If the stock is sold (or the stock or the corporation ceases to meet the qualifications discussed above), the gain (or the full deduction in the case of a disqualification) would be recaptured as ordinary income. In addition, if the stock is disposed of before being held for 5 years (or a disqualification occurs within 5 years of purchase of the enterprise zone stock), interest would be charged on the decrease in tax that resulted from the deduction. Under S. 2217, S. 1603, and S. 1032, the deduction would be treated as a preference for purposes of the alternative minimum tax.23

Regulatory flexibility

The bills would expand the definition of a small entity, for purposes of the Regulatory Flexibility Act, to include any qualified enterprise zone business, any unit of government designating an area as an enterprise zone to the extent any regulatory rule would affect carrying out projects within the zone, and any not-for-profit enterprise operating within such a zone.

Establishment of foreign trade zones in enterprise zones

The bills would require the Foreign Trade Zone Board to consider on a priority basis the processing of any applications that involve the establishment of a foreign-trade zone in an enterprise zone. Similarly, the Secretary of the Treasury would be required to consider on a priority basis the processing of any application that involves the establishment of a port of entry that is necessary to permit the establishment of a foreign-trade zone in an enterprise zone. In evaluating applications for the establishment of foreigntrade zones and ports of entry in connection with enterprise zones, the Foreign Trade Zone Board and the Secretary of the Treasury would be required to approve the applications, to the maximum extent practicable, consistent with their respective statutory responsibilities.

Repeal of Title VII of the Housing and Community Development Act of 1987

The bills would repeal Title VII of the Housing and Community Development Act of 1987, effective upon enactment.

B. Description of Enterprise Zone Provisions of H.R. 4210 (Tax Fairness and Economic Growth Act of 1992) 24

Designation of tax enterprise zones

In general

Under H.R. 4210, 35 tax enterprise zones would be designated during the period 1993 through 1995. Tax enterprise zones would be either urban tax enterprise zones or rural development investment zones. The Secretary of Housing and Urban Development would designate 10 areas as urban tax enterprise zones. The Secretary of Agriculture (in consultation with the Secretary of Commerce) would designate 25 areas as rural development investment zones. 25 All designated areas would be selected from areas nominated by State and local governments, a State-chartered economic development corporation (or similar entity), or the governing body of an Indian reservation. Designation of an area as a tax enterprise zone generally would remain in effect for 15 years.

Eligibility criteria for urban tax enterprise zones

To be eligible for designation as an urban tax enterprise zone, a nominated area would be required to have all of the following characteristics: (1) a population of at least 4,000; (2) a condition of pervasive poverty, unemployment, and general economic distress, which may include the distress resulting from a high incidence of crime and narcotics use; (3) with respect to size, (a) does not exceed 12 square miles, (b) consists of not more than three noncontiguous parcels, and (c) is located entirely within one State; (4) an unemployment rate of at least 1.5 times the national unemployment rate; (5) poverty rates of at least 20 percent in each of 90 percent of the area's census tracts; and (6) a satisfactory course of action (described below) adopted by the State or local governments for the nominated area designed to promote economic development in the

zone.

Eligibility criteria for rural development investment zones

To be nominated as a rural development investment zone, an area would be required to be either outside a standard metropolitan statistical area or determined by the Secretary of Agriculture (in consultation with the Secretary of Commerce) to be a rural area. To be eligible for designation, a nominated rural area is required to possess the following four characteristics: (1) a population of at least 1,000; (2) a condition of general economic distress; (3) with respect to size, (a) does not exceed 10,000 square miles, (b) is located within not more than four contiguous counties, (c) consists of not more than three noncontiguous parcels, and (d) is located entirely within one State; 26 and (4) a satisfactory course of action (described below) adopted by State or local governments for the nominated area. In addition, a rural area is required to meet at least two of the following four requirements: (1) an unemployment rate of at least 1.5 times the national unemployment rate; (2) poverty rates of at least 20 percent in each of 90 percent of the area's census tracts; (3) a decline in employment (as measured by total wages) of more than five percent over the five-year period prior to the zone's designation; and (4) a decline in population of 10 percent or more over the period from 1980 to 1990.

Course of action

In order for any nominated area to be eligible to be designated as a tax enterprise zone, the local government and State in which the area is located would be required to agree in writing that they will follow a specified course of action designed to reduce burdens borne by employers or employees in the area. A specified course of action could include one or more of the following actions with respect to a nominated area: reduced tax rates or fees; increased delivery of local public services; simplified government paperwork requirements; involvement in the program by public or private entities (e.g., community groups), including a commitment to provide jobs and job training, and technical, financial, or other assistance to employers, employees, and residents of the area; special preferences granted to minority contractors; donations of surplus land to community organizations agreeing to operate businesses on the land; programs to encourage employers to purchase health insurance for employees on a pooled basis; certain programs to encourage local financial institutions to make loans to area businesses (with emphasis on start-up firms and other small businesses); and special preferences for projects within the area in allocations of the State's low-income housing credit ceiling and private activity bonds ceiling. Programs which serve as part of the required course of action with respect to a nominated zone could not be funded from proceeds from any Federal program. 27

Selection process and criteria

The Secretary of Housing and Urban Development would designate a total of ten urban tax enterprise zones, consisting of five urban zones designated in 1993, three in 1994, and two in 1995. The Secretary of Agriculture (in consultation with the Secretary of Commerce) would designate a total of 25 rural development investment zones, consisting of 12 rural zones designated in 1993, seven in 1994, and six in 1995.28

All designated tax enterprise zones would be selected from nominated areas on the basis of the following criteria (each of which would be given equal weight): (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 guarantees that the promised course of action actually will be implemented; (3) the level of commitments by private entities of additional resources to the economy of the nominated area, including the creation of new or expanded business activities; (4) the average ranking (relative to other nominated areas) with respect to (a) in the case of a nominated urban tax enterprise zone, the degree of poverty and unemployment, or (b) in the case of a nominated rural development investment zone, two of the following criteria that give the area a higher average ranking: poverty, unemployment, job loss, or population loss; and (5) the potential for revitalization of the nominated area (including the potential reduction in the incidence of crime and narcotics use and traffic), taking into account particularly the number of jobs to be created and retained.

Period designation in effect

Designation of an area as a tax enterprise zone generally would remain in effect for a period of 15 years. However, an area's designation as a tax enterprise zone would be revoked if it is determined (after a hearing on the record) by the Secretary of Housing and Urban Development (in the case of an urban tax enterprise zone) or the Secretary of Agriculture (in the case of a rural development investment zone) that the local government or State in which the area is located has significantly modified the boundaries of the zone or is not complying substantially with commitments made as part of the required course of action.

Tax incentives for enterprise zones

Employer wage credit

A 7.5-percent nonrefundable tax credit would be provided to certain small employers for qualified enterprise zone wages. Qualified enterprise zone wages would be defined as wages paid to an individual who (1) does not receive annual wages or salary exceeding $30,000, (2) resides in the tax enterprise zone, and (3) performs substantially all services for the employer trade or business within the tax enterprise zone. However, wages would not be eligible for the credit if paid to certain relatives of the employer or, if the employer is a corporation, certain relatives of a person who owns more than 50 percent of the corporation. In addition, wages would not be eligible for the credit if paid to a person who owns more than five percent of the stock of the employer (or if the employer is not a corporation, more than five percent of the capital or profits interest in the employer).29

For purposes of this credit, a "small employer" would be defined as an employer that, on average, did not employ more than 100 full-time employees during the taxable year. 30 If an employee is terminated less than one year after initial employment, the amount of credits previously claimed by the employer with respect to that employee generally would be recaptured. 31

The wage credit would not be available for wages or salary paid to an employee beyond five years after the date such employee first began work for the employer (whether or not in a tax enterprise zone). The total wage credit that could be claimed by any small employer for any taxable year cannot exceed the credit amount allocated to that employer by the tax enterprise zone allocating official (whose functions are described below). The employer's deductions for wages or salaries paid would be reduced by the amount of credit determined for the taxable year. For alternative minimum tax (AMT) purposes, the wage credit would not be allowed to offset tentative minimum tax.32

Deduction for purchase of enterprise zone stock

An individual would be allowed an itemized deduction for the amount paid in cash during any taxable year to purchase enterprise zone stock. The amount allowed as a deduction for any taxable year would be limited to the lesser of (1) $25,000, or (2) the enterprise zone stock amount allocated to the taxpayer for the taxable year by the tax enterprise zone allocating official (whose functions are described below). If the amount paid in cash during any taxable year to purchase enterprise zone stock exceeds the limitation for such year, then the excess amount would be treated as paid for such stock during the immediately succeeding taxable year. In no event, however, would the amount of the deduction allowed under the provision with respect to any one individual to exceed $250,000.33 In addition, the maximum amount of enterprise zone stock that may be issued by any corporation would be limited to $5 million.

Enterprise zone stock would be defined as stock of a C corporation which is acquired on original issue from a corporation that is a qualified issuer, but only to the extent that the cash paid for the stock is used by the corporation within a 12-month period to acquire qualified enterprise zone property. A qualified issuer would be defined as a domestic C corporation that satisfies the following requirements: (1) the corporation does not have more than one class of stock outstanding; (2) the sum of (a) the unadjusted bases of the assets owned by the corporation and (b) the value (as determined under Treasury regulations) of the assets leased by the corporation does not exceed $5 million; (3) more than 20 percent of the total value and total voting power of the stock of the corporation is