the 80 economic development programs, including administering agency, funding
                                     received in fiscal year 2010, economic activities eligible for funding, area served based on
                                     population density, primary recipients targeted by program, and award type.




                                     Page 113                              GAO-12-262 Community Development Tax Expenditures
Appendix VII: Potential Duplication, Overlap,
and Fragmentation among Economic
Development Spending Programs




b
 USDA identified Empowerment Zones among its economic development programs and supporting
each of the nine economic development activities.


In February 2012, we reported our findings to date on overlap and
fragmentation among 53 economic development programs that support
entrepreneurial efforts. 120 Based on a review of the missions and other
related program information for these 53 programs, we determined that
these programs overlap based not only on their shared purpose of
serving entrepreneurs but also on the type of assistance they offer. Much
of the overlap and fragmentation among these 53 programs is
concentrated among programs that support economically distressed and
disadvantaged businesses. In ongoing work that will be published as a
separate report, we plan to examine the extent of potential duplication
among the 53 programs.




120
  See GAO-12-342SP. The number of programs administered by Commerce, HUD,
SBA, and USDA that were identified in GAO-11-477R decreased from 54 to 53 because
Commerce merged two minority business center programs.




Page 114                              GAO-12-262 Community Development Tax Expenditures
Appendix VIII: Comments from the
             Appendix VIII: Comments from the Department
             of the Treasury



Department of the Treasury




             Page 115                          GAO-12-262 Community Development Tax Expenditures
Appendix VIII: Comments from the Department
of the Treasury




Page 116                          GAO-12-262 Community Development Tax Expenditures
Appendix VIII: Comments from the Department
of the Treasury




Page 117                          GAO-12-262 Community Development Tax Expenditures
Appendix IX: GAO Contact and Staff
                  Appendix IX: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Michael Brostek, (202) 512-9110, or brostekm@gao.gov
GAO Contact
                  In addition to the contact named above MaryLynn Sergent, Assistant
Staff             Director; Elizabeth Curda; Jeffrey DeMarco; Edward Nannenhorn;
Acknowledgments   Melanie Papasian; Mark Ryan; and Sabrina Streagle made key
                  contributions to this report.




                  Page 118                             GAO-12-262 Community Development Tax Expenditures
Bibliography
               Bibliography




               To determine what is known about the effectiveness of selected
               community development tax expenditures, we conducted a literature
               review of studies that addressed the following tax expenditure provisions:
               (1) the Empowerment Zone/Renewal Community tax programs; (2) the
               New Markets Tax Credit program; (3) tax expenditures available for
               certain disaster areas; and (4) rehabilitation tax credits, including the 20
               percent tax credit for preservation of historic structures and the 10
               percent tax credit for the rehabilitation of structures (other than historic).
               We searched databases, including Proquest, Google Scholar, and
               Econlit, for studies through May 2011. We focused on studies that
               attempted to measure the impact of the selected tax incentives on certain
               measures of community development, such as the poverty and
               unemployment rate.

               Abravanel, Martin D., Nancy M. Pindus, and Brett Theodos. Evaluating
               Community and Economic Development Programs: A Literature Review
               to Inform Evaluation of the New Markets Tax Credit Program. Prepared
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               Aprill, Ellen P., and Richard Schmalbeck. “Post-Disaster Tax Legislation:
               A Series of Unfortunate Events.” Duke Law Journal, vol. 56, no. 1 (2006):
               51-100.

               Bartik, Timothy J. “Bringing Jobs to People: How Federal Policy Can
               Target Job Creation for Economically Distressed Areas.” Discussion
               paper prepared for The Hamiltion Project (2010).

               Busso, Matias, Jesse Gregory., and Patrick M Kline. “Assessing the
               Incidence and Efficiency of a Prominent Place Based Policy.” National
               Bureau of Economic Research Working paper no. 16096 (2010).

               Chernick, Howard and Andrew F. Haughwout. “Tax Policy and the Fiscal
               Cost of Disasters: NY and 9/11.” National Tax Journal, vol. 59, no. 3
               (2006): 561-577.

               Congressional Research Service. Empowerment Zones, Enterprise
               Communities, and Renewal Communities: Comparative Overview and
               Analysis. Washington, D.C.: 2011.

               Gotham, Kevin F., and Miriam Greenberg. “From 9/11 to 8/29: Post-
               Disaster Recovery and Rebuilding in New York and New Orleans.” Social
               Forces, vol. 87, no. 2 (2008): 1039-1062.


               Page 119                       GAO-12-262 Community Development Tax Expenditures
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Ham, John C., Charles Swenson, Ayse Imrohoroglu, and Heonjae Song.
“Government Programs Can Improve Local Labor Markets: Evidence
from State Enterprise Zones, Federal Empowerment Zones and Federal
Enterprise Community. Journal of Public Economics, vol. 95, no. 7-8
(August 2011): 779-797.

Hanson, Andrew. “Utilization of Employment Tax Credits: An Analysis of
the Empowerment Zone Wage Tax Credit.” Public Budgeting & Finance,
vol. 31, no. 1 (2011): 23-36.

Hanson, Andrew and Shawn Rohlin. “The Effect of Location-Based Tax
Incentives on Establishment Location and Employment across Industry
Sectors.” Public Finance Review, vol. 39, no. 2 (2011): 195-225.

Hebert, Scott, Avis Vidal, Greg Mills, Franklin James, and Debbie
Gruenstein. Interim Assessment of the Empowerment Zones and
Enterprise Communities (EZ/EC) Program: A Progress Report. A report
prepared for the U.S. Department of Housing and Urban Development.
November 2001.

Jennings, James. “The Empowerment Zone in Boston, Massachusetts,
2000-2009.” Review of Black Political Economy, vol. 38, no. 1 (2011): 63-
81.

Joint Committee on Taxation. Incentives for Distressed Communities:
Empowerment Zones and Renewal Communities (JCX-38-09), October 5,
2009.

Kolko, Jed and David Neumark. “Do Some Enterprise Zones Create
Jobs?” Journal of Policy Analysis and Management, vol. 29, no. 1 (2010):
5-38.

Listokin, David, Michael L. Lahr, Charles Heydt, and David Stanek.
Second Annual Report on the Economic Impact of the Federal Historic
Tax Credit. A report prepared for the Historic Tax Credit Coalition. May
2011.

Rich, Michael J., and Robert P. Stoker. “Rethinking Empowerment:
Evidence from Local Empowerment Zone Programs.” Urban Affairs
Review, vol 45, no. 6 (2010): 775-796.

Richardson, James A. “Katrina/Rita: The Ultimate Test for Tax Policy.”
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Schilling, James D., Kerry D. Vandell, Ruslan Koesman, and Zhenguo
Lin. “How Tax Credits Have Affected the Rehabilitation of the Boston
Office Market.” Journal of Real Estate Research, vol. 28, no. 4 (2006):
321-348.

Stead, Meredith M. “Implementing Disaster Relief Through Tax
Expenditures: An Assessment of the Katrina Emergency Tax Relief
Measures.” New York University Law Review, vol. 81, no. 6 (2006): 2158-
2191.

Tolan, Patrick E, Jr. “The Flurry of Tax Law Changes Following the 2005
Hurricanes: A Strategy for More Predictable and Equitable Tax Treatment
of Victims.” Brooklyn Law Review, vol. 72, no. 3 (2007): 799-870.




Page 121                      GAO-12-262 Community Development Tax Expenditures
Related GAO Products
             Related GAO Products




             2012 Annual Report: Opportunities to Reduce Duplication, Overlap, and
             Fragmentation, Achieve Savings, and Enhance Revenue.
             GAO-12-342SP. Washington, D.C.: February 28, 2012.

             Follow-up on 2011 Report: Status of Actions Taken to Reduce
             Duplication, Overlap, and Fragmentation, Save Tax Dollars, and Enhance
             Revenue. GAO-12-453SP. Washington, D.C.: February 28, 2012.

             Managing for Results: Opportunities for Congress to Address
             Government Performance Issues. GAO-12-215R. Washington, D.C.:
             December 9, 2011.

             Economic Development: Efficiency and Effectiveness of Fragmented
             Programs Are Unclear. GAO-11-872T. Washington, D.C.: July 27, 2011.

             Efficiency and Effectiveness of Fragmented Economic Development
             Programs Are Unclear. GAO-11-477R. Washington, D.C.: May 19, 2011.

             Managing for Results: GPRA Modernization Act Implementation Provides
             Important Opportunities to Address Government Challenges.
             GAO-11-617T. Washington, D.C.: May 10, 2011.

             Performance Measurement and Evaluation: Definitions and
             Relationships. GAO-11-646SP. Washington, D.C.: May 2, 2011.

             Indian Issues: Observations on Some Unique Factors that May Affect
             Economic Activity on Tribal Lands. GAO-11-543T. Washington, D.C.:
             April 7, 2011.

             Government Performance: GPRA Modernization Act Provides
             Opportunities to Help Address Fiscal, Performance, and Management
             Challenges. GAO-11-466T. Washington, D.C.: March 16, 2011.

             Opportunities to Reduce Potential Duplication in Government Programs,
             Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington
             D.C.: March 1, 2011.

             Recovery Act: Opportunities to Improve Management and Strengthen
             Accountability over States’ and Localities’ Uses of Funds. GAO-10-999.
             Washington, D.C.: September 20, 2010.




             Page 122                     GAO-12-262 Community Development Tax Expenditures
Related GAO Products




Community Development Block Grants: Entitlement Communities’ and
States’ Methods of Distributing Funds Reflect Program Flexibility.
GAO-10-1011. Washington, D.C.: September 15, 2010.

Revitalization Programs: Empowerment Zones, Enterprise Communities,
and Renewal Communities. GAO-10-464R. Washington, D.C.: March 12,
2010.

New Markets Tax Credit: The Credit Helps Fund a Variety of Projects in
Low-Income Communities, but Could Be Simplified. GAO-10-334.
Washington, D.C.: January 29, 2010.

Disaster Recovery: Past Experiences Offer Insights for Recovering from
Hurricanes Ike and Gustav and Other Recent Natural Disasters.
GAO-08-1120. Washington, D.C.: September 26, 2008.

Gulf Opportunity Zone: States Are Allocating Federal Tax Incentives to
Finance Low-Income Housing and a Wide Range of Private Facilities.
GAO-08-913. Washington, D.C.: July 16, 2008.

Tax Expenditures: Available Data Are Insufficient to Determine the Use
and Impact of Indian Reservation Depreciation. GAO-08-731.
Washington, D.C.: June 26, 2008.

Tax Policy: Tax-Exempt Status of Certain Bonds Merits Reconsideration,
and Apparent Noncompliance with Issuance Cost Limitations Should Be
Addressed. GAO-08-364. Washington, D.C.: February 15, 2008.

HUD and Treasury Programs: More Information on Leverage Measures’
Accuracy and Linkage to Program Goals is Needed in Assessing
Performance. GAO-08-136. Washington, D.C.: January 18, 2008.

21st Century Challenges: How Performance Budgeting Can Help.
GAO-07-1194T. Washington, D.C.: September 20, 2007.

Leveraging Federal Funds for Housing, Community, and Economic
Development. GAO-07-768R. Washington, D.C.: May 25, 2007.

Tax Policy: New Markets Tax Credit Appears to Increase Investment by
Investors in Low-Income Communities, but Opportunities Exist to Better
Monitor Compliance. GAO-07-296. Washington, D.C.: January 31, 2007.




Page 123                     GAO-12-262 Community Development Tax Expenditures
Related GAO Products




Empowerment Zone and Enterprise Community Program: Improvements
Occurred in Communities, but the Effect of the Program is Unclear.
GAO-06-727. Washington, D.C.: September 22, 2006.

Federal Tax Policy: Information on Selected Capital Facilities Related to
the Essential Governmental Function Test. GAO-06-1082. Washington,
D.C.: September 13, 2006.

Rural Economic Development: More Assurance Is Needed That Grant
Funding Information Is Accurately Reported. GAO-06-294. Washington
D.C.: February 24, 2006.

Telecommunications: Challenges to Assessing and Improving
Telecommunications for Native Americans on Tribal Lands. GAO-06-189.
(Washington, D.C.: January, 11, 2006).

Results-Oriented Government: Practices That Can Help Enhance and
Sustain Collaboration among Federal Agencies. GAO-06-15. Washington,
D.C.: October 21, 2005.

Government Performance and Accountability: Tax Expenditures
Represent a Substantial Federal Commitment and Need to Be
Reexamined. GAO-05-690. Washington, D.C.: September 23, 2005.

A Glossary of Terms Used in the Federal Budget Process.
GAO-05-734SP. Washington, D.C.: September 2005.

Community Development: Federal Revitalization Programs Are Being
Implemented, but Data on the Use of Tax Benefits Are Limited.
GAO-04-306. Washington, D.C.: March 5, 2004.

New Markets Tax Credit Program: Progress Made in Implementation, but
Further Actions Needed to Monitor Compliance. GAO-04-326.
Washington, D.C.: January 30, 2004.

September 11: Overview of Federal Disaster Assistance to the New York
City Area. GAO-04-72. Washington, D.C.: October 31, 2003.

Tax Administration: Information Is Not Available to Determine Whether $5
Billion in Liberty Zone Tax Benefits Will Be Realized. GAO-03-1102.
Washington, D.C.: September 30, 2003.




Page 124                      GAO-12-262 Community Development Tax Expenditures
           Related GAO Products




           Economic Development: Multiple Federal Programs Fund Similar
           Economic Development Activities. GAO/RCED/GGD-00-220.
           Washington, D.C.: September 29, 2000.

           Tax Policy: Tax Expenditures Deserve More Scrutiny.
           GAO/GGD/AIMD-94-122. Washington, D.C.: June 3, 1994.




(450870)
           Page 125                   GAO-12-262 Community Development Tax Expenditures
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