percent investment tax credit was allowed for the cost of eligible tangible personal property that was used in a trade or business or for the production of income. Capital gains Net capital gains are taxed as ordinary income under present law, subject to a maximum marginal rate of 28 percent in the case of individuals. Before 1987, net capital gains were taxed at a reduced rate. All taxpayers other than corporations could reduce net capital gains by 60 percent, and the remainder was taxed as ordinary income-effectively establishing a maximum 20-percent tax rate. The maximum tax rate for net capital gains of corporations was 28 percent. Private activity bonds Although interest on State or local government bonds used to finance trade or business activity generally is taxable, various exceptions are provided for what are termed private activity bonds. These include bonds issued as qualified small-issue bonds, as qualified redevelopment bonds, or to finance certain other private activities. Tax-exempt private activity bonds generally are subject to State volume limitations. Non-tax provisions Foreign trade zones A foreign trade zone may be established within any port of entry. Duties are not levied on goods imported 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. Regulatory flexibility Under present law, government agencies must follow certain procedures in promulgating regulations that are designed to ease the regulatory burden on small businesses, small nonprofit organizations, and small governmental jurisdictions. In general Summary of S. 2217, S. 1920, S. 1603, and S. 1032 S. 2217, S. 1920, S. 1603, and S. 1032 are substantially similar (except as otherwise indicated below), and also are substantially similar to the enterprise zone proposal contained in the President's fiscal year 1993 budget proposals. Designation of enterprise zones The bills would authorize the Secretary of Housing and Urban Development (HUD) to designate up to 50 enterprise zones from areas nominated by State and local governments (and Indian reservation governing bodies). The designations would be made over a four-year period, with not more than 15 designations being made during each of the first three years, and 5 in the last year. Designation of an area as an enterprise zone generally would be effective for 25 years. Tax incentives for enterprise zones Employee wage credit The bills would provide a 5-percent refundable tax credit to enterprise zone employees for the first $10,500 of wages. The maximum credit would be $525; it would be phased out between $20,000 and $25,000 of total wages. The credit would be reduced for individuals subject to 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 certain enterprise zone stock, subject to a $250,000 lifetime limitation.2 Stock would qualify for this deduction only if the issuing corporation used the proceeds from the stock issuance to acquire qualified enterprise zone property within 12 months following issuance. Any gain on the sale of the stock would be recaptured as ordinary income. In addition, the tax benefit of the deduction would be reduced if the stock were held less than five years when sold. The deduction would be treated as a preference for purposes of the alternative minimum tax (except under S. 1920). Exclusion of enterprise zone capital gain The bills would exclude from income certain long-term capital gain realized from the disposition of enterprise zone property (generally including real property and tangible personal property). The property must have constituted enterprise zone property for at least two years prior to disposition. Only gains attributable to periods that the property was used in an enterprise zone business would be eligible for the exclusion. The gain exclusion would not be a preference for purposes of the alternative minimum tax. Other provisions Preference in establishment of foreign trade 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. 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, and certain other enterprises. Repeal of Title VII of 1987 Housing Act The bills would repeal Title VII of the Housing and Community Development Act of 1987. 2 Under S. 1920, the annual limitation would be $100,000, subject to a $500,000 lifetime cap. In general Summary of H.R. 4210 H.R. 4210 ("Tax Fairness and Economic Growth Act of 1992"), as reported by the committee of conference (H. Rept. 102-461), contained provisions establishing an enterprise zone demonstration program. The bill was passed by the House of Representatives and the Senate on March 20, 1992, but was vetoed by the President on that date. Designation of tax enterprise zones H.R. 4210 would authorize the designation of 35 tax enterprise zones from areas nominated by State and local governments (and Indian reservation governing bodies). The Secretary of HUD would be authorized to designate 10 areas as urban tax enterprise zones, and the Secretary of Agriculture would be authorized to designate 25 areas as rural development investment zones. Designation of an area as a tax enterprise zone generally would be effective for 15 years. Tax incentives for tax enterprise zones Employer wage credit The bill would provide certain small employers with a credit equal to 7.5 percent of qualified enterprise zone wages paid to an individual who (1) does not receive annual wages or salary exceeding $30,000, (2) resides in the zone, and (3) performs substantially all services for the employer's trade or business within the zone. The credit would be a general business credit and, as such, could not reduce an employer's tentative minimum tax. Deduction for purchase of enterprise zone stock Under H.R. 4210, individuals could elect to deduct up to $25,000 per year of the purchase price of certain enterprise zone stock, subject to a $250,000 lifetime limitation. Stock would qualify for this deduction only if the issuing corporation used the proceeds from the stock issuance to acquire qualified enterprise zone property within 12 months following issuance. Any gain on the sale of the stock would be recaptured as ordinary income. In addition, the tax benefit of the deduction would be reduced if the stock were held less than 10 years when sold. The deduction would be treated as a preference for purposes of the alternative minimum tax. Additional first-year depreciation allowance An additional depreciation allowance equal to 25 percent of the adjusted basis of certain qualified zone property (generally tangible personal property and real property other than buildings) would be allowed for the taxable year that the property is placed in service in an active trade or business in an enterprise zone. The additional depreciation allowance would not be a preference for purposes of the alternative minimum tax. Limitation on tax incentives H.R. 4210 would impose an overall limitation on the amount of tax incentives available in each tax enterprise zone for each calendar year. Each urban tax enterprise zone would be subject to a maximum annual limitation of $14.3 million, and each rural development investment zone would be subject to a maximum annual limitation of $5.5 million. The local governments and the State in which a tax enterprise zone is located would be required to designate a government official who would be responsible for allocating the tax incentives of the zone among taxpayers. Unused allocations of tax incentives could be carried forward (with certain limitations). Studies H.R. 4210 would require the Secretary of the Treasury and the Comptroller General to conduct separate studies on the effectiveness of the tax enterprise zones provided for by the bill. An interim report of each study would be required to be submitted not later than July 1, 1996, and a final report by July 1, 2001, to the House Committee on Ways and Means and the Senate Committee on Fi nance. Summary of S. 686 Designation of rural enterprise zones S. 686 would authorize the Secretary of the Treasury to designate certain rural areas as rural enterprise zones. The bill would not limit the number of areas that could be designated as rural enterprise zones. Zone designations generally would be effective for 15 years. Tax incentives for rural enterprise zones Employer wage credit The bill would provide a 10-percent tax credit to employers in rural enterprise zones for certain wages paid to qualified employees who perform at least 50 percent of their services for the employer during the taxable year in a zone. The 10-percent credit would apply to (1) the amount of qualified wages paid by an employer in a rural enterprise zone during a taxable year that exceeds the qualified wages paid during the 12 months prior to the date the zone was designated, and (2) wages paid employees during any portion of the taxable year during which the employer is training or retraining such employees. Investment tax credit The bill would provide a 10-percent tax credit for certain personal property and depreciable real property placed in service during a year in which an area qualifies as a rural enterprise zone and used in an active enterprise zone trade or business. The credit would be subject to the present-law general business credit limitations. Increased research credit The bill would provide a 40-percent credit rate (in lieu of the present-law 20-percent credit rate) for qualified research expenditures that exceed a taxpayer's base amount with respect to research conducted in a rural enterprise zone. Deferral of capital gain reinvested in zone property The bill would allow taxpayers to defer the recognition of longterm capital gain from the sale or exchange of any property up to 10 years if the amount realized from the sale or exchange is used to purchase certain property used in the active conduct of a trade or business in a rural enterprise zone. The capital gain deferral would not be a preference for purposes of the alternative minimum tax. Summary of S. 383 Designation of Indian enterprise zones S. 383 would authorize the Secretary of Housing and Urban Development to designate up to 12 Indian enterprise zones between 1992 and 1995. The designation of an area as an Indian enterprise zone generally would be effective for 25 years. Tax incentives for Indian enterprise zones The proposed tax incentives for Indian enterprise zones would include the following: (1) an employment tax credit generally equal to 10 percent of wages and health insurance costs; (2) a capital gains deferral of up to 10 years for amounts reinvested in Indian enterprise zone property; (3) a 25-percent tax credit for constructing child care facilities; and (4) a tax credit for a portion of the Federal income taxes attributable to income from Indian enterprise zone business. The bill would limit the amount of annual tax incentives that would be available within an Indian enterprise zone. The bill would also permanently extend the authority to issue qualified small issue bonds for Indian enterprise zones. Other provisions The bill would give preference to the establishment of foreigntrade zones within designated Indian enterprise zones. In addition, the bill would require the Secretary of the Treasury and the Comptroller General each to prepare a study on the overall impact of the bill, and to submit their studies not later than July 1, 1995, to the House Committee on Ways and Means and the Senate Committee on Finance. Summary of Issues Relating to Tax Incentives for Enterprise Zones Effect of tax incentives on the location of investments In theory, favorable tax treatment of investment and employment within a specified geographic area should induce more economic activity to be located within that area. Because there are no Federal programs offering tax incentives targeted at specific geographic areas (other than Puerto Rico and other U.S. possessions), existing analysis has attempted to examine the effects of State and |