oversight

Community Development: Businesses' Use of Empowerment Zone Tax Incentives

Published by the Government Accountability Office on 1999-09-30.

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

                  United States General Accounting Office

GAO               Report to Congressional Requesters




September 1999
                  COMMUNITY
                  DEVELOPMENT
                  Businesses’ Use of
                  Empowerment Zone
                  Tax Incentives




GAO/RCED-99-253
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-283591

      September 30, 1999

      The Honorable John Mica
      Chairman, Subcommittee on Criminal Justice,
        Drug Policy, and Human Resources
      Committee on Government Reform
      House of Representatives

      The Honorable Christopher Shays
      Chairman, Subcommittee on National Security,
        Veterans Affairs, and International Relations
      Committee on Government Reform
      House of Representatives

      The Omnibus Budget Reconciliation Act of 1993 established the
      Empowerment Zone and Enterprise Community program as a
      comprehensive approach to help designated communities revitalize
      deteriorating areas. The act also provided three tax incentives that, among
      other things, were intended to revitalize the distressed areas by lowering
      the cost of doing business in an empowerment zone. These three tax
      incentives are (1) an employment credit, (2) a $20,000 increase in the
      expensing deduction for depreciable business property, and (3) a
      tax-exempt facility bond. The estimated cost of these incentives to the
      government, which is periodically updated, is projected to be about
      $2.5 billion over the 10-year life of this program.

      As arranged with your offices, this report discusses the extent to which
      businesses in empowerment zones used the program’s three tax
      incentives, as well as three other tax incentives that are targeted to help
      businesses, including those in distressed areas—the work opportunity
      credit; the welfare-to-work credit; and an environmental cleanup tax
      deduction, also known as the brownfields deduction. This report also
      discusses, where applicable, why the incentives were not used.

      To address these objectives, we mailed a survey to about 2,400 businesses
      in the nine original empowerment zones, which are located in Atlanta,
      Georgia; Baltimore, Maryland; Chicago, Illinois; Detroit, Michigan;
      Philadelphia, Pennsylvania/Camden, New Jersey; New York, New York;
      the Kentucky Highlands; the Mississippi Mid-Delta; and the Rio Grande
      Valley, Texas.1 We asked businesses about their use of the employment

      1
       The Taxpayer Relief Act of 1997 provided for a second round of this program with revised tax
      incentives. Consequently, additional empowerment zones were designated in January 1998 and
      January 1999.



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                   credit and the increased expensing deduction for tax year 1997, which was
                   the most recently completed tax year for which all of the businesses we
                   surveyed would have filed taxes when we initiated our work in
                   January 1999 (see app. I for a copy of the survey). Throughout the report,
                   we provide information separately for large urban businesses, small urban
                   businesses, and rural businesses because we found differences in how
                   they responded to the survey. In some cases, we provide information
                   separately for large rural businesses and small rural businesses.2 We also
                   are providing descriptive information on the businesses that responded to
                   the survey (see app. II). Because more than half of the large urban
                   businesses and the rural businesses did not respond to our survey, the
                   survey results only reflect the usage of the incentives by those who
                   responded and may not reflect actual usage of the incentives.3 In addition,
                   the estimates that are based on responses from our random sample of the
                   small urban businesses may be imprecise because of the sampling error
                   associated with the estimate. These estimates reflect the usage of the
                   incentives by the businesses that would have responded to the survey if
                   we had mailed it to all of them. Appendix III contains a complete
                   description of our scope and methodology, as well as the sampling errors
                   for the estimates that we report for small urban businesses.


                   Large urban businesses and rural businesses were more likely than small
Results in Brief   urban businesses to have used at least one of the three tax incentives
                   available to businesses in the empowerment zones. The employment credit
                   was the most frequently used of the three tax incentives. According to the
                   survey’s responses, 42 percent of the large urban businesses, an estimated
                   6 percent of the small urban businesses, and 32 percent of the rural
                   businesses used the employment credit. Large urban businesses and rural
                   businesses reported claiming $9.1 million for tax year 1997. The majority
                   of the businesses that used the employment credit reported that the credit
                   was at least “somewhat important” to making decisions about hiring
                   employees who live in the zones. The businesses that reported they did not
                   claim the employment credit cited a variety of reasons, which most
                   frequently included that they did not qualify for the credit because their
                   employees lived outside of the zone or they did not know about the credit.

                   In tax year 1997, the increased expensing deduction was used less than the
                   employment credit. About 9 percent of the large urban businesses, an

                   2
                    We defined large businesses as those with 50 or more employees and small businesses as those with
                   fewer than 50 employees.
                   3
                    For example, one survey that was returned too late to be included in our analysis was from a business
                   that reported claiming $700,000 in employment credits.


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             estimated 4 percent of the small urban businesses, and 8 percent of the
             rural businesses used the increased expensing deduction. Of the
             businesses that used this deduction, large urban businesses reported
             claiming $405,534 and rural businesses reported claiming $480,081. The
             businesses that reported they did not claim this deduction cited a variety
             of reasons. The four most frequently cited reasons were (1) a lack of
             knowledge about the increased deduction, (2) a lack of investment in
             “qualified zone property,” (3) insufficient business investments to use the
             deduction, and (4) insufficient income to use the deduction.

             Few businesses have used the tax-exempt facility bonds. Ten businesses
             reported receiving the proceeds from these tax-exempt bonds: seven large
             urban businesses, one large rural business, and two small rural businesses.
             Of the businesses that did not use these bonds, the predominant reason
             was that they did not know about them. Finally, most of the businesses did
             not use the work opportunity credit, the welfare-to-work credit, or the
             environmental cleanup tax deduction.


             On December 21, 1994, nine empowerment zones—six urban and three
Background   rural—were designated. The urban zones are located in Atlanta, Georgia;
             Baltimore, Maryland; Chicago, Illinois; Detroit, Michigan; Philadelphia,
             Pennsylvania/Camden, New Jersey; and New York, New York. The rural
             zones are located in the Kentucky Highlands; the Mississippi Mid-Delta;
             and the Rio Grande Valley, Texas.3 The businesses in these empowerment
             zones may be eligible for three tax incentives, which are (1) an
             employment credit, (2) a $20,000 increase in the expensing deduction for
             depreciable business property authorized under section 179 of the Internal
             Revenue Code, and (3) a tax-exempt facility bond. According to officials in
             the empowerment zones—including Executive Directors and others
             familiar with the zones’ efforts to provide information on the tax
             incentives, they have disseminated information on the three empowerment
             zone incentives by (1) mailing information to businesses operating in the
             zones, (2) responding to individual requests for information or assistance
             on operating in the zones, and/or (3) conducting seminars and other
             meetings with businesses from the zones.

             The empowerment zone employment credit allows a business to claim a
             credit for up to 20 percent of the first $15,000 in wages paid to each of its
             employees that lives and works in the zone—up to a maximum of $3,000

             3
              An additional 95 communities were designated as enterprise communities in 1994. Empowerment
             zones receive much larger grants and more tax incentives than enterprise communities and are the
             subject of this report.



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for each employee.5 The depreciation incentive increases by up to $20,000
the limit on expensing deductions for qualified empowerment zone
businesses, as authorized by section 179 of the Internal Revenue Code. For
example, in 1997, the limit for these businesses was $38,000 and the limit
for other businesses was $18,000.6 This deduction allows businesses to
recover the cost of certain depreciable property, such as equipment and
machinery, by deducting all or part of the cost in the year that the property
is placed in service rather than over several years.

A new category of tax-exempt bonds was authorized for the program to
offer businesses lower rates than conventional financing for borrowing
money. These bonds can be used by qualified businesses to finance the
purchase of business property and land, as well as to finance new facilities
or to expand and renovate existing ones. However, these bonds are
subject to an annual limit that is established for each state.7 Additionally,
the aggregate face amount of these bonds for each qualified business
cannot exceed $3 million per zone and $20 million for the same business in
all empowerment zones and enterprise communities nationwide. The
authorizing legislation requires, among other things, that each business
that benefits from these bonds ensures that at least 35 percent of its
employees live in the zone.

At least three additional tax incentives are available to businesses in the
empowerment zones, as well as to other businesses. The work opportunity
credit provides businesses with an incentive to hire individuals from
groups that have a particularly high unemployment rate or other special
employment needs. This tax credit allows businesses to claim a credit for
wages paid to qualified employees in their first year of employment up to a
specified limit per individual. These employees must be certified as being
in one of eight groups of people—such as veterans, high-risk youth, and
food stamp recipients—that have high unemployment rates or other
special employment needs. A second credit, the welfare-to-work credit, is
intended to encourage businesses to hire long-term recipients of family
assistance to ease the transition from welfare to work by increasing access
to employment, as well as providing certain employee benefits to
encourage training, health coverage, dependent care, and better job


5
 The credit will be reduced by 5 percentage points per year starting in 2002 for the nine initial
empowerment zones.
6
 The limit on this deduction for businesses that are not in empowerment zones will be raised in annual
increments until it reaches $25,000 for the years after 2002.
7
 Under current law, each state has the authority to issue tax-exempt private activity bonds in an
amount equal to $50 per resident. If a state’s population results in the authority to issue less than
$150 million, the state’s allocation is automatically raised to $150 million.


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                         retention. This tax incentive provides a credit for wages paid to qualified
                         employees over the initial 2 years of employment. Finally, the
                         environmental cleanup tax deduction, which is also referred to as the
                         brownfields deduction, allows businesses to deduct the cleanup costs for
                         certain contaminated sites in the tax year they incur these costs. The
                         expenditure must be made in connection with the abatement or control of
                         hazardous substances at a qualified contaminated site, with empowerment
                         zones designated as one of the targeted areas for this tax deduction.


                         We identified 13,590 for-profit, nonfarming businesses that operated in the
Businesses’ Use of the   original nine empowerment zones. These businesses ranged from
Tax Incentives for Tax   single-person operations to companies with hundreds of employees and
Year 1997 Varied         included manufacturing firms, wholesalers, service providers,
                         construction firms, retailers, and other types of businesses. We surveyed
Among the Three          about 2,400 of these businesses on their usage of the three empowerment
Respondent Groups        zone tax incentives and received responses from 48 percent of the large
                         urban businesses, 32 percent of the small urban businesses, and 46 percent
                         of the rural businesses that we surveyed.

                         According to our survey’s respondents, 46 percent of the large urban
                         businesses, an estimated 10 percent of the small urban businesses, and
                         33 percent of the rural businesses used at least one of the three
                         empowerment zone tax incentives for tax year 1997 (see fig. 1). At the
                         same time, 33 percent of the large urban businesses, an estimated
                         70 percent of the small urban businesses, and 47 percent of the rural
                         businesses indicated that they did not use any of the three tax incentives
                         that year. The employment credit was the most frequently used of the
                         three tax incentives, followed by the increased expensing deduction for
                         depreciable business property, and the tax-exempt facility bond. For the
                         businesses that did not use the tax incentives, their reasons for not using
                         them included not knowing about them, not qualifying for them, and
                         finding them too complicated to use. Finally, most of the businesses did
                         not use the work opportunity credit, the welfare-to-work credit, or the
                         environmental cleanup tax deduction.




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Figure 1: Use of the Three
Empowerment Zone Tax Incentives   80 Percentage of respondents



                                  70



                                  60



                                  50



                                  40



                                  30



                                  20



                                  10



                                   0

                                           Used at least one            Did not use any of    Did not know if they had
                                           of the incentives              the incentives     used any of the incentives

                                               Large urban businesses (246)

                                               Small urban businesses (3,856)

                                               Rural businesses (516)



                                  Notes: These percentages do not include the businesses that did not provide information on their
                                  use of these incentives.

                                  The number of small urban businesses is an estimate based on our sample.

                                  Source: GAO’s analysis of the responses to the survey.




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                         B-283591




Use of the Empowerment   Large urban businesses were the most likely to use the employment credit
Zone Employment Credit   and small urban businesses were the least likely to use it, according to the
                         respondents to our survey. As shown in figure 2, this credit was used by 42
                         percent of the large urban businesses, an estimated 6 percent of the small
                         urban businesses, and 32 percent of the rural businesses. Among rural
                         businesses, about two-thirds of the 28 large businesses and about
                         one-third of the 465 small businesses reported using the employment
                         credit. Large urban businesses and rural businesses reported claiming
                         $9.1 million for tax year 1997.8 Of this amount, 94 large urban businesses
                         claimed $5.2 million, 15 large rural businesses claimed $2.9 million, and
                         107 small rural businesses claimed $1 million.

                         While businesses of all types used the employment credit, its use varied
                         depending on the type of business, as shown in figure 3. For the large
                         urban businesses that used the credit, 55 percent were manufacturing
                         firms. For rural businesses, 40 percent of the businesses that used the
                         credit were in retail trade, followed by 22 percent that were involved in
                         providing services. For the small urban businesses, use of the employment
                         credit did not vary by type of business.




                         8
                          We could not estimate the amount claimed by small urban businesses because too few of them
                         provided an amount. Also, the $9.1 million reported by the survey’s respondents may include some
                         credits that were not claimed. For example, while a subchapter S corporation may have reported the
                         amount that the corporation could claim, the individual owners may or may not have claimed their
                         portion of the credit based on their individual tax liability situation.



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Figure 2: Use of the Employment
Credit, Tax Year 1997             90 Percentage of respondents



                                  80



                                  70


                                  60



                                  50


                                  40



                                  30


                                  20



                                  10


                                   0

                                           Used this credit            Did not use this credit   Did not know if they had
                                                                                                      used this credit

                                              Large urban businesses (246)

                                              Small urban businesses (3,856)


                                              Rural businesses (516)



                                  Notes: These percentages do not include the businesses that did not provide information on their
                                  use of this credit.

                                  The number of small urban businesses is an estimate based on our sample.

                                  Source: GAO’s analysis of the responses to the survey.




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Figure 3: Types of Businesses That
Used the Employment Credit           60   Percentage of respondents




                                     50




                                     40




                                     30




                                     20




                                     10




                                      0

                                                 Large urban businesses (215)                           Rural businesses (453)

                                                   Manufacturing

                                                   Construction

                                                   Wholesale trade

                                                   Retail trade

                                                   Services

                                                    Other



                                     Notes: These percentages do not include the businesses that did not provide information on their
                                     type of business.

                                     Other types of businesses include those related to finance, insurance, and real estate;
                                     transportation; communications; utilities; agriculture; and mining.

                                     Source: GAO’s analysis of the responses to the survey.




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Large urban businesses and rural businesses that used the employment
credit for tax year 1997 reported having proportionately more employees
living and working in the empowerment zones than other businesses.
Specifically, among the large urban businesses, the 42 percent that
reported using the credit employed 55 percent of the employees that were
reported to be living and working in the zones for large urban businesses.
Similarly, among the rural businesses, the 32 percent that reported using
the credit employed 68 percent of the employees reported to be living and
working in the zones for rural businesses. The number of employees was
not significantly different between the small urban businesses that used
the credit and those that did not.

The majority of the businesses that used the employment credit reported
that it was at least “somewhat important” to making decisions about
hiring employees who live in the zones. Specifically, 79 percent of the
large urban businesses, an estimated 67 percent of the small urban
businesses, and 74 percent of the rural businesses found this credit to be
at least “somewhat important” to hiring decisions, with about half of
these considering it “very important” or “extremely important.” The
remaining businesses considered the credit “hardly or not at all
important” to their decision-making.

The businesses that reported they did not claim the employment credit
cited a variety of reasons. As shown in figure 4, large urban businesses and
small urban businesses most frequently said that they (1) did not qualify
for the credit because their employees lived outside of the zone or (2) did
not know about the credit. Rural businesses most frequently said that they
did not know about the credit. Businesses also reported that the tax credit
was too complicated to use, that they did not qualify for the credit because
their employees are family members, or that their business did not have
federal tax liability against which to claim the credit.




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Figure 4: Reasons for Not Claiming the Employment Credit

45 Percentage of respondents



40



35



30



25



20



15



10



 5



 0

        Did not qualify         Did not know         This credit was too             Did not have           Did not qualify        Other
         for this credit       about this credit     complicated to use           federal tax liability      for this credit
     because employees                                                                                    because employees
       lived outside of                                                                                     who lived in the
            the zone                                                                                       zone were family
                                                                                                               members


                                                         Large urban businesses (106)

                                                         Small urban businesses (3,117)

                                                         Rural businesses (283)


                                                   Notes: These percentages do not include the businesses that did not provide a reason.

                                                   Other reasons include those provided by individual respondents.

                                                   The number of small urban businesses is an estimate based on our sample.

                                                   Source: GAO’s analysis of the responses to the survey.




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                       B-283591




Use of the Increased   In tax year 1997, the increased expensing deduction generally was used
Expensing Deduction    less than the employment credit. Nine percent of the large urban
                       businesses, an estimated 4 percent of the small urban businesses, and
                       8 percent of the rural businesses—all of which were small
                       businesses—used the increased expensing deduction (see fig. 5). Of the
                       businesses that used this deduction, 18 large urban businesses reported
                       claiming deductions of $405,534, and 37 rural businesses reported claiming
                       $480,081.9




                       9
                        We could not estimate the amount claimed by small urban businesses because too few of them
                       provided an amount. Also, we could not determine the portion of the amounts reported that was an
                       increase over that allowed for other businesses; therefore, the amounts reported may include
                       deductions that would have been allowed without the additional expensing deduction for zone
                       businesses.



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Figure 5: Use of the Increased
Expensing Deduction, Tax Year 1997   80 Percentage of respondents



                                     70



                                     60



                                     50



                                     40



                                     30



                                     20



                                     10



                                      0

                                           Used this deduction             Did not use this deduction         Did not know if they
                                                                                                            had used this deduction

                                                 Large urban businesses (246)

                                                Small urban businesses (3,856)

                                                 Rural businesses (516)



                                     Notes: These percentages do not include the businesses that did not provide information on their
                                     use of this deduction.

                                     The number of small urban businesses is an estimate based on our sample.

                                     Source: GAO’s analysis of the responses to the survey.




                                     For the businesses that used the increased expensing deduction, 16 large
                                     urban businesses and 29 small rural businesses reported that it was at
                                     least “somewhat important” in their decision to purchase depreciable




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B-283591




property; while 6 large urban businesses and 10 small rural businesses
reported that it was “hardly or not at all important” in those decisions.
The responses for small urban businesses were too small to report. No
large rural businesses reported using the deduction.

Businesses that reported they did not claim the increased expensing
deduction cited a variety of reasons (see fig. 6). Frequently cited reasons
included (1) they did not know about the increased deduction, (2) they did
not invest in qualified zone property, (3) their business investments were
too small or too large to use the deduction, and (4) their income was not
high enough to use the deduction.




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Figure 6: Reasons for Not Using the Increased Expensing Deduction, Tax Year 1997

45 Percentage of respondents



40



35



30



25



20



15



10



 5



 0

       Did not know            Did not invest in      Investments              Income was        Investments were             Other
        about this              “qualified zone         were too             not high enough      too small to use
        deduction                  property”          large to use              to use this        this deduction
                                                     this deduction              deduction

                                                          Large urban businesses (173)

                                                          Small urban businesses (3,005)

                                                           Rural businesses (363)


                                                   Notes: These percentages do not include the businesses that did not indicate a reason.

                                                   Other includes such reasons as the deduction was too complicated to use, the business did not
                                                   qualify as an “enterprise zone business,” and other reasons that were provided by individual
                                                   respondents.

                                                   The number of small urban businesses is an estimate based on our sample.

                                                   Source: GAO’s analysis of the responses to the survey.




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Use of Tax-Exempt Federal   Few businesses have used the tax-exempt facility bonds. Ten businesses
Enterprise Zone Facility    reported receiving proceeds from these tax-exempt bonds: 7 large urban
Bonds                       businesses, 1 large rural business, and 2 small rural businesses.9 We did
                            not ask these businesses to report the dollar value of the proceeds they
                            received from these bonds.

                            The reasons businesses reported for not using these bonds varied (see fig.
                            7). Of the businesses that did not use these bonds, 44 percent of the large
                            urban businesses, an estimated 67 percent of the small urban businesses,
                            and 59 percent of the rural businesses said that they did not know about
                            them. In addition, 16 percent of the large urban businesses said that these
                            bonds were too complicated to use and another 13 percent said that they
                            did not need them.




                            9
                             In June 1998, we reported that eight businesses had used this bond through April 1998. We did not
                            reconcile this difference. See Community Development: Information on the Use of Empowerment
                            Zone and Enterprise Community Tax Incentives (GAO/RCED-98-203, June 30, 1998).



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Figure 7: Reasons for Not Using Enterprise Zone Facility Bonds

70 Percentage of respondents




60




50




40




30




20




10




 0

       Did not know            These bonds were       Did not need            Did not qualify        Did not have                 Other
     about these bonds          too complicated       these bonds            as an “enterprise      “qualified zone
                                     to use                                   zone business”           property”



                                                         Large urban businesses (207)

                                                         Small urban businesses (3,535)

                                                         Rural businesses (464)


                                                  Notes: These percentages do not include the businesses that did not provide a reason.

                                                  Other includes such reasons as the business needed a bond larger than the $3-million limit
                                                  allowed for this type of bond, the state’s volume cap had been met when the business applied for
                                                  a bond, and other answers provided by individual respondents.

                                                  The number of small urban businesses is an estimate based on our sample.

                                                  Source: GAO’s analysis of the responses to the survey.




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Use of Work Opportunity    Among the other federal tax incentives available to businesses in
Credits, Welfare-To-Work   empowerment zones are the work opportunity credit, the welfare-to-work
Credits, and               credit, and the environmental cleanup tax deduction, which are also
                           available to businesses in other areas. Most of the empowerment zone
Environmental Cleanup      businesses did not use these tax incentives in tax year 1997. Seventy-six
Tax Deductions             percent of the large urban businesses, an estimated 90 percent of the small
                           urban businesses, and 87 percent of the rural businesses reported that they
                           used none of these three tax incentives. Large businesses were more likely
                           than small businesses to use the work opportunity credit. Specifically,
                           11 percent of the large urban businesses and 14 percent of the large rural
                           businesses indicated that they used this credit, compared with an
                           estimated 1 percent of the small urban businesses and 3 percent of the
                           small rural businesses. Three percent of the large urban businesses, no
                           small urban businesses, and 1 percent of the rural businesses used the
                           welfare-to-work credit; and less than 1 percent of the businesses in all
                           three groups used the environmental cleanup tax deduction.10 We did not
                           ask the businesses to provide their reasons for not using these incentives.


                           We are sending copies of this report to the appropriate congressional
                           committees; the Honorable Andrew Cuomo, Secretary of Housing and
                           Urban Development; the Honorable Dan Glickman, Secretary of
                           Agriculture; the Honorable Lawrence H. Summers, Secretary of the
                           Treasury; and the Honorable Charles O. Rossotti, Commissioner of
                           Internal Revenue. We will also make copies available to others on request.
                           If you or your staff have any questions about the material in this report,
                           please call me at (202) 512-7631. Key contributors to this report were
                           Nancy Simmons, Nancy Boardman, and Carolyn Boyce.




                           Stanley J. Czerwinski
                           Associate Director, Housing and
                             Community Development Issues



                           10
                             Ten percent of the large urban businesses, an estimated 8 percent of the small urban businesses, and
                           9 percent of the rural businesses did not provide information on their use of these three tax incentives.



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Page 19   GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
Contents



Letter                                                                                                1


Appendix I                                                                                           22

Survey of the Use of
Tax Benefits by
Businesses in
Empowerment Zones
Appendix II                                                                                          27
                       Businesses Differed by Type of Work                                           27
Information on         Respondents Were Mostly Corporations                                          28
Businesses That        Most Respondents Were Already in the Zone Before Designation                  31
                       Businesses Reported Employing Thousands of People                             33
Responded to the       Respondents Indicated That Multiple Factors Were Important in                 33
Survey                   Deciding Where to Locate
                       Most Respondents Have Not Considered Moving Out of Their                      34
                         Zones
                       The Number of Employees Working in Empowerment Zones Has                      35
                         Increased for Respondents That Had Been There Since Their
                         Designation

Appendix III                                                                                         37

Scope and
Methodology
Tables                 Table II.1: Most Important Factors for Selecting a Business                   34
                         Location
                       Table II.2: Factors Influencing Some Respondents to Consider                  35
                         Moving out of an Empowerment Zone Percentage of respondents
                       Table III.1: Sampling Errors and Confidence Intervals of                      39
                         Estimates for Small Urban Businesses

Figures                Figure 1: Use of the Three Empowerment Zone Tax Incentives                     6
                       Figure 2: Use of the Employment Credit, Tax Year 1997                          8
                       Figure 3: Types of Businesses That Used the Employment Credit                  9
                       Figure 4: Reasons for Not Claiming the Employment Credit                      11




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Contents




Figure 5: Use of the Increased Expensing Deduction, Tax Year                  13
  1997
Figure 6: Reasons for Not Using the Increased Expensing                       15
  Deduction, Tax Year 1997
Figure 7: Reasons for Not Using Enterprise Zone Facility Bonds                17
Figure II.1: Types of Businesses That Responded to the Survey                 28
Figure II.2: Federal Income Tax Category for Businesses That                  30
  Responded to Our Survey
Figure II.3: Number of Years Businesses Had Been Located in                   32
  Their Neighborhoods




Page 21        GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
Appendix I

Survey of the Use of Tax Benefits by
Businesses in Empowerment Zones




               Page 22   GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
Appendix I
Survey of the Use of Tax Benefits by
Businesses in Empowerment Zones




Page 23            GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
Appendix I
Survey of the Use of Tax Benefits by
Businesses in Empowerment Zones




Page 24            GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
Appendix I
Survey of the Use of Tax Benefits by
Businesses in Empowerment Zones




Page 25            GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
Appendix I
Survey of the Use of Tax Benefits by
Businesses in Empowerment Zones




Page 26            GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
Appendix II

Information on Businesses That Responded
to the Survey

                          The businesses that responded to the survey

                      •   represented various types of work;
                      •   were mostly corporations;
                      •   mostly were already located in the zone before its designation;
                      •   employed, in total, thousands of people;
                      •   considered multiple factors as important in deciding where to locate the
                          business; and
                      •   mostly had not considered moving out of the zone.

                          Also, for the respondents that had been in their zones since their
                          designation, the number of employees working there has generally
                          increased.

                          The following sections provide additional information on each of these
                          categories for the businesses that responded to the survey.


                          The businesses that responded to our survey provided descriptions of
Businesses Differed       their type of business. We coded this information into categories using
by Type of Work           standardized industrial classifications. More than half of the large urban
                          businesses were in the manufacturing business or were service providers,
                          while more than half of the respondents representing small urban
                          businesses and rural businesses were service providers or retailers (see
                          fig. II.1). The remaining businesses in each group included those involved
                          in wholesale trade; construction; finance, insurance, and real estate;
                          transportation; communications; utilities; agriculture; and mining.




                          Page 27        GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
                                          Appendix II
                                          Information on Businesses That Responded
                                          to the Survey




Figure II.1: Types of Businesses That Responded to the Survey

40 Percentage of respondents



35



30



25



20



15



10



 5



 0


      Manufacturing            Services        Wholesale trade                Retail trade         Construction                Other


                                                    Large urban businesses (246)

                                                    Small urban businesses (3,856)

                                                    Rural businesses (516)


                                          Notes: These percentages do not include the businesses that did not provide their type of work.

                                          Other types of businesses include those related to finance, insurance, and real estate;
                                          transportation; communications; utilities; agriculture; and mining.

                                          The number of small urban businesses is an estimate based on our sample.

                                          Source: GAO’s analysis of the responses to the survey.



                                          We asked businesses to identify the category in which they filed their
Respondents Were                          federal income taxes. Most of the businesses that responded to our survey
Mostly Corporations

                                          Page 28                GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
Appendix II
Information on Businesses That Responded
to the Survey




were corporations (see fig. II.2). Large urban businesses mainly were
subchapter C corporations (corporations that pay taxes as a corporate
entity) and subchapter S corporations (corporations that are not taxed as
a corporate entity and that have a limited number of owners who file taxes
separately). Small urban businesses included nearly equal numbers of
subchapter C corporations and subchapter S corporations, but they had a
greater percentage of sole proprietors than the large urban businesses.
The large rural businesses were mostly subchapter C corporations,
followed by subchapter S corporations. Finally, almost half of the small
rural businesses were sole proprietorships.




Page 29           GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
                                         Appendix II
                                         Information on Businesses That Responded
                                         to the Survey




Figure II.2: Federal Income Tax Category for Businesses That Responded to Our Survey

60 Percentage of respondents




50




40




30




20




10




 0

         Subchapter C               Subchapter S                          Partnerships            Sole proprietors
         corporations               corporations

                                                   Large urban businesses (246)

                                                   Small urban businesses (3,856)

                                                   Large rural businesses (28)

                                                   Small rural businesses (465)


                                                                                                            (Figure notes on next page)




                                         Page 30                GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
                      Appendix II
                      Information on Businesses That Responded
                      to the Survey




                      Notes: These percentages do not include the businesses that did not provide their federal income
                      tax category.

                      We classified rural businesses as large if they reported having 50 or more employees and small if
                      they reported having fewer than 50 employees. Consequently, the percentages for rural
                      businesses exclude businesses that did not report their number of employees.

                      Of the businesses that responded to the survey, 1 percent of the large rural businesses and
                      3 percent of the small rural businesses reported that they were farming operations. Also,
                      7 percent of the large urban businesses, 6 percent of the small urban businesses, 1 percent of
                      the large rural businesses, and 6 percent of the small rural businesses reported that they did not
                      know their federal income tax category.

                      The number of small urban businesses is an estimate based on our sample.

                      Source: GAO’s analysis of the responses to the survey.



                      According to the survey’s respondents, the majority of the businesses were
Most Respondents      already located in their zones on or before December 21, 1994, the date
Were Already in the   those areas were designated as empowerment zones. Specifically,
Zone Before           90 percent of the large urban businesses, an estimated 90 percent of the
                      small urban businesses, and 78 percent of the rural businesses were
Designation           already located in an area that was designated as an empowerment zone.
                      Another 7 percent of the large urban businesses, an estimated 3 percent of
                      the small urban businesses, and 3 percent of the rural businesses reported
                      that they had moved or expanded into the empowerment zones after
                      December 21, 1994. Also, 2 percent of the large urban businesses, an
                      estimated 5 percent of the small urban businesses, and 17 percent of the
                      rural businesses started as a new business in the zones on or after
                      December 21, 1994. In response to a related question, 82 percent of the
                      large urban businesses, an estimated 75 percent of the small urban
                      businesses, and 61 percent of the rural businesses indicated that they had
                      been located in their neighborhoods 10 years or more. Figure II.3 shows
                      the percentage of the respondents by the number of years they had been in
                      business.




                      Page 31              GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
                                       Appendix II
                                       Information on Businesses That Responded
                                       to the Survey




Figure II.3: Number of Years
Businesses Had Been Located in Their
Neighborhoods
                                             Percentage of respondents
                                       100


                                        90


                                        80


                                        70


                                        60


                                        50


                                        40


                                        30


                                        20


                                        10


                                         0

                                              Large urban    Small urban     Rural
                                              businesses     businesses    businesses
                                                 (246)         (3,856)        (516)

                                                    3 years or less

                                                    4 to 6 years

                                                    7 to 9 years

                                                    10 years or more



                                       Notes: These percentages do not include businesses that did not provide information on how
                                       long they had been in their neighborhoods.

                                       The number of small urban businesses is an estimate based on our sample.

                                       Source: GAO’s analysis of the responses to the survey.




                                       Page 32               GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
                        Appendix II
                        Information on Businesses That Responded
                        to the Survey




                        We asked businesses how many full-time and part-time employees
Businesses Reported     (including owners) their businesses had that were currently working in the
Employing Thousands     empowerment zone. The large urban businesses that answered this
of People               question reported having a total of 29,849 employees. Based on the
                        answers provided by the respondents from our sample of the small urban
                        businesses, we estimated that 48,797 employees are working within the
                        zones for small businesses that are similar to those responding to our
                        survey. The rural businesses reported a total of 6,533 current employees.


                        Respondents most often included the cost of doing business, the
Respondents             availability of skilled workers, the presence of specific target markets
Indicated That          and/or customer base, and their personal and/or business history in a
Multiple Factors Were   particular location as the factors that were most important in deciding
                        where to locate their businesses. Other location factors that were often
Important in Deciding   selected were the state and local taxes on business and industry, the
Where to Locate         productivity of workers, and the efficient transportation for materials and
                        products. Such factors as the availability of federal empowerment zone tax
                        benefits and the existence of empowerment zone projects to support
                        business development generally were selected less often than other
                        factors. However, large urban businesses were more likely than other
                        businesses to select these as factors in deciding where to locate. Table II.1
                        lists the percentage of the respondents that selected each factor.




                        Page 33           GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
                                         Appendix II
                                         Information on Businesses That Responded
                                         to the Survey




Table II.1: Most Important Factors for
Selecting a Business Location            Percentage of respondents
                                                                                      Large urban       Small urban            Rural
                                                                                       businesses       businesses        businesses
                                         Location factor                                     (246)           (3,856)            (516)
                                         Cost of doing business at this
                                         location (e.g., utilities, property,
                                         and/or construction)                                     56               41             26
                                         Availability of skilled workers                          55               25             20
                                         State and local taxes on business
                                         and industry                                             43               22             13
                                         Productivity of workers                                  39               19             15
                                         Efficient transportation for materials
                                         and products                                             38               18              8
                                         Presence of specific target markets
                                         and/or customer base                                     34               40             30
                                         Ample area or land for future
                                         expansion                                                26               12             12
                                         Personal and/or business history in
                                         a location                                               25               39             40
                                         Availability of federal empowerment
                                         zone tax benefits                                        21               13             15
                                         Empowerment zone projects that
                                         support business development                             20               13             14
                                         Access to capital and/or credit                          16               14             10
                                         State and local controls on
                                         environmental impacts associated
                                         with the business                                        16                7              5
                                         Other                                                    8                 7             10
                                         Information not provided                                 4                 6              9
                                         Note: The number of small urban businesses is an estimate based on our sample.

                                         Source: GAO’s analysis of the responses to the survey.




                                         Most businesses reported that they had not considered moving out of their
Most Respondents                         zones. Specifically, 65 percent of the large urban businesses, an estimated
Have Not Considered                      74 percent of the small urban businesses, and 90 percent of the rural
Moving Out of Their                      businesses had not considered moving out of their zones. On the other
                                         hand, 34 percent of the large urban businesses, an estimated 25 percent of
Zones                                    the small urban businesses, and 9 percent of the rural businesses had
                                         considered such a move. The survey’s respondents indicated a variety of
                                         factors, including high state and local taxes, an insufficient customer base,




                                         Page 34              GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
                                       Appendix II
                                       Information on Businesses That Responded
                                       to the Survey




                                       and the cost of doing business, influenced them to consider moving. Table
                                       II.2 lists the percentage of the respondents that selected each factor.

Table II.2: Factors Influencing Some
Respondents to Consider Moving Out     Percentage of respondents
of an Empowerment Zone Percentage                                                   Large urban       Small urban            Rural
of Respondents                                                                       businesses       businesses        businesses
                                       Relocation factor                                    (84)             (980)             (48)
                                       State and local taxes too high                           55               38             27
                                       Cost of doing business at this
                                       location (e.g., utilities, property,
                                       and/or construction) too high                            45               36             25
                                       Insufficient area or land for
                                       expansion                                                35               18              6
                                       Skilled workers not available                            27               20             19
                                       State and local controls on
                                       environmental impacts too
                                       restrictive                                              26               10              6
                                       Low productivity of available
                                       employees                                                25               15             19
                                       Inadequate support from
                                       empowerment zone projects                                23               33             17
                                       Limited or no access to needed
                                       capital and/or credit                                    12               26             19
                                       Insufficient customer base                               8                33             44
                                       Inefficient transportation for
                                       materials and products                                   2                 0              8
                                       Other                                                    21               28             29
                                       Note: The number of small urban businesses is an estimate based on our sample.

                                       Source: GAO’s analysis of the responses to the survey.




                                       We asked businesses to tell us the number of employees that were
The Number of                          working in their zones currently and in December 1994. When we
Employees Working in                   compared these answers, we found that large urban businesses that had
Empowerment Zones                      been in an empowerment zone since its designation reported an average
                                       increase of 7.6 employees since 1994. The average increase in employees
Has Increased for                      was higher for the large urban businesses that were involved in
Respondents That                       construction (an average increase of 19.8 employees), wholesale trade (an
                                       average increase of 19.6 employees), or providing services (an average
Had Been There Since                   increase of 14 employees). The small urban businesses reported an
Their Designation                      average increase of 4.1 employees; the large rural business reported an




                                       Page 35              GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
Appendix II
Information on Businesses That Responded
to the Survey




average increase of 50.7 employees; and the small rural businesses
reported an average increase of 0.9 employees. While the majority of the
respondents that had been in an empowerment zone since 1994 reported
increases in the number of employees, large urban businesses involved in
manufacturing reported an average decrease of 5.5 employees.




Page 36           GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
Appendix III

Scope and Methodology


               We conducted a mail survey of 2,380 businesses located in nine federal
               empowerment zones that were designated on December 21, 1994. To
               identify businesses in the six urban zones—Atlanta, Baltimore, Chicago,
               Detroit, New York and Philadelphia/Camden—we obtained the list of the
               businesses that the Department of Housing and Urban Development had
               used for a fall 1997 to winter 1998 telephone survey. The list was
               developed by Dun and Bradstreet in August 1997 and refined by Abt
               Associates to include for-profit businesses that were potentially able to
               use the tax incentives for empowerment zones. The information provided
               by the Department of Housing and Urban Development included the
               number of employees for each business. We used this information to sort
               the businesses into two groups: those with fewer than 50 employees or an
               unrecorded number of employees (small urban businesses) and those with
               50 or more employees (large urban businesses). We identified 585 large
               urban businesses and 12,854 small urban businesses. The list
               underestimates the actual number of new businesses in the zones because
               it does not include businesses that started in the zones between Dun and
               Bradstreet’s data preparation and our survey in 1999. For our survey, we
               eliminated as ineligible all known duplicates, government and nonprofit
               businesses, firms that had gone out of business, and businesses that told
               us they were not located in one of the empowerment zones and surveyed
               all the remaining 513 large urban businesses. In addition, from our initial
               random sample of 800 of the small urban businesses, we identified
               7 percent (56) that were in the ineligible categories. Thus, we estimate that
               there are 11,954 small urban businesses that were potentially eligible for
               our survey, and we included 744 of them.

               To identify businesses (excluding farming operations) in the three rural
               zones, we contacted program officials in the Kentucky Highlands;
               Mississippi Mid-Delta; and Rio Grande Valley, Texas, empowerment zones.
               These organizations provided us with lists of the businesses in their
               respective zones—a total of 1,204 rural businesses—from which, we
               eliminated businesses that were in the ineligible categories. We surveyed
               all of the remaining 1,123 eligible rural businesses. In total, we included
               2,380 businesses in the survey. We were unable to locate mailing addresses
               for 235 businesses or about 10 percent of the businesses.

               In developing the questionnaire for our survey, we conducted pretests
               with businesses in the Baltimore, Philadelphia, Atlanta, and Kentucky
               Highlands zones. We interviewed business owners to help ensure that our
               questions were clear, unbiased, and precise and that responding to the
               survey did not place an undue burden on businesses. We also obtained



               Page 37         GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
Appendix III
Scope and Methodology




reviews of our questionnaire from managers at the departments of
Treasury, Agriculture, and Housing and Urban Development, as well as the
Internal Revenue Service.

To maximize the number of responses to our survey, we mailed a letter to
all the businesses in the survey about 1 week before we mailed the
questionnaires. We also sent a reminder letter and replacement
questionnaire to the businesses that had not responded about a month
after mailing the questionnaires and a second follow-up letter with another
replacement questionnaire about a month after that. We received
completed questionnaires from 48 percent of the 513 large urban
businesses, 32 percent of the 744 small urban businesses, and 46 percent
of the 1,123 rural businesses (29 percent of the Rio Grande, 54 percent of
the Mid-Delta and 67 percent of the Kentucky Highlands businesses).

Because we used a sample (called a probability sample) to develop our
estimates for small urban businesses, each estimate has a measurable
precision, or sampling error, which may be expressed as a plus/minus
figure. A sampling error indicates how closely we can reproduce from a
sample the results that we would obtain if we were to take a complete
count of the universe using the same measurement methods. By adding the
sampling error to and subtracting it from the estimate, we can develop
upper and lower bounds for each estimate. This range is called a
“confidence interval.” Sampling errors and confidence intervals are
stated at a certain confidence level. For example, a confidence interval at
the 95-percent confidence level means that in 95 out of 100 instances, the
sampling procedure we used would produce a confidence interval
containing the universe value we are estimating. Table III.1 lists the
sampling errors and confidence intervals at the 95-percent confidence
level for estimates we developed for the small urban businesses.

We also contacted officials at the nine empowerment zone offices to
discuss their efforts to inform businesses of the three empowerment zone
tax incentives. We conducted our work from January through
September 1999 in accordance with generally accepted government
auditing standards.




Page 38          GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
                                              Appendix III
                                              Scope and Methodology




Table III.1: Sampling Errors and Confidence Intervals of Estimates for Small Urban Businesses
                                                                                                 Sampling     Confidence interval
Description                                                                          Estimate       error         From            To
Percentage of the businesses that used at least one of the three empowerment
zone tax incentives                                                                         10           4            6           14
Percentage of the businesses that used none of the empowerment zone tax
incentives                                                                                  70           6           64           76
Percentage of the businesses that did not know if they had used any of the
empowerment zone tax incentives                                                             18           5           13           23
Percentage of the businesses that claimed the employment credit in 1997                      6           3            3             9
Percentage of the businesses that did not claim the employment credit in 1997               81           5           76           86
Percentage of the businesses that did not know if they had claimed the
employment credit in 1997                                                                   11           4            7           15
Of the businesses that claimed the employment credit, the percentage that rated
it as at least “somewhat important” in their decisions to hire employees who lived
within their zones                                                                          67          26           41           93
Of the businesses that rated the employment credit as at least “somewhat
important,” the percentage that rated it as “very important” or “extremely
important”                                                                                  50          33           17           83
Of the businesses that did not claim the employment credit in 1997, the
percentage that reported the following reasons:

did not qualify for the credit because employees lived outside the zone                     31           7           24           38
did not know about this credit                                                              40           7           33           47
this credit was too complicated to use                                                       8           4            4           12
did not have federal taxes or their partners and
shareholders had no federal taxes                                                            5           3            2            8
did not qualify for this credit because employees are family members                         4           3            1            7
other reasons                                                                                9           4            5           13
Percentage of the businesses that used the increased expensing deduction for
1997                                                                                         4           2            2             6
Percentage of the businesses that did not use the increased expensing deduction
for 1997                                                                                    78           5           73           83
Percentage of the businesses that did not know if they had used the increased
expensing deduction for 1997                                                                17           5           12           22
Of the businesses that did not use the increased expensing deduction for 1997,
the percentage that reported the following reasons:

did not know about this deduction                                                           40           7           33           47
made no investment in qualified zone property                                               22           6           16           28
investments were too large                                                                   3           2            1            5
did not have high enough income                                                             10           4            6           14
investments were too small                                                                  16           5           11           21
this deduction was too complicated to use, did not qualify as a zone business, or
other reasons                                                                               10           4            6           14
                                                                                                                          (continued)




                                              Page 39             GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
                                              Appendix III
                                              Scope and Methodology




                                                                                                 Sampling     Confidence interval
Description                                                                          Estimate       error         From            To
Of the businesses that had never received proceeds from an empowerment zone
facility bond, the percentage that reported the following reasons:

did not know about this type of bond                                                        67           6           61           73
this bond was too complicated to use                                                         6           3            3            9
did not need this bond                                                                       6           3            3            9
did not qualify as a zone business                                                           9           4            5           13
property was not qualified zone property                                                     4           3            1            7
state volume cap had been met when business applied, needed a larger bond
than allowed, or other reasons                                                               8           4            4           12
Percentage of the businesses that used the work opportunity credit                           1           1            0             2
Percentage of the businesses that used the welfare-to-work credit                            0           0            0             0
Percentage of the businesses that used none of the three additional credits                 90           4           86           94
Percentage of the businesses in

manufacturing                                                                               12           4            8           16
services                                                                                    30           6           24           36
wholesale trade                                                                             12           4            8           16
retail trade                                                                                22           5           17           27
construction                                                                                 4           2            2            6
other industries                                                                            16           5           11           21
Percentage of the businesses that filed incomes taxes as

subchapter C corporation                                                                    31           6           25           37
subchapter S corporation                                                                    30           6           24           36
partnership                                                                                  5           3            2            8
sole proprietor                                                                             23           5           18           28
Percentage of the businesses that did not know how they had filed taxes                      6           3            3             9
Percentage of the businesses in the zones before December 21, 1994                          90           4           86           94
Percentage of the businesses that moved or expanded into the zones on or after
December 21, 1994                                                                            3           2            1             5
Percentage of the businesses that started as new businesses in the zones on or
after December 21, 1994                                                                      5           3            2             8
Percentage of the businesses located in their neighborhoods for

3 years or less                                                                              5           3            2            8
4 to 6 years                                                                                11           4            7           15
7 to 9 years                                                                                 8           3            5           11
10 years or more                                                                            75           5           70           80
Estimated number of employees working within the zone, including owners and
operators                                                                              48,797       14,741       34,056       63,538
                                                                                                                          (continued)




                                              Page 40             GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
                                             Appendix III
                                             Scope and Methodology




                                                                                               Sampling     Confidence interval
Description                                                                        Estimate       error         From           To
Percentage of the businesses that selected the following factors as most
important to them in deciding where to locate their businesses:

cost of doing business                                                                    41           6           35          47
availability of skilled workers                                                           25           5           20          30
state and local taxes on business and industry                                            22           5           17          27
productivity of workers                                                                   19           5           14          24
efficient transportation for materials and products                                       18           5           13          23
presence of specific target markets and/or customer base                                  40           6           34          46
ample area or land for future expansion                                                   12           4            8          16
personal and/or business history in location                                              39           6           33          45
availability of federal empowerment zone tax benefits                                     13           4            9          17
empowerment zone projects that support business development                               13           4            9          17
access to capital and/or credit                                                           14           3           10          18
state and local controls on environmental impacts                                          7           3            4          10
other reasons                                                                              7           3            4          10
Percentage of the businesses that have considered moving out of their zones
since December 21, 1994                                                                   25           5           20          30
Percentage of the businesses that have not considered moving out of their zones
since December 21, 1994                                                                   74           6           68          80
Of the businesses that have considered moving out of their zones, the
percentage that reported the following factors influenced them:

state and local taxes too high                                                            38          12           26          50
cost of doing business at this location                                                   36          12           24          48
insufficient area or land for expansion                                                   18          10            8          28
skilled workers not available                                                             20          10           10          30
state and local controls on environmental impacts                                         10           8            2          18
low productivity of available employees                                                   15           9            6          24
inadequate support from empowerment zone projects                                         33          12           21          45
limited or no access to needed capital and/or credit                                      26          11           15          37
insufficient customer base                                                                33          12           21          45
inefficient transportation for materials and products                                      0           1            0           0
other factors                                                                             28          11           17          39
Average increase in the number of employees since December 1994 for
businesses that had employees working in the zones then                                  4.1         2.5          1.6          6.6
Percentage of the businesses that reported having fewer than 50 employees                 91           4           87          95
Percentage of the businesses that reported having 50 or more employees                     5           3            2             8




(385779)                                     Page 41            GAO/RCED-99-253 Businesses’ Use of Empowerment Zone Tax Incentives
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