amount of capital losses that may be allowed as a deduction for any taxable year."

If an individual incurs a loss with respect to certain small business stock, the loss is treated as an ordinary loss rather than a capital loss. The maximum amount that may be treated as an ordinary loss for any year under this provision is limited to $50,000 ($100,000 in the case of spouses who file a joint return).

Non-tax provisions

Foreign trade zones

A foreign trade zone may be established within any port of entry. Duties are not levied on imported goods shipped into a foreign trade zone until the time that the goods leave the foreign trade zone for shipment to other areas of the United States. The Foreign Trade Zone Board is responsible for approving applications for the establishment of foreign trade zones, while the Secretary of the Treasury is responsible for approving applications for the establishment of ports of entry.

Designation of enterprise zones under the Housing and Community Development Act of 1987

Pursuant to the Housing and Community Development Act of 1987, the Secretary of Housing and Urban Development (HUD) may designate not more than 100 nominated areas as enterprise zones (42 U.S.C sec. 11501 et. seq.).8 An area may be so designated after being nominated by one or more local governments and the State or States in which it is located, and after the Secretary of HUD consults with (1) the Secretaries of Agriculture, Commerce, Labor, and the Treasury, (2) the Director of the Office of Management and Budget, (3) the Administrator of the Small Business Administration, and, (4) in the case of an area on an Indian reservation, the Secretary of Interior. An enterprise zone designation is to remain in effect for 24 years (or until an earlier termination date designated by the State or local government, or until the designation is revoked by the Secretary of HUD).

A nominated area may be designated as an enterprise zone only if it meets the following requirements: (1) the boundary of the area is continuous; (2) the area has a population of not less than 4,000 if any portion of the area (excluding certain qualifying rural areas) is located within a metropolitan statistical area with a population of 50,000 or more; and (3) the area's population is at least 1,000, or the area is entirely within an Indian reservation. In addition, the State and local governments (or Indian reservation governing body) must certify, and the Secretary of HUD must accept such certification, that (1) the area is one of pervasive poverty, unemployment, and general distress; (2) the area is located wholly within the jurisdiction of a local government that is eligible for Federal assistance under section 119 of the Housing and Community Development Act of 1974; (3) the unemployment rate is at least 1.5 times the national unemployment rate; (4) the poverty rate within the area is at least 20 percent; and (5) either (a) at least 70 percent of the households in the area have incomes below 80 percent of the median income of households of the local government, or (b) the population of the area decreased by 20 percent or more between 1970 and 1980.

At least one-third of the enterprise zones must be within rural areas, meaning such areas (1) are within a local government jurisdiction(s) with a population of less than 50,000, (2) are outside of a metropolitan statistical area, or (3) are determined by the Secretary of HUD, after consultation with the Secretary of Commerce, to be rural areas.9

No area may be designated as an enterprise zone unless the local government and the State (or, in the case of a nominated area on an Indian reservation, the reservation governing body) in which the area is located agree in writing that, during any period during which the area is an enterprise zone, such governments will follow a specified course of action designed to reduce the various burdens borne by employers or employees in such area, including, but not limited to: (1) a reduction of tax rates or fees applying within the area; (2) an increase in the level of public services, or in the efficiency of the delivery of public services, within the area; (3) actions to reduce or simplify paperwork requirements within the area; (4) program involvement by public authorities, private entities, organizations, neighborhood associations and community groups, particularly those within the area (including a commitment to provide jobs and job training for, and technical, financial, and other assistance to, employers, employees and residents of the area); (5) providing special preference to contractors owned and operated by minorities; and (6) providing surplus land in the area to neighborhood organizations agreeing to operate a business on the land.

III. DESCRIPTION OF PROPOSALS

A. Description of Enterprise Zone Provisions of S. 2217 (Enterprise Zone-Jobs Creation Act of 1992),10 S. 1920 (Economic Growth and Family Tax Freedom Act of 1991), 11 S. 1603 (Economic Growth Act of 1991), 12 and S. 1032 (Enterprise Zone-Jobs Creation Act of 1991) 13

Designation of enterprise zones

The enterprise zone provisions contained in S. 2217, S. 1920, S. 1603, and S. 1032, are substantially similar (except as otherwise indicated below). 14 Under these bills, up to 50 enterprise zones would be designated over a four-year period from areas nominated by State and local governments. 15 The Secretary of HUD would begin to make the designations four months after the date of enactment of the legislation. Not more than 15 designations would be made during the first 12 months, not more than 30 within 24 months, not more than 45 within 36 months, and not more than 50 within 48 months.

Under the bills, a nominated area (other than a rural area) would be eligible to be designated as an enterprise zone only if the area: (1) has a continuous boundary with a population of at least 4,000 (1,000 for enterprise zones located within a metropolitan statistical area with a population of less than 50,000); (2) has pervasive poverty, unemployment, and general distress; (3) is located within a jurisdiction that is eligible for Federal assistance under section 119 of the Housing and Community Development Act of 1974; (4) has an unemployment rate of at least 1.5 times the national rate; (5) has a poverty rate of at least 20 percent for each populous census tract within the area; (6) has at least 70 percent of its households with incomes below 80 percent of the median income of households located within the jurisdiction of the local government, or had a population decrease of at least 20 percent between 1970 and 1980.

A nominated area that is a rural area 16 would be eligible to be designated as an enterprise zone only if the area: (1) has a continuous boundary with a population of at least 1,000; 17 (2) has pervasive poverty, unemployment and general distress; (3) is located within the jurisdiction of a local government that is eligible for Federal assistance under section 119 of the Housing and Community Development Act of 1974; and (4) meets at least one of the other criteria set forth above with respect to nonrural areas.

In addition, in order for any nominated area to be eligible to be designated as an enterprise zone, the local government and the State in which the area is located would be required to agree that they will follow a specified course of action that is designed to reduce the various burdens borne by employers or employees in the nominated area. A specified course of action would include (but would not be limited to) tax benefits, increases in the level of efficiency of local services within the area, involvement in the program by private job training and community groups, mechanisms to increase equity ownership by residents and employees within the area, donation of real estate to benefit low and moderate income people, provision of supporting public facilities and infrastructure improvements, and other financial incentives and assistance programs provided by State and local governments to encourage local entrepreneurship and improve the quality of life in the nominated

area.

Under the bills, at least one-third of the areas designated as enterprise zones would be required to be rural areas. In addition, the Secretary would be required to designate enterprise zones from eligible nominated areas on the basis of the following selection criteria: (1) the strength and quality of promised contributions by State and local governments relative to their fiscal ability; (2) the effectiveness and enforceability of the course of action; (3) the level of commitment by private entities; (4) other factors, including relative distress, determined by the Secretary of HUD to be consistent with the intent of the enterprise zone program; and (5) reasonable geographic distribution of enterprise zones.

In general, the designation of an area as an enterprise zone would remain in effect for 25 years, unless the designation provides otherwise or the Secretary revokes the designation.

Tax incentives for enterprise zones

Refundable wage credit for low-income zone employees

The bills would provide a 5-percent refundable tax credit to enterprise zone employees for the first $10,500 of wages 18 paid to an employee. To qualify for the full credit, an employee must perform substantially all of his or her services within an enterprise zone for an enterprise zone business 19 and have total wages below $20,000. The maximum credit would be $525; the credit would be phased out between $20,000 and $25,000 of total wages. In addition, the credit would be reduced for individuals subject to the alternative minimum tax.

In general, a business would qualify as an enterprise zone business if: (1) at least 80 percent of its gross income is attributable to active business activities conducted within the zone; (2) less than 10 percent of its property is stocks, securities or property held for use by customers; (3) no more than an insubstantial portion of the property is collectibles, unless held for sale to customers; (4) substantially all the property (whether owned or leased) is located within the zone; (5) substantially all the employees work within the zone; and (6) less than 50 percent (by value) of the business activity's property or services are obtained from, or provided to, related persons that are not enterprise zone businesses. Rental real estate located within an enterprise zone would be treated as an active business and could qualify as an enterprise zone business without regard to the 10-percent test described above.

Exclusion of enterprise zone capital gain

The bill would exclude from gross income certain long-term capital gain realized from the disposition of enterprise zone property. Enterprise zone property would be defined as real property and tangible personal property (other than financial property and collectibles) located in an enterprise zone and used in an enterprise zone business. To qualify for the exclusion, the property must have constituted enterprise zone property for at least two years prior to disposition.

Only those gains attributable to periods that the property was used in an enterprise zone business would be eligible for the exclusion. In addition, the gain exclusion would not apply to sales or exchanges of property between persons controlled by the same inter

ests.

The gain exclusion would not be a preference for purposes of the alternative minimum tax.

Deduction for purchase of enterprise zone stock

Under the bills, individuals could elect to deduct up to $50,000 per year of the purchase price of enterprise zone stock, subject to a $250,000 lifetime limitation. 20 In order for stock to qualify as enterprise zone stock, the following requirements would have to be met: (1) the individual's purchase is on the original issue of the stock; (2) the amount of proceeds must be used by the issuer within 12 months to acquire (or maintain) newly acquired enterprise zone property; and (3) the issuer must be a subchapter C corporation (a) which does not have more than one class of stock, (b) which is engaged solely in the conduct of an enterprise zone business, (c) which does not own or lease more than $5 million of property, 21 and (d) more than 20 percent of whose stock is owned by individuals, partnerships, estates or trusts. In addition, a corporation could not issue more than $5 million of enterprise zone stock. 22