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[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

            TAX INCENTIVES TO ASSIST DISTRESSED COMMUNITIES

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 21, 2000

                               __________

                             Serial 106-80

                               __________

         Printed for the use of the Committee on Ways and Means

                     U.S. GOVERNMENT PRINTING OFFICE
67-485 CC                    WASHINGTON : 2001

_______________________________________________________________________
            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 
                                 20402

                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                       Subcommittee on Oversight

                    AMO HOUGHTON, New York, Chairman

ROB PORTMAN, Ohio                    WILLIAM J. COYNE, Pennsylvania
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
WES WATKINS, Oklahoma                JIM McDERMOTT, Washington
JERRY WELLER, Illinois               JOHN LEWIS, Georgia
KENNY HULSHOF, Missouri              RICHARD E. NEAL, Massachusetts
J.D. HAYWORTH, Arizona
SCOTT McINNIS, Colorado

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S

                               __________

                                                                   Page

Advisories announcing the hearing................................     2

                               WITNESSES

U.S. Department of the Treasury, Jonathan Talisman, Acting 
  Assistant Secretary for Tax Policy.............................     8

                                 ______

Community Development Tax Credit Coalition, and Coastal 
  Enterprises, Inc., Ronald L. Phillips..........................    26
Computers for Schools Association, Willie Cade...................    76
Fishing School, Tom Lewis........................................    71
Food Donation Connection, Bill Reighard..........................    47
Hall, Hon. Tony P., A Representaive in Congress from the State of 
  Ohio, statement................................................    24
National Congress of American Indians, and Washoe Tribe of Nevada 
  and California, Hon. A. Brian Wallace..........................    42
New York, Town of Mina, Hon. Rebecca N. Brumagin.................    36
Puerto Rico Department of Economic Development and Commerce, Hon. 
  Xavier Romeu...................................................    66

                       SUBMISSIONS FOR THE RECORD

Association of American Railroads, Edward R. Hamberger, letter...    82
English, Hon. Phil, a Representative in Congress from the State 
  of Pennsylvania, letter........................................    83
Enterprise Foundation, Columbia, MD, F. Barton Harvey III, 
  statement......................................................    84
National Trust for Historic Preservation, Richard Moe, statement.    88
North Carolina A&T University, School of Agriculture, Greensboro, 
  NC, Daniel Godfrey, and University of Florida, Richard Jones, 
  joint statement................................................    90
Pechanga Band of Luiseno Indians, Temecula, CA, Hon. Mark A. 
  Maccarro, statement............................................    95
United States Hispanic Chamber of Commerce, George Herrera, 
  statement......................................................    96
Young, Hon. Don, a Representative in Congress from the State of 
  Alaska, letter and attachment..................................    98

 
            TAX INCENTIVES TO ASSIST DISTRESSED COMMUNITIES

                              ----------                              

                        TUESDAY, MARCH 21, 2000

                  House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:01 p.m., in 
room 1100, Longworth House Office Building, Hon. Nancy L. 
Johnson (Chairman of the Subcommittee) presiding.
    [The advisories announcing the hearing follow:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE

March 10, 2000

No. OV-16

                     Houghton Announces Hearing on

            Tax Incentives to Assist Distressed Communities

    Congressman Amo Houghton (R-NY), Chairman, Subcommittee on 
Oversight of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on tax incentives to assist distressed 
communities. The hearing will take place on Tuesday, March 21, 2000, in 
room B-318 Rayburn House Office Building, beginning at 2:00 p.m.
      
    Oral testimony at this hearing will be from invited witnesses only. 
Invited witnesses will include a representative of the U.S. Department 
of the Treasury, representatives of State and local governments, and 
community development experts. However, any individual or organization 
not scheduled for an oral appearance may submit a written statement for 
consideration by the Committee and for inclusion in the printed record 
of the hearing.
      

BACKGROUND:

      
    The Omnibus Budget Reconciliation Act of 1993 (OBRA 93) authorized 
the U.S. Department of Housing and Urban Development and the U.S. 
Department of Agriculture to designate 10 empowerment zones (6 urban, 3 
rural, and 1 Indian reservation) and 100 enterprise communities (65 
urban, 30 rural, and 5 Indian reservations) based on certain 
eligibility requirements, including specified poverty rates and 
population and geographic size limits. Qualified businesses operating 
in these designated areas are eligible for specified tax incentives.
      
    For qualified businesses operating in these empowerment zones, the 
following tax incentives were established: (1) a 20 percent wage credit 
for the first $15,000 in wages paid to a zone resident who also worked 
within the zone, (2) an additional $20,000 limit for expensing under 
section 179, and (3) special tax-exempt financing. Qualified businesses 
operating in enterprise communities were eligible for the tax-exempt 
financing but not the wage credit or additional section 179 expensing 
limit.
      
    The Tax Relief Act of 1997 (97 Act) established two more urban 
empowerment zones (effective January 1, 2000) in which qualified 
businesses would be eligible to use each of the tax incentives created 
in OBRA 93. The legislation also created 20 additional urban and rural 
empowerment zones (effective January 1, 1999) in which qualified 
businesses could utilize the increased 179 expensing limits and the 
tax-exempt financing, but not the wage credit.
      
    Portions of the District of Columbia were designated an enterprise 
community in 1994 pursuant to OBRA 93, and qualified businesses were 
eligible for tax-exempt financing. The 97 Act designated a District 
enterprise zone which included the enterprise community designated in 
OBRA 93 and several other tracts. Qualified businesses operating in the 
newly designated enterprise zone were eligible for each of the tax 
incentives created in OBRA 93 for empowerment zones. In addition, the 
97 Act provided for a 0 percent capital gains rate upon the sale of 
qualified assets held for five years or longer in the District and a 
$5,000 credit for first-time home buyers in the District.
      
    Reps. J.C. Watts, Jr. (R-OK) and James M. Talent (R-MO) have 
introduced H.R. 815, the ``American Community Renewal Act of 1999,'' 
and Rep. Tom Davis (R-VA) is developing a proposal for the District of 
Columbia. The Administration has proposed a ``New Markets'' incentive, 
extending and expanding the empowerment zone incentives, and expanding 
specialized small business investment company incentives.
      
    In announcing the hearing, Chairman Houghton stated: ``The 
challenge of revitalizing distressed communities is critically 
important. I know this first hand because the current economic boom 
hasn't reached every community in New York's Southern tier. We can't 
afford to leave anyone behind. We need to take a good look at how well 
tax incentives in current law are working, as well as proposals to 
expand incentives to help the communities which need it most. ''
      

FOCUS OF THE HEARING:

      
    The hearing will examine the operation of current law tax 
incentives for distressed communities, as well as several proposals.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect or MS Word format, with their name, address, 
and hearing date noted on a label, by the close of business, Tuesday, 
April 4, 2000, to A.L. Singleton, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Oversight office, room 1136 Longworth 
House Office Building, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect or 
MS Word format, typed in single space and may not exceed a total of 10 
pages including attachments. Witnesses are advised that the Committee 
will rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at ``http://waysandmeans.house.gov.''
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                

                       NOTICE CHANGE IN LOCATION

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE

March 15, 2000

No. OV-16-Revised

             Change in Location for Subcommittee Hearing on

            Tax Incentives to Assist Distressed Communities

                        Tuesday, March 21, 2000

    Congressman Amo Houghton (R-NY), Chairman of the Subcommittee on 
Oversight of the Committee on Ways and Means, today announced that the 
Subcommittee hearing on tax incentives to assist distressed communities 
scheduled for Tuesday, March 21, 2000, at 2:00 p.m., in room B-318 
Rayburn House Office Building, will now be held in the main Committee 
hearing room, 1100 Longworth House Office Building.
      
    All other details for the hearing remain the same. (See 
Subcommittee press release No. OV-16, dated March 10, 2000.)
      

                                

    Chairman Houghton. Ladies and gentlemen, we are going to 
begin the hearing.
    Last year in presenting proposals from the Second 
Bipartisan Congressional Retreat to the House Rules Committee, 
one of my colleagues recalled a phone call Bill Hudnut received 
when he was first elected to Congress. Maybe some of you have 
heard this story. I think it is a pretty good one.
    The first call Hudnut received was from a woman in his 
district complaining about trash collection. ``Ma'am,'' he 
said, ``I have just been elected to serve you in the Congress 
of the United States. Don't you think you should call the 
sanitation department?'' Her reply was ``I really didn't think 
I should start that high.'' So it is a humbling reminder that 
many of the matters that people care about most do not fall 
within the purview of the United States Congress.
    Even so, many of the decisions we make here in Congress, 
and here in this committee, have far-reaching implications in 
people's daily lives. The first purpose of the Internal Revenue 
Code is to collect revenue to finance the services provided by 
the Government, but the tax code is also used to help people 
buy homes, save for their retirement and put their children 
through college.
    In recent years, we have tried to use the tax code to help 
distressed communities. The Omnibus Budget Reconciliation Act 
of 1993, OBRA 93, authorized the designation of 10 empowerment 
zones and 100 enterprise communities based on certain 
eligibility requirements. Businesses operating in these 
designated areas are eligible for special tax incentives. The 
Tax Relief Act of 1997 established two more urban empowerment 
zones and 20 additional urban and rural empowerment zones.
    Portions of the District of Columbia were designated an 
enterprise community in 1994 under OMBRA 93, and the 97 Act 
designated a District enterprise zone which included the 
enterprise community designated in OBRA 93 and several other 
tracts.
    Building on this experience, Representatives J.C. Watts, 
Jr. from Oklahoma, and James M. Talent from Missouri have 
introduced H.R. 815, the ``American Community Renewal Act of 
1999.'' The Administration has proposed a ``New Markets'' 
incentive extending and expanding the empowerment zone 
incentives and expanding specialized and small business 
investment company incentives.
    There are a number of other proposals to help communities 
that have merit. Mr. Portman and Mr. Becerra have introduced a 
bill to encourage the donation of computers to schools. Tony 
Hall and I have introduced a bill to encourage restaurants to 
donate food to food banks. Mr. Crane and Mr. Rangel have 
introduced legislation to provide incentives for investment and 
job growth in Puerto Rico. Clay Shaw and John Lewis have 
introduced the Historic Homeownership Assistance Act, which 
would create a credit for rehabilitating owner-occupied homes 
in Federal, State and local historic districts. We will be 
hearing about several of these proposals today.
    Much of what is needed in distressed communities--improved 
public safety and better schools--is primarily the 
responsibility of State and local government. However, there 
are ways that the Federal Government can help. There are ways 
we can help through the tax code. Many communities throughout 
our Nation are reexperiencing revitalization. Some are 
succeeding with help from the Federal Government and some are 
going it alone. We need to know more about what is working and 
we need to know how effective current tax incentives are and we 
need to give serious consideration to the thoughtful proposals 
that are here before us today.
    I would like to recognize now the Ranking Democrat, Mr. 
Coyne for his opening statement.
    Mr. Coyne. Thank you, Mr. Chairman.
    Thank you for holding today's hearing on tax incentives to 
assist distressed communities throughout the country. It is 
critical that Congress periodically review the progress being 
made to reverse the years of economic decline many of our urban 
and rural areas face. This evaluation must be made in the 
context of overall growth of the national economy.
    In the 14th Congressional District in Pennsylvania, some 
neighborhoods are still suffering from the downturn in the 
manufacturing and steel industries that began in the 1970s. To 
help these communities, it is vital that the Federal Government 
assist in attracting new capital to these distressed areas.
    I consider environmental cleanup and redevelopment of old, 
abandoned industrial sites a critical issue for our cities. The 
400,000 brownfield sites scattered across the country have 
become public health and pollution problems. They also 
constitute serious impediments to the economic health of the 
surrounding communities.
    I am co-sponsoring legislation with Congressman Weller to 
expand the existing Internal Revenue Code Section 198 provision 
that allows expensing of remediation costs at brownfield sites. 
The legislation would also extend the expiration date of this 
provision.
    The President's New Market Initiative, which we are also 
considering today, would address one of the largest barriers to 
rebuilding communities, the lack of capital for businesses in 
distressed areas. The proposal would provide a tax credit for 
equity investments in community development. I support this 
legislation and believe that the initiative would attract 
significant new capital to many distressed communities.
    The President also proposed improvements in the Empowerment 
Zone and Enterprise Community Tax Program. The proposal would 
extend the EZ and EC program, provide enhanced tax incentives 
and designate additional zones in communities for assistance. 
The EZ/EC Program has a proven record of success and continues 
to have strong support.
    I hope that we can work together to pass bipartisan 
legislation in these areas. It is important that we act 
promptly to help our distressed communities. All Americans 
should be able to share in the longest economic expansion in 
United States history.
    Once again, I would like to commend the Chairman for 
calling these very important hearings.
    Chairman Houghton. Thank you, Mr. Coyne.
    Would anyone else like to have an opening statement? Mr. 
Watkins?
    Mr. Watkins. Thank you, Mr. Chairman, for having these 
oversight hearings on community renewal and also the New Market 
Initiative.
    I have long devoted my public life to economic growth and 
job development. A lot of the rural areas in this country have 
never recovered from the Great Depression. We have literally 
the highest unemployment, the highest underemployment, the 
lowest educational level in many of those areas and also out 
migration. The out migration has caused many of these small 
communities to deteriorate but also, they have gone into the 
larger cities, and it has become a problem also in the big 
cities.
    We have not been able to address that over the years and I 
think the Empowerment Zones and the Enterprise Communities have 
begun to do that a little bit in some respect in the economic 
development out there because a lot of various things are going 
on. One of the things I want to do today is hopefully make sure 
we have equity for the rural economically depressed areas like 
I grew up in as a boy where my family had to leave three times 
to go from southeast Oklahoma to California in search of a job 
before I was 10 years of age. It destroyed my family.
    One of the things I have tried to do in Congress is to have 
set asides for the rural areas so we wouldn't have to compete 
against Chicago or some of the larger cities, but we would have 
opportunities in the small, rural areas.
    Also, it is my understanding that under the community 
renewal, the tax incentives priority would be given to the 
Empowerment Zones and Enterprise Communities. I want to make 
sure we have clarification of that today to see if we could 
make sure they are designated instead of going around different 
areas. There might be more than just those but also to 
designate those so that they would not be lost in the shuffle.
    Thank you, Mr. Chairman.
    Chairman Houghton. Thank you.
    Mr. Weller?
    Mr. Weller. Thank you, Mr. Chairman.
    I want to commend you for holding this hearing as we work 
to find ways to revitalized plighted areas, distressed areas in 
our country, both urban, suburban and rural.
    I wanted to draw attention, as Mr. Coyne has, to an issue 
that I believe is an issue we should address as we look at 
working in a bipartisan way with the Administration on the 
President's New Markets Initiative as well as with the 
Republican Congress' Community Renewal Initiative and combining 
those two packages.
    I want to focus on the issue of brownfields, an issue which 
I believe is both an economic development as well as an 
environmental issue, particularly as regards the whole concept 
of smart growth and bringing urban sprawl under control.
    The whole goal of addressing the brownfields issue is to 
revitalize as well as to recycle old industrial parks as well 
as that abandoned gas station on that strategic corner in a 
community that people always wonder why is it never developed. 
We can all think of that gas station in many of our 
communities.
    It is estimated that there are as many as 425,000 
brownfields throughout this country. The U.S. Conference of 
Mayors recently surveyed 210 of their cities and estimated if 
they can clean up, recycle and reuse the existing brownfields 
within those 210 cities, they could bring in an additional $2.4 
billion in tax revenues and create $550,000 new jobs in those 
cities.
    I represent part of the city of Chicago and it is estimated 
that in the Chicago land area there is an estimated 2,000 
brownfields. The Conference of Mayors points out that 
revitalizing those brownfields would create 34,000 jobs in the 
Chicago metropolitan area. Clearly revitalizing brownfields is 
good for the environment, helps bring urban sprawl under 
control and also creates jobs.
    In 1996 and 1997 many of us worked in a bipartisan effort 
along with Mayor Richard Daley of Chicago to come up with a tax 
incentive to attract private investors to purchase these old 
industrial parks and commercial sites that required 
environmental cleanup and to recycle them, clean them up and 
put them back to work hiring people.
    We successfully obtained in the 1997 Balanced Budget Act a 
provision which provided a brownfields tax incentive, 
essentially allowing private investors to fully deduct or 
expense the cost of cleanup but it was in a targeted way. 
Unfortunately, that provision only benefitted low income census 
tracts, empowerment zones and a limited number of brownfields 
throughout this country.
    Time and time again I am often asked by community leaders 
and those who want to clean up the environment, those who want 
to revitalize distressed areas and rural areas, suburban areas 
as well as middle class communities, why this provision is not 
available for those communities as well.
    It is estimated that there are over 400,000 sites 
nationwide that today are left out under the current provision. 
I believe, as I know Mr. Coyne does, Ms. Johnson and others, 
who joined with me in introducing H.R. 4003 which expands the 
current brownfields expensing provision, removes that targeting 
which will allow rural, suburban as well as middle class 
communities to benefit from this important economic 
revitalization as well as environmental initiative.
    I am pleased this legislation has the co-sponsorship of a 
large number of members of the Ways and Means Committee in a 
bipartisan effort and my hope is that this provision can be 
included as part of a community renewal/new markets initiative 
that we can work together in a bipartisan way.
    I commend you for holding this hearing, Mr. Chairman. Mr. 
Secretary, I look forward to working with you and discussing 
this during the hearing today.
    Chairman Houghton. Thank you, Mr. Weller.
    Mr. Hulshof?
    Mr. Hulshof. Thank you, Mr. Chairman.
    Briefly, I want to say I want to associate myself with the 
remarks of Mr. Watkins from Oklahoma. If you want to look at a 
sector of our economy that has not shared our Nation's economic 
prosperity, one need look no further than rural America.
    Chairman Houghton. Without objection.
    Mr. Hulshof. I will yield the balance of my time.
    Chairman Houghton. Thank you.
    I would like to call Mr. Talisman, the Acting Assistant 
Secretary for Tax Policy, U.S. Department of the Treasury. We 
are honored to have you here.

STATEMENT OF JONATHAN TALISMAN, ACTING ASSISTANT SECRETARY FOR 
            TAX POLICY, U.S. DEPARTMENT OF TREASURY

    Mr. Talisman. Thank you very much.
    I am pleased this afternoon to have the opportunity to 
discuss with you the Administration's program of tax incentives 
designed to foster the revitalization of economically 
disadvantaged American communities.
    There has been substantial bipartisan agreement on the need 
to assist these communities. We very much appreciate your 
holding this hearing and look forward to working with all of 
you to find solutions to address needs in these communities.
    As you know, despite the unprecedented prosperity that is 
evident in so many places in the United States, not all 
communities have shared in this new affluence. In some 
communities, good jobs are still scarce, construction is rare 
and the infrastructure, including schools, is aged.
    The Administration believes that in this period of general 
prosperity, no American community should be left behind. 
Accordingly, we are dedicated to working on a bipartisan basis 
to provide incentives to the private sector to bring economic 
opportunity to residents of inner cities and less affluent 
rural communities.
    Let me be clear, we view tax policy as one, but by no 
means, the only tool at our disposal in achieving this 
important goal. To be most effective, tax measures must be 
integrated into a broader program designed to foster community 
development. Thus, in conjunction with targeted tax incentives, 
the Administration has proposed other initiatives to ensure 
that all communities have access to the tools that are critical 
to success in the new economy.
    The tax code already has several measures to aid 
economically disadvantaged communities. As discussed in greater 
detail in my written testimony, these include tax benefits for 
the 135 urban and rural empowerment zones and enterprise 
communities that have been designated since 1993, a special set 
of incentives designed to foster the redevelopment of the 
District of Columbia and the low income housing credit which 
has played a vital role in helping working poor people to find 
affordable, decent housing while revitalizing communities.
    The Administration's fiscal year 2001 tax proposals, 
totalling about $17 billion over ten years, seek to build on 
these programs and to leverage the progress that has already 
been made in revitalizing America's economically disadvantaged 
communities.
    For example, the New Market Tax Credit would attract 
capital to lower income areas by providing a subsidy to 
investors. Specifically, it would help to attract $15 billion 
in equity capital to community-based financial institutions 
which in turn would invest these funds in their communities 
spurring the creation of higher quality jobs and equally 
important, building lasting links to the new economy.
    High technology and service firms at the heart of the new 
economy have generally sought to locate near other similar 
enterprises so that they may tap a common pool of customers, 
employees and other resources. The New Market Tax Credit would 
provide incentives for the businesses of the new economy to 
locate in distressed areas, even if few such enterprises are 
already operating in these communities.
    The credit is specifically designed to further the efforts 
of community-based financial institutions in promoting economic 
revitalization while allowing these entities to make the on-
the-ground decisions concerning where the need for capital is 
greatest. Such institutions, including a wide variety of 
existing or newly formed community development banks and 
venture funds, would apply to the Treasury for authorization to 
issue stock with respect to which the investors could claim a 
tax credit equal to approximately 25 percent of the investment 
in present value terms. The credit would be claimed in five 
equal installments, each equal to 6 percent of the original 
investment during the first five years of investment.
    We greatly appreciate the active leadership of Mr. Rangel, 
Mr. LaFalce, Ms. Velazquez, as well as Senators Rockefeller, 
Robb, Sarbanes, Kerry and others in working over the last 12 
months to move this proposal forward.
    The Administration would also like to see a further 
expansion of the Empowerment Zone Program. The President's 
fiscal year 2001 budget would extend empowerment zone status 
for the existing 31 designated zones through 2009. At present, 
these designations expire as early as 2004. Furthermore, the 
wage credit rate would remain at 20 percent in all zones 
through 2009. The current set of incentives available in some 
zones does not include the wage credit, while in other zones, 
this credit phases out over the final three years of 
designation. Businesses in all 31 zones would be eligible to 
expense rather than to depreciate over time an additional 
$35,000 in qualified investment property. Finally, ten new 
empowerment zones would be authorized, eight in urban 
communities and two in rural areas.
    Affordable rental housing remains in extremely short supply 
in many communities. Paradoxically, general prosperity can 
actually exacerbate the shortage of high quality, affordable 
housing for low income workers. For example, in the greater 
Washington area as in Silicon Valley, the problem of housing 
has become acute as the creation of new jobs has led to a 
substantial increase in the cost of housing. Many low income 
workers must either contend with the inadequate housing stock 
often found in central cities or reside so far from their jobs 
that the cost of commuting measured in both time and money is 
staggering.
    The per capital credit allocation of $1.25 used to 
determine the annual State limit was set in 1986. Since that 
time, inflation has eroded the value of the cap on low income 
housing credit allocations by 45 percent. Most State housing 
agencies receive qualified proposals for far more low income 
rental housing than they can support with the available credit.
    The Administration, is proposing an increase in the cap to 
$1.75 per capita and subsequent indexing of this amount for 
inflation, a step that has also been proposed by Congress. 
These measures will subsidize the construction and 
rehabilitation of additional low income housing units while 
allowing the State agencies to still choose the projects that 
best meet local needs. We appreciate the efforts of Ms. Johnson 
and the co-sponsors of HR 2400, including Mr. Watkins, Mr. 
Frost, Mr. Ballenger, Mr. Barcia and Mr. Isakson, as well as 
Senator Mack and the 75 Senate co-sponsors of S.1017
    Another set of proposals will ensure access to computers 
and the Internet so that the economically disadvantaged may 
participate fully in America's economic, political and social 
life. The Administration believes that we must make access to 
computers and the Internet as universal as is the telephone 
today in our schools, libraries, communities and homes.
    To bridge what the Administration sees as this digital 
divide, we have made several proposals, including an 
enhancement of the current law temporary deduction for 
corporate donations of computer equipment to schools and other 
institutions in disadvantaged communities, a tax credit for 
certain corporate sponsorship payments to schools, libraries 
and technology centers in empowerment zones and ECs and a 
credit to employers who provide training in technology skills 
and other basic education to educationally disadvantaged 
workers.
    The budget also includes proposals to improve the 
specialized small business investment companies to make them 
more workable and also to reformulate the economic activity tax 
credit under Section 30(a) which will encourage increased 
economic redevelopment in Puerto Rico.
    Let me now turn briefly to the renewal community proposal 
which has been made by Mr. Watts, Mr. Talent, Mr. Davis and 
also was passed as part of the budget bill last year. Like the 
authors of that proposal, the Administration favors increased 
expensing authority as a means to encourage capital formation 
in disadvantaged areas, expensing authority to encourage the 
remediation of environmental hazards, a wage credit to spur the 
hiring of residents of distressed communities and measures to 
encourage saving by low income workers.
    We are eager to continue working on a bipartisan basis with 
members of the committee as well as Mr. Watts, Mr. Talent, Mr. 
Davis and the rest of the Congress in ensuring through the use 
of targeted tax incentives and other complementary measures 
that all American communities share in the Nation's general 
prosperity.
    While we have certain concerns with the renewal community 
proposal including the zero rate capital gains provision and 
the family development accounts, we would like to work with the 
Congress to develop a package on a bipartisan basis that can 
achieve these goals.
    We look forward to working with you and the committee to 
craft a set of measures that will help reach our common goal of 
promoting the revitalization of America's most economically 
disadvantaged communities as efficiently and quickly as 
possible. I want to thank you and the members of the 
subcommittee for providing a chance today to discuss these 
important issues. I hope that we can work together to ensure 
that all Americans share in the current prosperity and have 
even greater opportunity in the future.
    Thank you and I would be happy to respond to questions.
    [The prepared statement follows:]

Statement of Jonathan Talisman, Acting Assistant Secretary for Tax 
Policy, U.S. Department of the Treasury

    I am pleased to have the opportunity this afternoon to 
discuss with you the Administration's program of tax incentives 
designed to foster the revitalization of economically 
disadvantaged American communities. I would like to begin by 
acknowledging the efforts of the Chair, the Speaker, other 
Members of Congress from both parties, and the panelists this 
afternoon, all of whom have sought to provide assistance to 
America's economically distressed communities.
    Despite the unprecedented prosperity that is evident in so 
many places in the United States, not all communities have 
fully shared in this affluence. In some communities, good jobs 
are still scarce, new construction is a rarity, and 
infrastructure, including schools, shows its age. The 
Administration believes that, in this period of great 
prosperity, no American communities should be left behind. 
Accordingly, we are dedicated to insuring that the residents of 
inner cities and less affluent rural communities, just like 
those Americans living in the Silicon Valley or along the 
Dulles Corridor, have full access to the opportunities which 
symbolize the promise of the new economy.
    The Administration's budget proposals include almost $17 
billion in new tax incentives over ten years to ensure that we 
satisfy this commitment. We view tax policy as one, but by no 
means the only, tool at our disposal in achieving this 
important goal. To be most effective, tax measures must be 
integrated into a broader program designed to foster community 
development. Thus, in conjunction with targeted tax incentives, 
the Administration has proposed major initiatives on the 
appropriations side to insure that all communities have access 
to the tools that will be critical to success in the new 
economy. For example, the Administration has proposed to expand 
the Community Development Financial Institutions Fund to 
bolster the capacity of specialized, locally-based financial 
institutions serving economically disadvantaged areas, and has 
launched BusinessLINC to provide smaller firms in these 
communities the know-how and business opportunities enjoyed by 
their larger counterparts. Other initiatives in the President's 
FY2001 budget would fund community technology centers train 
teachers in the use of computer and internet technology, and 
encourage private-public partnerships to provide basic banking 
services to individuals and businesses in economically-
disadvantaged areas.

Current Law

    Investment, by both the private and public sectors, is the 
key to economic development. Only with investment by the public 
sector in infrastructure and the private sector in businesses 
can real economic opportunity be created. Since 1993, the 
Administration, together with Congress, has sought to direct 
both types of investment to disadvantaged communities through 
the designation of Empowerment Zones and Enterprise 
Communities. Since 1993, 125 communities have been selected on 
the basis of their comprehensive strategic revitalization plans 
to receive special tax incentives and other resources.

Empowerment Zones

    The Omnibus Budget Reconciliation Act of 1993 authorized a 
demonstration project under which nine Empowerment Zones, six 
in urban areas and the remainder in rural areas, were 
designated through a competitive application process. State and 
local governments nominated distressed geographic areas, which 
were selected based on the strength of their strategic plans 
for economic and social revitalization. The incentives 
available in the Empowerment Zones designated under the 1993 
Act remain available through the end of 2004.
    By virtue of this designation, businesses located in these 
zones became eligible for a number of tax incentives 
specifically designed to encourage new businesses and business 
growth in these areas of acute need. These include a wage 
credit, preferential tax treatment for certain depreciable 
property, and special tax-exempt bond financing.
    The wage credit provides a 20 percent subsidy on the first 
$15,000 of annual wages paid to residents of Empowerment Zones 
by businesses located in these communities. By lowering the 
cost of labor, the wage credit encourages new businesses to 
locate in zones, and encourages those businesses already there 
to expand, providing good jobs and opportunities for self-
sufficiency for zone residents.
    Further incentives are intended to encourage investment 
machines, computers and other tangible business property. 
Empowerment Zone businesses are allowed to expense the cost of 
property up to an additional $20,000 above the amounts 
generally available under Section 179 of the Internal Revenue 
Code, rather than depreciate such property over time. This 
additional expensing lowers the cost of the capital investment 
necessary to support the creation of high-paying jobs in the 
new economy.
    Finally, the original legislation permitted the issuance of 
a new class of tax-exempt private activity bonds to provide 
subsidized financing to projects in Empowerment Zones. By 
lowering the cost of capital, tax-exempt financing makes 
projects that would not otherwise be undertaken by the private 
sector economically viable, leading to the creation of new jobs 
in disadvantaged areas.
    The landmark 1993 legislation also made these zones 
eligible for a variety of programs administered by other 
agencies, including the Department of Housing and Urban 
Development and the Small Business Administration. These 
programs complement the tax incentives, and contribute further 
to the revitalization of these economically disadvantaged 
communities.
    The Empowerment Zone legislation has been expanded during 
recent years. The Taxpayer Relief Act of 1997 provided for the 
designation of two additional Empowerment Zones. The Act also 
authorized the designation of twenty ``Round II'' Empowerment 
Zones using slightly expanded eligibility criteria. Although 
businesses in the ``Round II'' Empowerment Zones may not claim 
a wage credit, the available tax incentives are otherwise very 
similar to those provided in the original nine zones and 
remain, under current law, in place through the end of 2008.
    Since environmental hazards often pose a major obstacle to 
the privately-financed revitalization of both urban and rural 
areas, the 1997 legislation provided an additional incentive to 
help private firms clean up such contamination. Under this 
provision, businesses in Empowerment Zones may expense, and 
therefore recover immediately for tax purposes, the costs of 
remediating certain environmental hazards in the soil and 
ground water. This favorable tax treatment, which is also 
available in some other economically depressed areas, reduces 
the expected return necessary to justify investments that often 
benefit the entire community.

Enterprise Communities

    In addition to the Empowerment Zones, the Omnibus Budget 
Reconciliation Act of 1993 also provided for the designation of 
95 Enterprise Communities, at least thirty-five of which would 
be located in rural areas. Businesses in these communities are 
entitled to the same favorable tax treatment of environmental 
remediation expenses and tax-exempt financing benefits as those 
in the Empowerment Zones.

District of Columbia Incentives

    A special set of incentives, bearing a broad resemblance to 
those provided to the Empowerment Zones, were enacted in 1997 
to foster the redevelopment of the District of Columbia. The 
Taxpayer Relief Act of 1997 included tax incentives for both 
residents and business to locate in the District of Columbia. A 
$5,000 income tax credit for first-time home purchasers was 
intended to attract new homeowners to the District. A second 
set of incentives, similar to those provided to the original 
nine Empowerment Zones, was intended to encourage the 
establishment of new businesses in the District as well as new 
investment in existing enterprises.
    Subject to certain income restrictions, the $5,000 credit 
is available to first-time purchasers of a principal residence 
in the District of Columbia who have not owned houses in the 
District during the year preceding the purchase. Although the 
credit was initially available only for property purchased 
through the end of 2000, subsequent legislation in 1999 
extended the incentive through the end of 2001.
    Other tax incentives offer a range of economic inducements 
to businesses operating in the more economically disadvantaged 
parts of the District. With the exception of a provision 
related to the sale of capital assets, these incentives are 
available only to businesses located either within the 
boundaries of the D.C. Enterprise Community, or located in 
census tracts elsewhere in the District where the poverty rate 
exceeds 20 percent. These areas are collectively known as the 
D.C. Zone. With certain minor adjustments, businesses in the 
Zone may claim the same wage credit, expensing of certain 
capital investment, expensing of environmental remediation 
costs, and tax exempt bond financing, as businesses in the 
original nine Empowerment Zones. In addition, capital gains 
realized from the sale of certain assets are excludable from 
the income of the seller, whether a business or individual. For 
the purposes of this provision alone, the DC Zone is expanded 
to include all census tracts in the District in which the 
poverty rate exceeds 10 percent.

Native American Wage Credit

    Unfortunately, many residents of Native American 
communities continue to struggle economically, even during 
these times of prosperity. The Indian Wage Credit provides a 
powerful incentive for job growth in these communities. 
Employers may claim an Indian employment credit equal to 20 
percent of the qualified wages and employee health insurance 
costs paid to an enrolled member of an Indian tribe in 
compensation for services performed on or near a reservation. 
The aggregate amount of qualified wages and health insurance 
costs may not exceed $20,000 per person per year. This 
incentive is now available through 2003.

New Proposals

    The President's FY2001 budget proposals, the Administration 
seeks to leverage the progress that has already been made in 
revitalizing America's economically disadvantaged communities 
through the provision of another $17 billion in targeted tax 
incentives over the next decade. These measures will allow more 
communities to benefit from the investment that is so important 
in a technology-driven economy, while offering an innovative 
approach to the task of attracting patient equity capital to 
businesses in economically disadvantaged areas.

New Markets Tax Credit

    An important priority is the New Markets Tax Credit, a part 
of the President's broader New Markets Initiative. This tax 
incentive would help attract $15 billion in equity capital to 
community-based financial institutions which, in turn, would 
invest these funds in their communities, spurring the creation 
of high-quality jobs and, equally important, building lasting 
links to the new economy.
    High technology and service firms at the heart of the new 
economy have generally sought to locate near other similar 
enterprises, in places like the Silicon Valley and the Dulles 
Corridor, so that they may tap a common pool of customers, 
employees and other resources. Thus these enterprises tend to 
be highly concentrated geographically, and often not in lower-
income areas. The New Market Tax Credit would attract capital, 
and therefore high-growth industries, to lower-income areas by 
providing a subsidy to investors. This temporary subsidy will, 
at least in part, compensate investors for the additional costs 
involved in establishing operations in locales which have yet 
to benefit from the strength of the U.S. economy over the past 
decade and where the presence of other fast-growing firms may 
therefore be limited.
    The New Markets Tax Credit is specifically designed to 
further the efforts of community-based financial institutions 
in promoting economic revitalization while encouraging these 
entities to make the ``on the ground'' decisions concerning 
where the need for capital is greatest. Such institutions -
including a wide variety of existing or newly-formed community 
development banks and venture funds -would apply to the 
Treasury Department for authorization to issue stock (or other 
equity interests) with respect to which the investors could 
claim a tax credit equal to approximately 25 percent of the 
investment, in present value terms. The credit would be claimed 
in five equal installments, each equal to 6 percent of the 
original investment, during each of the first five years of 
investment.
    Community development entities selected for a credit 
allocation would be required to invest the leverage funds by 
taking equity stakes in, or providing loans to, businesses 
located in low-income communities. The required investments 
could be made in a wide range of commercial ventures, the basic 
requirement being that the business conduct an active trade or 
business in one or more low-income communities. The selected 
community development entities themselves would decide which 
local commercial ventures are likely to produce the greatest 
social and financial return.
    We greatly appreciate the active leadership of Mr. Rangel, 
Mr. LaFalce and Ms. Velazquez, as well as Senators Rockefeller, 
Robb, Sarbanes, Kerry, Kennedy and Daschle, in working over the 
last twelve months to move New Markets Tax Credit legislation 
forward. Our current budget proposal would, relative to the 
original design, more than double the amount of capital with 
respect to which credits could be allocated, raising this 
amount from $6 billion to $15 billion by providing $3 billion 
per year from 2001 through 2005.

Empowerment Zones

    In addition to the New Markets Tax Credit, the 
Administration would like to see a further expansion of the 
Empowerment Zone program, as well as movement towards 
standardization of incentives across the already-designated 
zones.
    The President's FY2001 budget proposal would extend 
empowerment zone status for the existing thirty-one designated 
zones through 2009. At present, these designations expire as 
early as 2004. Furthermore, the wage credit rate would remain 
at 20 percent in all zones until 2009. The current set of 
incentives available in some zones does not include the wage 
credit, while in other zones this credit phases out over the 
final three years of designation.
    Businesses in all thirty-one zones would be eligible to 
expense, rather than to depreciate over time, an additional 
$35,000 in qualified investment property. Under current law, 
this additional expensing authority in Empowerment Zones is 
limited to $20,000.
    Finally, ten new Empowerment Zones would be authorized, 
eight in urban communities and two in rural areas. During the 
period 2002 through 2009, businesses located in these zones 
would be eligible for the same tax incentives that are 
available to businesses in the other 31 Empowerment Zones, 
including the expensing of qualified environment remediation 
costs and certain tax-exempt financing benefits.

Low-Income Housing Credit

    The low-income housing credit has played a vital role in 
helping working poor people to find affordable, decent housing 
and in helping to revitalize low-income communities. But 
affordable rental housing remains in extremely short supply in 
many communities. Paradoxically, general prosperity can 
actually exacerbate the shortage of high-quality, affordable 
housing for low-income workers. Here in the greater Washington 
area, as in Silicon Valley and the areas surrounding New York 
City, the problem has become acute as the creation of new jobs 
has led to a substantial increase in the cost of housing. Many 
low-income workers must either contend with the inadequate 
housing stock often found in central cities or reside so far 
from their jobs that the cost of commuting, measured in both 
time and money, is staggering. To help address this need, the 
Administration is proposing an expansion of the low-income 
housing credit. We also appreciate the leadership on this issue 
of Mrs. Johnson, Mr. Rangel, and the co-sponsors of H.R. 2400, 
including Mr. Watkins, Mr. Frost, Mr. Ballenger, Mr. Barcia, 
and Mr. Isakson.
    This tax credit is allowed in annual installments over 10 
years for qualifying low-income rental housing, which may be 
newly constructed or substantially rehabilitated residential 
units. In order to qualify for the credit, the building owner 
must receive an allocation from a state or local housing 
authority, which is counted towards an annual limit for each 
state.
    The per capita credit allocation of $1.25, used to 
determine the annual state limit, was set in 1986. Since that 
time, inflation has eroded the value of the cap on low-income 
housing credit allocations by 45 percent. Most state housing 
agencies receive qualified proposals for far more low-income 
rental housing than they can support with available credits. 
The Administration is proposing an increase in the cap, to 
$1.75 per capita, and subsequent indexing of this amount for 
inflation. These measures will subsidize the construction and 
rehabilitation of additional low-income housing units while 
allowing the state agencies to choose projects that best meet 
local needs.

Digital Divide

    Access to computers and the Internet--and the ability to 
use this technology effectively--are becoming increasingly 
important for full participation in America's economic, 
political and social life. Unfortunately, unequal access to 
technology by income, educational level, race, and geography 
could deepen and reinforce the divisions that exist within 
American society. The Administration believes that we must make 
access to computers and the Internet as universal as the 
telephone is today--in our schools, libraries, communities, and 
homes.
    In recognition of the importance of technology in the new 
economy, the President's FY 2001 Budget includes a series of 
tax incentives to insure that residents of disadvantaged 
communities are able to develop the skills that will be 
essential for labor market success in the coming years. This 
initiative, to help ``bridge the digital divide,'' consists of 
three components. The first is an enhanced deduction for 
corporate donations of computer equipment to schools and other 
institutions in disadvantaged communities. Such donations will 
help to provide these institutions the tools necessary to train 
residents in new technology. The second is a tax credit for 
certain corporate payments to schools, libraries and technology 
centers in Empowerment Zones and Enterprise Communities. This 
credit will help insure that innovative educational programs, 
many with a focus on technology, flourish in communities 
undergoing economic and social revitalization. The final 
incentive is a tax credit for certain employer-provided 
education programs in workplace literacy and basic computer 
skills. This credit is vital in ensuring that our least-
educated workers obtain the basic skills necessary for success 
in the new economy.
    The first measure, designed to encourage corporate 
donations of computer equipment, builds upon and extends a 
similar provision of the Taxpayer Relief Act of 1997. Under the 
1997 legislation, a taxpayer is allowed an enhanced deduction, 
equal to the taxpayer's basis in the donated property plus one-
half of the amount of ordinary income that would have been 
realized if the property had been sold. This enhanced 
deduction, limited to twice the taxpayer's basis, was made 
available to donors for a limited three-year period. Without 
this provision, the deduction for charitable contributions of 
such property is generally limited to the lesser of the 
taxpayer's cost basis or the fair market value. To qualify for 
the enhanced deduction, the contribution must be made to an 
elementary or secondary school. The Administration proposal 
would extend this special treatment through 2004, as well as 
expand the provision to apply to contributions of computer 
equipment to a public library or community technology center 
located in a disadvantaged community.
    The second measure is a 50 percent tax credit for corporate 
sponsorship payments made to a qualified zone academy, public 
library, or community technology center located in an 
Empowerment Zone or Enterprise Community. The proposed tax 
credit would provide a substantial incentive that would 
encourage corporations to sponsor such institutions. Up to $16 
million in corporate sponsorship payments could be designated 
as eligible for the 50 percent credit in each of the existing 
31 Empowerment Zones (and each of the 10 additional Empowerment 
Zones proposed in the Administration's FY2001 budget). In 
addition, up to $4 million of sponsorship payments would be 
credit-eligible in each Enterprise Community. All told, this 
credit could induce over $1 billion in sponsorship payments to 
schools, libraries and technology centers, providing innovative 
educational programs to disadvantaged communities.
    The third component of the Digital Divide proposal is a 
credit to employers who provide training in basic technology 
skills, English literacy, and other basic education to 
educationally disadvantaged workers. The credit would be equal 
to 20 percent of qualified training expenditures, up to a 
maximum of $1,050 per participating worker. Eleven percent of 
the labor force has less than a high school education. Their 
employers may hesitate to provide general education because the 
benefits of basic technological and other skills and literacy 
education are more difficult for employers to capture through 
increased productivity than the benefits of job-specific 
education. The proposed credit will help workers with low 
levels of education to improve their job skills and enhance 
their employment opportunities.

Specialized Small Business Investment Companies

    Specialized Small Business Investment Companies play a 
special role in insuring that businesses in disadvantaged 
communities have access to capital. Licensed by the Small 
Business Administration, these partnerships or corporations 
make long-term loans to, or equity investments in, small 
business owned by socially or economically disadvantaged 
entrepreneurs. The Administration has proposed in the FY 2001 
budget that these entities be allowed greater flexibility with 
regard to their organizational form, and specifically in 
transitioning from one organizational form to another without 
triggering adverse tax consequences. For example, the proposal 
would also allow C corporations to roll over, without payment 
of tax on realized capital gains, the proceeds from the sale of 
publicly-traded securities if these are used to purchase a 
common stock or partnership interest in a Specialized Small 
Business Investment Company.

Puerto Rico Economic Activity Tax Credit

    The Administration supports extension of the wage-based 
credit as a more efficient means of promoting beneficial 
economic activity in Puerto Rico, which is still seeking to 
recover economically from the repeal of section 936 and, in 
addition, from the devastating effects of Hurricane Mitch. The 
Administration views the proposed extension of the credit as 
providing a means to helping Puerto Rico and its people through 
this difficult recovery and transition period. To provide a 
more efficient tax incentive for the economic development of 
Puerto Rico and to continue the shift from an income-based 
credit to an economic-activity-based credit that was begun in 
the 1993 Act, the President's FY 2001 budget would extend and 
modify the phase-out of the economic-activity-based credit for 
Puerto Rico by opening it to newly established business 
operations during the phase-out period and extending the phase-
out period through taxable years beginning before January 1, 
2009.

Renewal Communities

    In the ``American Community Renewal Act,'' Mr. Watts, Mr. 
Talent, and Mr. Davis, joined by numerous cosponsors from both 
parties, proposed further expansion and refinement of the use 
of tax incentives to encourage private sector investment in the 
revitalization of disadvantaged communities. The full Committee 
has since adopted a version of this proposal. We are eager to 
work with members of the Committee, as well as Mr. Watts, Mr. 
Talent, and Mr. Davis, in ensuring, through the use of targeted 
tax incentives and other complementary measures, that all 
American communities share in the Nation's general prosperity.
    H.R. 3832, which incorporates provisions originally 
introduced in the ``American Community Renewal Act,'' would 
permit the designation of up to 15 Renewal Communities, at 
least three of which would be located in rural areas. Renewal 
communities would be composed of contiguous low-income census 
tracts, with respect to which the State and local government 
had promised to reduce taxes, improve local services, or reduce 
government regulation. A number of tax incentives would be 
available to businesses and individuals located in the Renewal 
Communities.
    Clearly, there is broad agreement between the 
Administration and Congress on the problems facing low-income 
areas, and the power of tax incentives to help address these 
needs. In particular, both the Administration and Congress view 
increased investment as critical to community redevelopment, 
and tax incentives as a valuable tool to attract capital to 
lower-income areas.
    H.R. 3832 would provide for additional expensing of certain 
capital investment in excess of that permitted under section 
179 of the Internal Revenue Code, and for the expensing of 
qualified environmental remediation expenses. In addition, H.R. 
3832 provides an extension of the Work Opportunity Tax Credit, 
with certain adjustments, for businesses located in Renewal 
Communities. H.R. 3832 would permit a credit against tax equal 
to 15 percent of the first $10,000 in wages paid, per eligible 
employee, for the first year of employment. The credit rate 
rises to 30 percent for the second year of employment. Like the 
authors of the ``American Community Renewal Act,'' the 
Administration favors increased expensing authority as a means 
to encourage capital formation in disadvantaged areas, 
expensing authority to encourage the remediation of 
environmental hazards, a wage credit to spur the hiring of 
residents of distressed communities, and measures to encourage 
saving by low-income workers.
    However, the Administration has concerns with the specifics 
of certain proposals in H.R.3832. Most notably, exempting from 
taxation the capital gains on the sale of appreciated assets is 
not an efficient means to encourage capital formation, and may 
lead to unintended and undesirable consequences. Potential 
investors in distressed communities are unlikely to respond to 
an incentive that provides benefits not at the time funds are 
committed but only upon the sale of the assets. Furthermore, a 
reduction in capital gains rates will not provide a meaningful 
incentive to invest in depreciable property -such as machinery 
and equipment that is so often thought to spur job growth -
since such property is unlikely to increase in value above its 
original cost. And the ability of taxpayers to deduct interest 
on borrowing while entirely excluding the gains from the sale 
of certain property, could create negative tax rates like those 
associated with the individual tax shelters of the early 1980s. 
This would result in an expansion of non-productive investments 
that benefit neither the targeted area nor the country as a 
whole. Finally, exempting capital gains from taxation could 
have the perverse effect of encouraging disinvestment, as 
owners of appreciated assets accelerate their liquidation of 
investments to receive the tax benefit while this is available.
    The Administration has supported -and continues to support 
in the President's FY2001 budget--the basic concept of 
development accounts. But we have concerns with the particular 
provisions related to Family Development Accounts included in 
H.R. 3832. First, allowing an up-front deduction for 
contributions to a savings account, and an exclusion for 
earnings and withdrawals from that account, sets a bad 
precedent by effectively assessing a negative rate of tax on 
such savings. Second, allowing eligible low-income individuals 
who make contributions to their own Family Development 
Accounts, and non-eligible individuals who make contributions 
to one or more other individuals' Family Development Accounts, 
to claim an above-the-line deduction for their contributions 
would create complexity and significant administrative 
problems.
    The Administration supports the structure contained in the 
Assets for Independence Act, under which Individual Development 
Accounts established on behalf of low-income individuals 
receive matching grants from the Federal government and non-
profit entities. The Department of the Treasury, in conjunction 
with the Internal Revenue Service, recently issued guidance 
clarifying the favorable tax treatment under current-law rules 
of matching grants received by a low-income individual who 
establishes such an Individual Development Account.
    In addition, the Administration's Retirement Savings 
Account proposal, a substantial initiative in the FY 2001 
budget, provides another model for powerful incentives that 
should encourage savings by low-income workers while avoiding 
unintended, and potentially serious, negative interactions with 
certain facets of the pension and tax systems. We are now 
actively discussing the structure of this program with 
representatives from the private sector, including employers 
and financial service providers. We have been pleased at their 
generally favorable response thus far, and hope that these 
conversations will help us further refine and improve the 
Retirement Savings Account concept.
    Notwithstanding these concerns, the Administration looks 
forward to working with Members of Congress to craft a set of 
measures that will help reach our common goal of promoting the 
revitalization of America's most economically disadvantaged 
communities as efficiently and quickly as possible.
    I would like to thank Mr. Houghton, Mr. Coyne and the 
members of the Subcommittee for providing the chance today to 
discuss these important issues. I hope that, working together, 
we can insure that all Americans share in the current 
prosperity and have even greater opportunity in the future. 
This concludes my prepared remarks. I would be pleased to 
respond to your questions.
      

                                

    Chairman Houghton. Thanks very much.
    Mr. Coyne?
    Mr. Coyne. Thank you, Mr. Chairman.
    Mr. Talisman, how would Treasury's fiscal year 2001 
proposal, the New Market Initiative, affect three areas: 
housing, education and crime in the economically distressed 
areas of the country?
    Mr. Talisman. We have a number of budget proposals to 
address crime and housing. One of the aspects of our proposal 
is to bring investment into these communities to provide a 
safer environment and to ensure that the communities will be 
better developed and therefore, be less suspect to the concerns 
that you have raised.
    We have what I would call corollary budget proposals to 
address the concerns of education, for example, expansion of 
the Qualified Zone Academy Bond Program in those areas as well 
as our School Modernization Bond Program and then we also have 
discretionary authority with respect to the crime issue.
    Mr. Coyne. So education concerns would be addressed as part 
of the overall proposal?
    Mr. Talisman. As part of the overall budget proposal, that 
is correct. As I pointed out, our digital divide proposal would 
also encourage employers to provide basic training to their 
economically disadvantaged workers to bring them up and let 
them share in the prosperity.
    Mr. Coyne. What tangible progress has been made in 
distressed communities that were designated under the EZ/EC 
Program since this subcommittee held its oversight hearings in 
1997? Could you bring us up to date on progress there?
    Mr. Talisman. Again, the usage of EZ/EC, the wage credit 
has increased significantly since we last testified between 
1997 and 1998. There has been a great deal of activity both on 
the discretionary side and on the tax side and educational 
efforts to bring greater activity into the EZ/EC.
    What we have done is there have been efforts at work force 
development, access to capital, increased jobs and projects and 
programs that I think all lead to evidence of success, but 
again, this is a question I think would take a great deal of 
time to answer. I would be happy to answer more fully in 
writing.
    Mr. Coyne. Could you tell us the status of the Title 20 and 
other funding for the EZs? Could you tell us about the funding, 
Round 1, Round 2 and the proposed Round 3, the status?
    Mr. Talisman. Again, Round 1 is fully funded. Round 2 we 
propose in our budget and we would be happy to work with 
Congress to ensure that there is budget authority for the Round 
3 empowerment zones as well.
    Mr. Coyne. What about the proposed Round 3? You are 
proposing full funding for Round 3, is that it?
    Mr. Talisman. No, we have proposed full funding for Round 2 
and would be happy to work with the Congress to ensure full 
funding for Round 3.
    Mr. Coyne. So that is open for negotiation?
    Mr. Talisman. That is correct.
    Mr. Coyne. Thank you.
    Chairman Houghton. Mr. Hulshof?
    Mr. Hulshof. Thank you, Mr. Chairman.
    Mr. Talisman, I am going through, in addition to your oral 
testimony, your written statement as well. Specifically, a 
couple of points that you mentioned on page nine, some of the 
concerns that the Administration has exempting from taxation 
the capital gains on the sale of appreciated assets. I am not 
going to delve into that any further as far as making a 
comparison with the Watts-Talent Community Renewal Act but the 
paragraph under that talks about your concern about family 
development accounts. You allege that allowing low income 
individuals who make contributions to their own family 
development accounts to claim an above the line deduction would 
create complexity and some administrative problems. Would you 
expand on that?
    Mr. Talisman. The question I think is twofold with respect 
to family development accounts. First, it is the first instance 
to our knowledge that you would get both an up front deduction 
for contributions to the account and exclusion for earnings 
from the account and then an exclusion for withdrawals from the 
account.
    We also think the above the line deduction for the account, 
the complexity arises from the fact that it is not only the 
individual who can make contributions to the account but other 
persons can make contributions to the account as well. It would 
be very difficult for the IRS to track those amounts and to 
ensure there is not a double dip or more than that with respect 
to the accounts.
    All of these things, we share the goal of encouraging 
economically disadvantaged people to provide for accounts as 
evidenced by our retirement savings accounts and our support 
for the individual development accounts. Certainly we would be 
happy to work with you all to come up with a mechanism we agree 
does not create these concerns.
    Mr. Hulshof. One of the reasons I asked you that Mr. 
Talisman is because just gleaning from your written statement a 
host of tax credits, some that are already law like the low 
income housing tax credit which I fully support, and then some 
new tax credits, I just find it interesting that you talk about 
complexity to the Code because I think tax credits adds to that 
complexity.
    Let me ask you specifically, I think it was a couple of 
years ago if my memory serves, maybe as far back as 1995 that 
the Housing and Urban Development Inspector General was 
somewhat critical of the process used to determine the 
empowerment zone designations. As I recall, that report noted 
there were several enterprise community applications that were 
selected and the categorization of them was ``weak'' and they 
were selected over eight strong applications and 21 medium 
applications.
    Far be it for me to suggest that the Secretary of Housing 
and Urban Development would make these decisions on political 
reasons, either former, past or future Secretaries, but what 
assurance can you give us as far as steps being taken to 
improve the selection process to make sure that the neediest 
areas do receive these designations?
    Mr. Talisman. Mr. Hulsof, to be honest, I think it would be 
better if I refer your question to HUD regarding their process. 
I know they have put in safeguards since that report and I 
would be happy to get them to respond to you with respect to 
those safeguards.
    Mr. Hulshof. In the new markets proposal, it seems that 
Treasury would also have quite a bit of discretion in choosing 
which entities would convey a credit to its investors. I guess 
I am asking shouldn't those decisions be based on objective 
criteria, maybe spelled out in legislation or would you prefer 
to allow your department to issue those regulations?
    Mr. Talisman. The CDFI Program already uses a criteria to 
certify CDFIs. Those criteria include the organization's 
financial capacity, the capacity and skills of its management 
team, its track record in community development and then 
looking at projections for the tax credits that it would be 
allocating.
    We certainly would be happy to work with the Congress in 
developing such criteria we believe that by regulation would 
give us the most flexibility for providing those criteria and 
potentially reacting to the marketplace in the future.
    I appreciate your concern. I think it has worked very well 
in the CDFI in response to certain concerns. Again, those 
criteria have been strengthened and I think the recent reports 
from both GAO and the IG's Office with respect to the CDFI Fund 
have been unqualified opinions.
    Mr. Hulshof. Thank you.
    Chairman Houghton. Mr. Weller?
    Mr. Weller. I want to follow up on the comments I made 
earlier regarding brownfields and the need to do a better job 
of recycling, cleaning up and revitalizing brownfields 
throughout this country.
    I noted according to the League of Cities and some of the 
other community organizations that there is over 410,000 
brownfields that currently are left out and do not qualify for 
the existing provision in the tax code that we worked together 
on back on in 1997 putting together the Balanced Budget Act to 
provide a tax incentive for private investors to purchase, do 
the environmental cleanup and recycle and to bring jobs to 
these blighted communities.
    In the President's budget, the President included a 
provision to extend the current provision and make it 
permanent. While that is a great idea because I am one of those 
who worked to put the original provision in the law, I would 
like to better understand why the Administration did not 
include in your budget this year, not just the extension but 
also to expand this provision so that rural, suburban and 
middle class communities can utilize this tool to recycle, 
reuse and revitalize communities?
    Mr. Talisman. I think there is a balance here, Mr. Weller. 
Obviously the brownfields proposal is not only about 
environmental cleanup, it is also aimed at encouraging the 
revitalization of these communities. I think we have some 
concern regarding if you extend the ambit of the proposal to 
all areas that the distressed communities will be the last ones 
to receive the capital necessary to remediate these sites. So 
we though the targeting of the proposal was proper to ensure 
that the economically disadvantaged communities receive the 
first available funds to remediate and that this incentive 
would encourage that.
    Certainly if the targeting is something that is too tight, 
we would certainly be willing to talk to the Congress about the 
targeting but we do worry about losing the capital incentive.
    Mr. Weller. So you are saying that rural communities, 
suburban or middle class communities should not benefit from a 
tax incentive to clean up that gas station that is on that 
strategic corner, on that major thoroughfare through town or 
that industrial park that is on the side of town that hasn't 
been used for decades because there is a need for environmental 
cleanup and it just happens to be a middle class community?
    Mr. Talisman. Again, I think there are issues regarding the 
targeting. The market generally will work to provide the 
capital necessary to clean up sites in affluent areas. 
Certainly with respect to rural areas that you discussed, there 
are a number of rural areas that would qualify for the current 
brownfields incentive.
    Mr. Weller. There have been statements made by the 
Administration regarding smart growth and that concept to try 
and discourage urban sprawl. Statistics show that to compare 
brownfields to new greenfield industrial parks that consumes 
about four to five times as much open space to create a new 
industrial park. Suburban areas are where you are experiencing 
this so-called sprawl, not in the inner city. We want to 
revitalize the inner cities and that is the purpose of this 
hearing. At the same time, we also want to help the environment 
by bringing urban sprawl under control.
    If we remove the so-called targeting, we help those 
suburban communities control sprawl, don't we?
    Mr. Talisman. With respect to sprawl, I think our Better 
America Bonds Program would certainly help in that regard and 
keep open spaces.
    With respect to the brownfields, I think the reason we have 
made it permanent is one of the problems we have faced is that 
the takeup rate on the brownfields has not been great because 
of the lack of permanence, the States need to market this 
proposal to encourage capital formation and also that there are 
certain brownfield projects such as groundwater cleanup that 
take a number of years.
    Mr. Weller. My friends Mr. Coyne, Mr. Johnson and others, 
in fact ten members of this committee, five Republicans and 
five Democrats, have introduced a bill which does extend the 
existing provision but also expands it so that rural, middle 
class and suburban communities can also utilize this tool to 
clean up that old industrial park and to clean up that old gas 
station on that strategic corner. We believe that middle class 
communities need help too.
    Would you be willing to work with us to find a way to 
expand this tax provision so that we can help these communities 
regardless of where they are located, rural, suburban, middle 
class or elsewhere, not just in the inner city and low income 
neighborhoods?
    Mr. Talisman. Mr. Weller, I would be happy to work with you 
to see if we can develop an approach that we are both 
comfortable with in this regard.
    Mr. Weller. Thank you.
    Chairman Houghton. Before I go on to the next questioner, I 
would like to say that Representative Thomas Allen of Maine and 
Tony Hall of Ohio have joined us. Gentlemen, we are delighted 
to have you here.
    Mr. Lewis, would you like to inquire?
    Mr. Lewis. Thank you very much, Mr. Chairman.
    Thank you, Mr. Secretary for being here today. I just have 
one question to ask.
    As you may know, the district I represent, which includes 
the City of Atlanta, has a lot of historic homes, especially in 
distressed areas. That is why I am a co-sponsor of H.R. 1172. I 
believe Chairman Houghton made a reference to this piece of 
legislation in his opening statement. Does Treasury have a 
position on H.R. 1172 which would provide a tax credit for the 
rehabilitation of owner-occupied homes in historic districts? 
Do you agree that such a tax credit would be helpful in 
improving these overlooked, distressed communities in our 
cities and rural communities all over America?
    Mr. Talisman. Mr. Lewis, obviously we did not adopt that 
proposal as part of our budget, however, as evidenced by all 
the budget proposals discussed in my testimony, we share your 
interest in revitalizing these communities and in ensuring that 
the economically disadvantaged communities can share in the 
prosperity.
    We have some concern with respect to the targeting of the 
historic home ownership tax credit but share your goal in 
making sure these communities are updated and modernized. One 
of the ways we think we can do that is by spurring job growth 
through the new market tax credit and the empowerment zone 
incentives that we provide in our budget.
    Mr. Lewis. In supporting this piece of legislation, you 
would have tremendous support from this committee. I believe 
the great majority of the members of this committee, in a 
bipartisan fashion, support this piece of legislation. It would 
improve many communities, not just our large urban centers, as 
I tried to state, but in hamlets, towns and villages all across 
America.
    Mr. Talisman. Again, we share your goals and we would be 
happy to work with you with respect to the targeting of your 
proposal to make sure it functions appropriately but again, we 
have certain concerns and we believe the approach taken in our 
budget will have an effect on these communities in a way that 
will be targeted.
    Mr. Lewis. Thank you very much.
    Chairman Houghton. You don't have any other suggestions for 
us in pushing through this legislation because ultimately we 
will be dealing with the Treasury.
    Mr. Watkins?
    Mr. Watkins. Thank you, Mr. Chairman.
    I thank you so much and the members of the committee for 
having these oversight hearings. I would like to take some 
points being made today that we can take forward and hope the 
committee will.
    Let me say I was working on the enterprise zone back when 
Jack Kemp was and I was on the other side of the aisle at that 
time and went all the way to the White House when President 
Reagan was there, pounding the table trying to get some kind of 
equity for the economically and rural depressed areas of this 
country. Finally a third was set aside for rural America and 
that helped a lot. We should have equal but at least a third.
    What I am pointing out is that I am for community renewal, 
new markets, trying to bring out these economically depressed 
areas and helping to give people an opportunity to stay, live, 
work, and raise their families in those areas. I had to leave 
three times before I was nine years of age and it destroyed my 
family.
    I have been told by Jim Talent and J.C. Watts that the 
empowerment zones and enterprise communities will be given 
priority. I would like for us to have some clarification 
language to that question, that they be designated so that they 
are not left out. Yes, expand and create some more, but make 
sure we also do that with equity. First, I would appreciate 
some clarification language by the Administration and hopefully 
by our committee staff to make sure that is very clear in the 
language and that we have that priority and designation. When 
they were established, there were nine empowerment zones, six 
urban and three rural--95 enterprise zones, out of 95, 65 were 
given to urban but only 30 given to rural. It should have been 
at least 33 given to the rural areas.
    In the 1997 Tax Relief Act, two more urban were set up but 
not one for the rural areas. So I hope that we can propose--my 
staff will work with the committee--and that we add the equity 
of at least one more empowerment zone for the rural areas.
    I work with Indian tribes in my area and we have 22 percent 
of the American Indians in the United States in eastern 
Oklahoma. I work with two of the tribes, getting them to work 
with the communities there so we can work together but we need 
to add that in some additional legislation.
    What disturbed me was when I looked at the Administration 
proposing that we extend and expand the empowerment zones. When 
I look at that, they are proposing ten additional empowerment 
zones--eight urban and only two rural. The small people get 
stomped on. I sound like a Democrat, don't I? There is still a 
little bit of it in me, I guess. I would like the 
Administration to treat the rural economically depressed areas 
of America with the same equity as urban areas.
    I just left some families a while ago in my office who have 
lost everything because prices are 1946, 1947 prices but they 
have no jobs in those rural areas, off-farm jobs. I have 
devoted my entire life to trying to build jobs so our people 
could stay, live and work and raise in those areas. When I look 
at the inequities, it makes me think maybe the Administration 
doesn't care about the rural areas.
    We say these tax credits or investments should be going to 
selected community development entities. When I look at 
community development entities, I don't see the enterprise 
communities or empowerment zones listed. I would like to ask 
that question of you. Can we get equity for the rural areas 
from this Administration, hopefully from this committee too? 
Can we get an answer about the CDEs? Do they include the 
enterprise zones, empowerment zones and enterprise communities?
    Mr. Talisman. Mr. Watkins, in response to your questions, 
we would be happy to work with you to ensure equity across the 
board for both rural and urban communities. I would point out 
that under the new markets tax credit, 51 percent of rural 
tracts are eligible for the new markets tax credit and that is 
approximately one-third of all eligible tracts. So I do believe 
there is equity in that proposal. We certainly want to work 
with all members of Congress to ensure equity across the board.
    Mr. Watkins. It is so significant in the small rural areas. 
The largest movement of people ever in the history of our 
country was from the rural areas to the urban cities during the 
Great Depression and World War II. Basically, we did nothing to 
stop that. Now we have a lot of inner city problems. At least 
in rural areas, people are known by name, they can have some 
self esteem. We need to have help and I want to say I am going 
to stand up and fight for it.
    I don't like to see proposals come in where you say you 
will and change it. Will you come here and change what you are 
proposing to make sure there is a third of those rural areas?
    Mr. Talisman. Again, I am happy to work with Congress to 
develop a proposal that is balanced. Again, we will work with 
you and the rest of the committee to ensure on a bipartisan 
basis we have achieved that balance.
    Mr. Watkins. I would appreciate that very much.
    Let me say the voices of the rural people are faint, they 
are scattered. You can have a fire in an urban center and it is 
worldwide news. You can burn one of my little towns to the 
ground and it is not worldwide news. It is faint because they 
have all left.
    My mother insisted that I get an education. The only 
problem is lots of times in rural areas, you are caught by the 
digital divide, you lock yourself out. You cannot go home. I 
want equity for the rural areas of this country. I would 
appreciate very much if you could provide to me and to this 
committee how you are going to provide that equity. Hopefully 
our committee will help the other committee to make sure it is 
adopted with equity for the rural areas.
    Mr. Chairman, I appreciate this opportunity very, very 
much. You are familiar with my part of the country and I know 
how difficult it is. We have 22 percent of the Native Americans 
and I worked very hard putting together a package and we did 
not get declared an empowerment zone even though I worked 
closely with the tribes in a rural depressed area that is one 
of the top ten lowest economic areas in the Nation. Maybe if 
that one addition had been done, we would have made it but 
didn't do it.
    Chairman Houghton. Mr. Secretary, we appreciate your being 
here. As you can see, Mr. Watkins feels very strongly about 
these matters and if you could work with him we would certainly 
appreciate it.
    Thank you very much for your testimony.
    Mr. Talisman. Thank you very much.
    Chairman Houghton. We will move on to the next panel. The 
next panel will be Mr. Brian Wallace, Chairman, Washoe Tribe of 
Nevada and California and Vice President, National Congress of 
American Indians; the Honorable Rebecca Brumagin, Supervisor, 
Town of Mina, Findley Lake, New York; Ronald L. Phillips, 
President, Coastal Enterprises Incorporated, Wiscasset, Maine, 
on behalf of the Community Development Tax Credit Coalition; 
and William D. Reighard, President, Food Donation Connection, 
Newport, Virginia.
    Before the panel starts, I would like to introduce Mr. Tony 
Hall of Ohio who is very interested in these areas, 
particularly in the food donation program. I would like to have 
him say a word or two.

 STATEMENT OF HON. TONY P. HALL, A REPRESENTATIVE IN CONGRESS 
                     FROM THE STATE OF OHIO

    Mr. Hall. Thank you, Mr. Chairman.
    I have a written statement that hopefully can be a part of 
the record. If it cannot, I am just glad to be here. I don't 
sit on the Ways and Means Committee but I am glad to be here to 
talk about a bill that you and I are both interested in and I 
am grateful for you scheduling this meeting.
    I am also here in support of what Mr. Reighard is probably 
going to say to you about H.R. 1325, the ``Good Samaritan Tax 
Act.'' A good portion of the members of this committee and the 
full committee are cosponsors of this legislation. What it says 
in so many words is to allow the donation of food to our food 
banks and soup kitchens of the country so that the people that 
are donating the food can get a better break than what they are 
getting now on the donation of food.
    For example, if XYZ hardware store offers nails and hammers 
to Habitat for Humanity, they get a pretty nice deduction on 
that. If the same group of people offer food, they don't get 
really a deduction. Corporations get a deduction but small 
businesses and certain types of franchisees, for example, Pizza 
Hut, the corporation, when they donated lots of food in 
Cleveland, Ohio, they got a significant tax break but when a 
lot of the stores there when to franchisee stores, the donation 
of food dropped substantially.
    What we are trying to do is provide for businesses, 
farmers, small businesses, franchise stores to be given the 
ability to donate food to food banks and soup kitchens. I would 
hope that the Congress would approve the ability to buy more 
commodities but subject to doing that, whether they are going 
to do it or not, we should increase that appropriation. If we 
don't do it, this would be the second best thing, to allow 
people to donate food to food banks and soup kitchens. Even 
though the economy great and going up, there is a tremendous 
need out there. As a matter of fact, there has been a 150 
percent increase in people asking for food over the past four 
or five years.
    This bill is a rather simple bill and I hope that this 
committee will look on it in a very favorable way.
    Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Hon. Tony P. Hall, a Representative in Congress from the 
State of Ohio

    Mr. Chairman, I am grateful to you for scheduling a hearing 
on this important topic. It is clear that the benefits of the 
longest economic expansion in our history have skipped over 
many areas in our nation.
    I sense a genuine desire to do something to assist these 
distressed communities. This desire exists in both parties; in 
both the House and the Senate; and in both the Legislative and 
Executive Branches. As the President put it in his State of the 
Union Address, ``This is not a Democratic or a Republican 
issue. Giving people a chance to live their dreams is an 
American issue.''
    But as we consider legislation to address the problems of 
people who live in the Mississippi Delta or on Native American 
reservations, we also should keep in mind that even in areas 
that have greatly benefitted from the expansion, some have 
fallen through the cracks. Just last week I read in the 
Washington Post that in Fairfax County, the home of the 
Internet, the number of homeless people now exceeds 2,000. More 
than 800 of them are children. In my own district of Montgomery 
County, Ohio, the unemployment rate is now lower than the 
national average, but the number of people seeking assistance 
from food banks is increasing.
    This is not a problem that the federal government can solve 
alone. There is a role to play for churches and other faith-
based organizations, the private sector and generous citizens. 
One way to get these people involved is for federal tax policy 
to offer incentives.
    Chairman Houghton and I are sponsoring legislation, the 
``Good Samaritan Tax Act,'' to encourage donations of food. Our 
bill has two simple principles:
    1) The tax code ought to treat donations of food in the 
same way it treats donations of other inventory; and
    2) Tax incentives ought to be available to anyone in the 
food business, not just corporations.
    Our bill is affordable. The five-year estimate by the Joint 
Committee on Taxation is $187 million.
    As part of the next panel Bill Reighard, President of the 
Food Donation Connection, will speak about this bill in greater 
detail. I want to thank Bill for coming here today.
    I am pleased that a majority of the Members of the House 
Ways and Means Committee has joined us by cosponsoring this 
legislation. I would urge that, as the Committee drafts its 
legislation, that it include these provisions. Thank you.
      

                                

    Chairman Houghton. Thank you, Mr. Hall. As you know, I 
totally agree with you. You are wonderful to make that 
statement. I think that will be helpful as background material.
    Now I would like to introduce Congressman Tom Allen to 
introduce his constituent, Mr. Phillips.
    Mr. Allen. Mr. Chairman, I thank you very much for allowing 
me to be here. I also am not a member of this committee but I 
did want to be here to introduce Ron Phillips to the committee.
    In Maine, Coastal Enterprises and Ron Phillips are regarded 
as a State treasure. I don't mean to embarrass Ron by that. He 
is here today to speak for the Community Development Tax Credit 
Coalition but in southern and central Maine, project after 
project and business after business owes their prosperity and 
sometimes even their existence to the good work of Coastal 
Enterprises.
    Coastal Enterprises is a nonprofit community development 
corporation located in Wiscasset, Maine and it works with 
individuals, other financial institutions and government 
agencies to make sure that community development takes place as 
it is meant to take place, in a concrete way so that 
individuals and small businesses get a chance to succeed. To 
does a lot of work with financial and technical development 
assistance, with research and policy development work. It has 
an excellent record for effectively using public funds to help 
leverage private investments. In particular, in Maine as we 
have lost the textile industry and the shoe industry, Coastal 
Enterprises has been very effective in helping displaced 
workers retrain for other lines of work.
    If you go to the Coastal Enterprises annual meeting, as I 
have on several occasions, and hear individuals who stand up 
and say I was on welfare and didn't think I had a chance, but 
then they started their own business through the good work and 
assistance of Coastal Enterprises, you begin to have a sense of 
the impact of this organization on individuals and businesses 
throughout southern Maine.
    Ron Phillips and Coastal Enterprises are recognized more in 
Maine but around the country and I am delighted to welcome him 
here. We are proud of him in Maine and we know the work they 
are doing in Maine is really a model.
    I thank you very much for allowing me to welcome him here.
    Chairman Houghton. Thank you very much, Tom.
    Mr. Phillips, would you like to testify?

      STATEMENT OF RONALD L. PHILLIPS, PRESIDENT, COASTAL 
ENTERPRISES, INC., WISCASSET, MAINE, ON BEHALF OF THE COMMUNITY 
                DEVELOPMENT TAX CREDIT COALITION

    Mr. Phillips. Thank you, Congressman Allen, very much for 
doing that.
    Thank you, Chairman Houghton and members of the committee.
    I am very glad to be here today to support this bill, the 
``New Markets Tax Credit.'' My comments are written and they 
can be presented for the record but I will try to summarize 
them.
    My name is Ron Phillips and I am President of Coastal 
Enterprises. We are a nonprofit community development 
corporation and community development financial institution 
based in the rural, mid-coastal village of Wiscasset, Maine. 
Our mission is to help low income people and communities 
achieve an equitable standard of living, learning and working 
in harmony with the natural environment.
    We provide flexible venture capital and subordinated debt 
financing and technical assistance throughout the State to 
develop small business startups and expansions, value added 
natural resources from our farms, fish and forest sectors; 
social services facilities such as child care centers and 
affordable rental and home ownership housing. We have directed 
some $275 million in capital in partnerships with banks and 
other private and public investors to over 1,000 projects to 
create economy opportunity, livable wage, jobs, self employment 
and housing for thousands of Mainers, women in business and now 
an increasing number of refugees and new immigrants in our 
State.
    I am here today both as a practitioner of community 
economic development and as a representative of the New Markets 
Tax Credit Coalition to encourage your bipartisan support of 
this bill. Our New Markets Tax Credit Coalition represents many 
of the over 4,000 community development corporations, community 
development financing institutions, community development banks 
and credit unions, national intermediaries and others, some of 
the regions of this country like the Mississippi Delta, the Mid 
Atlantic or border regions of the southwest and even 
communities where CDCs are active in EC or EZ designated areas. 
So we have quite a network.
    We believe that the New Markets Tax Credit will provide a 
major tool to access private capital for low income rural and 
urban neighborhoods and people and enable community development 
entities like CEI to invest in small business entrepreneurs, 
new ventures, commercial real estate and community development 
facilities.
    The media, as we have heard, is bursting with news of the 
booming stock market and the race to invest but none of these 
investments is going to low income rural and inner city areas. 
According to PricewaterhouseCoopers, 90 percent of the 
nationwide investments have been flowing to high tech and 
Internet stocks and related industries. In our own State of 
Maine, regional disparities and major plant closings and 
downsizings as Congressman Allen talked about and downsizings 
are challenging employment and economic opportunity for tens of 
thousands of older as well as younger working families. These 
conditions are pronounced in other regions like Appalachia 
where poverty and unemployment have actually increased for many 
of its counties in recent years.
    At the same time at the grassroots level, there are 
partnerships and alliances underway to rebuild our communities. 
Local government, private industry, the banking community, 
academic institutions and citizens are engaged.
    In Maine, our legislature is actively considering bills to 
support innovative, specialized incubators, stepped up 
technical assistance for small businesses and micro 
enterprises, capital for new farm enterprises and even 
incentives for banks to loan money to CDCs and CDFIs. So we 
don't just look to the Federal Government for this kind of 
assistance. But the New Markets Tax Credit can play a powerful 
role in boosting similar initiatives to access private capital, 
to invest in small businesses, entrepreneurs, commercial real 
estate, facilities and communities that are left out of the 
tremendous economic boom. It will encourage long-term 
partnerships among the private, nonprofit and public sectors.
    Let me say this about the community development field. 
There is a network of thousands of CDCs and CDFIs and national 
intermediaries ready, willing and able to work with this credit 
to achieve the kind of impact on people and communities we are 
talking about here today. Many have already had significant 
experience with the Low Income Housing Tax Credit. A tested 
infrastructure is actually in place.
    CEI itself has a record of success in tax credit financing 
for community development projects. In 1993, 20 urban and rural 
CDCs participated in an innovative HUD tax demonstration 
project which provided a five percent credit per year over ten 
years to the investor. In partnership with KeyBank of 
Cleveland, Ohio which is very active in the small business 
market of Maine, and assisted by the National Rural LISC Group, 
we mobilized $2 million to capitalize a small business loan 
fund. Typically, this kind of capital serves the purpose of 
filling a gap in a business financing deal, what we call 
subordinated debt or even equity so that the senior debt of 
other banks and lenders can come into the project.
    To date, we have financed 21 small businesses. That 
includes child care centers, fish processing facilities, 
alternative home care services, retail food cooperatives and 
other ventures that are contributing to Maine's economic 
development while creating access to jobs and services for low 
income families. Over 500 jobs have been retained or created in 
the program, many of them for a TANF recipients. What is more, 
millions of dollars, over $8 million, were leveraged in other 
capital with these projects. So in actuality, we have put 
together about $10 million for these 21 deals. The project is 
beginning to pay in government taxes and savings from social 
assistance.
    One story worth noting because the project simply goes to 
the heart of creating opportunity for the harder to employ is 
Faithworks in Lewiston. Lewiston, by the way, is a designated 
Enterprise Community, the only one in Maine. Father Bill Baxter 
of Faithworks created a job shop assembly operation that 
performs contract work such as stuffing sample bags you might 
find in your Sunday newspapers. It provides employment for 
welfare recipients and others who need entry level jobs and the 
time and space in a nurturing environment to grow before they 
can be ready for better paying jobs.
    Over 600 people have participated in the program. On 
location at the space in the former mill complex where Faith 
Works is located, representatives from the Work Force 
Development Center stand by to recruit workers and sign them up 
for specialized training and career growth and other job 
placement. Funds from this HUD tax credit demonstration we put 
together helped start this project.
    Let me offer a few recommendations about the New Markets 
Tax Credit that we think are important to ensure its optimum 
success. The current New Markets Tax Credit proposal is for a 
five year, six percent credit. It provides for $3 billion per 
year in activity for fiscal years 2001 through 2005. Credits 
would be sold to investors, just like we sold our credit to 
KeyBank in Cleveland, so that community development entities 
such as CDCs or CDFIs can provide the technical and financial 
assistance to the range of private business enterprises and 
community development projects in designated low income 
communities.
    Based on our experience in working with businesses, people 
we want to help in communities and regions we care about, we 
recommend three changes. They relate to the targeting 
provisions of the bill, the term of the credit and criteria for 
selection of the CDE, the certified development entity as 
defined in the bill.
    First is targeting. The current proposal would limit the 
benefit of the tax credit to low income people and activities 
in eligible census tracts. This will unnecessarily exclude a 
majority of the geography of the United States and especially 
hurt rural regions where poverty is not concentrated 
geographically, or businesses simply just don't locate 
anywhere. We recommend that an option to target either people 
or place be permitted as now contained in the Senate bill.
    I was looking over three projects I wanted to describe to 
you in detail. I know I only have maybe a couple of minutes 
left but one has to do with a project based in Bangor that 
provides foster care support for kids in eastern and rural 
parts of Maine. It is a great program. In fact, one of the 
participants there was featured by the United States Treasury 
under the CDFI Program. Former Secretary Rubin was quite taken 
with her story. This would not be an eligible area for this 
program.
    Another project envisioned is a fast growing 
telecommunications call center that provides computer support 
services. It has a contract with Microsoft for example. There 
is a pending contract with a major West Coast bank to tell you 
what is going on with on-line banking right in Maine. The jobs 
are growing and they are paying relatively good wages. We are 
trying to get people in there. In fact, they have hired now 
over 200 people with low incomes and on welfare that would 
qualify in the program we are trying to help with the New 
Markets Tax Credit. However, this company would not be eligible 
for the capital that we could invest in under the new market 
tax credit as proposed.
    Second is the term. Economic development is a long-term 
process and the current term of 6 percent credit for five years 
from an economic development standpoint is just too short. We 
would prefer a ten year term with a minimum of a seven year 
threshold. I think the Senate bill contains that provision. 
Senators Rockefeller and Robb have that in there.
    Finally is selection criteria. I agree with what was said 
earlier regarding the criteria for selecting the CDEs, that 
there needs to be a screening process that clearly spells out 
that a CDE ought to submit a five year business plan, show its 
capacity, its track record, and that its mission is compatible 
with the goals of the tax credit.
    In conclusion, the CDC/CDFI is prepared to serve as a 
gateway to underserved new markets, communities and people to 
ensure more Americans have a chance at economic fulfillment. 
This goal is more important today than ever in a time of great 
wealth creation. The lower income and working people of this 
country are part of a phenomenon that some are actually calling 
growth without prosperity. The New Markets Tax Credit is 
designed to divert capital from the private market to new 
market opportunities. We have experience, we have a network, we 
have untapped potential. We urge your bipartisan support of a 
bipartisan issue. We applaud therefore the work of all those 
who have brought forward this legislation from the White House 
and Treasury Department to members of your staff and this 
committee, and those in the Senate with the companion bill. It 
is going to make a big difference for a lot of people to get a 
share of the expanding American pie.
    Thank you very much.
    [The prepared statement follows:]

Statement of Ronald L. Phillips, President, Coastal Enterprises, Inc., 
Wiscasset, Maine on behalf of the Community Development Tax Credit 
Coalition

    Mr. Chairman and members of the House Ways and Means 
Oversight Subcommittee, my name is Ron Phillips, and I am 
President of Coastal Enterprises, a nonprofit community 
development corporation based in the rural, midcoastal village 
of Wiscasset, Maine. I am here today both as a practitioner of 
community economic development and as a representative of the 
Community Development Tax Credit Coalition to speak on behalf 
of the New Markets Tax Credit Bill H.R. 2713. I would like to 
thank Chairman Houghton, Rep. Coyne and the members of the 
Subcommittee for this opportunity to testify in favor of the 
New Markets Tax Credit as proposed by President Clinton in his 
fiscal year 2000 and 2001 budgets, sponsored by Congressman 
Rangel, and sponsored by Senators Rockefeller and Robb in 
S.1526. My comments and recommendations are written and are 
presented herein for the record.
    If enacted, we believe the New Markets Tax Credit will 
benefit millions of families, individuals, and rural and urban 
regions and neighborhoods in this country still outside of the 
mainstream of economic prosperity.
    The New Markets Tax Credit will encourage private 
investment to promote economic development in communities being 
left out of the tremendous economic boom being experienced in 
the U.S. It will encourage long-term partnerships among the 
private nonprofit and public sectors. Representative Houghton 
and members of the Subcommittee, we applaud therefore the work 
of all those who have brought this legislation forward, from 
the White House and Treasury Department, to members of your 
staff, and those in the Senate with their companion bill. It is 
going to make a big difference for a lot of people seeking a 
share of the expanding American pie.

                              Introduction

    First, a word about the Community Development Tax Credit 
Coalition. We represent community development corporations, 
community development finance institutions, community 
development banks and credit unions, venture capital, secondary 
market securitization, and special regions such as the 
Mississippi Delta, or boarder regions of the southwest. 
Together these groups represent some 4,100 CDCs/CDFIs in rural 
and urban regions geared up to implement this NMTC.
    Let me also add that I serve on several boards relevant to 
our community development field, including the banking 
community. These are KeyBank's national community development 
board, which partnered with us in an innovative economic 
development tax credit I will discuss briefly below, the FHLB 
of Boston, whose member banks are potential lenders or 
investors in this proposed tax credit, the board of directors 
of the National Congress for Community Economic Development, 
with 800 CDC members especially representative of African 
American and other minorities, the board of National Community 
Capital, which is the voice for the CDFI field of 500 entities, 
and the Rural LISC advisory board, an organization that is 
providing support to an expanding number of rural development 
organizations. I was a founding member of the Association for 
Enterprise Opportunity which advocates for microenterprises, 
and the Community Development Venture Capital Alliance, which 
is expanding the role of targeted venture capital to benefit 
low income people and communities.

                               About CEI

    Based in the rural, coastal village of Wiscasset, CEI is a 
privately and publicly funded organization operating primarily 
in Maine's rural regions. Our mission is to help low income 
people and communities achieve a better standard of living 
working and learning in harmony with the natural environment. 
We provide equity and subordinated debt capital and technical 
assistance to develop starting or expanding small businesses, 
social services facilities such as child care, and affordable 
rental and homeownership housing. We employ nearly 70 people, 
manage 8 branches throughout the state, and invest capital 
raised from private foundations, banks and investors, and 
public sources, especially federal agencies. We have directly 
invested or leveraged over $275 million in partnerships with 
banks and other private or public investors to over 1000 
projects to create economic opportunity and livable wage jobs, 
self-employment or housing services for thousands of Mainers, 
including women in business, refugees and new immigrants.
    Maine lags behind the nation in many indicators, whether 
R&D, post secondary educational attainment, housing 
affordability or disposable income. Per capita income is 13% 
below the national average, and hourly wages lag behind as 
well. It is the poorest state in New England, and has been hard 
hit over the past few years with plant closings and 
downsizings, particularly in the central part of the state. Yet 
Maine has tremendous assets in natural resources and small 
business entrepreneurs. Mainers foremost have an exceptional 
work ethic. It is these skills and potential to adapt to new 
opportunities in a changing global economy, while preserving a 
rural way of life that we seek to optimize. Access to private 
capital is essential to unleash the entrepreneurial talent of 
people and regions not yet in the mainstream.
    At CEI we target financing to small firms that create 
livable wage jobs for low income individuals, add value to our 
natural resources, such as farms, fish and forest products, and 
new and emerging technology sectors including locally-owned 
telecommunications firms. We develop alternative, home-based 
care and assisted living facilities for the elderly. We have 
one of the nation's leading telecommunications capacity 
building assistance programs, reaching thousands of businesses 
to develop their e-commerce business opportunities. Our current 
portfolio consists of 500 ventures employing nearly 5000 Maine 
workers. We've counseled 10,000 small entrepreneurs, helping 
specific populations such as women business owners, or refugees 
and new immigrants gain access to technical and financial 
resources for their businesses.
    However, we cannot do our work without access to flexible 
development capital and technical funds for technical 
assistance. These are the lynch pins to create economic 
opportunity in new market regions. The NMTC has the potential 
of creating access to flexible private capital in a powerful 
way to invest in our small business entrepreneurs, new 
ventures, commercial real estate and community development 
facilities and projects to benefit low-income communities.

                  What is the New Markets Tax Credit?

    First, a few words of background about the New Markets Tax 
Credit. The New Markets Tax Credit is a 5-year, 6% per year 
credit allocated to qualified CDEs. The CDEs will use the 
capital gained from the sale of the credits to private 
investors to provide technical and financial assistance to a 
range of private business enterprises and community development 
projects in designated low-income communities. The Credit is 
designed to encourage $15 billion in private sector equity 
investment for business growth in low-and moderate-income rural 
and urban communities. The Administration's proposal provides 
for $3 billion per year in activity for 2001 to 2005.
    Qualified community development entities (CDEs) would apply 
to the Treasury Department for an allocation of the Credit. 
These CDEs must have as their primary mission to serve or 
provide investment capital for low-and moderate-income 
communities, and maintain accountability to community 
residents. CDEs include community development corporations, 
community development financial institutions, small business 
investment corporations, community development venture capital 
firms, and other investment funds. Once the credits is 
allocated, CDEs would sell the credits to investors, and use 
the proceeds of the sales to benefit low-income community 
businesses and programs.
    Investors in community economic development would, in turn, 
receive tax credits of approximately 25% in net present value 
on their investments.
    The Community Development Tax Credit Coalition is among the 
strongest supporters of the New Markets Tax Credit. I would 
like to address three main points regarding the Credit:
    1. The need for investment in low-income areas;
    2. the ability of community development entities to funnel 
this investment; and
    3. some suggestions to make the Credit a more effective 
tool for the people it is meant to serve.

   The need for long-term, Patient Capital in Low-Income Communities

    According to PricewaterhouseCoopers, venture capital 
investment nationwide hit a record high of approximately $15 
billion in the fourth quarter of 1999. This amount of $15 
billion should sound familiar -it is equal to what the 
President has proposed in his recent New Markets Tax Credit 
over five years. We are asking that the federal government 
support this Credit to provide incentives to invest in low-
income communities over five years what has been invested in 
just three months, primarily in technology. Technological firms 
captured more than 90 percent of nationwide investments, and 
about half of the remaining 10 percent went to similar 
Internet-related industries.
    As we all know, rural areas and inner cities are not 
centers of Internet technology. Small businesses located in 
these communities operate primarily in natural resource-based 
industries, manufacturing, and retail. Only a tiny two percent 
of the fourth quarter funds reported by PricewaterhouseCoopers 
supported industrial investments, and five percent or less went 
to non-Internet related rural investment.
    For many rural areas, the current economic boom is a 
distant echo. The ten poorest counties in the U.S. are rural, 
with poverty rates in some cases exceeding 60 percent. The 
number of Appalachian counties with unemployment and poverty 
rates at least 25 percent higher than the national average went 
up to 97 in 1998 from 90 counties in 1992.
    We are paying a price for allowing the tide to lift some 
boasts so much higher than others. The employment situation, 
which seems so upbeat nationally, is distinctly downbeat for 
many Americans. For example, while Hispanic males have the 
greatest labor participation rate Hispanic families have the 
highest poverty rate.\1\ This is aggravated by lack of access 
to financial services and capital, manifesting itself in lack 
of housing and community facility developments in low-income 
Hispanic and African American communities.
---------------------------------------------------------------------------
    \1\ While Hispanic males have the greatest labor participation rate 
(76.9 percent, compared to 75.8 percent for white males and 68.7 
percent for black males), Hispanic families have the highest poverty 
rate (27 percent, compared to 26.4 percent for African American 
families and 8.5 percent for white families).
---------------------------------------------------------------------------
    These statistics show that while the national economy and 
employment rates are at record highs, certain people and areas 
of the country are experiencing increased poverty and income 
disparity.
    It is important to provide an economic stimulus to these 
communities that are missing out on this growth. If we do not 
provide these incentives now when the economy is at an all-time 
high, when will we be able to do so?
    The New Markets Tax Credit is an opportunity for low-income 
communities to get access to the nation's exploding venture 
capital economy.

            The Capability of Community Development Entities

    A nationwide network of more than 4,100 non-profit 
community development entities has the capacity and the proven 
ability to funnel new capital into poor areas. They are rooted 
in the communities they serve. They are accountable to the 
people who live there. And they have demonstrated their ability 
to effect change over the past thirty years -by building more 
than 580,000 affordable housing units, more than one-third of 
all affordable housing nationwide, producing 71 million square 
feet of commercial industrial space, and creating or 
maintaining 275,000 private sector jobs.
    Community development entities have successfully used tax 
credit vehicles in the past. Both the Low Income Housing Tax 
Credit as well as the Community Development Corporation Tax 
Credit Demonstration have been effectively used by community 
development entities to attract private investment capital for 
development that benefits low-income communities.
    The Low Income Housing Tax Credit is an effective tool for 
encouraging private investment, and has formed partnerships 
between the non-profit and for-profit worlds. The Low Income 
Housing Tax Credit has transformed the way the country finances 
low-income housing since it was enacted in 1986. Annually, it 
generates more than 60,000 to 70,000 units and $1.8 billion in 
related wages. Non-profit organizations currently produce one-
third of these units.

                 CEI's HUD CDC Tax Credit Demonstration

    CEI has a record of success in tax credit financing for 
community development projects, especially using the Community 
Development Corporation Tax Credit program. In 1993, Congress 
enacted the Community Development Corporation Tax Credit 
program governed by Section 13311 of Title XIII, Chapter I, 
Subchapter C, Part II of the Omnibus Budget Reconciliation Act 
of 1993. The CDC Tax Credit provided 20 CDCs across the country 
with a 10-year, 5 % per year credit for up to $2 million in 
activity. In certain instances, a taxpayer also received a 
deduction for a charitable contribution to a CDC under the CDC 
Tax Credit. CEI was chosen as one of the sites for the Credit.
    With the assistance of Local Initiatives Support 
Corporation (LISC), we mobilized a $2 million investment from 
KeyBank in Cleveland, Ohio, a bank also active in the Maine's 
small business market. These funds capitalized a small business 
loan fund and provided operating support to start up the fund.
    The real story, of course, is not just the innovative way 
in which we captured private capital to build our strength for 
community development. The real story is in the outcomes. As a 
result of the $2 million, we leveraged several million dollars 
from other sources, primarily banks and financed 21 small 
businesses -child care centers, fish processing facilities, 
alternative home-care services, and other ventures that created 
employment for low income families. Over 500 jobs were 
retained/created in the program.
    Here are some relevant impact statistics:

                          HUD CDC Demonstration
                             Impact to date

Amount of Capital.............................               $2,000,000
Loan fund amount..............................                1,800,000
Cost of funds to CDC..........................                     3.2%
Funds for operations..........................                  200,000
Number of businesses/loans....................                    21/28
Job impact created/sustained..................                      500
Average interest rate.........................                     9.5%
Range of term of loan.........................               5-15 years
Average term of loan..........................                  7 years
Use of funds..................................        primarily working
                                                   capital building and
                                                              equipment

    One story worth noting is a project called Faithworks in 
Lewiston aimed at employing the hardest to employ. Fr. Bill 
Baxter of Faithworks in Lewiston, Maine created a job shop 
assembly operation performing contract work such as stuffing 
sample bags you find in your Sunday newspapers. It provides 
employment for welfare recipients who needed entry level jobs 
from which to grow. Over 600 people have participated in the 
program. On location at the space in the former mill complex, 
representatives from the Workforce Development Center stand by 
to recruit workers for more specialized training and job 
placement. Funds from our pool of capital helped this project 
in its early start up period.
    There are many other successful ventures, but the point is 
that the community development entity in this case acted as the 
catalyst and money manager to move capital from one place to a 
place of need. This is the NMTC at work.
    The New Markets Tax Credit will build off of the proven 
success of the Low Income Housing Tax Credit and the CDC Tax 
Credit to leverage private investment funds for underserved 
communities. The network of community development entities 
already exists. This new tool would enable CDEs to expand 
significantly their ability to attract private capital for 
economic development activities in these communities.

             Recommendations for the New Markets Tax Credit

    The Coalition endorses the New Markets Tax Credit proposal 
and applauds the Administration and Congress on their efforts 
to encourage private sector investment in low-income 
communities. We recommend three changes based on our 
experiences working in poor communities. These recommendations 
are intended to make the proposal more effective. Specifically, 
the three recommendations involve the targeting, the term, and 
the demonstration of ability to use the Credit.

Targeting

    The New Markets Tax Credit proposal requires that a 
community development entity document its ability to provide 
investment capital to low-income communities. These communities 
are defined as census tracts with poverty rates of 20 percent 
of median family income, or with median family income that does 
not exceed 80 percent of the greater metro, non-metro, or 
statewide area median family income. Empowerment zones and 
enterprise communities also qualify.
    While this formula includes 40 percent of the communities 
around the country, it will exclude many pockets of poverty and 
populations of low-income people living within census tracts 
that do not meet the criteria. For example, this limitation 
would make it difficult for many community development entities 
serving low-income rural populations in the Midwest or 
Northeast who live within census tracts that do not reflect 
high levels of poverty.
    My home state of Maine is an example of a state left out by 
census tract targeting. For example, when we applied for the 
HUD CDC tax credit, similar distress factors were required, 
that is, poverty where residents did not exceed 80% of the area 
median income. This left only a smattering of parts of Maine 
eligible. If I could show you a map of Maine -with 1.2 million 
people spread out over 33,000 square miles, 3,500 miles of 
coastline, and the 3rd most rural in the nation -patches of 
poverty would show up around Lewiston, Portland, north in 
Aroostook County, downeast in Washington County, and some other 
locations. There would be no correlation of distressed census 
tracts to either population, labor markets, or how businesses 
and markets functions.
    We recommend therefore that the NMTCl give CDEs the option 
of targeting their development activities to a qualified 
investment area or to a qualified target population, defined as 
individuals who are low-income or otherwise lack adequate 
access to loans or equity investments. I ask you to note that 
this condition already exists in S.1526 bill. In this bill, the 
Secretary of the Treasury has the discretion to take the target 
populations as defined by section 3(20) of the Riegle Community 
Development and Regulatory Improvement Act of 1974, and to 
treat them as low-income communities under the New Markets Tax 
Credit program.
    By giving applicants the option of targeting place or 
population, funds may be targeted to individuals and areas in 
need while allowing development organizations the flexibility 
to serve effectively low-income populations that fall under the 
screen of census tract data.

Term

    Our second concern is the length of the term of the Credit. 
The Coalition proposes to extend the term of the Credit from 
five years to up to ten years, without increasing the cost of 
the program. Economic development is a long-term process. 
Consider conforming uses of capital, such as revitalization of 
an idle mill complex, which certainly represents the kind of 
challenges we face in New England small towns. Much longer 
terms are required. Even equipment financing could benefit from 
7-year terms. Consider a limited partnership. We established a 
for profit social investment venture capital firm and raised 
$5.6 million from 23 investors. They included Fleet, Key, 
Peoples Heritage, and other community banks, along with 
foundations and private investors. The minimum holding time for 
an investor is 10 years. Our equity firm places smaller sums of 
capital in businesses that fall off the radar of big venture 
capital/high tech investors.
    Our experience has shown that anything less than seven 
years, for an equipment loan to a start-up company or small 
venture capital firm for example, is not practical. Most small 
business will not be able to make the profit necessary to repay 
the loan fully in five years.
    At Coastal Enterprises, we have 500 loans outstanding. Of 
these loans, 70 percent have terms of at least seven years, and 
15 percent of all of our loans are over 10 years. Under the CDC 
Tax Credit described above we were able not only to make 25 
loans for working capital and equipment, but also to support a 
diverse set of beneficiaries including day care centers, 
fisheries, health care facilities, food cooperative, and 
biotech companies.
    The experience of Kentucky Highlands Investment Corporation 
and the Local Initiatives Support Corporation sheds a similar 
light. During Kentucky Highlands's 30 years in community 
development venture capital, many loans that began as seven-
year loans were extended because the small businesses needed 
longer loans with fixed rates. In it current portfolio of 58 
loans, almost three-quarters are at least seven years in 
length.
    The Retail Initiative, an equity investment fund 
established by the Local Initiatives Support Corporation, 
invests in new supermarkets sponsored by community development 
corporations in distressed urban neighborhoods. Small 
businesses occupy satellite space around the supermarkets. The 
Retail Initiative invests for a ten-year holding period, which 
is necessary for the supermarkets to generate the requisite 
cash flow and market valuation on which the investment is 
based.
    For these reasons, we support a seven-year tax credit at 
six percent over per year for New Markets, as contained in 
S.1526.

Demonstration of Capacity

    Our third recommendation is to include language in the bill 
that identifies the criteria to be used in making allocations 
to community development entities. The current legislative 
proposal includes the screening of a community development 
entity to ensure that its primary mission is to serve low-
income communities and that it has a targeted area of service. 
We propose four recommendations:
    1. We propose that each community development entity (CDE) 
be required to submit a comprehensive business plan, outlining 
its mission, goals, and capacity, as well as a five-year 
development strategy, when applying for Credit allocations. 
This is consistent with the requirement to secure eligibility 
under the CDFI program. We are a professional industry with 
ever-sharpening standards of excellence in our practice of 
community development finance. We want to be certain the Credit 
is allocated to achieve the intended outcomes. The CDE would 
then be evaluated on its financial capacity, management team's 
capacity, community development track record, and its projected 
community development impact. It is critical that the Treasury 
Department have the ability to screen applicants effectively 
and assess their capacity and commitment as community economic 
developers, as well as their understanding of the market.
    2. We also support giving priority to applicants that can 
demonstrate exceptional capacity and experience in community 
development, including relationships with private sector 
investors and a plan to market the Credit to these investors. 
Those entities that are ``ready-to-go'' i.e. have an 
established loan or investment fund, a promised investor, and/
or prepared business deals, should be given priority.
    3. In addition to these basic criteria, we recommend that 
there be language to ensure national coverage for the program. 
This provision must ensure geographic diversity and a balance 
between urban and rural development entities in granting 
allocations.

                               Conclusion

    The community development field is prepared to use the New 
Markets Tax Credit to help ensure more Americans have a chance 
at economic fulfillment. The lower income and working people of 
this country are part of a phenomenon that some are calling 
growth without prosperity. In a time of great wealth creation, 
it is the right time to create new opportunity for those who 
have not shared in our recent economic success. The NMTC is 
designed to direct capital from the private market to new 
market opportunities with modest incentives. We have 
experience, we have a network, we have untapped potential.
    I wish to thank you for the opportunity to address you 
today. I would like to emphasize the community development 
industry's strong support for the New Markets Tax Credit. I 
also appreciate your consideration of our three concerns 
regarding the Credit, those being enlarging the target area to 
include population, extending the term to seven to ten years, 
and requiring the demonstration of capacity by community 
development entities.
    Thank you.
      

                                

    Chairman Houghton. Thanks very much, Mr. Phillips.
    I have the honor, the way Mr. Allen did, of introducing a 
constituent of mine, a lovely lady, Rebecca Brumagin. It is a 
pleasure to have you here, Rebecca.
    Rebecca is a former Town Councilman, Town Clerk, Executive 
Director of a very important achievement center, a children's 
rehabilitation agency in Erie, Pennsylvania. She also is the 
owner of a business, Legacy Designs and Gift Shop in Findley 
Lake. She has a distinguished educational record. She is 
married to Dennis and have two sons, Lex and Tyler, and two 
granddaughters, Emily and Elizabeth.
    The redevelopment of Mina is a direct result of the 
tremendous work which you have done there and we are honored to 
have you here. Please go ahead with your testimony.

  STATEMENT OF HON. REBECCA N. BRUMAGIN, SUPERVISOR, TOWN OF 
                  MINA, FINDLEY LAKE, NEW YORK

    Ms. Brumagin. Thank you very much.
    Chairman Houghton and members of the subcommittee, thank 
you for this opportunity to speak to you about the success we 
have seen in our town. It is the Town of Mina, Findley Lake, 
New York. Let me tell you a little bit about that community.
    I am going to summarize my testimony, so I ask that the 
written testimony go into the record.
    Findley Lake is located the western part of New York State 
in Chautauqua County. I don't know if you are familiar with 
that county or not, but that county has quite a jewel. It has 
Chautauqua Institution. You may have heard of this 
internationally renowned cultural center. It is the place where 
President Clinton prepared for the presidential debates just a 
few years ago.
    The entire county is really not as affluent and as 
privileged as Chautauqua Institution is. Our rural community 
has really struggled, particularly in the last 10-20 years with 
how to turn ourselves around. You do have an exhibit before you 
in a navy blue book and there are some photos in there that I 
would like to share with you.
    The first photo is from 1991 and shows what the downtown of 
our small community looked like at that point in time. As you 
can see, there are sofas, chairs, the place is really a 
shambles. Again, we are talking about a community of 1,100 
people, a small downtown of only two blocks. This is our main 
street. The photo below it from the year 2000 shows you that 
same building converted into a victorian gift shop.
    The third page shows you a building that has a lot of 
history in our community. It was a livery, a gas station, a 
supermarket and in 1996, this is what this building looked like 
in the downtown of our community. Below it, two years later in 
1998, it was renovated and as you can see, it is really very 
nice.
    When we think about how did this happen, I know you are 
talking about tax incentives, I want you to know that this 
small, rural community did this by ourselves. We did not do 
this with any tax incentives, we did it through a cooperative 
effort of people really caring about a community and taking the 
steps, on their own, to invest in a very risky way, their life 
savings sometimes so that they could develop businesses in our 
community.
    It really started because we had a couple of people in our 
community who said, this is a beautiful community and we have 
the opportunity to change it around. They invested and spoke to 
other potential business owners and little by little, people 
started to invest in this community. Based on the success they 
were seeing, the merchants got together and realized that a 
cooperative effort was really important. They spoke with the 
Chautauqua County Visitors Bureau and used them for public 
relations and started creating signature events for our 
community to draw people in there on a regular basis. Those 
have been extremely successful.
    We had visitors come to our community who say I was here 
five years ago and this place was a shambles. How did this 
community turn around? Who did it? The real answer to that is 
not one individual person. The answer to that is we did it as a 
community.
    Local government was really not involved in the renaissance 
of this community. Until a couple of years ago when an 
opportunity came before us, our elementary school closed and as 
you can well imagine in a small community with only 1,100 
people, when we lost our elementary school, we lost a very 
important asset. We used that as an opportunity to come 
together, to develop a community center and to start assessing 
who it is we are and what assets we have and how we could 
develop those assets.
    In the last two years, we have made incredible strides. We 
have developed a pre-school program that is in the process of 
becoming an integrated pre-school, a pre-school for children 
with disabilities along with children who do not have 
disabilities.
    We do have a high degree of poverty in our community. Of 
the 14 children who attended that pre-school last year, 11 of 
them were low income and could not afford to pay the $40 a 
month to send their child to the pre-school. So we were able to 
get scholarships for those 11 children.
    In addition to that, we have developed a senior citizens 
group and they are active, they are vital and are just 
incredible in our community. They work on beautification 
projects and have been thoroughly enjoying themselves.
    We have an older constituency, so when I think about that 
community, I think about the place where I was raised, it is my 
hometown, but also the fact that the people I am accountable to 
many are senior citizens and they think of me as their 
daughter. They pull me off to the side and tell me what they 
think about how we are doing and what else we need to do.
    For the first time in our community, we are going to have a 
public library and we are excited about that. We have just 
received a charter from New York State and are going to be 
opening that library on Memorial Day, May 29, 2000.
    Also, our lake that was created out of two ponds in the 
early 1800s, happens to be the very beginning of the West 
Branch of French Creek. Our lake is created through underground 
springs, so the West Branch of French Creek starts there. If 
you are familiar with French Creek, you will know that it is 
the most ecologically diverse stream in North America. There is 
a lot to offer the community by bringing people in to see our 
nature center.
    With that, I would say that our community has really 
accomplished what it has accomplished through working together, 
not through one segment of the community at the expense of 
another segment. Individuals step forward, they are asked to 
help and they do that on a regular basis.
    With that, I would say to you that the tax incentives you 
are contemplating, I think are extremely important. Pilot 
projects I think are extremely important. For a community to 
have a positive result, they need to have success. They can 
build on that success, it is contagious and I think the tax 
incentives you are considering are the types of things that 
help a community have a small success that eventually builds 
into a large success.
    Thank you very much.
    [The prepared statement follows:]

Statement of Hon. Rebecca N. Brumagin, Supervisor, Town of Mina, 
Findley Lake, New York

    Chairman Houghton and members of the subcommittee, thank 
you for this opportunity to testify before you regarding the 
success in recent years of revitalizing the hamlet of Findley 
Lake in the Town of Mina, New York State.
    This is a great honor for our community and I am grateful 
for the opportunity to share with you my perspective on how our 
small town, through hard work and the cooperative efforts of 
many, has become energized and revitalized.

Background:

    Findley Lake is located in the Town of Mina and County of 
Chautauqua in western New York State. With 1100 permanent 
residents in the town, it is the first community you enter when 
traveling east on Interstate 86 from Pennsylvania and it is the 
Southern Tier Gateway to New York State.
    Findley Lake was founded in the early 1800s by a Scottish 
pioneer, Alexander Findley, who out of necessity to power his 
sawmill created the lake by constructing a dam at the north end 
of two ponds. The lake has four small islands and covers an 
area of approximately 300 acres with a distance of 5 miles to 
walk or ride around it. The lake is used for recreational 
activities in the summer such as swimming, boating, water 
skiing and fishing as well as in the winter with ice fishing 
and snowmobiling.
    Findley Lake is uniquely situated in close proximity to 
some important regional assets. Four miles from the town is 
Peek'n Peak, a four-season resort. Fifteen minutes away on 
Chautauqua Lake is the internationally renowned cultural 
center, Chautauqua Institution. Lake Erie is 15 minutes away 
and Presque Isle State Park in Erie, Pennsylvania is 30 minutes 
from the hamlet. Findley Lake is easily accessible from 
Interstate 90, Interstate 79 and the newly designated 
Interstate 86.
    Findley Lake along with other nearby towns experienced a 
significant decline in retail business in the last few decades. 
We are part of America's rustbelt, and with family farms 
disappearing over the years, we have been struggling to find 
our place in the service economy. In the early 1990s, the 
downtown area of Findley Lake was run down and many of the 
buildings were in disrepair. One of the former storefronts was 
converted into slum apartments and there were trashed sofas and 
chairs on Findley Lake's Main Street. It was an embarrassment 
to the community yet no plan was developed to improve and 
reinvigorate downtown. There was little retail trade to keep 
local shoppers in the community and it seemed a pipe dream to 
think that the hamlet could one day attract tourists and 
visitors into quaint specialty shops.

The Renaissance Story:

    There were dreamers. There were individuals who saw that 
Findley Lake could become a small jewel for the region.
    One couple owned a small restaurant in town and they 
decided to move the restaurant into their Victorian home and 
upscale the menu and the decor. Over time, through their 
creativity and hard work, they developed a regional following 
and the restaurant's excellent reputation put Findley Lake on 
the map. The same couple purchased the slum apartment house 
downtown and began renovating the building. They opened a 
Victorian gift shop and encouraged others to come to Findley 
Lake and start a retail business.
    Others followed and experienced success. One by one, new 
entrepreneurs developed an idea, invested their savings, and 
started a business from scratch or relocated their existing 
business to Findley Lake. After a few years, the enthusiasm 
became contagious, new ideas sprouted and creative individuals 
with dreams became willing to invest in Findley Lake. An 
example of the continued interest in Findley Lake is evidenced 
by three new businesses that have within the past two months 
expressed a serious desire to open in Findley Lake.
    Findley Lake has become a source of pride for the region.
    The downtown Findley Lake merchants represent one segment 
of a whole community. Revitalization must be in keeping with 
the character of the community and preserving the rural nature 
of the Town of Mina is very important to our residents. Long 
term success takes sustained effort and it takes cooperation 
among the various segments of the community. Growth and change 
do not come along harmoniously unless the majority of the 
community is in agreement with that growth and change. 
Leadership can make an enormous difference in assisting a 
community with identifying and attaining its goals.

Developing a Sense of Community:

    The hamlet of Findley Lake and the Town of Mina is a 
community. Community is about people, their dreams and their 
desire to live in a place where they have an opportunity to be 
successful and to enjoy life. It is said, ``If you don't work 
where you live, you eventually will live where you work.'' It 
is important to look beyond economic success and think in terms 
of quality of life when assessing the success of a community.
    The renaissance of Findley Lake over the past few years is 
a story about more than economic success. It is about people 
coming together and truly appreciating one another. Visitors to 
Findley Lake regularly ask questions such as, ``Who did all 
this? It wasn't like this when I was here 5 years ago.'' The 
answer is, we all did it--it is truly a community 
accomplishment.
    I attribute our current success to the efforts of many 
individual citizens as well as to three groups (many 
individuals participate in more than one group). Business 
leaders, local government officials, community organizations 
and civic-minded individuals have worked cooperatively to 
achieve community success and have identified additional needs 
to develop Findley Lake in a cohesive manner consistent with 
our recently developed comprehensive plan. At a recent 
appreciation dinner for individuals who support our town, 
almost 10% of our population attended. This illustrates that in 
a small town, it takes a high percentage of its people to make 
the community work.

Business Leaders:

    The evolution of Findley Lake to a retail shopping and 
tourist destination can be traced back to those individuals who 
had a vision of Findley Lake as a diamond in the rough and 
individually promoted it to others. The businesses that came to 
Findley Lake did so with no support other than their own 
initiative. The promotion of Findley Lake took place by word of 
mouth from business owner to potential business owner, and it 
eventually became an articulated and shared vision for the 
community.
    The Findley Lake Area Chamber of Commerce was formed and 
this was a catalyst for further development and promotion of 
the area. Utilizing the advertising and public relations 
resources from the Chautauqua County Visitors Bureau, the 
downtown merchants in the chamber began promoting Findley Lake 
through events. Merchants work together cooperatively and 
duties are divided among the members who take turns chairing 
and organizing the events. They have developed signature events 
such as entertainment every Wednesday night in the summer 
entitled ``Live at the Gazebo,'' a Harvest Festival, May Day, 
First Sundays and more. They assess what works and build on it 
and they are flexible enough to change what doesn't work well 
and improve on it for the future. An annual brochure is 
prepared and events for the year are listed. Community 
organizations are invited to include their fundraising and 
other events in the brochure.

Local Government:

    Local government became actively involved in the 
renaissance of Findley Lake when an opportunity arose out of 
the controversial closing of the community's elementary school 
in 1997. The community rallied around the concept of purchasing 
the building and developing a community center. Negotiations 
with the school district were very cordial and the voters in 
the Town of Mina agreed to the purchase effective June 1998. 
That decision led to the development of various community 
initiatives in the past two years which continue to enhance and 
support the broader view of community success.
    In November 1999, the Town Board of the Town of Mina 
adopted a mission statement. The essence of the statement is 
that the town will support efforts that enhance the quality of 
life while preserving a rural way of life; that diverse 
interests of the community will be taken into consideration 
when making decisions; and that all parties will approach 
issues in an atmosphere of mutual respect and cooperation.
    In January 2000, the Town of Mina adopted a Comprehensive 
Plan that lays out the priorities for the community including 
lake quality and infrastructure as well as the need to further 
improve the downtown with signage, public restrooms, parking 
and community beautification efforts. The Planning Board for 
the town is actively rewriting the zoning law and the town 
board has stepped up enforcement of the current zoning law. 
These are important steps in preparing for our future.

Community Organizations:

    The community has some long standing and supportive 
community organizations such as the Findley Lake Volunteer Fire 
Department and Auxiliary, Girl Scouts, the Findley Lake 
Property Owners, and the Findley Lake and Mina Historical 
Society. These active groups have consistently supported the 
community in numerous ways over the years.
    Findley Lake is very energetic and there are many 
initiatives on the horizon that are being pursued and supported 
by the community. In the past two years, the following 
organizations have been developed to further enhance the 
Findley Lake and Mina region:
    Findley Lake Early Childhood Center (a service of the 
Achievement Center) --An Erie, Pennsylvania non-profit 
organization with over 75 years of service to children with 
disabilities agreed to develop services for children in Findley 
Lake. They are running a preschool and are pursuing state 
approval for an integrated preschool for children with and 
without disabilities as well as providing various types of 
supportive therapies for children.
    Young at Heart--A local senior citizens group formed in the 
fall of 1998 and they meet weekly. Besides social and leisure 
activities, they are a county congregate meals site and they 
work on beautification projects at the community center.
    Alexander Findley Community Library--After two years of 
effort, this group recently received their charter from New 
York State to open a public library in the Town of Mina. The 
library will have its grand opening on Memorial Day, May 29, 
2000.
    Findley Lake Nature Center--This group has recently filed 
for incorporation. Their goal is to promote the natural 
resources of the area. Findley Lake is the beginning of the 
west branch of French Creek, the most ecologically diverse 
stream in North America. The group will develop nature trails 
behind the community center and is working with local 
universities to prepare a bio-diversity study.
    Quality Findley--A group of enthusiastic individuals formed 
Quality Findley in May 1999 to fundraise and promote the long-
term viability of Findley Lake. They are establishing an 
endowment fund with a local community foundation and have an 
ambitious goal of $1 million dollars to be raised in 5 years. 
Within their first year they have pledges totaling $175,000.

Civic-minded Individuals:

    Listed below are three examples of the commitment that 
individuals have shown to improving the quality of life in the 
Findley Lake area:
    A ``Community Challenge'' started with one individual 
offering $5 to start a fundraising effort for a memorial 
flagpole. It resulted in the completion of a flagpole, the 
development of a community flag and the donation of a United 
States flag by our U. S. Congressman, the Honorable Amo 
Houghton. A flag that flew over the Capitol Building now 
proudly flies over Findley Lake each Memorial Day.
    Water Wheel Committee--After the completion of the memorial 
flagpole, the symbolic $5 was turned over to the community this 
time with the challenge to build a water wheel at the same 
location where our founder, Alexander Findley built his water 
wheel. The challenge was accepted and in August 1999, as part 
of the celebration of the 175th anniversary of the town, a 
water wheel was built with volunteer labor. The water wheel is 
an attraction to the community and a source of pride for the 
area.
    Tapestry Newsletter--Part of the glue that binds our 
community is a biweekly newsletter that was developed by two 
individuals in September 1998. The purpose of the newsletter is 
to promote a sense of community by informing readers about the 
various activities that take place throughout the town and the 
region. The byline for the Tapestry is ``Our Lives Are 
Interwoven.'' The Tapestry is free and there are no paid 
advertisements in the newsletter, it is completely supported by 
individuals who offer a small contribution to cover the cost of 
printing. About 400 copies are distributed of each issue.
    People in Findley Lake are friendly, welcoming and eager to 
work together. They rise above political and personal 
undercurrents. They truly have a sense of community and they 
promote the town through their warm enthusiasm.

Community Needs:

    Findley Lake is a unique community currently experiencing a 
small amount of economic and community success. I am grateful 
for the opportunity to be involved in my hometown of Findley 
Lake in various capacities and to work with the many 
individuals who take pride in our town and are committed to its 
success.
    However, even with our success to date, we have significant 
needs that if go unmet will limit our ability to sustain our 
success into the future. Tax incentives could make a 
significant difference to us. We have immediate and long term 
needs including:
     a main street manager to organize and promote 
events,
     infrastructure (water and sewer),
     funding to improve and maintain lake quality,
     a state tourist information/welcome center at I-
86,
     parking, public restrooms, underground utilities, 
and support for community beautification projects,
     a bank,
     medical and pharmaceutical services,
     senior housing and
     financial support for retail shops, restaurants 
and other compatible businesses.
    We have worked diligently as a community and we have tapped 
our individual and collective resources and need support to 
further advance our town.

In Closing:

    Small town America conjures up thoughts of simplicity, 
pureness and beauty that can touch the heart and soul and 
rejuvenate the spirit. Rural America can inspire freedom, 
creativity and independence. However, there is often a shortage 
of resources in small towns. Without adequate resources and 
incentives, many of America's small communities have stagnated 
and they are really struggling.
    Financial assistance through tax incentives can help a 
distressed community that is attempting to address the 
challenges of turning itself around. Communities can become 
energized and revitalized if they work collaboratively to 
assess their strengths, are realistic about their needs, and 
articulate and work diligently toward a common vision. 
Improvement in a community is the result of one small success 
followed by another. Vital ingredients in the process are 
mutual respect, cooperation and perseverance. They also need 
financial incentives to help pull themselves up by the 
bootstraps so they eventually can become economically self-
sufficient.
    For those communities who are struggling, tax incentives 
may be the catalyst to bring people together to develop a 
common goal and to begin to experience success. Without 
incentives, those towns may continue to deteriorate as business 
leaders, local government officials and community organizations 
do not have the tools to implement positive change. It can be 
frustrating to live in a depressed community where there is 
very little hope of change.
    I applaud the subcommittee for your interest in developing 
tax incentives that will help rural communities. I 
wholeheartedly support tax incentives for small businesses and 
communities. I recommend that you also consider developing or 
expanding pilot projects that can assist small rural 
communities in their desire to succeed.
    Thank you again for allowing me to share the story of one 
small American community.
      

                                

    Chairman Houghton. Thanks very much.
    Mr. Wallace?

 STATEMENT OF HON. A. BRIAN WALLACE, CHAIRMAN, WASHOE TRIBE OF 
    NEVADA AND CALIFORNIA, AND PHOENIX AREA VICE PRESIDENT, 
  NATIONAL CONGRESS OF AMERICAN INDIANS, GARDNERVILLE, NEVADA

    Mr. Wallace. Thank you, Mr. Chairman.
    My name is Brian Wallace. I am Chairman of the Washoe Tribe 
of Nevada and California and also have the privilege of 
representing the National Congress of American Indians, which 
is the oldest national Indian organization in the country.
    On behalf of Native America, I would like to extend our 
regards and prayers to you and the members of the committee.
    In the discussion about tribal economic development, there 
are four areas I would like to concentrate on. First is the 
necessity for a bipartisan approach to this particular issue. 
In some sectors of our country and in Native America this is a 
matter of basic survival so it is very important to us.
    Also, I would like to talk about some basic, fundamental 
principles that need to be articulated throughout this 
discussion, highlight current statutes that provide incentives 
to investment in Indian country that actually come due and 
potentially expire in 2003 and 2004 and comment on some of the 
proposals before this body.
    On the discussion of the need for bipartisan legislative 
processes, I guess a retrospective analysis of the current 
economic expansion this country has enjoyed but in Native 
American it is somewhat of an alarming issue because the 
difference between hope and prosperity is growing even wider. 
It is something that concerns us very much. We really appeal to 
this body and this committee in particular that maybe can 
achieve in working together to find this divine earnestness on 
taking the serious nature of this discussion and the work 
before us.
    The Census Bureau recently certified that the upgrade in 
terms of personal economics and family economics across America 
has not been arrived in Indian country at all. That is 
something that is of grave concern to us.
    We would also like to recognize the leadership of 
Representatives Watts, Talent and Rangel in finding the courage 
and leadership to actually speak on behalf of people who really 
do not have a strong voice in this particular discussion today.
    We are encouraged by the commitment of Speaker Hastert to 
move legislation this year and we really appeal to this 
committee and subcommittee to leverage all of the talent and 
technical expertise you have in helping us in this discussion.
    On the question of principles, I would like to highlight 
four basic areas. First and prompt is respect for tribal 
sovereignty. In the national discussion about economics self-
determination and the role of governance, there is always 
historically a significant omission of including tribal 
governments in a national community of governmental efforts. It 
is something we continually have to point out and work very 
hard to show that there is meaning and effort behind that.
    On the question of presumption of status and some of the 
perspective solutions that are being talked about, we are 
fearful that we don't codify the differences between Indian 
country and its developmental interests and other parts of 
America. We would certainly be handicapped by having to compete 
for special designation and incentives being discussed before 
the committee.
    Another thing we would like to point out is the role of 
non-profit organizations and the governmental role in 
development in our community which is dominated by these basic 
entities, historically and also in the future particularly in 
assisting us in matchmaking and development opportunities and 
providing incentives for investment. The access to capital is 
critical.
    Under current statute, the Omnibus Budget Reconciliation 
Act of 1993 codified two particular and worthwhile incentives--
the Indian employment credit that provides incentives for 
employment of tribal members and new employment on reservations 
outside of certain parts of the development sector and an 
incentive for accelerated appreciation to provide incentives 
for private investment in business property on Indian 
reservations with certain qualifications.
    With regard to the prospective debate related to 815 and 
2713 and 2840, prospective legislation, we would like to 
comment on some proposed modifications, particularly an up-
front tax incentive that is needed to channel capital to slower 
growth and riskier long term investments.
    Although the capital gains relief is very important, 
capital gains relief is very important and provides incentives 
but we would like to see the credit to be extended provide for 
investing communities and incentives for investment and not 
divestment.
    We would also be interested in extension and modification 
of the employment tax credit now codified in the code to 
provide for flexibility for nonprofits and governmental 
entities to also take advantage of this particular, and also to 
revise the community renewal selection qualification process to 
incorporate respect for tribal governmental sovereignty.
    My experience here is somewhat like dealing with the ISTEA 
legislation where we are exposed to a democratic process where 
States and qualified small governments vote en masse on 
particular priorities. It is strange we get outnumbered every 
time.
    I would also like to highlight making tax credits for 
commercial renovation at technological centers and academies 
available to all Indian reservation communities who would like 
to apply, Congressman Portman's initiative but the credit 
should be more broadly available to encourage commercial 
renovation and corporate sponsorship of technical education on 
all Indian reservations regardless of whether they are 
enterprise zones or enterprise communities, or for that matter, 
renewal communities.
    We are very proud to have the opportunity to be a part of 
this discussion and to play a meaningful role in the 
development of a national character that we can be proud of as 
Indian people but also as Americans. Many people are counting 
on us to get this right and put the hard work into making a 
difference in our community.
    In closing, I would like to thank you for the attention you 
have given to this very important area and express how 
appreciative we are of the meaning behind the work you are 
doing.
    Thank you for the opportunity to appear before the 
committee.
    [The prepared statement follows:]

Statement of the Hon. A. Brian Wallace, Chairman, Washoe Tribe of 
Nevada and California, and Phoenix Area Vice President, National 
Congress of American Indians, Gardnerville, Nevada

                            I. Introduction

    Good morning Chairman Hougton, Congressman Coyne, and 
distinguished members of the Ways and Means Oversight 
Subcommittee. My name is A. Brian Wallace. I am the Phoenix 
Area Vice-President of the National Congress of American 
Indians (NCAI) and Chairman of the Washoe Tribe of Nevada and 
California. On behalf of NCAI, I would like to thank you for 
the opportunity to discuss proposed tax incentives to help 
economically distressed communities which include most Indian 
reservations.
    NCAI is the oldest, largest, and most representative Indian 
organization in the Country. NCAI was organized in 1944 in 
response to the termination and assimilation policies 
promulgated by the Federal Government. These polices proved to 
be devastating to Indian Nations and Indian people throughout 
the United States. NCAI remains dedicated to furthering the 
interests of our 250 member tribes and working on a myriad of 
policy issues, including the promotion of Indian economic 
opportunity (both on and off reservations), the provision of 
incentives for community development, and the attraction of 
private capital to Indian reservations and trust lands.
    NCAI's testimony contains several major segments. First, it 
reaffirms the need for a bipartisan approach to this and other 
critical policy issues; second, it articulates basic principles 
that are most likely to foster genuine economic development in 
Indian Country; third, it describes the current-law tax 
incentives for investment and job creation on Indian 
reservations, both of which are due to expire in 2003 unless 
extended; and finally, it proposes certain modifications and 
additions to the distressed community legislation introduced by 
various members in this Congress.

             II. Need For a Bipartisan Legislative Process

    The needs of distressed communities in this Country are 
real and urgent, especially those found in most tribal 
communities throughout Indian Country. According to the U.S. 
Census Bureau, about one-third of the nation's American Indian, 
Eskimo, and Aleut households had incomes that placed them below 
the poverty line in 1997. And unfortunately, Indian 
reservations and Alaska villages, like other distressed 
communities, have been untouched by the recent wave of 
prosperity that has lifted the fortunes of many United States 
regions.
    To address this need, Representatives J.C. Watts, James 
Talent, Charles Rangel, and others have taken a leadership role 
in developing legislation designed to revitalize low-income 
communities in the United States, such as economically 
depressed Indian reservations. We understand that such 
legislation include H.R. 815, the American Community Renewal 
bill, H.R. 2713, the New Markets Tax Credit bill, and H.R. 
2848, the New Markets Initiative bill. We are encouraged that 
Speaker Dennis Hastert has committed to work with the 
Administration to move the legislation this year. We are also 
encouraged by the bipartisan commitment made to foster economic 
development in distressed communities. We would urge this 
Subcommittee and the full Ways and Means Committee to lend its 
strong support and technical resources to the development and 
passage of a bipartisan compromise incorporating features of 
all three bills.

                            III. Principles

    In determining what is most likely to foster economic 
development in Indian Country which is mostly still 
characterized by high unemployment and pervasive poverty, we 
believe that it is important to adhere to the following 
principles:
     Respect for Sovereignty: Indian tribes enjoy the 
powers of self government, including the regulatory control of 
economic development on their lands, in the same manner as 
State and local governments.
     Presumption of Status, Not Competition: Indian 
communities with high unemployment and poverty rates should not 
be forced to compete with each other or with similarly situated 
communities for tax incentives.
     Role of Nonprofit Organizations and Governmental 
Entities in Development: The legislation should recognize and 
reward the significant role that tribal governments and 
nonprofit organizations play in Indian Country economic 
development.
     Access to Capital is Critical: In order to 
stimulate economic development in Indian communities, tax 
incentives must be designed to increase the flow of loan and 
equity capital to these communities.

                            IV. Current Law

    The Omnibus Budget Reconciliation Act of 1993 (OBRA) 
contained two provisions providing special tax incentives for 
job creation and investment on Indian reservations. These 
provisions were added to the OBRA incentives for Empowerment 
Zone/Enterprise Community investments in recognition of the 
widespread poverty existing on most Indian reservations and to 
spare Indian communities from having to compete with other 
communities or among themselves for such tax incentives.
    Indian Employment Credit. The purpose of this credit is to 
provide incentives for the employment of tribal members in new 
employment on Indian reservations other than gaming. Effective 
January 1, 1994 through December 31, 2003, employers may claim 
a nonrefundable income tax credit for 20 percent of the wages 
and health benefits (up to $20,000) paid to an enrolled member 
of an Indian tribe, or the member's spouse, so long as the 
employee works on a reservation (and lives on or near that 
reservation) and is paid wages that do not exceed $30,000 
annually (this amount is updated annually for inflation after 
1994). Under this provision, an employer may receive a credit 
worth a maximum of $4,000 for up to seven years, for a total of 
$28,000 per employee. The credit is not available for gaming-
related employment.
    Accelerated Depreciation. The purpose of the accelerated 
depreciation provision is to provide an incentive for private 
investment in business property on an Indian reservation. 
``Qualified Indian reservation property'' and ``qualified 
infrastructure property'' are eligible for accelerated 
depreciation. To meet the requirements for ``qualified Indian 
reservation property,'' the property must: (1) be used 
predominantly to conduct business within an Indian reservation; 
(2) not be used or located outside the Indian reservation on a 
regular basis; (3) not be acquired by a party who is related to 
the taxpayer under IRC Sec.  465(b)(3)(C); (4) not be used for 
conducting gaming activities; and (5) be between 3-year and 20-
year property, or nonresidential real property. The provision 
is effective for property placed in service on or after January 
1, 1994, and before December 31, 2003.
    To meet the requirements for ``qualified infrastructure 
property,'' the property may be located outside the Indian 
reservation, so long as the purpose is to connect with 
qualified infrastructure property located within the 
reservation (e.g. roads, power lines, water systems, railroad 
spurs, and communications facilities).

           V. Legislation to Spur Indian Country Development

    We have reviewed and summarized the three leading 
proposals, H.R. 815, H.R. 2713 and H.R. 2848. Listed 
immediately below are proposed modifications and comments on 
the various components that tribal governments would like to 
see incorporated into the bipartisan compromise package:
      Include a Tax Credit for Investments in Community 
Development Entities. The proposal in H.R. 2713 and H.R. 2848 
to provide tax credits for equity investments in certified 
``community development entities'' should be incorporated into 
the bipartisan package. An up-front tax incentive is needed to 
channel capital into slower growth and riskier long-term 
investments. Although capital gains relief may provide some 
assistance to entrepreneurs when they eventually liquidate 
their investment, the tax credit will provide a stronger 
initial incentive to invest in distressed communities.
    Comment: In order to spur effective partnerships in Indian 
Country and other disadvantaged communities, the tax credits 
should be fully available to taxable investors in joint 
ventures with nonprofit and/or governmental entities.
     Extend and Modify the Indian Employment Tax 
Credit. The current tax credit for increasing employment of 
tribal members should be extended and modified. The credit 
should be modified to allow employers the choice of using the 
credit to offset either corporate income taxes or payroll 
taxes. This election would allow the credit to be utilized by 
governmental and nonprofit employers, as well as by for-profit 
companies. In extending the credit, Congress should also direct 
the IRS to administer the enrolled tribal member requirement in 
a flexible manner. Current IRS Form 8845 instructions imply 
that an employer must obtain a copy of the tribal government's 
enrollment list. Such information is considered highly 
proprietary which has discouraged some employers from utilizing 
the credit.
    H.R. 815 would extend and modify the current Work 
Opportunity Tax Credit to apply only to Renewal Communities. 
Under this proposal, employers could receive a credit worth 15 
percent of up to $10,000 for first-year wages and 30 percent of 
up to $10,000 for second and third year wages. There are three 
major distinctions between this proposal and the Indian 
employment credit available under current law. First, H.R. 815 
would apply to wages only, not to health benefits. Second, the 
amount of the credit is less--an employer could receive a 
credit worth a maximum of $1,500 in the first year and $3,000 
in the second and third years, for a total of $7,500 per 
employee. Third, the employee receiving the benefit must live 
in, not merely near, the Renewal Community.
    Comment: The employment credit in H.R. 815 is too 
restrictive. It should be supplemented by extension and 
modification of the Indian employment credit.
     Revise Community Renewal Selection and 
Qualification Process to Incorporate Respect for Tribal 
Governmental Sovereignty. Tribal governments should not have to 
be nominated by a State government in order to be considered 
for selection as a renewal community. H.R. 815 is unclear on 
this point. In addition, tribal governments should not be 
expected to set aside regulatory or environmental standards in 
exchange for favorable tax treatment.
     Make Tax Credits for Commercial Renovation and 
Technological Centers and Academies Available to all Indian 
Reservation Communities. H.R. 815 includes a 20 percent tax 
credit for the cost of renovating commercial buildings located 
in a renewal community. Similarly, the President's FY2001 
proposed budget, in the section entitled ``Bridging the Digital 
Divide,'' includes a 50 percent tax credit for corporate 
sponsorship of qualified zone academies, public libraries, and 
community technology centers located in empowerment zones 
(``EZs'') or enterprise communities (``ECs''). Both of these 
tax credits should be made available more broadly to encourage 
commercial renovation and corporate sponsorship of technical 
education on all Indian reservations, regardless of whether 
they have been designated as an EZ or EC or Renewal 
Community.\1\
---------------------------------------------------------------------------
    \1\ The same broad treatment should apply with regard to the tax 
deductibility of computer technology/equipment donations. Note: in the 
President's FY2001 budget, this proposal contains the alternative 
formulation: ``located in an EZ or EC or in a census tract with a 
poverty rate of 20 percent or more.
---------------------------------------------------------------------------
     Tribal Government Tax-Exempt Bond Authority. 
Tribal governments themselves need expanded access to capital 
for a variety of economic development purposes. Under current 
law, tribal governments are virtually hamstrung when they try 
to make a tax-exempt bond offering. Provisions similar to those 
contained in H.R. 1946 should be incorporated into the 
legislation. See Attachment A (summary of H.R. 1946).
     Provide Development Accounts to All Working Poor 
Individuals and Families, Regardless of Where They Reside. H.R. 
815 limits ``family development accounts'' to individuals 
residing in a designated renewal community. Development 
Accounts should be provided to all individuals that meet the 
income criteria.

                             VI. Conclusion

    Mr. Chairman, thank you for the opportunity to present 
testimony on proposed tax incentives to help economically 
distressed communities. In this time of unprecedented 
prosperity found throughout most of the United States, Indian 
communities must be accorded the same opportunities for 
prosperity as the rest of the Country. NCAI believes that the 
comments and recommendations provided in this statement will 
assist in addressing the economic disparity found throughout 
Indian Country, and we look forward to working with this 
Congress in the development of tax incentives that would 
correct this critical situation. Tribal governments are also 
very optimistic that a bipartisan approach to addressing this 
issue will succeed during this session.
    I would be happy to respond to any questions you may have.

              Tribal Government Tax-Exempt Bond Authority

                         Amendments Act of 1999

H.R. 1946, Introduced by Congressman Shadegg May 26, 1999

    H.R. 1946 would give Indian tribal governments and tribal 
business ventures expanded access to tax-exempt financing 
through the following Internal Revenue Code amendments:
    1. H.R. 1946 would remove the ``essential governmental 
function''restriction on tribal governmental bonds. In its 
place, H.R. 1946 would require that the financed facilities be 
located on land within or in close proximity to the exterior 
boundaries of the tribe's reservation.
    Reason for Provision: Under current law, tribes may issue 
tax-exempt governmental bonds only for facilities used in the 
exercise of an essential governmental function. State and local 
governments are not subject to a similar restriction. The 
legislative history of this restriction has defined ``essential 
governmental function'' narrowly (e.g., roads, sewers, 
schools). In removing the restriction, H.R. 1946 would enable 
tribes to issue governmental bonds to finance facilities for 
tribal use even if the facilities do not serve such functions. 
However, no part of the bond issue proceeds may be used for 
property placed in service for gaming or casino purposes.
    2. H.R. 1946 would allow Indian tribal governments to issue 
various types of tax-exempt private activity bonds permitted by 
State and local governments under current law, so long as the 
tribe maintained a 50% ownership interest in the financed 
facility. The business would also have to satisfy an employment 
test that is somewhat different than that of current law.
    Reason for Provision: Under current law, tribes may issue 
tax-exempt private activity bonds only for manufacturing 
facilities. H.R. 1946 would treat tribal governments like State 
or local governments, enabling them to issue tax-exempt private 
activity bonds for various types of facilities, such as 
facilities used by 501(c)(3) organizations, low-income rental 
housing, and electric generation, water treatment, and solid 
waste and sewage disposal plants.
    3. H.R. 1946 would exempt tribal private activity bonds 
from the State volume cap requirement generally applicable to 
tax-exempt private activity bonds.
    Reason for Provision: Tax-exempt private activity bonds 
issued by State and local governments generally are subject to 
a population-based volume cap on the principal amount of 
private activity bonds that may be issued during each year.
    4. H.R. 1946 would except tribal bonds from the ``federal 
guarantee'' prohibition.
    Reason for Provision: The ``federal guarantee'' prohibition 
generally comes into play where the borrower relies on future 
federal assistance to repay the loan. Tribal bond issuances 
often fail to secure approval of bond counsel or underwriter's 
counsel because of the level of federal assistance being 
received by the tribe.
    In addition, H.R. 1946 makes an important amendment to the 
Securities Act of 1933. It would place bonds issued by a 
federally-recognized Tribal Government on par with those issued 
by state and local governments by exempting both from federal 
securities registration requirements.
      

                                

    Chairman Houghton. Thanks very much, Mr. Wallace.
    Mr. Reighard?

     STATEMENT OF BILL REIGHARD, PRESIDENT, FOOD DONATION 
                 CONNECTION, NEWPORT, VIRGINIA

    Mr. Reighard. Thank you for this opportunity to speak on 
H.R. 1325, the Good Samaritan Tax Act. In addition to my oral 
testimony, I would like to include written testimony as part of 
the record.
    This Act would eliminate the uncertainty that exists 
concerning the tax deduction a company can take when it donates 
its wholesome, excess food to nonprofit organizations that 
serve those who are hungry. This would encourage food service 
companies to make the effort needed to save their excess food 
which otherwise would go to waste.
    This Act has the support of Food Chain and America's Second 
Harvest as well as the National Restaurant Association and the 
National Council of Chain Restaurants.
    I have worked in the food service industry for 25 years in 
management positions in operations, quality assurance, product 
development and technical services. In 1992, I formed Food 
Donation Connection which is dedicated to ensuring that excess 
wholesome food that is desperately needed in our communities 
does not go to waste.
    We accomplished this by providing restaurants with an 
alternative to discarding this excess food by linking them to 
agencies that help those who are hungry. Our primary client is 
Pizza Hut who has the largest prepared food donation program in 
the country. Pizza Hut restaurants have donated over 30 million 
pounds of excess food to 2,000 hunger agencies since 1992. This 
program earned Pizza Hut and my company the UPS Foundation 
Distinguished Service Award from Food Chain in 1994 and Pizza 
Hut received a national U.S.D.A. Hero of Food Recovery and 
Gleaning Award in 1997.
    We also manage food donation programs for Morrison's 
Cafeterias, KFC and Taco Bell and are working with other 
restaurants and chains that are considering donating excess 
food.
    Despite our country's economic prosperity, 36 million 
Americans, including 14 million children, don't get enough to 
eat. A report by the Conference of Mayors shows demand for 
emergency food increasing. The New York Times points out that 
America's Second Harvest is not receiving sufficient food to 
meet the demand from their affiliate food banks.
    As individuals leave welfare and enter the workplace, they 
often turn to food banks and other nonprofit, private sector 
groups for food to help ends meet. At the same time, good, 
wholesome, excess food is being discarded. However, it costs 
businesses money to properly save this food.
    Recognizing this, Congress included legislation in the Tax 
Reform Act of 1976 designed to encourage donations of excess 
food to 501(c)(3) organizations that serve infants, ill or the 
needy. Section 170 of the IRS Code allows a deduction equal to 
the donated food basis cost plus one-half the depreciated value 
not to exceed twice the basis cost. This last limitation, as 
well as strict receipting requirements, ensures that a company 
cannot earn a profit by producing food specifically for 
donation.
    Two issues with the existing law discourage food service 
companies from donating. First, the IRS challenges as an 
industry coordinated issue any appreciated value placed on the 
donated food. Many companies are not willing to take on the IRS 
to gain a deduction to offset the additional cost of 
preparation, packaging and storage of donated food. They are 
content to settle for throwing away the food and taking a 
standard deduction.
    Second, current law provides that this deduction is only 
available to regular C corporations. Many restaurants are set 
up as limited liability or Subchapter S corporations or sole 
proprietors and are not eligible for the deduction. The Good 
Samaritan Tax Act codifies fair market value and makes all 
business entities eligible for the deduction.
    The programs we manage have been successful because they 
use the tax savings to provide an economic incentive to their 
restaurant managers for donating. When this incentive is lost, 
donations drop significantly or stop altogether. We see this 
repeatedly when restaurants are sold to franchisees that are 
not eligible for the deduction under current law.
    We know that food service donations of wholesome, excess 
food to private sector, nonprofit hunger agencies works. These 
donations provide needed food as well as a great source of 
protein for these agencies. I believe this Act will encourage 
more restaurants to donate food which will go a long way to 
solving the hunger problem in America today.
    Mr. Chairman, I encourage you and the subcommittee to do 
everything in your power to enact the Good Samaritan Tax Act 
this year. Every day we wait, another child in America goes to 
bed hungry.
    Thank you.
    [The prepared statement follows:]

Statement of Bill Reighard, President, Food Donation Connection, 
Newport, Virginia

    Good Afternoon. I would like to thank Chairman Houghton and 
ranking member Coyne, and other members of the Subcommittee for 
this opportunity to speak on the Good Samaritan Tax Act, H.R. 
1325.
    This bill, if enacted, will go a long way toward solving 
the issue of hunger in America. By allowing companies to offset 
the costs associated with donating surplus wholesome food to 
hungry Americans, The Good Samaritan Tax Act will encourage 
more food service companies to make the effort needed to set up 
food recovery and donation programs. The Good Samaritan Tax Act 
has the support of the National Restaurant Association, the 
National Council of Chain Restaurants, and America's leading 
food recovery and distribution organizations--Foodchain and 
America's Second Harvest.

                             My Background:

    Since 1992, I have been President of Food Donation 
Connection (FDC). FDC assists restaurants in providing an 
alternative to discarding excess wholesome unsold food by 
linking those restaurants to food rescue programs and agencies 
that help the hungry. FDC manages the donations of over 4500 
restaurants to 1500+ hunger agencies.
    Our Mission Statement is from John 6:12, which reads: 
``When they had all had enough to eat, Jesus said to his 
disciples, ``Gather the pieces that are left over. Let nothing 
be wasted.''
    We accomplish this by handling coordination and 
administration for our client restaurants. This includes 
determining recipient food rescue programs and handling 
paperwork, maintaining an 800 number for use by donor 
restaurants and hunger agencies, tracking and reporting all 
excess food donations, tax savings calculation and reporting 
and providing the ongoing follow-up and monitoring necessary 
for successful implementation and growth.
    Prior to establishing Food Donation Connection, I worked 
for 17 years in the food service industry, holding management 
positions in operations, quality assurance, product development 
and technical services.

                        Hunger Exists in America

    Despite our country's economic prosperity, hunger is a 
pressing social issue in America. According to a recent report 
by Tufts University, 36 million Americans, including 14 million 
children, live in food insecure households. A United States 
Conference of Mayors report shows demand for emergency food 
increasing, and that over 20% of this demand goes unmet. In a 
New York Times article, America's Second Harvest said they do 
not receive sufficient food to meet the demand from the member 
agencies of their network food banks. As individuals leave 
welfare and enter the work place, they often turn to food banks 
and other non-profit private sector groups for food to help 
make ends meet. Layoffs also remain widespread as companies 
reconstitute themselves to compete in the changing economy.

                Wholesome Excess Food is Going to Waste

    At the same time that many Americans go hungry, good 
wholesome food is going to waste. One of the major reasons this 
food is not getting to the hungry is because businesses cannot 
offset the costs of donating it.
    It takes management commitment and money to properly save 
excess food for donation to hunger agencies. Prepared food must 
be properly saved, packaged, labeled and kept refrigerated or 
frozen until it is picked up by the agency. Operating 
procedures and food safety standards must be developed and 
implemented. Hunger agencies need to be selected and approved, 
and ongoing pick-up schedules established. A system for 
donation reporting and tracking must be in place. Tax 
regulations require strict receipting procedures and limit the 
type of non-profit organizations that can receive the donation. 
An example of these requirements as they appear on one of our 
client's food donation log appear below:
[GRAPHIC] [TIFF OMITTED] T7485.001

    A number of expenses are incurred when a restaurant donates 
its excess food. Based on our experience, provided below is an 
example of the typical cost associated with food donation 
programs. Note that costs will vary from company to company 
based on type and value of food donated, the type of storage 
containers needed, storage method and other factors. This 
example assumes the value of the donated food to be two times 
cost. Costs represent a percentage of tax savings. Since the 
tax incentive is a deduction (as opposed to a credit) a company 
must be profitable to realize any tax savings. Two tax rates 
are used in this example.

                                                               Cost: % of tax savings    Cost: % of tax savings
                      Program Cost Item                            at 35% Tax Rate           at 15% Tax Rate

Storage & Transport Containers..............................                       4%                        9%
Restaurant Manager Bonus Costs..............................                      10%                       10%
Employee Labor to Save Food.................................                      10%                       23%
Management oversight........................................                       3%                        7%
Program Management..........................................                      15%                       25%
Company Incentive After Costs...............................                      58%                       26%

     To increase Donations, Companies must be able to offset costs

    Obviously, if we are to encourage food service companies to 
donate rather than discard usable surplus food, we need to 
allow them to offset the costs of doing so. In fact, Congress 
did include legislation in the Tax Reform Act of 1976 designed 
to help companies offset the costs of donating food to 
501(c)(3) organizations that serve infants, ill or needy. 
Section 170 of the IRS Code allows a deduction equal to the 
donated food basis cost plus = of the appreciated value, not to 
exceed twice the basis cost. This last limitation, as well as 
strict receipting requirements, insures that a company cannot 
earn a profit by producing food specifically for donation.

  Example Calculation of Incentive Provided by Tax Reform Act of 1976

    The Tax Reform Act of 1976 allows regular  
corporations that donate excess food to certain specified 
501(c)(3) non-profit organizations that serve the ill, infants 
or needy to take an incremental deduction for donated food. 
Strict receipting requirements must be met to take the 
incremental deduction
    Example of potential tax benefit--

                                               Surplus Not     Surplus
                                Product Sold     Donated       Donated

 Sales revenue........        $1.00          $.00          $.00
 Base cost (food &              .35           .35           .35
 direct labor)................
 Gross margin/(loss)..          .65         (.35)         (.35)
    Incremental tax deduction.            -             -           33*
    Total income/(deduction)            .65         (.35)         (.68)
     for tax..................
 Tax (assumes 35%             (.23)           .12           .24
 rate)........................
 Gross margin/(loss)           $.42        $(.23)        $(.11)
 after tax....................

    In this example, donating reduces the after tax cost of 
surplus by 52%. The company still loses money on the donated 
food. The amount of the loss is reduced.
    *Incremental deduction is one-half of the foods' 
appreciated value (FMV less base cost) however base cost plus 
the incremental deduction cannot exceed twice base cost.

                  Problems with the Current Law Exist

    While the food donation provisions of the 1976 act were 
well intended and designed to encourage companies to donate 
food, two problems exist today that actually discourage food 
service companies from doing so.
    First, the IRS challenges, as an industry coordinated 
issue, any appreciated value placed on the donated food. The 
uncertainty of the value of their deduction prevents many 
companies from investing in and incurring the costs of food 
donation programs. In fact, under current IRS interpretation, 
it actually makes more financial sense for a company to throw 
away excess food rather than donate it.
    Second, this deduction is only available to regular 'c' 
corporations. Many restaurant companies are set up as limited 
liability or sub-chapter's corporations or sole proprietors and 
are not eligible for the deduction.

          The Good Samaritan Tax Act Addresses These Problems

    This Good Samaritan Tax Act restores some common sense to 
our tax code by addressing these two issues.
    First, the Act clarifies the determination of fair market 
value when internal company policies relating to the treatment 
of food are also involved, ensuring that restaurants that 
donate food to non-profit hunger relief agencies will be 
allowed to take the full deduction available to them under 
current law. Free of the risk of having to defend themselves 
against an IRS challenge, more businesses will be encouraged to 
donate food.
    Second, the Act will extend the deduction to all business 
entities, providing the incentive to thousands of restaurants 
that are not organized as ``c'' corporations.

           Food Donation Programs Meet Local Community Needs

    Despite strong economic growth, hunger remains a problem in 
every state. Hunger exists in rural areas as well as in urban 
areas. A major strength of food donation programs is that 
restaurants operate in every part of the country. The result is 
a largely untapped source of excess food in each of our 
communities.
    A strong network of non-profit agencies that serve those 
who are hungry has developed across the country. America's 
Second Harvest network food banks, along with Foodchain and 
other national organizations, provide food to this network. 
However, increased demand at these agencies has resulted in the 
need for additional food. At the same time, food-manufacturing 
companies, a traditional source of excess food, have become 
more efficient in their operations. In addition, a secondary 
market for excess manufactured goods, i.e. Big Lots, Odd Lots, 
Internet surplus food sales etc., has developed. This has 
reduced the food available at a time when need is increasing. 
These agencies have a need for food now. The Good Samaritan Tax 
Act would increase the supply of available wholesome food by 
encouraging additional restaurants to donate their excess food.
    Mr. Chairman, I appreciate the opportunity to testify here 
today. I encourage you and the committee to do everything in 
your power to enact the Good Samaritan Tax Act this year. Every 
day we wait, another child in America goes to bed hungry.
    Testimonials
    We know that food donation programs work. The unsolicited 
testimonials on the next four pages give an insight into the 
heartof Pizza Hut's Harvest program.
[GRAPHIC] [TIFF OMITTED] T7485.002

[GRAPHIC] [TIFF OMITTED] T7485.003

[GRAPHIC] [TIFF OMITTED] T7485.004

[GRAPHIC] [TIFF OMITTED] T7485.005

      

                                

    Chairman Houghton. Thank you very much, Mr. Reighard.
    I just have one question and then I will turn it over to 
Mr. Coyne.
    Ms. Brumagin, you have done an extraordinary job, done it 
all on your own with no government money at all. You have done 
it privately. Why should the Federal Government get in here at 
all with tax incentives?
    Ms. Brumagin. My feeling is that most communities really do 
not have the ability to assess what it is they need and make 
the kind of changes they need. I think we were just very lucky 
as a community. I think we were very fortunate that we had 
people who were willing to come to our community and invest 
their life savings not really knowing what was going to happen. 
I think tax incentives can make an enormous difference for a 
distressed community.
    I don't know if you know what it is like to be at a local 
level where government officials do not have a lot of time to 
really try to assess what they can do for their community, may 
not really have the ideas and certainly do not have the money 
to invest in their own communities to help turn them around. I 
think tax incentives are the way of spurring that on for 
people.
    Chairman Houghton. Thank you.
    Mr. Coyne?
    Mr. Coyne. Thank you.
    Mr. Phillips, you obviously support the Administration's 
New Market Initiative. I wonder if you could give us some 
examples of what investments in the short term the private 
sector would be expected to make in some of our distressed 
communities?
    Mr. Phillips. I tried to mention a couple during my initial 
remarks but for example, a lot of new investment opportunities 
are evolving in the telecommunications sector, even in rural 
communities. We are trying to support more homegrown 
entrepreneurs in that area.
    I mentioned EnvisionNet which is based in Augusta and their 
startup and growth. They are employing more and more people 
every day. It is a call center support venture for Microsoft, 
on line banking and other things of that nature. They require 
capital to start and grow that business.
    The way that would work is that if we were certified as a 
CDE, certified development entity, we would sell the credit say 
to an investor, a bank, individual investor, institutional 
investor, create a pool of capital and use that money to help 
finance that particular project.
    Other projects get into areas of natural resources and 
value added types of industries which I mentioned. For example, 
in partnership with a bank, we helped finance the startup and 
expansion of Coast of Maine Organic Products with production 
operation downeast in one of Maine's poorest counties. The 
company manufactures a compost product for the household 
garden. They employ 15 in that particular venture. This is a 
much smaller project, so in rural communities you get that kind 
of variation.
    We see the credit as providing our capacity to inject 
capital at the appropriate times and appropriate levels to help 
start or grow some of these businesses and these jobs.
    Mr. Coyne. Of all the segments of the President's New 
Market Initiative, what do you think is the most important 
feature of his proposal?
    Mr. Phillips. There are several components to it. Each 
addresses a variation of capital needs, so all are important. 
For example, the CDFI Fund is a component of that because they 
are looking for permanent authorization and so forth. There is 
also community-based venture capital, the APICs and the New 
Markets Tax Credit and probably some other things. A very good 
question, all of them, of course, but let me try to answer more 
specifically.
    The opportunities for access to equity capital is more or 
less at the top of our list in the sense that equity capital 
gives us the most flexibility, so provisions for community-
based venture capital are important, a very critical one; so 
too is the CDFI Fund because you can use those funds for equity 
capital; but also for softer loans where the return will not be 
as high, such as facility or micro loans; and we believe the 
New Markets Tax Credit will allow us some opportunity to 
structure funding in a way that will allow us to access a much 
higher volume of private capital.
    So in a way all of those pieces are moving toward the same 
objective of creating access to flexible private capital market 
in many ways to invest in some of these projects I speak about.
    Mr. Coyne. Thank you.
    Chairman Houghton. Kenny?
    Mr. Hulshof. Mr. Reighard, thank you for being here and I 
especially want to applaud your efforts as President of the 
Food Donation Connection in helping to manage the donations of 
4,500 restaurants to some 1,500 plus hunger agencies. This is a 
hot button issue for me.
    My wife, in addition to her full-time career in marketing, 
just recently completed her term as president on the board of 
directors of the Central Missouri Fund Bank. So I have been 
sort of watching from the side as a supportive husband to see, 
for instance, in the last year the Central Missouri Food Bank 
that has about 20 Missouri counties, distribute 10 million 
pounds of food.
    Since welfare reform has been instituted, they have 
distributed about 113 percent more food now than at the time 
that welfare was in play. They are quick to point out that they 
are still only reaching about 47 percent of the poverty level 
in Missouri. So I think anything we can do is important.
    This bill, Mr. Chairman that you authored, that I co-
sponsored, I think is a good bill.
    I mention this because we are here in this forum. I 
recognize that most and probably your own experience is that as 
food is collected, there is a cost or distribution fee. The 
Central Missouri Food Bank in Columbia, Missouri is the only 
Second Harvest Food Bank in the Nation that does not charge for 
its food as it give it to other pantries and kitchens. As a 
result, I think that has been an incentive for a lot of other 
businesses to partner up with the Central Missouri Food Bank 
because they know this is very much a charitable endeavor.
    I am not suggesting that you do that in your own experience 
but the good thing is that hunger is a curable illness as I 
like to say. So I applaud your efforts.
    Let me ask you specifically about this bill, H.R. 1325. Do 
you think there are enough safeguards in this legislation to 
prevent it from becoming the stale bread bill?
    Mr. Reighard. That is a good question. As you pointed out 
we work with 4,500 restaurants and we have been coordinating 
donations for eight years. We found there are really three 
solid reasons why this would not become a stale bread bill.
    First, the original or the current law requires strict 
donating and receipting requirements on any food that is 
donated under this bill. It can only be donated to those 
organizations that serve the infant, ill or needy. Those 
organizations have to sign a receipt each time saying they will 
use that food only for this purpose, they will not resell it or 
give it to another organization.
    Second, like the food bank you mentioned, there is a non-
profit network across the country that is developed to serve 
food to the hungry but they are strapped for resources and 
money. You are not going to find an agency that is going to go 
out and pick up stale bread or food they can't use. We run into 
that, for example, there is an overproduction of bagels and 
bread in this country and it is very hard for those chains to 
donate their surplus food because there is just not sufficient 
agency use for it. In fact, on a limited basis, we have run 
into that with Pizza Hut in some areas where we cannot find 
acceptable organizations.
    Third, current law requires that the food meet all FDA and 
applicable Health Department requirements. So our experience 
says this bill is successful in getting food the agencies need, 
we have not seen food they don't need move through it.
    Mr. Hulshof. Again, I applaud your ingenuity and your 
ministry if I can use that term trying to create these 
different partnerships, whether it is as the Central Missouri 
Food Bank has attempted to do with local dairy owners and that 
is obviously very difficult, getting milk and distributing milk 
because it is such a perishable item.
    In the recent effort, we have a toastmaster which 
manufactures can openers and as they test these can openers on 
cans of food, they now have instituted this program to 
repackage the cans and then allow those to be distributed.
    I am very supportive of the bill and I appreciate you 
helping us to bring this to the forefront with your testimony 
today.
    Mr. Reighard. Thank you for your support.
    Chairman Houghton. Thanks very much.
    Mr. Weller?
    Mr. Weller. I would like to direct my questions to Ms. 
Brumagin. First, let me commend you and your community on your 
locally-led, locally-driven initiative in revitalizing your 
community of Findley Lake and Chautauqua County.
    I spoke with the representative from the Treasury 
Department earlier in the hearing regarding the issue of 
brownfields. Do you have brownfields in Chautauqua County?
    Ms. Brumagin. I am sure we do. I am not really that 
familiar with it, however.
    Mr. Weller. In any case, I represent the south side of 
Chicago, the south suburbs and rural areas going about 100 
miles from the City of Chicago.
    In many cases, here is that gas station that is one that 
one corner in every town that no one seems to buy, fix up or 
use and everyone wonders why. Usually it is because there is 
some environmental cleanup that is necessary. This is an 
example of a small brownfield. We can always think of the 
industrial parks that have them.
    Currently we have a provision that was included in the 
Balanced Budget Act of 1997 that provides for a tax incentive 
for private investors who purchase a brownfield, clean it up 
and then they can expense or deduct in that year the cost of 
doing so as a way of recovering the cost of cleanup. That is 
incentive for them to purchase an existing industrial park or 
an existing commercial site in a community.
    That provision is currently limited just to low income 
census tracts or empowerment zones. From the standpoint of an 
elected official representing the Town of Mina in Chautauqua 
County, do you feel that is the best approach or do you feel 
that communities that happen to be middle class, rural or 
suburban should also have the opportunity to use that type of 
incentive for environmental cleanup of a brownfield?
    Ms. Brumagin. First of all, we did have a situation in our 
community where we had just that. We had a gas station on the 
corner and also one of the buildings that is in the photo used 
to be a gas station. I know there were people who were really 
hesitant to purchase those properties because they were very 
concerned about the liability associated with purchasing them.
    The one building in particular, the one from 1996, had gas 
tanks. I know a lot of people looked at that and they would not 
purchase that property. The people who did so really took a big 
chance in doing that. It turned out very positively for them, 
however, because we just had the State come through and redo 
that road and they removed those fuel tanks from the ground.
    Mr. Weller. In that case, the taxpayers picked up the tab 
for the cleanup?
    Ms. Brumagin. We appreciated that very much. I know that 
building could have sat there for many more years because 
people who had considered purchasing it would not do so because 
of the liability associated with that.
    Mr. Weller. I find that abandoned gas stations usually are 
the best example because almost all of us can think of one in a 
town we live in or a town nearby our home. People often wonder 
why. It is on the most strategic corner in town, why doesn't 
someone buy that and use it for some commercial or positive 
purpose. In most cases, it is a brownfield and there is some 
cleanup necessary.
    I just want to share with you that we do have a bipartisan 
proposal. Ten members of the Ways and Means Committee have a 
proposal which we introduced last week, H.R. 4003, in which I 
am joined by Representative Coyne, Mr. Johnson and seven other 
members of this committee in sponsoring which eliminates that 
so-called targeting, eliminates that incentive to just low 
income areas but also allowing rural and suburban and middle 
class communities like yours to have the opportunity to cleanup 
that old industrial site or that old gas station.
    One thing I found was of great concern. I spoke and met 
with a large group of conservation oriented folks a couple of 
weeks ago in the south suburbans at a conservation congress 
hosted at Governor State University and the great concern at 
that meeting was the south suburbs keep growing south and 
consuming vast amounts of farmland and open space. They 
expressed great concern about the need to revitalize old 
brownfields to reduce the need for new greenfields, to take the 
pressure off farmland and open space.
    I believe that addressing the need to give middle class 
communities, rural and suburban communities the opportunity to 
cleanup old brownfields is good for the environment as well as 
good for creating jobs.
    I want to thank you for testifying today.
    Chairman Houghton. Thanks very much, Mr. Weller.
    Mr. Lewis?
    Mr. Lewis. Chairman Wallace, thank you for being here 
today. The Assistant Secretary testified in his prepared 
statement that many residents of Native American communities 
continue to struggle economically in spite of all this 
prosperity and all this growth. Could you tell the committee 
what has been the impact of the Native American wage credit? Is 
it helping? Is it making a difference in your communities?
    Mr. Wallace. It has made a difference in certain parts of 
the community but some of the development preconditions that 
make this advantage more meaningful haven't necessarily 
existed, the preconditions where you have the incentives of 
capital to be invested for development coming into the 
community.
    One of the things that handicaps tribes is really creating 
the fundamental preconditions that attract capital. In 
instances where that does happen with certain advantages like 
accelerated depreciation credit that is in the code now, 
actually not only had a direct and meaningful contribution to 
development in Indian country but it also had a very nice and 
intended benefit. Not only does it inspire capitalization of 
business facilities and operations on reservations, it also 
provided incentives for utility companies and other entities 
that provide public infrastructure to bring to the reservation 
and also gives them a benefit in terms of accelerated 
depreciation of their capital investment in the community as 
well.
    The wage credit itself does have a benefit. It is just that 
right now we are struggling hard to create the broader 
preconditions that make it more meaningful.
    Mr. Lewis. Could you tell members of the committee what is 
the average annual income of an American Indian family?
    Mr. Wallace. As I understand, according to the U.S. Census, 
and this is something we are not very proud of, I just saw a 
citation of approximately almost one third of the national 
tribal population is below the Federal poverty line, $18,000 or 
less.
    Mr. Lewis. In terms of dollars, what did you say?
    Mr. Wallace. $18,000 per family. Average income, one-third 
of Native America is below $18,000 per capita.
    I wanted to again highlight the meaningfulness of this 
discussion and the historic requirement to overcome what 
appears to be the natural omission of the view of tribal 
governments as part of the community of governments and their 
central role in creating a development orbit for tribes.
    Some of the perspectives that we talked about today and 
some of the initiatives are privately oriented but the 
architecture of tribal development environment is dominated by 
the tribal governments themselves and then the NGOs that have 
been with us to try to help jump-start tribal economies. That 
is a distinction I think cannot be overlooked and needs to be 
repeated over and over.
    We are certainly very interested in seeing the existing, 
accelerated depreciation credit and the employment tax credit 
renewed because we are just beginning to realize its full 
benefit.
    On a personal note, where I come from, Congressman Lewis 
you are considered a very distinguished American and 
personally, you have set a standard of public service and faith 
that I can only hope to achieve in my lifetime. It is a very 
distinct privilege to be here before not only the committee but 
also to work with you on these very important issues.
    Mr. Lewis. Thank you very much, Mr. Chairman.
    Chairman Houghton. Thank you, Mr. Wallace.
    Mr. Watkins?
    Mr. Watkins. Ms. Brumagin, we think a lot of your 
communities and we think a lot of your congressman. He is quite 
a guy, we all like him and he does a great job here. He is very 
effective and now and then he lets me get a word in but not 
very much.
    Mr. Lewis. Will the gentleman from Oklahoma yield for a 
moment? I just want to say you have a very good congressman. He 
is a wonderful Chairman, he is a good leader and he is my 
friend. I am a Democrat and he is a Republican.
    Ms. Brumagin. Hear, hear.
    Mr. Watkins. I have been all three, a Democrat, an 
Independent and a Republican. Whatever you want me to be, I 
will be.
    I read your entire testimony. You have a tremendous 
location.
    Ms. Brumagin. Yes, we do.
    Mr. Watkins. A new interstate coming through there and easy 
access to others. I imagine there is a lot of God sent beauty 
there too. I can only imagine by the name of the lake and so 
forth. What is your per capita income there?
    Ms. Brumagin. I actually do not know our per capita income. 
Our community is very diverse, even though it is very small, 
1,100 people. For those families that are permanent residents, 
their incomes are very low because there are really not that 
many places to be employed.
    Mr. Watkins. You set up an endowment of $175,000 and I was 
impressed with that.
    Ms. Brumagin. The other part of our community, however, are 
those people who are attracted to this beautiful little lake 
and we do have people who have second homes there. Those are 
the people who really have been contributing to the endowment 
fund. So we have a good amount of wealth from the seasonal 
residents.
    Mr. Watkins. Keep up the good work because they need you 
and they need some incentives from time to time for some other 
economic opportunities.
    This is the reason I questioned the Administration 
proposing the tax credit for community development entities. 
When you go down and find out what the community development 
entities are, they talk about community development financial 
institute. We don't have any of those in rural America; the 
community development corporation, we don't have any of those 
in rural America; small business investment corporations, we 
don't have any in economically depressed rural areas; new 
market venture capital firms, we don't have any, so we don't 
have the vehicles. We don't have the economic infrastructure. 
That is what a lot of people don't understand.
    Our economic infrastructure has been destroyed. We left the 
cotton fields and the fields. I grew up in a town of less than 
200. We used to have two banks, two cotton gins, out migration, 
two blocks of businesses. We don't have two stores left in my 
boyhood hometown. That is why I am so committed and dedicated 
to this. That is why I would like to have equity in a lot of 
these programs.
    Mr. Wallace, I have thought about some Native American 
activities. I noticed you talked about these being for 
economically depressed Indian reservations. Mr. Wallace, I have 
22 percent of the Native Americans in America. We don't have 
reservations. I have three grandchildren who are Native 
American. They are ignored. I was the only non-Indian on the 
baseball team growing up. I was a minority and I didn't know it 
in a rural economically depressed area.
    I fought this battle because I want my Native Americans to 
be included, not left out. Our President of the United States, 
Andrew Jackson, forced them to the Trail of Tears, Congressman 
List from North Carolina, to march the Trail of Tears and also 
from Georgia and other areas. They came to an area called 
Indian Territory, part of Oklahoma. That was good enough for 
them to be sent to; why isn't it good enough for them to have 
some of the incentives that some of the other areas have had? 
Don't ignore your own people. There are those out there that 
are not on Indian reservations.
    Again, I had two of my tribes--the Choctaws and the 
Chickasaws--to come together with an empowerment zone 
application with the local people. I want our local people to 
work together but it was ignored. I see that we weren't treated 
with equity, we weren't given the same number of a third of the 
urban areas.
    I hope the committee is listening. We have to make sure 
there is equity for those who are least fortunate if I read the 
script correctly.
    Thank you.
    Chairman Houghton. Thank you, Mr. Watkins.
    Mr. Portman?
    Mr. Portman. Thank you, Mr. Chairman.
    I appreciate my colleague from Oklahoma's statement. It 
focuses on the need to make sure that what resources we have 
here are used most effectively, whether it is focused on rural 
communities, urban communities, those identified by political 
jurisdiction, and Chairman Wallace talked about the 
reservations, the need for focus there.
    I guess one of the points Mr. Watkins is making is 
sometimes it is hard to identify a group by political 
jurisdiction that might need the same kind of help. Under the 
1993 OBRA legislation, we have things like the Indian 
employment credits, accelerated depreciation, in 1997 in my own 
area, not my district, we were one of the Round II empowerment 
zones. We are proud of that and are trying to work through 
that. We have had some problems, frankly, in working through 
that.
    We now have a lot of talk about new initiatives. Mr. 
Phillips talked about the new markets initiatives and how that 
can be helpful. We have ideas out there to expand the existing 
empowerment zones. In my area, the Round II empowerment zones 
want whatever benefits the Round I empowerment zones currently 
have. We need to work through that and make sure there is 
fairness there between zones.
    There are proposals to expand the current SSBIC incentives, 
expand those and make the small business initiatives work 
better. Then there is the Community Renewal Act which is 
another series of tax incentives. So there is a lot going on 
and a lot out there.
    One of the questions I have is what is working and what is 
not working? In our case in greater Cincinnati, we have had 
trouble with our enterprise zone, putting together the right 
kind of board. We haven't been able to come together and reach 
a consensus on how to spend the money we have and we're asking 
for new money. It is difficult without a track record of 
success.
    I guess the first question I would have building on Mr. 
Lewis' question to you, Chairman Wallace because I think you 
have a good feel as to what has worked and what hasn't, on the 
Indian employment credit, the 20 percent wage credit which goes 
to wage credit or health care, a 20 percent credit for that 
which is paid in excess to what was paid in 1993 or before that 
time, is that accurate?
    Mr. Wallace. Yes, sir.
    Mr. Portman. That is something you indicated has been 
helpful but not as helpful as it could be and yet you didn't 
really explain how it could be more helpful. Could you take a 
moment just to expand on that and say how it could be modified 
to make it work better? You talk about bringing in capital 
which may be another issue but even with the existing credit, 
what is working, what isn't and how can it be changed to use 
the same resources more effectively?
    Mr. Wallace. Thank you for following up on that because the 
light came on after I gave my first answer. The employment tax 
credit is very beneficial but as I talked about the geography 
of the development environment related to tribes, it is heavily 
influenced by governmental activities and the participation of 
nonprofit organizations, development entities and the tribal 
economy.
    The credit is very worthy and it certainly needs extension 
but if there is a possibility to modify the credit, to take 
into consideration the players in the development orbit of the 
tribe, the government and the nonprofits, if there could be 
some flexibility incorporated where it would be an elective 
process where you could either choose to take the credit to 
discount your corporate tax liability or more so we would like 
to advocate if you could use that to offset your payroll taxes 
and give those other players some incentive and some 
flexibility in dealing with the credit, and take full advantage 
of it.
    Mr. Portman. So it is expanding those entities that would 
be eligible to receive a credit?
    Mr. Wallace. Precisely.
    Mr. Portman. Going to the nonprofit area and not just 
private companies but both the tribal government and non-
profits that are working in the area to expand development?
    Mr. Wallace. Exactly. That would be very helpful because 
there is no incentive where they can take advantage of the 
discounting of the corporate liability tax.
    Mr. Portman. How about getting capital into the area? You 
mentioned that as a major problem, that it is great to have the 
accelerated depreciation, great to have the tax advantages of 
the wage credit, but it is tough to get capital invested. Are 
you looking at ways to do that in this new legislation? Do you 
like the new markets initiatives in that respect? Is that the 
kind of effort you think is necessary to get capital in these 
areas?
    Mr. Wallace. We find a significant amount of merit in those 
proposals and are very supportive of them and some of the other 
ideas that have come before the committee.
    Also talking about prospective incentives, some of the 
other things, tribes are actually involved in issuing debt to 
marketplace and providing types of opportunities that are 
available to other governments but in Congress' consideration 
of some of the limitations and qualifications of this policy 
and proposal, particularly as articulated in the Internal 
Revenue Code, we would hope we would have the opportunity to 
talk about some prospective barriers that have come up.
    The essential government function restriction is very 
narrow for us to take full advantage. State and local 
governments aren't subject to similar restrictions on the bonds 
they issue, so it is restrictive to us.
    The restriction on private activity bond limits to tribes 
issuing bonds were required that only is applicable to 
manufacturing facilities, so we are wedded unfortunately to one 
specific sector of the economy and don't have the flexibility 
to get engaged in other diverse activities.
    Third, the fact that tribes as State and local governments 
enjoy a relationship with the Federal Government and the 
intergovernmental revenue streams that are available to us 
disqualifies tribes because of that, because of the Federal 
guarantee prohibition. So that is a handicap.
    Fourth, tribe bond issues currently do not enjoy an 
exemption from the Federal securities registration, so we 
really don't have the ability to take advantage of the 
efficiency of the bonding network and the community that lives 
in this part of the wilderness so to speak in economic terms. 
So the tribes have very narrow opportunities. Then the cost of 
capital goes up because of the specialized nature of the 
inflexibility of our access to the efficiency of the 
marketplace.
    Mr. Portman. Thank you.
    Chairman Houghton. Rebecca, you did us proud.
    Gentlemen, you were wonderful.
    Thanks so much for your testimony.
    Chairman Houghton. Now I think we will have the next panel. 
I would like to introduce Tom Lewis, President, Fishing School; 
William P.D. Cade, President, Computers for Schools 
Association; and then I am going to let Commissioner Carlos 
Romero Barcelo introduce his witness.
    Mr. Barcelo. The Chairman is sole representative in 
Congress of the almost 4 million disenfranchised U.S. citizens 
of Puerto Rico.
    I appreciate the opportunity to introduce our next 
panelist, the Puerto Rico Secretary of Economic Development and 
Commerce and Executive Director of the Puerto Rican Industrial 
Development Company, Mr. Xavier Romeu.
    Mr. Romeu will discuss how Puerto Rico can benefit from the 
new community development proposals and how to accomplish 
community development goals in the island. As resident 
Commissioner for Puerto Rico, it has been my goal to gain full 
participation in the Federal programs that promote the health 
and welfare of all Americans, including Medicare and Medicaid 
while ensuring that we can equally prosper in this period of 
unprecedented economic growth.
    Puerto Rico was excluded from the 1993 Omnibus 
Reconciliation Act that authorized the U.S. Department of 
Housing and Urban Development and the U.S. Department of 
Agriculture to designate empowerment zones. The principal 
reason was the existence at that time of the Section 936 tax 
credit on the island. The Section 936 tax credit provided 
almost total exemption from Federal income taxes from U.S. 
company operations in Puerto Rico and the U.S. territories. 
Nonetheless in 1996, Congress enacted a ten year phase out of 
the credit, ending it altogether after December 31, 2005.
    I still believe, as I did at that time, that the tax credit 
provided in Section 936 was to a significant extent a corporate 
welfare. As many of you know, I was one of the first voices 
calling for its repeal because it gave too much and provided 
very little for what it gave. We felt that a tax incentive 
directed towards jobs would be much more productive for Puerto 
Rico and would be less expensive for the Nation.
    Now, Puerto Rico, like many other communities across the 
Nation, is at an economic crossroads and I strongly urge 
Congress to consider new initiatives that will expand the 
economic incentives to Puerto Rico ensuring that the 3.8 
million U.S. citizens are not left behind in this time of 
economic growth, particularly when we have large unemployment 
in Puerto Rico.
    There is a stimulus to migration to the mainland looking 
for jobs and many times going into communities where they 
cannot find a job and end upon welfare, which is a burden on 
those communities. This is an incentive for migration 
undesirable to us and undesirable to the Nation.
    It is my pleasure to introduce Mr. Xavier Romeu from the 
Department of Economic Development and Commerce in Puerto Rico.
    Chairman Houghton. Thank you very much, Commissioner.
    Mr. Romeu?

   STATEMENT OF HON. XAVIER ROMEU, SECRETARY, DEPARTMENT OF 
    ECONOMIC DEVELOPMENT AND COMMERCE, HATO REY, PUERTO RICO

    Mr. Romeu. Good afternoon, Mr. Chairman. Good afternoon, 
Don Carlos.
    I am the Secretary of the Department of Economic 
Development and Commerce of Puerto Rico and also the Executive 
Director of the Industrial Development Company of Puerto Rico, 
better known as PRIDCO. PRIDCO is specifically charged with 
attracting new investment and promoting the creation of U.S. 
jobs on U.S. soil, namely the beautiful island of Puerto Rico.
    I commend you, Mr. Chairman, along with the Speaker and 
other members of the House of Representatives, who have labored 
on ways to create and extend tax incentives to assist 
communities that have not fully participated in our Nation's 
economic growth and prosperity. I particularly commend and 
highlight the lifelong labor of our Congressman, Resident 
Commissioner Carlos Romero Barcelo for his leadership in 
including Puerto Rico in all economic development initiatives 
that help Puerto Rico develop as a good investment 
jurisdiction. I also commend the Administration for including 
Section 30(a), the Puerto Rico Economic Activity Tax Credit, in 
its proposal to this committee.
    I would like to take some time to ask what better time than 
this for Congress to ensure that all communities, not just 
some, in America prosper and grow to their full capacity.
    In announcing these hearings, Mr. Chairman, you emphasized 
that we cannot afford to leave anyone behind. Congressman 
Watkins just a few moments ago correctly called for equity and 
inclusiveness of all world areas in the Nation's well being and 
I could not agree more with the Congressman from Oklahoma.
    Congressman Portman raises very appropriately the question 
of what is working in each one of our communities for economic 
development that like Puerto Rico need additional benefits in 
order to develop to their full economic capacity.
    I am here today to advise the members of the committee on 
what works in Puerto Rico and how to best extend the principle 
of equity and inclusiveness to the four million U.S. citizens 
of Puerto Rico to make sure that we, as proud U.S. citizens and 
Americans, are not left behind and are included in the economic 
prosperity of our Nation.
    I know the members of this committee, as well as many of 
your colleagues in the House, are committed to the idea of 
inclusiveness and equity. While many of the proposals under 
consideration by the subcommittee will succeed in economic 
development on the U.S. mainland, it will do little for Puerto 
Rico, Mr. Chairman.
    However, I am very pleased to report that Representative 
Phil Crane, along with Representatives Rangel, Congressman 
Romero Barcelo, Congressman Weller and Congressman Dunn have 
introduced legislation, H.R. 2138, that will effectively apply 
the principal objectives of these initiatives, investment and 
job growth in the private sector to the benefit of the American 
citizens of Puerto Rico.
    The Crane-Rangel initiative is, in your words, Mr. 
Chairman, ``a proposal to expand incentives to help communities 
which need it the most.'' Under the leadership of Governor 
Pedro Rossello and Don Carlos Barcelo, Puerto Rico's economy 
has been transformed over the past seven years. Our efforts 
have brought Puerto Rico extraordinary results when compared to 
the recent past. When I say the recent past, I mean only the 
last seven or eight years.
    We have sold off most of our state-run companies, we have 
undertaken major new infrastructure projects, including modern 
mass train systems, a super aqueduct that is already relieving 
our chronic water shortage in Puerto Rico, new roads, and the 
construction of what will become the largest world trade and 
convention center in all of Latin America. We have also pursued 
an aggressive local incentives program that reduces our local 
corporate tax burden to as little as 2 percent for companies 
investing in some parts of the island of Puerto Rico.
    While this new Puerto Rico represents historic progress, we 
lag the Nation in the key indicators that this committee is 
concerned with today. Our current rate of unemployment is 
approximately 11 percent, two to three times the average 
national rate. To bring it further in line with the national 
average, we must work in a partnership with the Federal 
Government. Quite frankly, Mr. Chairman, we cannot do this 
alone.
    In the context of today's hearing, the question for us, the 
4 million U.S. citizens of Puerto Rico, is how we can work 
together to keep and expand U.S. jobs on U.S. soil, namely the 
beautiful island of Puerto Rico.
    In 1996 in the context of raising revenue to offset the 
impact of minimum wage increase which applied both in the 
mainland and in Puerto Rico, Congress eliminated the only 
Federal tax program designed to encourage employment and 
investment in Puerto Rico, Section 30(a) of the Internal 
Revenue Code.
    Under Section 30(a), U.S. companies are rewarded for 
creating jobs for the American citizens of Puerto Rico by 
receiving a Federal tax credit against their income from Puerto 
Rico operations that is calculated by taking their wages into 
account. Simply stated, the more jobs U.S. companies doing 
business in Puerto Rico create, the greater the tax credit.
    Under the 1996 changes, the Congress limited the credit to 
U.S. operations in Puerto Rico existing as of October 13, 1995 
and no credit, I emphasize no credit, was left in place for new 
companies or for existing companies planning to expand into new 
lines of business. In other words, while Congress was enacting 
Federal tax incentives to encourage companies to grow on the 
mainland, over four years to the tune of $55 billion, at least 
at the Federal level, it created a disincentive for companies 
to grow in Puerto Rico.
    We have pursued an aggressive program in Puerto Rico to 
attract new business but we are limited by the lack of new 
Federal incentives and the caps in existing incentives. 
Congress knows only too well that there are limits to what a 
local jurisdiction can accomplish and that is why it has 
enacted new tax incentives almost every year for the mainland.
    In the context of the subcommittee's program for all 
communities, Section 30(a) is the best way, short of statehood, 
to retain and expand the private sector in Puerto Rico. The net 
effect of Congress' actions in 1996 are significant. Since 1996 
and for the first time in history, we have generally maintained 
the presence of our existing mainland U.S. companies but it is 
increasingly a challenge to attract new investment in Puerto 
Rico.
    Puerto Rico is competing against low wage, non-U.S. 
jurisdictions for future investment by American companies 
because virtually every Federal, commercial, environmental and 
labor law, including the minimum wage, applies in Puerto Rico, 
we will have an even greater challenge competing with those 
jurisdictions such as Mexico, the Dominican Republic and 
Central American countries.
    I want to stress and make very clear that Section 30(a) 
does not take or attract businesses from the mainland. That was 
the old Section 936, which like Don Carlos, we were happy to 
see go away from the island and which was corporate subsidies.
    Instead Section 30(a) makes Puerto Rico competitive with 
other non-U.S. jurisdictions. U.S. jobs that do not stay in 
Puerto Rico in the future will leave the U.S. altogether. The 
retention and growth of these jobs on U.S. soil is an important 
point not just for Puerto Rico's U.S. citizens, but for the 
mainland as well. Puerto Rico is the tenth largest purchaser of 
goods and services from the mainland, totalling approximately 
$14 billion a year. Moreover, well over 220,000 mainland jobs 
depend directly on Puerto Rico.
    As a result, by including Puerto Rico in legislation to 
strengthen communities, Congress would not only give additional 
tools to continue to create jobs and build communities, but 
would also ensure the positive benefit of a strong Puerto Rico 
on the mainland.
    The likely additional increase in the Federal minimum wage 
places an additional challenge on Puerto Rico's effort to 
create jobs. Paradoxically, Mr. Chairman, when Congress passed 
the 1996 Small Business Job Protection Act, none of the tax 
breaks applied to any U.S. businesses in Puerto Rico. I submit 
it would be unfair and counterproductive to exclude Puerto Rico 
once again. Puerto Rico is more affected by the minimum wage 
increase than any other jurisdiction in the U.S. In fact, 
because our overall low wage levels, approximately 50 percent 
of the work force in Puerto Rico comes within $1 of the minimum 
wage and would be directly by this increase.
    Congress should include Puerto Rico in any offset to the 
negative effects that a minimum wage increase will have on 
business and the economy. The most effective way to do so is 
through Section 30(a).
    The incentives being discussed today for our Nation as a 
whole will do a great deal to accomplish the goals of 
increasing private sector investment in communities on the 
mainland and if Puerto Rico's political status placed it on a 
par with the mainland, as a State of the Union, they would be 
effective in Puerto Rico as well.
    Regrettably absent a change in status to Statehood which 
has proven time and again to be the best growth incentive in 
American history, we need a program that is designed 
specifically for Puerto Rico. Section 30(a) is such a program. 
No community development program will be fully successful if it 
does not include all American communities, including Puerto 
Rico.
    For us and for Congress, the challenge is to continue to 
encourage U.S. employers to maintain and create new private 
sector jobs in Puerto Rico and prevent those jobs from fleeing 
to non-U.S. jurisdictions.
    We in the Rossello administration and you in Congress share 
the commitment to whenever possible, keep American jobs on 
American soil and the best way to accomplish this is to extend 
Section 30(a).
    Mr. Chairman, members of the committee, Congressman Romero 
Barcelo, I thank you for the opportunity to share our views 
with the committee. I look forward to working with each one of 
you to enact legislation to encourage job creation and capital 
investment in Puerto Rico.
    Thank you.
    [The prepared statement follows:]

Statement of the Hon. Xavier Romeu, Secretary, Department of Economic 
Development and Commerce, Hato Rey, Puerto Rico

                              Introduction

    Mr. Chairman and members of the Committee, I am the 
Secretary of the Department of Economic Development and 
Commerce of Puerto Rico and Executive Director of the Puerto 
Rico Industrial Development Company (PRIDCO). Economic 
Development and Commerce is an ``umbrella'' Department, 
encompassing several agencies focused on the development of a 
diversified economy and the improvement of the island's 
business climate. PRIDCO is specifically charged with 
attracting new investment and promoting the creation of U.S. 
jobs on U.S. soil.
    I commend you Mr. Chairman, along with the Speaker and the 
other Members of the House of Representatives who have labored 
on ways to create and extend tax incentives to assist 
communities that have not fully participated in this Nation's 
economic growth and prosperity. I particularly commend our 
Resident Commissioner, Carlos Romero Barcelo, for his 
leadership on including Puerto Rico in all economic development 
initiatives that would help Puerto Rico. What better time than 
this to step back and ask how Congress can insure that all 
communities in America prosper and grow to their full capacity?
    In announcing this hearing you emphasized that ``We can't 
afford to leave anyone behind.'' I am here today to advise the 
Members of this Committee with respect to how best to extend 
the principle of inclusiveness to the four million United 
States citizens of Puerto Rico; to make sure that these 
Americans are not left behind. I know that the Members of this 
Committee, as well as many of your colleagues in the House, are 
committed to that ideal.
    While many of the proposals under consideration by this 
Subcommittee will succeed in economic development on the 
mainland, they will do little for Puerto Rico. I am, however, 
very pleased to report that Representative Phil Crane, along 
with Representatives Rangel, Romero-Barcelo, Weller and Dunn 
have introduced legislation (H.R. 2138) that effectively will 
apply the principal objectives of those initiatives, investment 
and job growth in the private sector, to the benefit of the 
American citizens of Puerto Rico. The Crane/Rangel initiative 
is, in your words, Mr. Chairman, ``a proposal to expand 
incentives to help the communities which need it most.''

                               Background

    Under the leadership of Governor Pedro Rossello Puerto 
Rico's economy has been transformed over the past seven years. 
Once dominated by state-run enterprises, most of which operated 
at a loss and inefficiently, we are now deeply committed to 
growing a diversified private sector and to job creation.
    Our efforts have brought Puerto Rico extraordinary results 
when compared to our recent past. Traditionally, as was the 
case when the Rossello Administration came to power, even with 
a high public payroll, we suffered from extreme unemployment, 
ranging at times as high as twenty-five percent. Our 
infrastructure was badly in need of repair and expansion, and 
our economy was in need of diversification.
    Our efforts have paid off when compared to our past. We 
have sold off most of our state run companies. We have 
undertaken major new infrastructure projects, including a 
desperately needed mass transit system, a new superaqueduct 
which will vastly relieve our chronic water shortage problems, 
new roads, and the construction of what will become the largest 
World Trade and Convention Center in all of Latin America. We 
have also pursued an aggressive local incentives program that 
reduces our local tax burden to as little as 2% for companies 
investing in some parts of our island.
    While the New Puerto Rico represents historic progress for 
us, we lag the Nation in the key indicators that this Committee 
is concerned with today. Our current rate of unemployment, 
approximately 11%, while an all time low for us, is 
significantly above the national average. To bring it further 
in line with the national average, we must work in a 
partnership with the federal government. We cannot do it alone.
    In the context of today's hearing, the question is how can 
we work together to keep and expand U.S. jobs on U.S. soil?

           Section 30A--A Job Creation Credit for Puerto Rico

    In 1996, in the context of raising revenue to offset the 
impact of a minimum wage increase which applied both on the 
mainland and in Puerto Rico, Congress eliminated the only 
federal tax program designed to encourage employment and 
investment in Puerto Rico, Section 30A of the Internal Revenue 
Code.
    Under Section 30A, U.S. companies are rewarded for creating 
jobs for the American citizens of Puerto Rico by receiving a 
federal tax credit against their income from Puerto Rico 
operations that is calculated by taking their wages into 
account. The more jobs they create, the greater the tax credit.
    Under the 1996 changes, Congress limited the credit to U.S. 
operations in Puerto Rico in 1995, and no credit was left in 
place for new companies, or existing companies planning to 
expand into new lines of business. In other words, while 
Congress was enacting federal tax incentives to encourage 
companies to grow on the mainland, it created, at least at the 
federal level, a disincentive for U.S. companies to grow in 
Puerto Rico.
    While we have pursued an aggressive program in Puerto Rico 
to attract new business, we are limited by the lack of new 
federal incentives and the caps in existing incentives. 
Congress knows only too well that there are limits to what a 
local jurisdiction can accomplish, and that is why it has 
enacted new tax incentives almost every year for the mainland. 
In the context of this Subcommittee's program to lift all 
communities, 30A is the best way to expand the private sector 
in Puerto Rico.
    The effect of Congress' actions in 1996 are significant. 
Since 1996, and for the first time in modern history, while we 
have generally maintained the presence of our existing U.S. 
corporate citizens, it is increasingly difficult to attract 
significant new U.S. corporations, and existing companies have 
disincentives to create new jobs or replace old equipment.
    Puerto Rico is competing against low wage non-U.S. 
jurisdictions for future new investments by American employers. 
Because virtually every federal commercial, environmental, and 
labor law, including the minimum wage, applies in Puerto Rico, 
we will have even greater difficulty competing with such 
jurisdictions once Section 30A expires. With Section 30A in 
place, there is no better jurisdiction outside of the mainland 
for U.S. companies to grow.
    I want to make very clear that Section 30A does not attract 
businesses away from the mainland. Instead, it makes Puerto 
Rico competitive with other non-U.S. jurisdictions. U.S. jobs 
that do not go to Puerto Rico will leave the U.S. altogether.
    The retention and growth of these jobs on U.S. soil is an 
important point not just for Puerto Rico and its U.S. citizens, 
but for the mainland as well. Puerto Rico is the tenth largest 
purchaser of goods and services from the mainland, totaling 
approximately $14 billion a year. Moreover, well over 220,000 
mainland jobs depend directly on the Puerto Rican economy.
    As a result, by including Puerto Rico in legislation to 
strengthen communities, Congress would not only give us greater 
tools to continue to create jobs and build communities, but 
would also insure that the positive benefits of a strong Puerto 
Rico on the mainland are also preserved and strengthened.

                   Minimum Wage Impact on Puerto Rico

    The likely additional increase in the federal minimum wage 
compounds Puerto Rico's efforts to create jobs. Paradoxically, when 
Congress passed the 1996 Small Business Job Protection Act, which 
provided tax benefits for businesses affected by the 1996 minimum wage 
increase, none of the tax breaks applied to any U.S. business in Puerto 
Rico.
    It would be extremely unfair and counterproductive to exclude 
Puerto Rico once again. Puerto Rico is more affected by the minimum 
wage increase than any other American jurisdiction. In fact, because of 
lower overall wage levels, approximately 57 percent of the workforce in 
Puerto Rico comes within $1 of the minimum wage and would be directly 
affected by this increase. Congress should include Puerto Rico in any 
offset to the negative effects that a minimum wage increase will have 
on its businesses and its economy. The most effective way to do that is 
by expanding Section 30A.

             The Job Creation Tax Incentive for Puerto Rico

    The incentives being discussed today by the nation as a 
whole will do a great deal to accomplish the goals of 
increasing private sector investment in communities on the 
mainland, and if Puerto Rico's political status placed it on a 
par with the mainland, they would be effective for us as well. 
Regrettably, absent a change in status to statehood, which has 
proven time and time again in American history to be the best 
growth incentive, we need a program that is designed 
specifically for Puerto Rico. Section 30A is the best way to 
help us create jobs.
    No community development program will be fully successful 
if it does not include all Americans communities, including 
Puerto Rico. For us, and for Congress, the challenge is to 
continue to encourage U.S. employers to maintain and create new 
private sector jobs in Puerto Rico. We in the Rossello 
Administration, and you in Congress, share a deep commitment to 
wherever possible, keep American jobs on American soil.
    I look forward to working with you to enact legislation to 
encourage job creation and capital investment by U.S. companies 
in Puerto Rico.
      

                                

    Chairman Houghton. Thank you very much.
    Mr. Lewis?

 STATEMENT OF TOM LEWIS, FOUNDER AND PRESIDENT, FISHING SCHOOL

    Mr. Lewis. Thank you, Mr. Chairman, members of the 
committee. It is an honor for me to be here with you today.
    My name is Tom Lewis and I am a retired Metropolitan Police 
Officer here in Washington, D.C., a local minister and the 
founder and President of the Fishing School. It is an after-
school motivation program that I run in northeast Washington.
    I started out many years ago as a police officer working in 
schools with children. My job was to go into schools and talk 
with children about the jobs of police officers and things we 
did to help them and their families. As I talked with these 
children from time to time, I would see the one in the third 
grade bringing the one in the first grade to school just as 
filthy and dirty in the morning, slobbering over each other and 
it just kind of broke my heart.
    I all too often witnessed the results of that kind of 
childhood with children coming to school dressed and looking 
like orphans. The result of that kind of thing led to children 
growing up involved in robberies, drug addiction and even 
murder. I once remember finding the body of a man who had been 
dead and the stench of that body for four days, I never smelled 
anything like it in my life.
    As I began to think about that, I also thought about the 
smell, the stench of the other things that were going on within 
our communities, the smell of pain and suffering and 
degradation. So I wanted to find a way to do something about 
it. As victims, the children were being presented as victims 
and far too often as perpetrators as time went on.
    Through my police work, it became clear that someone had to 
do something to rid this community of this kind of poison. I 
desperately wanted to help the children but I didn't know what 
to do. I didn't know where to begin, I just knew I had to do 
something.
    In 1985, I purchased a building in a distressed part of 
Washington, D.C. on Wylie Street, a street that was said to 
have been the worse street in America. When I had that house 
there I was trying to help supplement my own income for my own 
three children. As I was praying at church I had a vision and I 
decided I was going to open that house as a family service 
center there in Washington, D.C. It is a rough area and people 
though I was crazy for going there but my mind and my vision 
drove me there and I decided to do my life's work there. 
Taxicabs don't go on that block, pizza delivery trucks don't go 
there, police officers don't want to go there. They won't go 
there unless they are with someone else.
    I named it the Fishing School based on the adage that says, 
``If you give a man a fish, it will feed him for a day. Teach 
him how to fish and he will feed himself for a lifetime.'' What 
we are actually trying to do is fishing in the rivers of the 
mind there. We work with about 35 children a day, teaching them 
a variety of skills. We help them with homework, deal with 
computer skills, give them a warm meal every day, teach them 
basic life skills like practicing good manners, showing respect 
and practicing self discipline.
    The children, despite their chaotic even dangerous 
environment, show signs of getting the message, catching on to 
kindness and decency and self respect, catching on to hope and 
confidence and the joy that comes from learning. Every day more 
and more kids on Wylie Street are learning how to fish in the 
rivers of the mind.
    I wouldn't want to mislead you to believe this is anything 
less than a slow and arduous process. Some of the children 
still won't even dare to dream. Some of them come to me as 
children who have never known a real childhood and real 
laughter, to play hopes and gains. The Fishing School offers 
them hope, the Fishing School teaches them to dream big dreams 
and to work hard to achieve their dreams whatever it may be.
    People who don't live in our neighborhood can't understand 
the hopelessness that invades the lives of our children. It is 
like a thief. They watch the evening news and shake their heads 
at those kids in the inner city who join gangs, sell drugs, 
bring babies into the world at an alarming rate. They shake 
their heads and breathe a sigh of relief that their kids are 
safe at home at least, safer in the suburbs and in their 
private schools. I don't blame them, I want the same thing for 
my children but I want to tell those people who only know the 
kids in my neighborhood from what they see in the media, these 
aren't really bad kids.
    The kids that join the gangs, the girls that have babies 
they can't support, are undisciplined, they are reckless, their 
behavior isn't moral by anyone's standards but what most people 
can't comprehend is that these kids, many of them, have never 
been told they have a choice. For many of these children, they 
believe it is the only way they can get along or belong, the 
only way they can have an identity, the only way they know how 
to get along, how to get love and acceptance. They don't know 
there is another way.
    If you say, but don't they understand this kind of behavior 
will ruin their future? The vast majority of them will look you 
in the eye and say, what future? It is up to us to give these 
kids a future. How do we do that? By giving them hope, by 
showing them the world outside their neighborhood.
    At the Fishing School we often take field trips to the 
museums all over town, Goddard Space Center, we bring them up 
here to Capitol Hill to learn about Congress and to the many 
other historic landmarks that make our city so rich. We show 
them the world of books, bring in volunteers and consultants 
who inspire them in a variety of subjects. We teach them about 
virtue, self respect and respect for others. At the Fishing 
School, we teach them about God and the dignity he bestows on 
each one of them.
    We often pray for their families and their friends and 
their futures. It is all about hope at the Fishing School. I 
encourage each child to find his own strength. For the boy who 
is good at carpentry, we show him how to build things; for the 
children who can write, we encourage them to read their work to 
audiences at Borders Book Store. To the young man who wanted to 
dance, I found him a tutor and they got him a scholarship at 
the Washington School of Ballet. He ended up dancing the 
Nutcracker Ballet with Chelsea Clinton before she left town.
    So you see I don't just want children to survive; we want 
them to strive and go beyond that. I believe our program works 
not because we spend a lot of time lecturing kids on the 
dangers of drugs. These kids know how dangerous drugs can be. 
They have sick and in some cases, dead brothers, mothers and 
fathers to prove it. They don't need my lectures. They need my 
love.
    Mr. Chairman, if you will allow me to continue half a 
minute. I believe there is a need for Fishing Schools in every 
inner city in this country. My cousin has been trying to open a 
school in rural North Carolina and after several years of 
trying this, we finally opened it last year.
    I got a call from a lady in Dayton, Ohio who wants to open 
a Fishing School there. I got a call from a lady who is coming 
to Washington the first week in April to look at our school 
from Augusta, Georgia. She wants to open a program there.
    I believe a program such as we are dealing with here today 
can make an honest effort to assist these people who open these 
kinds of programs. They can help now if you pass this bill. 
Though I recently opened a second Fishing School in my 
neighborhood, there are still many other neighborhoods where 
another Fishing School is needed and a tax write-off like the 
one you are proposing today would provide a tremendous jump-
start.
    In fact, as I see it, your proposals are really about jump-
starting programs all over the country just like the Fishing 
School. You can turn crack houses into Fishing Schools one 
neighborhood at a time until we have a Nation where Fishing 
Schools are the norm in our inner cities and crack houses are 
the exceptions.
    Until we have a Nation where the Pizza man will deliver 
pizzas to children on any block in America.
    Thank you for your time and patience.
    [The prepared statement follows:]

Statement of Tom Lewis, Founder and President, Fishing School

    Thank You Mr. Chairman, Members of the Committee. It's an 
Honor for me to be here with all of you today.
    My Name is Tom Lewis. I'm a 20 year veteran of the 
Washington D.C. Metropolitan Police Department, an ordained 
Minister and the Founder of the Fishing School--an after school 
program for children in northeast D.C.
    As a Police Officer, I met hundreds of young people in the 
inner-city. As part of my work, I visited D.C.'S Public Schools 
on a regular basis. I talked to them about the work I did and I 
taught them that Police Officers are their friends, that we're 
there to protect them and their families. The kids started 
calling me ``Officer Friendly,'' a name that stuck for years.
    Many times after I gave a talk, little children would come 
up to me and ask, ``would you be my daddy?''
    It broke my heart to see so many children--far too many--
with fathers in prison and mothers on drugs. Mr. Chairman, they 
were virtually orphans.
    In other parts of my police work, I all too often witnessed 
the results of that kind of childhood: robberies, drug 
addiction, even murder.
    I once remember finding the body of a man who had been dead 
for four days, killed by another man's bullet. The stench from 
that body was repugnant, even painful, but not nearly as 
painful as the stench of poverty that emanated from the 
community around me; the stench of child abuse; the stench of 
crime; of drugs. . .especially where children are involved, 
both as victims and--far, far too often--as perpetrators.
    Through my police work, it became clear that someone had to 
do something to rid the community of this pervasive poison. I 
desperately wanted to help the children, but I didn't know what 
to do. I didn't know where to begin. I Just knew I had to do 
something.
    In 1985, I purchased a building on wylie street--a street, 
once called the most dangerous street in the United States. God 
gave me a vision to turn that house into a place where children 
could be safe, where they could study, where they could learn 
right from wrong. When people asked (and still ask) why I chose 
such a dangerous street, I tell them, ``because it's where 
these children live''.
    Taxis won't go there. Pizza delivery trucks won't go there. 
My brother-in-law, a police officer, won't go there with less 
than four officers in a squad car. The fishing school is an 
oasis, a haven on wylie street. Even the gang members, a few 
doors down, have been told by their leaders to leave us alone. 
and they do, because as one of them told me, ``Mr. Lewis, we 
know you're doing good things with the children''.
    I named it the Fishing School based on the adage: ``Give a 
man a fish and you'll feed him for a day; teach him how to fish 
and he'll feed himself for a lifetime.'' up to 35 kids crowd 
into our cramped building everyday. We have tutors who help 
them with their homework and work on their computer skills.
    We teach them basic life skills like: practicing good 
manners, showing respect and practicing self-discipline. Those 
aren't skills adopted readily by any child, much less the child 
of a prostitute, the child of a drug dealer, the malnourished 
child, the abused child. And yet, everyday, I see tiny miracles 
at the fishing school. These children, despite their chaotic, 
even dangerous environments, show signs of getting the message. 
Catching onto kindness and decency and self-respect. Catching 
onto hope and confidence and the joy that comes from learning. 
Everyday, more and more kids on wylie street are learning to 
fish.
    But I wouldn't want to mislead you into believing this is 
anything less that a slow and arduous process, and some of the 
children still won't eveN dare to dream. Some of them come to 
me as children who've never known a real childhood, with 
laughter and play and hopes and dreams. The Fishing School 
offers them hope. The Fishing School teaches them to dream big 
dreams and to work hard to achieve their dream, whatever it may 
be.
    I once had a banker visit The Fishing School to teach the 
children about finances. One little nine year old boy asked 
him, ``why are you wearing that suit and tie in this 
neighborhood?''
    ``These are my work clothes,'' the man explained. ``As a 
little boy, I was very poor, but I decided when I grew up, I 
wanted to make something of myself. So I studied hard and 
worked hard and today I'm a banker, and this is what bankers 
wear to work''.
    And then he looked at the boy and said, ``if you study very 
hard and obey your teachers, you can be whatever you want to be 
when you grow up''.
    ``I'm not going to grow up to be a man,'' the little boy 
said. ``I won't live that long. I'll probably get shot first.''
    Today that boy is fifteen years old. He's a good student. 
He plays on a basketball team. I believe he will grow up to be 
a man, and a fine one at that. And what's more, he believes it 
too.
    He has something he didn't have six years ago as a little 
boy.. . .he has hope.
    People who don't live in our neighborhood can't comprehend 
the hopelessness that invades the lives of our children like a 
thief. They watch the evening news and shake their heads at 
``those kids'' in the inner-city who join gangs, sell drugs, 
and bring babies into the world at an alarming rate. They shake 
their heads and breathe a sigh of relief that their kids are 
safe-or at least safer-in the suburbs and in their private 
schools. I Don't blame them. I hope my kids will someday live 
in safe neighborhoods, too.
    But I want to tell those people who only know the kids in 
my neighborhood from what they see in the media, that these 
aren't really bad kids. The boys that join the gangs. The girls 
that have babies they can't support. They're undisciplined and 
they're reckless. And their behavior isn't moral by anyone's 
standards.
    But what most people can't comprehend is that these kids--
many of them--have never been told they have a choice. For many 
of these children, they believe it's the only way they can 
belong. The only way they can have an identity. It's the only 
way they know how to get love and acceptance. They don't know 
there's any other way.
    If you say, ``but don't they understand this kind of 
behavior will ruin their future?'' The vast majority of these 
kids would look at you and reply, ``what future?''
    It's up to us to give these kids a future. And how do we do 
that? By giving them hope.
    By showing them the world outside their neighborhood. At 
the fishing school, we often take field trips to the museums 
all over town to Goddard Space Center. . .we bring them up here 
to capitol hill to learn about congress, and to the many other 
historic landmarks that make our city so rich.
    We show them the world of books and bring in volunteers who 
inspire them in a variety of subjects. We teach them about 
virtue. We teach them about self-respect and respect for 
others. And at the Fishing School, we teach them about god and 
the dignity he has bestowed on each one of them. We often pray 
for their families and friends and for their futures. It's all 
about hope at the Fishing School
    I encourage each child to find his or her strengths. For 
the boy who is good at carpentry, I have him help me build 
things. For the children who can write, I encourage them to 
read their work to audiences at Border's Bookstore. To the 
young man who wanted to dance, I found him a tutor. He went on 
to join the Washington Ballet where he danced in the Nutcracker 
Suite next to the president's daughter. He has now moved to new 
york where he has joined the theater. One young lady, just this 
year, left for college. She's the Fishing School's first 
graduate to go onto college. I expect there will be many more.
    You see, I don't just want these kids to survive. I want 
them to thrive.
    I believe the Fishing School works not because I spend a 
lot of time lecturing kids on the dangers of drugs. These kids 
know how dangerous drugs can be. They have sick-and in some 
cases dead--brothers and mothers and fathers to prove it.
    They don't need my lectures. They need my love. Tough love 
at times, but love just the same. Over 97% of the children who 
come to the Fishing School have no fathers in their home. I'm 
the only father many of them will ever know. And I take the 
responsibility very seriously. Their achievements and failures 
affect me just as much as if they were my own flesh and blood.
    Everyday, I help each child focus on his or her gifts and 
talents and abilities. Just because a child is poor, doesn't 
mean he's bereft of god-given talent. But what is often the 
case, the child is without anyone who will unleash that talent 
and encourage him, encourage her to cultivate that talent. at 
the fishing school, we do this everyday, and everyday we see 
results both large and small.
    I believe that there is a need for a fishing school in 
every inner-city of this country. My cousin has been trying to 
open such a school in rural North Carolina for several years. 
Like most people with the will and the interest to open this 
type of school in a depressed neighborhood, my cousin lacked 
the money and thus had to wait until the right opportunity came 
along. For her, it came recently in the form of an old 
dilapidated gas station which was donated by someone in the 
neighborhood. This facility, like the one that was donated to 
me for one of my schools, is sorely in need of repair before it 
can really provide the benefit intended for the children. If 
the HR. 815, the American Community renewal act of 1999, and 
the proposed new markets incentive were to pass, costs for the 
start-up of these types of schools could be minimized by as 
much as 35,000 dollars. Specifically, the current proposals 
would allow persons who attempt to start a Fishing School 
program to spend 35,000 dollars--tax free--to equip and furnish 
the school.
    I know up here on Capitol Hill, where you talk in terms of 
billions of Dollars everyday, a number like $35,000 sounds 
small.
    But Mr. Chairman, to someone like my cousin, and others 
like her, $35,000 could mean the difference between starting 
and actually running an effective Fishing School and just 
dreaming about it.
    Thirty-five thousand dollars can buy several computers, 
faxes, copiers and desks. It would buy needed books and kitchen 
equipment for those of us who feed the children. It sure would 
have helped when i got started ten years ago.
    And it can help now if you pass this bill. Although I 
recently opened a second Fishing school in my neighborhood, 
there are still many other neighborhoods where another Fishing 
School is needed and a tax write-off like the one you are 
proposing here today would provide a tremendous jump start. In 
fact, as I see it, your proposals are really about jump-
starting programs all over the country, just like the Fishing 
School.
    You can help turn crack houses into Fishing Schools. One 
neighborhood at a time, until we have a nation where Fishing 
Schools are the norm in our inner cities, and crack houses are 
the exception.
    Until we have a nation where the pizza man will deliver 
pizza to children on any block in america.
    Thank you for your time and god bless you.
      

                                

    Chairman Houghton. Thanks very much, Mr. Lewis
    Mr. Cade?

  STATEMENT OF WILLIE CADE, PRESIDENT, COMPUTERS FOR SCHOOLS 
                 ASSOCIATION, CHICAGO, ILLINOIS

    Mr. Cade. Thank you, Mr. Chairman.
    I want to give you a perspective of what it means to have 
donated computers in our school systems today from two 
perspectives. First, from the point of view of Chairman of the 
national association where we have 30 programs in States all 
over the U.S. that are donating used computers to schools and, 
from my own personal experience as the person in Chicago who 
does it.
    Over the last nine years, our program has donated over 
77,000 computers in 30 States in the United States. I am here 
to testify about some legislation that can actually help us get 
our job done. There are some amazing statistics in my mind when 
we get to our school systems and the computers that are in the 
schools.
    Probably the most amazing one to me right now is that the 
computers in schools today on average are seven years old. If I 
was to look at a computer in my own private business that was 
seven years old, I would scrap it.
    Our goal, with this legislation, is to encourage businesses 
to donate newer computers relative to the seven year old, 
computers that are less than three years old. It is codified in 
H.R. 2308 here at the House.
    Our process would do three basic things with the new 
legislation. It would expand the currently existing 21st 
Century Classroom Act and it would expand it by adding one more 
year of eligibility on donated equipment for the tax benefit. 
It would include organizations that are now not included. 
Finally it would create an enhanced tax credit.
    In 1999, there were 45 million computers that were 
delivered to industry or homes in the United States. This year, 
it is expected that 54 million computers will be installed. 
That is over 100 million computers in the last two years alone. 
If we can capture a mere percentage of that, in two years we 
would be able to supply the 12 million plus computers that will 
be required in our school system to make them technologically 
sound. That does include, by the way, all of the 107,000 
schools that are in our country today.
    I know today our hearings are specifically about 
empowerment zones. Most of the computers that I donate or work 
with in schools are computers that actually go into schools 
where students don't have a chance to have computers. An 
example that I saw last week was a school of 600 children on 
the west side of Chicago where the last three years the 
principal had locked up the computers because he didn't want 
them stolen. When I looked at the computer he was protecting, I 
suggested to the new staff at that point they probably should 
be stolen, that they were technology that had been around since 
1980.
    It is estimated that 50 percent of our labor force is going 
to be involved in the technology area in a few short years. It 
takes five years for teachers to actually integrate technology 
into their classrooms. We have done a marvelous job of getting 
Internet to the schools in the last four years. Currently 95 
percent of schools in the U.S. have an Internet connection.
    Unfortunately though, most of them don't have computers to 
connect to those wonderful T1 lines that are there. So I can go 
into the City of Chicago and find a T1 line, which is the 
equivalent of 24 telephone lines and find three computers 
connected to it.
    We need computers in our schools in a big way. If we waited 
and bought new equipment at our current budget levels, it would 
take us 17 years to get the equipment there. I assume Congress 
and the rest of us are very sensitive with our dollars and I 
therefore assume level funding. If we do it with used 
computers, we could do it in two to three years.
    The bill would encourage Pentium II level technology 
donations. Right now our minimum standard is a Pentium system 
operating at approximately 75 megahertz. That makes machines 
that are very well received in the schools.
    I will stop at this point because my time has expired.
    [The prepared statement follows:]

Statement of Willie Cade, President, Computers for Schools Association, 
Chicago, Illinois

    Thank you for the privilege of addressing you on what I 
consider legislation valuable for the future of our country. I 
would like to begin by wholeheartedly thanking Congressmen 
Portman and Becerra for their strong support of this 
legislation. I am among the many students, parents, teachers 
and friends of education most grateful to Congressmen Portman 
and Becerra for their sponsorship of this far-sighted 
legislation and their championing of better technology in our 
schools, particularly schools located in empowerment and 
enterprise zones and on reservations.
    My name is Willie Cade. I am the president of the Computers 
for Schools Association. I am responsible for the computer 
donation program called ``Computers for Schools'' in states and 
communities across the country.
    The Computers for Schools Association has taken over the 
computer donation program initiated and run until recently by 
the Detwiler Foundation. The program refurbishes computers 
being retired from businesses to use in schools, places where 
the level of technology continues to lag significantly behind 
the business standard. Unofficially, we are the nation's single 
most productive source of donated computers to schools. We have 
facilitated donation of more than 77,000 computers in 30 
states. Today I am here to testify about legislation that could 
vastly improve the educational environment of children located 
in some of our poorest areas.
    The 21st Century Classrooms Act, part of the Tax Relief Act 
of 1997, was an attempt to enhance computer donations with more 
and newer technology. It provides businesses with an enhanced 
tax deduction for donation of equipment two years old or less.
    Unfortunately, the promise of the Act has not been 
fulfilled. We at Computers for Schools have received more than 
a thousand calls regarding the Act and have worked with dozens 
of companies eager to put it to use. Most could not....for 
three primary reasons: the two-year provision did not fit their 
equipment use cycle, the provision was limited to original 
acquirers and the deduction enhancement did not provide 
significant incentive. In general, a business buys a computer 
with a three-year life cycle in mind. Asking business owners to 
donate equipment before that cycle is complete essentially asks 
them to take a loss on their equipment investment. Many in a 
position to donate-those with accelerated equipment use 
patterns-still found that the deduction provisions in the Act 
did not adequately compensate them for the loss of revenue they 
could receive by getting a fair market price for the machines.
    Before us today is the New Millennium Classrooms Act, which 
builds on the foundation laid with the 21st Century Classrooms 
Act. It is our opinion at Computers for Schools that the New 
Millennium legislation will take us closer to accomplishing the 
intent behind the 21st Century Classrooms Act. Several elements 
of the bill are key in this regard; it expands the window 
through which donations can be made from two years to three and 
it provides for a more straight-forward tax credit for eligible 
donations -a tax credit that could be converted to a deduction 
to achieve the same effect. Additionally, the credit-30 percent 
for donations for unspecified direction-will rise to 50 percent 
when the donation is designated for enterprise or empowerment 
zone schools. This legislation also helps us expand the group 
of eligible donors and thus raises the potential for the 
significant donations intended. Lastly, the New Millennium 
Classrooms Act extends the law for 3 more years -current law 
will sunset at the end of this year.
    The question before us today is whether reconditioned 
computers can play a significant role in getting current 
technology (multimedia capable) into the neediest classrooms. 
In 1999, 45 million new computers were sold in the United 
States. This year it is expected that 54 million computers will 
be installed. Assuming 50% of these computers were replacing 
systems currently in use, if we captured 15% of those 
replacement systems, we could put the number of needed 
computers in all our schools in three years. Unfortunately, 
donations of current technology are in the low single digits. 
The legislation will encourage the capturing of these 
computers, helping us to meet our goals, particularly in the 
most needy schools -those in enterprise and empowerment zones 
and on reservations.
    Ladies and gentlemen of the committee, the legislation you 
are considering has the power to alter lives. I don't have to 
tell you we live in a world increasingly dependent on 
technology. By the year 2006 it is estimated that 50% of our 
labor force will work directly or indirectly in information 
technology. Our children and our society must be prepared for 
that world as thoroughly as is within our power. This is about 
life options-the ability and capability of students to make 
positive choices about who they are, what they can do and who 
they will become.
    The New Millennium Classrooms Act helps open those options. 
The case for computer-aided teaching and its positive impact on 
academic achievement grows stronger every day. Secretary of 
Education Richard Riley emphasized the importance of technology 
in education. He noted that with an expectation of 70 percent 
growth in computer and technology-related jobs in the next six 
years, students who can use technology effectively will be in 
the best position to build rewarding careers and productive 
lives. But, children not exposed to technology will grow 
increasingly disenfranchised. All this while recent studies 
show that there is an increasing number of children who are 
being left behind.
    Consider that children from lower income areas and many 
disadvantaged minority children, children less likely to have 
computers at home, are unfortunately also less likely to have 
computers in their schools. A recent National 
Telecommunications and Information Administration study shows 
that with regard to computers, the gap between White and Black 
households grew 39% between 1994 and 1998. With regard to 
Internet access, the gap between White and Black households 
increased by 37.7% between 1997 and 1998. Additionally there 
was a 73% gap in ownership between families earning less than 
$15,000 and $35,000.
    At the same time, studies show that schools with 81 percent 
or more economically disadvantaged students as defined by 
federal education Title I eligibility, have one multimedia 
computer for every 32 students while a school with less than 20 
percent economically disadvantaged will have a multimedia 
computer for every 22 students. Schools with 90 percent or more 
minority students have one multimedia system for every 30 
students.
    Now consider that the very students with the least 
technology available to them are the ones who can be helped 
most by its use. This was borne out by a recent City University 
of New York study that noted dramatic increases in test scores 
for disadvantaged students once computer-aided instruction was 
introduced or increased in their curricula. Computers are 
patient, persistent and operate with total equanimity. These 
characteristics have special relevance for disadvantaged youth 
growing up in tough, often less-than-nurturing surroundings. 
These are also the very youth helped most by this legislation 
because of its incentive clause to encourage equipment 
donations where they are needed most, to enterprise and 
empowerment zones. The New Millennium Classrooms Act is an act 
of empowerment.
    Even outside the target zones delineated in the bill, our 
schools stand in dire need of technology upgrading. Depending 
on which figures you look at, our current students-per-computer 
ratio across the country is ten or 11 to one. That's about ten 
students for each computer. But that ratio includes millions of 
woefully substandard machines; 386's, 286's, Apple IIe's, even 
old 8086's and Commodore 64's. The best that can be said about 
these systems is that they're a step above typewriters, but 
even that statement is suspect. Getting serious, up-to-date 
education software installed on any of these is out of the 
question.
    While that ten-to-one ratio of students per computer may 
sound promising, it needs to be put in another context. 
Statistics by the Educational Testing Service show a much lower 
students per computer ratio for multimedia computers. 
Multimedia computers are the type that provide adequate access 
to the Internet and to the kind of software that teachers find 
useful as teaching tools. The students-per-multimedia computer 
ratio increases even more in lower income districts. In an 
Educational Testing Service study conducted just a few years 
ago, the ratio of multimedia computers to students in lower 
income school districts was 1 computer to 32 students. This, 
while the Department of Education recommends that the optimal 
ratio of students per computer is five to one.
    The New Millennium Classrooms Act would spur the donation 
of nothing older than Pentium II generation technology. This 
raises the bar in our schools where the average machine today 
is a circa 1993 model. If enacted, New Millennium accepts 
nothing built prior to 1997 and keeps that standard moving 
forward with the calendar.
    In addition to its direct impact on teaching and learning, 
this bill provides other benefits to help us better prepare for 
the next century.
    The Rand Institute estimates it will cost about $15 billion 
to provide US schools with the technology necessary to educate 
our children for the future. New Millennium helps us stretch 
the funds available, providing more opportunities for other 
critical technology needs such as teacher training, 
infrastructure and curricular software.
    As we approach a preferable level of technology in our 
schools, this bill lets us do so in a cost-effective manner-
easing pressure on federal and state budgets. I want to be 
clear; we do not advocate this legislation as a replacement to 
state and federal technology expenditures. This is, however, a 
way to limit the inflation of that spending. Many of you have 
already noted that a time of better budget health is also a 
time to be more mindful of spending. From a cost-benefit 
perspective, New Millennium helps keep the pulse of spending 
more even and secures more for less in the process.
    New Millennium also triggers more business interest and 
involvement in our communities and our schools. I am not here 
to discuss the extent and nature of that involvement--that is 
for local schools and communities to decide. But the Act gives 
businesses another tool through which they can contribute to 
their communities. In the process those businesses are not 
penalized financially when they concentrate their giving on 
empowerment and enterprise zones. The Act also encourages the 
most environmentally sensitive of recycling options...re-use.
    This Act also has Welfare to Work and workforce development 
implications. In our work, Computers for Schools is partnered 
with numerous refurbishing facilities where trainees are the 
chronically underemployed or unemployed. To give one example, 
our donations in New Jersey, which go through four state 
community colleges, are refurbished and outfitted for schools 
by former welfare recipients. They are learning skills that can 
move them so far ahead it turns welfare checks into distant 
specks in their rear-view mirrors.
    Other trainees through our program include inmates at 
correctional facilities, students in vocational and technical 
schools and those in high schools and even middle schools. For 
all of them, the equation is the same; exposure to the current 
technology only enhances their training, making them more ready 
for key certifications such as A+ and MCSE or Microsoft 
Certified Systems Engineer. These skills are in high demand. 
They can make the transition from welfare to work, or crime to 
work, permanent. But it doesn't happen without the opportunity.
    As we see it at Computers for Schools, opportunity is what 
the New Millennium Classrooms Act is all about. First and 
foremost, it opens a world of opportunity to students and 
teachers in the classroom. It gives local, state and federal 
budget makers the opportunity to extend their tight dollars. 
For business it's an opportunity to contribute to students and 
communities without being penalized in the process. And we have 
just noted how this legislation can help trainees.
    The Community Reinvestment Act is about creating 
opportunity in areas long left outside the economic growth and 
success of America. The New Millennium Classrooms Act adds to 
the benefits of this bill by providing an opportunity to give 
the children in these areas access to technology in their 
schools and libraries. This access can be the great equalizer, 
but without it, we stand to disenfranchise our most vulnerable 
children and alienate them from the opportunities that could 
change their lives. The least we can do for these children, the 
future generation, is give them all the positive tools at our 
disposal to help them meet the challenges of the 21st Century. 
The New Millennium Classrooms Act does that.
    Thank you.
      

                                

    Chairman Houghton. Thank you very much.
    Mr. Coyne? Mr. Portman?
    Mr. Portman. I appreciate the testimony of all three 
panelists. Mr. Lewis, God bless you for what you are doing with 
the Fishing School. I am from Cincinnati and you mentioned 
somebody from Dayton might be coming to talk to you. I know 
some folks in Cincinnati who might be interested as well and I 
want to get your card afterwards or whatever information you 
have.
    Mr. Cade, as you know, the nexus here between the 
enterprise zones and the empowerment zones and the computer 
bill is that we give an enhanced credit if the donation is made 
to an enterprise zone, an empowerment zone or to an Indian 
reservation. It goes from a 30 percent credit to a 50 percent 
credit. Therefore, it does target schools that you have talked 
about, like the school in Chicago that really needs the help 
the most and really doesn't have the resources to go out and 
get the technology that is needed to allow these kids to be 
able to experience what they are going to need out in the real 
world in terms of high technology.
    I have a few questions for you if I could go through them 
quickly in the time that I have because there have been some 
concerns raised about this legislation. As you said, it is 
competing with everything else and we want to be sure the 
dollars we provide through tax incentives are targeted and well 
spent.
    There was an article in the Washington Post recently that 
addressed computer training for teachers. Do you think this 
legislation, H.R. 2308, addresses the issue of teachers not 
having adequate training to be able to effectively teach with 
computers?
    Mr. Cade. Absolutely. First, let me thank you for your work 
on this bill and specifically H.R. 2308. It has been a great 
help to us.
    One of the things we do with our donated computers is 
actually provide them for teachers in their homes so that they 
can operate on a personal basis with this. The only way I know 
to really learn today's technology is to have it in your home 
and have it be something you find personally useful. So we 
provide them to the teachers, they can take them home, and that 
is the only way it is going to really work in terms of teachers 
being trained on technology.
    Mr. Portman. The other thing we have talked about with your 
organization and with schools is they have a technology budget 
and if they can get some of the hardware, then they can spend 
more money on the Internet wiring, training or other things. 
They don't have room in the budget for the whole thing, so what 
you are doing in Chicago and around the country is allowing 
them to do more with regard to training.
    Current law does provide for two year computers but not 
three year computers and there has been some back and forth on 
that. Could you address the criticism that this change would 
allow for donations of three year computers that would be out 
of date?
    Mr. Cade. The current technology that is three years old is 
a Pentium II system running at 266 megahertz. Those are the 
kinds of systems that frankly are wonderful systems to have. 
They run every piece of software I know of in terms of the 
educational environment. As a matter of fact, when we go in 
with a Pentium 100 system, we are considered heroes. So this 
legislation actually goes beyond that and provides even a 
higher standard that we hope to attain with all of our 
donations.
    Mr. Portman. I appreciate that. I think that is true and I 
think the current law is just a little too restrictive. Why not 
make it three years. I just upgraded myself to that Pentium II. 
It is a huge difference and many schools are working not just 
with a Pentium but even earlier technology that a three year 
computer would be well received as you said.
    There has been this sense that this legislation would make 
it more lucrative for a company to donate a computer than to 
sell it on the resale market. Can you talk about that?
    Mr. Cade. My suspicion is that actually won't and I looked 
at the numbers, but it will actually give them a sufficient 
incentive to donate it to the schools. Right now there is just 
not enough of an incentive to do that en masse. There are a few 
individual corporations who do it but if we can get more and 
more to do it, it would help us enormously, especially given 
the task.
    The other thing I might mention is our national goal has 
been to get five students for every one computer. We need to 
not lose sight of the fact that once we accomplish that goal, 
we have to repeat it again and again and again because of the 
nature of technology which changes so fast.
    Mr. Portman. The final question and I will pose it more as 
a rhetorical question. There has been the sense we don't want 
to force these schools to take computers they don't want. Is 
any school forced to take a computer they don't want, or any 
library or anybody else?
    Mr. Cade. Sir, I don't have time to deal with schools that 
don't want computers, I have so many who do. I have never heard 
of one that doesn't.
    Mr. Portman. Obviously they don't have to accept the 
donation. Some schools aren't going to want them, some schools 
may have more hardware than they need but less of something 
else and may need something else like training or wiring.
    Thank you very much for what you do around the country, and 
your organization. We hope we can expand this particularly into 
those communities that need it the most.
    Chairman Houghton. Thank you, Mr. Portman.
    I just have a few questions. Mr. Cade, it is a fascinating 
program you are involved in. Several friends of mine and myself 
have been giving computers to a school in Zimbabwe. We don't 
care whether they go back to 1980; any computer in the schools 
there is very, very helpful, but I understand what you are 
saying. The Tax Relief Act of 1997 was of help.
    Mr. Romeu, tell us a little bit about Section 30(a) prior 
to 1996?
    Mr. Romeu. Prior to 1996, Section 30(a) was available to US 
companies with Puerto Rico operations starting in 1994 through 
October 13, 1995. A number of companies in Puerto Rico elected 
Section 30(a) status. Section 30(a) was not available after 
October 13,1995 for new companies and new Puerto Rico 
operations. Although a number of companies including, among 
others, Sara Lee from the State of Illinois, have used Section 
30(a), they are not able to make use of that section for new 
lines of business that were not in Puerto Rico in 1995. This is 
because not only is it being phased out with Section 936 until 
2005, but it is not available to companies who are Section 
30(a) and who want to bring in new operations and new lines of 
businesses to Puerto Rico. If they do, the Section 30(a) 
benefits are eliminated completely.
    As it stands right now, there are a number of corporate 
citizens that do well that can't compete with other foreign 
jurisdictions with Section 30(a) because they will lose that 
incentive as of 2005 and there will be severe income cap limits 
in 2002.
    Chairman Houghton. Thank you very much.
    Mr. Lewis, I don't have any questions for you but I think 
that was as compelling testimony as I have ever heard here and 
I thank you very much for it. I also thank you for the fact you 
weren't given very much time to prepare. You are a good sport 
and you are very articulate. If you could give me some more 
information on this individual in Augusta, Georgia, that would 
help me tremendously.
    Mr. Lewis. Yes, sir. I do have that information.
    Chairman Houghton. Good. That is wonderful.
    Are there other questions? Mr. Portman? Commissioner?
    [No response.]
    Chairman Houghton. Thank you again, so much for this great 
help this afternoon.
    There being no further business before the subcommittee, 
the hearing is adjourned.
    [Whereupon, at 4:39 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

                          Association of American Railroads
                                       Washington, DC 20001
                                                      April 4, 2000

Dear Mr. Chairman:

     The Association of American Railroads (AAR) submits the following 
comments in connection with the hearing held by the Subcommittee on 
Oversight of the Committee on Ways and Means on Tuesday, March 21, 2000 
concerning tax incentives to assist distressed communities. AAR asks 
that the comments be made a part of the hearing record.

                               Background

     Freight railroads move just about everything--from lumber 
to grain, from chemicals to scrap iron, from orange juice to 
new automobiles. Overall, railroads carry more than 40 percent 
of U.S. intercity freight, including 64 percent of the coal 
shipments which are used to generate 36 percent of our nation's 
electricity.
     In 1998, Class I railroads operated 20,250 locomotives 
across a network of more than 132,000 route miles. 
Collectively, these locomotives consumed 3.6 billion gallons of 
diesel fuel transporting freight at a total cost of more than 
$2 billion.

                          Higher Diesel Prices

     In recent months, railroad diesel fuel prices have risen 
by more than 80 percent, causing the cost of fuel to jump 
sharply for an industry which is already highly energy-
intensive. This rise is attributable to a considerable 
tightening in world oil markets during the last year as OPEC 
and other exporting countries have cut production.
     As a result, on an annualized basis, railroads today are 
paying about $1.3 billion more for fuel than they were just 12 
months ago. Placing this into perspective, $1.3 billion 
represents the equivalent of 700 new locomotives or double 
tracking some 1400 miles of rail line. These higher fuel costs 
have significantly reduced railroad cash flows which are 
essential to sustain the substantial capital investment 
required by the industry. More important to the subject matter 
of the Subcommittee's hearing, a portion of these increased 
fuel costs are passed along to freight shippers and other 
railroad customers, including agricultural communities.

                         Distressed Communities

     Our nation's rural farming communities, many of which are 
located in economically disadvantaged areas, are highly 
dependent on efficient and economical methods of transportation 
to move their agricultural produce to market. Railroads 
transport the bulk of agricultural goods to market in the 
United States. The higher transportation costs attributable to 
the dramatic rise in diesel fuel have equated to lower profits 
for our nation's farmers, as well as lost sales in both 
domestic and foreign markets.

                          Proposed Legislation

     One solution to help reduce the burden of high fuel costs 
on both economically distressed farming communities and the 
nation's railroads would be to enact H.R. 1001, the 
Transportation Tax Equity and Fairness Act. This legislation, 
which is pending in the House Committee on Ways and Means, 
would repeal the inequitable 4.3 cent-per-gallon deficit 
reduction motor fuel excise tax that is currently imposed on 
the nation's railroad and barge industries. This unfair tax is 
exacerbating the impact of higher fuel prices both on the 
railroad industry and its customers in economically 
disadvantaged communities. The measure would allow distressed 
farming communities to improve their profit margins which have 
been squeezed due to increasing diesel fuel costs and enhance 
the railroad industry's ability to keep shipping rates 
reasonable, while it continues to invest in necessary equipment 
and infrastructure improvements.
    The American Farm Bureau Federation, the American Soybean 
Association, National Association of Wheat Growers, National 
Corn Growers Association support efforts to repeal the 4.3 
cent-per-gallon deficit reduction motor fuel excise tax to help 
revitalize distressed farming communities.
    AAR is pleased that Congress recognized the importance of 
repealing the 4.3 cent deficit reduction fuel tax last year by 
passing the measure as part of the Taxpayer Relief Act of 1999. 
Unfortunately, the President vetoed the legislative package for 
reasons unrelated to this issue.
     Mr. Chairman, AAR thanks you for agreeing to cosponsor 
H.R. 1001 and urges enactment of the measure in the second 
session of the 106th Congress.
            Sincerely,
                                        Edward R. Hamberger
                              President and Chief Executive Officer
      

                                

Statement of Hon. Phil English, a Representative in Congress from the 
State of Pennsylvania

Dear Chairman Houghton:

    I would like to commend you for scheduling a hearing to 
address the issue of tax incentives for distressed communities. 
As such, I would like to bring to your attention a proposal to 
provide favorable tax treatment for qualified urban housing 
fringe benefit programs.
    As you may be aware, a number of urban colleges, 
universities and hospitals are endeavoring to stabilize 
distressed or transitional urban neighborhoods by providing 
financial incentives to employees to purchase, renovate, and 
occupy houses in those neighborhoods. These programs, which 
have been very well received in the communities where they are 
offered, are intended to promote stability by stimulating 
housing demand, increasing the investment in maintenance of 
owner-occupied housing and keeping the middle class households 
within city boundaries.
    I have introduced legislation, H.R. 3389, to stimulate and 
encourage neighborhood revitalization in our communities by 
excluding such housing incentives from taxable income of 
employees who purchase and occupy housing in distressed 
neighborhoods. I feel that excluding such benefits from income 
for tax purposes would make them more attractive to employees 
and thereby help to build and strengthen communities. In 
addition, by increasing the value of the housing incentives, 
the proposed benefit would increase employee participation in 
existing programs and encourage other institutions to establish 
similar programs.
    The benefit of this proposal would be capped at $25,000, 
and indexed for inflation. H.R. 3389, however, would not 
delineate the form or scope of incentives that employers may 
offer. In particular, this proposal would not limit 
participation on the basis of compensation, as urban renewal 
strategies should seek to attract employees of all income 
levels.
    I would appreciate your consideration of this proposal, as 
I believe it represents a way in which the federal government 
can be instrumental in addressing the challenges of 
revitalizing distressed communities. Thank you again for 
holding a hearing on this very important issue. I look forward 
to working with you in the future.
            Sincerely,
                                               Phil English
                                                 Member of Congress
      

                                

Statement of F. Barton Harvey III, Enterprise Foundation, Columbia, MD

                       Introduction and Overview

    The Enterprise Foundation appreciates the opportunity to 
comment for the printed record of the Oversight Subcommittee's 
March 21 hearing on tax incentives to assist distressed 
communities. We commend Chairman Houghton and the rest of the 
Subcommittee for recognizing the importance of providing 
targeted tax benefits to encourage investment in communities 
yet to share in our nation's historic economic prosperity.
    The Enterprise Foundation is a national nonprofit 
organization founded in 1982 by Jim and Patty Rouse. Our 
mission is to see that all low-income Americans have access to 
fit and affordable housing and the opportunity to move up and 
out of poverty into the mainstream of American life. Working 
with public and private partners, the Foundation provides low-
income people with decent affordable homes, safer streets and 
access to jobs and child care. We have raised and invested more 
than $3.2 billion in loans, grants and equity to build or 
renovate 107,000 apartments and houses. Through our employment 
network we have placed more than 30,000 people in permanent 
full-time jobs.
    We view revitalizing distressed communities as both a moral 
obligation and a market opportunity. It is, we believe, a moral 
obligation of a just society to assure that all its citizens 
have the opportunity to participate fully in that society. It 
is also a market opportunity because the very places that are 
most cut off from the mainstream of our society are also the 
largest untapped domestic markets for American business 
investment and expansion. President Clinton's New Markets Tour 
last summer demonstrated both propositions. I was honored to 
join the President on that tour, to visit examples of 
Enterprise's work in the Watts neighborhood of Los Angeles and 
the Pine Ridge reservation in South Dakota.
     This statement focuses on two proposals the Subcommittee 
is considering in connection with its March 21 hearing: 
increasing the Low Income Housing Tax Credit (Housing Credit) 
cap and enacting the New Markets Tax Credit (New Markets 
Credit). The Enterprise Foundation strongly supports both these 
proposals and we urge Congress to include them in any tax bill 
it passes this year. Before discussing these proposals, 
however, we would like to comment on why we believe now is the 
time to provide these and other tax incentives to revitalize 
America's distressed communities and give a brief overview of 
the unique and essential role nonprofit community development 
groups play in community revitalization efforts.

     Now is the Time to Invest in America's Distressed Communities

    No one would dispute that we are living in a period of 
unprecedented economic prosperity for many Americans. No one 
would dispute either that some areas of our nation have yet to 
experience that prosperity. And few would dispute that one of 
the best ways to assure that our prosperity continues is to 
expand it to include those who so far have been left behind.
    Assuring all Americans the opportunity for decent housing, 
good jobs and stable communities should not be a partisan 
political issue. We were heartened by Speaker Hastert and 
President Clinton's commitment to find common ground on how 
best to bring new investment and new tools to our nation's 
distressed communities. The principles of Speaker Hastert and 
the President's shared commitment were eloquently articulated 
and are worth repeating:
    1. The Administration and the Congress should work in a 
spirit of good faith to develop a bipartisan effort to bring 
capital and new tools to the impoverished urban and rural parts 
of America so that individuals who live there will be empowered 
to renew their communities and develop new markets of economic 
opportunity.
    2. Since these solutions need to come from within these 
distressed communities, both political parties need to put 
aside politics and ideological constraints, and participate in 
a process that focuses on solutions that can work in those 
communities without being subject to waste or abuse.
    3. We believe that there are significant untapped new 
markets in both rural and inner city communities, which have 
unique competitive advantages, that, given the tools, can 
enable individuals in those areas to renew their communities.
    4. To accomplish that, our goal is to responsibly and 
effectively empower impoverished communities with new equity 
capital, tax incentives and other tools needed to address these 
problems within their neighborhoods, nurturing new enterprises 
while providing private sector and government resources to 
empower communities to solve their long term problems.
    5. These economic incentives must be seen as a complement 
to other efforts to strengthen education, housing, crime and 
drug-abuse reduction.\1\
---------------------------------------------------------------------------
    \1\ ``Shared Commitment to Empower America's Impoverished 
Communities,'' Statement by the Press Secretary, The White House, 
November 5, 1999.
---------------------------------------------------------------------------
    We wholeheartedly agree with those principles. Given this 
commitment by the Speaker and the President to work together, 
we believe bipartisan agreement on a community revitalization 
bill is possible this year. We urge members on both sides of 
the aisle to take advantage of that opportunity. For if we do 
not seize the opportunity now, when our economy is stronger 
than ever before, when will we?

  Nonprofit Community Development Groups Are Revitalizing Communities

    It has been said that no social problem in America is not 
being solved by someone somewhere. Very often, that someone is 
a resident of a low-income community, working in or with a 
community development group to bring hope and opportunity to 
their neighborhood. Community development groups come in 
countless shapes and sizes and vary widely in scope and 
sophistication. They may be faith-based, established by a 
church or synagogue. They may be bank-sponsored, set up by a 
lender. They may be government-created or they may have grown 
on their own from indigenous block clubs, community 
associations and other neighborhood civic groups. They may 
focus on one activity, such as developing affordable housing, 
or several, such as economic development, social services and 
community organizing.
    Despite and far more important than their differences, most 
community development groups share a few important 
characteristics. First, most are nonprofit, as their missions 
do not emphasize making money for themselves. Second, they are 
located in and accountable to the neighborhoods they serve. 
Third, like successful small businesses, they are 
entrepreneurial and creative, since tackling society's toughest 
problems on tight budgets demands it. Fourth, they work most 
effectively in partnership with other private sector, 
government and nonprofit intermediaries, such as The Enterprise 
Foundation, committed to community revitalization. Enterprise 
works with nearly 1,500 nonprofit groups in 550 communities 
nationwide.
    Ultimately, nonprofit community development organizations 
are indispensable because they do what neither the public nor 
the private sector can or will do alone. Recent research 
indicates that there are more than 3,600 of them. Their 
achievements, in the toughest communities in America, are 
nothing less than extraordinary. These groups have produced 
approximately 550,000 affordable homes and apartments. They 
have provided nearly $2 billion in financing to almost 60,000 
small and large businesses and developed 71 million square feet 
of commercial and industrial space. And they have created 
nearly 250,000 jobs.\2\
---------------------------------------------------------------------------
    \2\ National Congress of Community Economic Development, 1999 
Community Development Census, as excerpted in 2000 Advocate's Guide to 
Housing and Community Development Policy, National Low Income Housing 
Coalition, p. 6 and p. 14.
---------------------------------------------------------------------------
    The Subcommittee is considering a variety of thoughtful, 
worthy proposals from members of both parties. All have merit 
and we commend their congressional sponsors and advocates for 
their intent. The remainder of this statement will focus on the 
two proposals that we believe would generate the most 
investment in distressed communities: increasing the Housing 
Credit cap and enacting the New Markets Credit. We urge the 
members of this Subcommittee and all members of Congress to 
strongly support including these two proposals in any tax bill 
Congress passes this year.

            Increasing the Low Income Housing Tax Credit Cap

    In our view, any discussion of tax incentives to revitalize 
distressed communities, and, indeed, any comprehensive 
community revitalization tax bill, must start with the Housing 
Credit. Housing alone cannot turn around most distressed 
neighborhoods. But a decent, affordable place to live is the 
foundation for fighting poverty and disinvestment. Housing 
provides family stability, spurs additional investment and 
provides a tangible sign of hope to a community.
    The Housing Credit is one of the most successful federal 
housing programs ever created. The more than one million homes 
the program has helped finance since its creation in 1986 
account for virtually all the affordable apartments produced in 
this country since then. Three years ago, this Subcommittee 
held hearings on the General Accounting Office's (GAO's) 
exhaustive examination of the program. That examination--
perhaps the most extensive ever undertaken by GAO--showed that 
the vast majority of Housing Credit properties serve lower 
income tenants, paying lower rents, for longer periods of time 
than required by law. The report further showed that Housing 
Credit developments are well maintained, managed and monitored 
for compliance with the strict requirements of the law.
    Our Housing Credit investment subsidiary, The Enterprise 
Social Investment Corporation, has committed over $3 billion in 
private sector equity that has or will produce over 77,000 
affordable apartments in distressed communities nationwide. 
This massive infusion of capital would not have been possible 
without the Housing Credit. In addition to financing 
desperately needed homes, generating jobs and fueling local tax 
bases, Housing Credit development sends a powerful signal that 
a community is coming back. This new investment has a powerful 
catalytic effect, inspiring confidence and triggering other 
investments in the neighborhood.
    The only problem with the Housing Credit is that it cannot 
nearly keep up with the need for affordable housing in this 
country, especially in distressed communities. The annual 
Housing Credit cap, $1.25 per capita in each state, has never 
been adjusted since the program was created in 1986. As a 
result, inflation has cut the Housing Credit's purchasing power 
in half. Meanwhile, demand for decent, affordable apartments 
has exploded. Nearly five and-a-half million low-income 
households pay more than half their income for rent and/or live 
in dilapidated housing. Every year, tens of thousands of 
affordable apartments are demolished or converted to market 
rate use. It is no surprise that demand for Credits outstrips 
supply by more than three to one in most states.
    Huge majorities of both houses of Congress and President 
Clinton have recognized the urgent need to update the Housing 
Credit for inflation and protect it from future erosion. Nearly 
85 percent of the House--369 members--has cosponsored 
legislation (H.R. 175) sponsored by Mrs. Johnson and Mr. Rangel 
to increase the annual Housing Credit cap to $1.75 per capita 
and index it to inflation. The Enterprise Foundation sincerely 
thanks Mrs. Johnson and Mr. Rangel for their leadership on this 
vital piece of legislation. We also thank Senators Mack and 
Graham for their leadership on an identical Senate bill (S. 
1017) to increase the Housing Credit cap. That bill has 77 
Senate cosponsors. Finally, we thank President Clinton for 
proposing to increase the Housing Credit cap in his last three 
annual budgets.

                  Enacting the New Markets Tax Credit

    All businesses need equity to succeed, especially those 
trying to make it in distressed communities. Consider the 
following recent comments by Federal Reserve Board Chairman 
Alan Greenspan:
    "An important key to the success of small and large 
businesses is having access to capital and credit. Credit alone 
is not the answer. Businesses must have equity capital before 
they are considered viable candidates for debt financing. 
Equity acts as a buffer against the vagaries of the 
marketplace. . .Continued efforts to develop the markets for 
private equity investments will be rewarded by an innovative 
and productive business community. This is especially true in 
lower income communities, where the weight of expansive debt 
obligations on small firms can severely impede growth 
prospects.'' \3\
---------------------------------------------------------------------------
    \3\ ``Changes in Small Business Finance,'' Remarks at the Federal 
Reserve System Research Conference on Business Access to Capital and 
Credit, Arlington, VA, March 9, 1999.
---------------------------------------------------------------------------
    Using the Housing Credit and other tools, nonprofit 
community development groups have shown they can produce high-
quality affordable housing in distressed communities. Many have 
found it more difficult to generate the business development 
and job creation their neighborhoods need to complement and 
reinforce new housing development. The President's New Markets 
Credit would provide an effective tool for doing that. We 
strongly support this proposal. We thank the President for 
proposing the Credit and Mr. Rangel, Mr. LaFalce and Ms. 
Velazquez and Senators Rockefeller, Robb, Sarbanes, Kerry, 
Kennedy and Daschle for their strong leadership on behalf of 
this proposal.
    The New Markets Credit would provide a six percent annual 
tax credit for five years to ``Community Development Entities'' 
(CDEs) whose mission is providing capital in low-income 
neighborhoods. CDEs would include the nonprofit community 
development groups described earlier. CDEs would use proceeds 
from the sale of the Credits to finance commercial facilities, 
manufacturing plants, small businesses and community service 
centers in qualified communities. Qualified communities would 
be census tracts where the poverty rate is at least 20 percent 
or where the median family income does not exceed 80 percent of 
the greater of metropolitan area income or statewide median 
family income. The Treasury Department would allocate the 
Credit. The program would be funded at $3 billion per year for 
five years.
    One of the most promising features of the New Markets 
Credit is its modeling on the Housing Credit. That bodes well 
for the program's success. The Housing Credit has channeled 
billions of dollars in private investment into distressed 
communities and spawned a sophisticated industry of community 
developers, intermediaries and investors who understand how to 
use a tax credit to revitalize low-income communities. These 
same entities will be prepared to utilize the New Markets 
Credit because it so closely resembles a program they already 
are using with such success.
    While we strongly support the New Markets Credit as 
proposed by the President, we recommend two modifications 
included in Senator Rockefeller's New Markets Credit 
legislation (S.1526): extending the term of the Credit to seven 
years and targeting the Credit to low income populations in 
addition to low income areas. We believe these modifications 
would make the New Markets Credit even more effective.
    Extending the Credit term from five to seven years would 
assure that new businesses in distressed communities receive 
the sustained capital investment they need to succeed. 
Community development lenders generally agree that business 
development in distressed areas typically requires a seven-to 
ten-year investment. We are concerned that a five-year term may 
not provide patient-enough capital to fledgling enterprises 
before their Credit subsidy would terminate.
    Targeting the Credit to low-income populations in addition 
to low-income areas would enable distressed communities located 
outside poverty census tracts to benefit from the investment 
the Credit would generate. Senator Rockefeller's bill would 
provide the Treasury Secretary the authority to target the 
Credit in this manner. This more flexible targeting, similar to 
the targeting of the Community Development Financial 
Institutions program on the spending side of the budget, would 
be particularly useful in extending the Credit's benefits to 
rural communities. Many such communities would not be eligible 
for New Markets Credit investment without this change.

                               Conclusion

    Expanding our nation's historic economic prosperity to 
include those yet to share in it is both a moral obligation and 
a market opportunity for our society. Congress can help meet 
that obligation and maximize that opportunity by enacting 
targeted tax incentives to revitalize our nation's distressed 
communities. Nonprofit community development groups and their 
partners have demonstrated what works in community 
revitalization. Now, they need the tools to continue rebuilding 
their neighborhoods. Increasing the Low Income Housing Tax 
Credit cap and enacting the New Markets Tax Credit would 
provide two such tools. We urge Congress to seize the 
opportunity to enact these proposals this year.
    The Enterprise Foundation thanks the Subcommittee for the 
opportunity to submit this statement for the printed record.
      

                                

Statement of Richard Moe, President, National Trust for Historic 
Preservation

    The National Trust for Historic Preservation is pleased to 
have the opportunity to submit testimony for the record on tax 
incentives to assist distressed communities. The National Trust 
is a non-profit organization with more than 265,000 members, 
chartered by Congress to promote public participation and 
education in historic preservation and to engage the private 
sector in preserving our nation's heritage. Our mission is 
protecting the irreplaceable. As the leader of the national 
historic preservation movement, the National Trust is committed 
to saving America's diverse historic resources and to 
preserving and revitalizing communities nationwide.
    The Internal Revenue Code contains numerous provisions that 
assist distressed communities. There are also numerous 
legislative and Administration proposals, many of which were 
detailed during the hearing. This testimony will focus on the 
commercial historic rehabilitation tax credit, which has been a 
component of the tax code since 1976, and on H.R. 1172, a 
proposal by Representatives Clay Shaw (R-FL) and John Lewis (D-
GA) to expand the historic rehabilitation tax credit to include 
owner occupied historic residences.
    The subject of this hearing, assistance to distressed 
communities, is an important issue and one of principal 
interest to the National Trust in accomplishing its mission. 
Over the decades since World War II, a combination of social 
and economic forces, abetted in no small measure by government 
policies and programs, has produced a steady migration of 
population and business activity from large and small urban 
areas. Left behind in the surge to the suburbs and exurbs is an 
enormous (but dwindling) inventory of sound housing stock and 
older commercial buildings, much of which has historic or 
architectural importance. Investment decisions have been 
greatly influenced by substantial subsidies provided for low-
density, land consumptive development and the demolition of 
existing building stock through the well-intentioned but 
ultimately catastrophic bulldozing of established urban centers 
and neighborhoods under federal urban renewal and highway 
construction programs.
    The decline and disinvestment of our nation's older 
communities puts their historic resources, and the 
neighborhoods themselves, at great risk. From 1980-1990, 
Chicago lost 41,00 housing units to abandonment, Philadelphia 
10,000 units, and St. Louis 7,000 units. If we lose these 
neighborhoods, we will lose the physical fabric of our nation--
where ordinary Americans have worked, played, learned, prayed, 
and participated in the civic life of America. We will be 
losing, in short, the physical evidence of our history and the 
diverse cultures upon which it is built. These are not large 
mansions or house museums--they are the brownstones of Harlem, 
the row houses of Baltimore, the bungalows of Miami.
    Tax incentives for historic rehabilitation cannot reverse 
demographic trends, restore fiscal solvency to cities and 
towns, fight crime, or improve education. What they can do is 
provide, at the margin, a corrective to the institutionalized 
bias toward out-migration of population and business activity 
and the consumption of open space at the expense of 
reinvestment in declining areas that are already equipped with 
buildings and infrastructure. In addition, where incentives are 
linked to the rehabilitation and reuse of buildings of historic 
or architectural value, the benefits of historic preservation--
both tangible and intangible--can also be realized.
    The federal commercial historic rehabilitation tax credit, 
which is a 20% credit for rehabilitation and preservation of 
income-producing properties, is the nation's most effective 
federal program to promote urban and rural revitalization and 
to encourage private investment in rehabilitating historic 
buildings. According to the Annual Report for Fiscal Year 1999 
entitled ``Federal Tax Incentives for Rehabilitating Historic 
Buildings'' produced by the National Park Service, the 
commercial historic rehab tax credit has generated over $20 
billion in historic preservation rehabilitation since its 
inception in 1976.
    In 1999, the commercial rehab tax credit was used to create 
or improve over 13,000 rental housing units, a third of which 
now house low and moderate-income tenants. Taking into account 
new construction, which often takes place in conjunction with 
approved rehabilitation and is ineligible for the credit, the 
program leverages far greater than five to one in private to 
public investment in the preservation and renewal of our older 
communities. In 1999, the rehab tax credit leveraged $2.3 
billion in private investment, at a cost to the federal 
treasury of less than $475 million.
    As a result of this remarkable incentive, citizens across 
the country have rescued landmark railroad stations, hotels, 
schools, and office buildings from decay and demolition. These 
restorations frequently catalyze reinvestment in the 
surrounding neighborhood, thus adding value beyond that of the 
rehabilitation itself. Historic preservation fueled the ``back 
to the city movement'' of the 1970s and 1980s, bringing new 
life to abandoned and deteriorated warehouse districts, 
waterfronts, downtowns, and other remnants of an area's history 
and settlement which had previously been in tatters. Today, 
fueled by a real estate boom, strong national and regional 
economies, and resurgent interest in distinctive, walkable, 
close-in neighborhoods, the commercial rehab tax credit is 
experiencing strong and steady growth on an annual basis.
    Moreover, in 15 states around the country, the federal tax 
credits can be combined with state rehabilitation tax credits 
to make large-scale, historic renovation projects feasible. In 
St. Louis, a $250 million renovation is planned for historic 
Cupples Station that will encompass a 260-room hotel and a 
mixed-use complex with nearly 500,000 square feet of office 
space. The 12 acre project, which will include the renovation 
and development of a 10 building complex, will utilize both the 
federal historic rehab tax credit program and a new program of 
state tax credits passed by the Missouri legislature last year. 
Already, the Missouri credit has given rise to nearly 20 
projects in downtown St. Louis.
    As the St. Louis example illustrates, the combination of 
federal and state commercial tax credits make feasible large-
scale commercial projects that might otherwise not get off the 
ground. Several states also have a residential rehab tax credit 
program to accomplish the same goals for homeowners and home 
buyers. Connecticut's Historic Homes Rehabilitation Tax Credit 
Program is billed as ``a catalyst for renewal in urban 
neighborhoods.'' The program establishes a tax credit up to 
30%, with a maximum credit of $30,000, of the eligible rehab 
costs for owner-occupied historic buildings containing one to 
four dwelling units. The program targets urban areas in 29 
Connecticut towns and cities such as Bridgeport, East Hartford, 
New Haven and others that need renewal and revitalization.
    What our states and cities need is a corresponding federal 
tax incentive that will support efforts underway at the state 
level to address the problems of blight and abandonment that 
threaten older residential neighborhoods and communities. 
Neither the proposed New Markets Tax Credit, which the 
Administration and several Democratic members of Congress are 
proposing, nor the ``American Community Renewal Act'' 
championed by several House Republicans, would address the need 
for a targeted incentive for residential neighborhoods and 
moderate income home ownership. Such an incentive is badly 
needed. As any inner-city developer, community organization, or 
public official involved reclaiming distressed communities 
knows, projects designed to help residential neighborhoods 
always involve a carefully constructed financial package that 
operates on a narrow margin.
    Clearly, this is no time for massive government programs, 
which might or might not be successful in helping to preserve 
these resources. What is needed is an incentive that will 
involve a minimum of government involvement and a maximum of 
individual initiative, one that is modest in cost, and limited 
in scope but can spark broad private activity. H.R. 1172, the 
Historic Homeownership Assistance Act, introduced by 
Representatives Clay Shaw and John Lewis, is a fair, feasible, 
and effective answer.
    H.R. 1172 is designed to promote home ownership, historic 
preservation, and community revitalization. The legislation 
would create a 20 percent federal tax credit for rehabilitation 
expenses in connection with a the historic rehabilitation of an 
owner occupied historic home or an eligible structure in a 
national, state, or locally designated historic district. As 
passed by the Senate, the credit can be used only for 
substantial rehabilitation projects in historic districts where 
the median family income is no more than twice the state median 
income.
    Because of its potential to help older distressed 
communities, restore historic neighborhoods, and in doing so 
combat sprawl, H.R. 1172 enjoys broad bi-partisan support: it 
has been cosponsored by 197 members of the House of 
Representatives, including 25 members of the Ways and Means 
Committee. The Senate version, S. 664, sponsored by the late 
Senator John Chafee (R-RI) and Senator Bob Graham (D-FL) has 
garnered 35 cosponsors.
    Last year, the Senate passed a slightly modified version of 
the legislation, providing a tax credit of 20 percent for 
qualified rehabilitation expenditures up to $20,000 as part of 
S. 1429, the ``Taxpayer Relief Act of 1999.'' The Senate-passed 
version targeted the tax credit to homeowners in historic 
districts where the median income was no greater than 200% of 
median family income. The final tax package passed by Congress 
last November, which President Clinton vetoed, contained a 
historic homeownership deduction proposal which would have 
allowed taxpayers to deduct 50 percent of the costs of 
qualified rehabilitation expenditures on a historic home, up to 
$100,000.
    The National Trust supports the Senate-passed version of 
the historic homeowner tax credit because it would provide 
greater benefit to low and moderate income neighborhoods. A 
historic homeowner tax credit would provide a much needed boost 
to older neighborhoods in our cities and small towns, where 
once vibrant communities decline for want of adequate 
incentives for reinvestment. This tax credit would be a tool 
both for do-it-yourself homeowners and community development 
corporations that are trying to turn around depressed areas. 
Contrary to popular perception, most historic districts are 
home to people of modest means. And the targeting requirement 
in the Senate-passed version of the bill means that wealthy 
historic districts would not, in any event, be eligible for the 
credit.
    According to National Park Service and Census Bureau data, 
more than 50% of all buildings eligible for the proposed 
historic homeownership tax credit are located in National 
Register Historic Districts within census tracts with poverty 
rates of greater than 20 percent. Lower income people tend to 
live in old buildings, which makes historic preservation a 
highly effective community revitalization tool targeted to the 
less affluent. Places like Georgetown and Annapolis are what 
people think of when they hear the words ``historic district.'' 
But in fact, they should be thinking of Anacostia, where there 
are 550 historic buildings in a National Register Historic 
District, or the Greater Fourteenth Street Historic District 
here in Washington, where there are 485 historic buildings.
    The historic homeowner tax credit would help spur 
revitalization of small town neighborhoods such as Southside 
Historic District in Corning, New York, as well as inner-city 
historic neighborhoods such as Quaker Hill Historic District in 
Wilmington, Delaware. Both of these neighborhoods were 
important to the settlement and history of their communities, 
but in recent decades have experienced decline and 
deterioration of their diverse historic housing stocks. A 
historic rehab tax credit would help bring reinvestment to 
these neighborhoods and utilize their rich mix of architectural 
styles as part of an overall revitalization strategy.
    According to the National Park Service, there are now 
almost one million buildings nationwide that are already in 
historic districts on the National Register which were built as 
housing or could be used for housing. Moreover, there are many 
more neighborhoods--particularly in low income areas--that are 
eligible for listing in the National Register of Historic 
Places but have not been listed because there has been no 
impetus to do so. The universe of lower-income districts and 
communities that could be served by the credit would grow if 
the credit were enacted, because there would be an incentive to 
get them registered.
    For those with insufficient tax liability to use the 
credit--including the 72% of all Americans who do not itemize 
their deductions--the bill provides a fair and simple mechanism 
by which the credit can be transferred to the bank or mortgage 
banker making the mortgage loan. The lender then would pass the 
value of the credit to the homeowner in the form of a reduced 
interest rate, or in distressed areas, as down payment 
assistance. This legislation has been designed to help boost 
moderate income renters into homeownership, to give them a 
lasting stake in their community which will bring new vitality 
to areas that have suffered a spiral of neglect and despair.
    Mr. Chairman, our struggling communities need to regain 
many things that they have lost. The Historic Homeownership 
Assistance Act enjoys extraordinarily broad, bi-partisan 
support because Members recognize that it holds great potential 
to assist our cities and small towns in reinvesting in what is 
already there--the people, homes, and neighborhoods that have 
constituted their communities. I want to thank you for your 
support for this legislation and for the opportunity to provide 
testimony for the hearing record.
      

                                

Statement of Daniel Godfrey, North Carolina A&T University, School of 
Agriculture, Greensboro, North Carolina, and Richard Jones, University 
of Florida

    Initiative for the Development of New Markets in Underdeveloped 
                              Communities

America Needs A New Initiative for the Economic Development of 
Communities

    For the first time in three decades, the United States 
government is in the black. The federal budget switched from a 
$290 billion deficit in 1992 to a $69 billion surplus last 
year. Yet, while wages are rising and welfare rolls are 
shrinking in most of the nation, persistent economically 
depressed communities still exist. The President and many in 
Congress have indicated that these people should not and will 
not be forgotten. While the economy has created nearly 19 
million new jobs since January 1993 and unemployment has 
dropped from 7.2 % to just 4.3 %, there is more work to do. 
Several rural communities, such as Appalachia, the Mississippi 
Delta, Native American communities, and others have poverty 
rates over 30%, high school drop out rates over 50% and some 
reservations have unemployment as high as 80%. It will take a 
broad, yet, localized approach to begin breaking these 
persistent cycles of economic depression.
    Of course, private industry investments are essential for 
community development and traditional tax credits are an 
excellent mechanism to spur growth. However, there are other 
elements that struggling communities need. Coordinating outside 
resources, infrastructure development, children and youth 
programs, and workforce training are areas that traditional tax 
credits inadequately address. For example, a small town in New 
York may be 100 miles away from a city of significant size and 
they have a company interested in relocating to their region. 
Of course, the company will build their building and the 
surrounding streets; however, they want to bring 1000 new 
families to the area that need a place to live but the city 
cannot support this influx of people. How do they find 
engineers to design their roads, properly trained city 
planners, or achieve a bond rating high enough to fund new 
projects. These communities need access to a variety of 
professionals that do not typically locate in such areas.

Role of Land-Grant University's Extension and Research Programs

    Land-Grant Universities with their extension and research 
staff can help small towns and cities overcome these obstacles. 
Extension agents have daily experience coordinating efforts 
between federal, state, and local interests and give local 
individuals ownership in the development process. However, 
universities are having to decrease staff designated to these 
activities because of lack of adequate federal and state 
funding. A program needs to be developed that:
    -provides adequate base funding for extension and research 
at universities,
    -encourages all federal agencies and their state 
counterparts to work together at the local level, and
    -creates new tax credits that stimulate private industry to 
make investments in communities beyond the direct needs of the 
company.

Elements Necessary for Successful Development of Under-served 
Areas

    1) Underdeveloped communities, whether urban, rural or 
suburban, need creative, sustainable economic development 
strategies. These strategies must be designed and calculated to 
transform these under-served areas into self-sufficient 
communities. From the start, this requires local leaders who 
have the information needed to develop these strategies and 
technical assistance to make the strategies a reality. This 
provides citizens the opportunity to be involved from the 
beginning rather than later in a reactive mode. The Initiative 
should focus on providing programs to teach individuals how to 
communicate with one another and understand fundamentals of 
economic development. The initiative should also apply to both
    2) It is futile to ``reinvent the wheel.'' Communities need 
to develop communication and coordination mechanisms to be able 
to learn from each other about how to tap available resources 
of support. Local organizations, such as the extension service, 
are in place which have experience coordinating Federal 
Agencies and transferring information across and between 
states. Local organizations, which have the ability, can 
institute place-based solutions by selecting services from 
among the federal agencies rather than the federal government 
dictating a program to each community.
    3) A local workforce investment initiative is an essential 
element of community development Workforce investment is one 
step toward building infrastructure that eventually reaches 
across several disciplines from family and youth support, to 
transportation, to business and industry, to agriculture. Any 
workforce initiative must include diverse organizations that 
can provide diverse services. The companies that are going to 
eventually invest in the community need to be assured they can 
find a skilled labor force and support services for that labor 
force. A system must be set up to train current workers and 
future employees. A strong school system with work training in 
high school is an example of an important tool toward 
attracting private sector investment. Several types of 
workforce programs for current and future employees exist; 
however, they are not reaching many under-served communities.
    4) There is a need to provide community leaders with 
training necessary to build quality roads, parks, housing, 
utilities, childcare, and healthcare are essential. However, 
these services are not cheap and require, in some cases, the 
ability to issue bonds or raise tax revenue. Federal support to 
build roads, parks, or adequate housing is desperately needed. 
The New Initiative must establish a grant funding, low-interest 
loans, or direct funding for these infrastructure services. The 
funding program must be flexible so a community can access only 
what it needs. Thus, avoiding scenarios where one year only 
sewer projects receive funding and another year only healthcare 
projects receive funding. Communities must be able, as simply 
as possible, to receive funding to enhance the essential 
services they lack in a coordinated manner.
    5) Private sector investment is crucial to achieve a 
successful long-term solution. More than 100 communities 
benefit from the Empowerment Zone/Enterprise Community 
provisions of the tax code. As most in state government and 
many in local government have known for years, certain tax 
incentives which attract private investment serve the public 
good as they deliver jobs and income which bring the public 
returns, often many times over, for their initial investment. 
Public investments like these have made good business sense to 
local and state governments for decades.

The New Formula

    There are three important steps to successfully 
implementing an improved formula for community development: 
providing adequate base funding for extension and research at 
universities, encouraging all federal agencies and their state 
counterparts to work together at the local level, and creating 
new tax credits that stimulate private industry to make 
investments in communities beyond the direct needs of the 
company.
    1. State extension services and research specialists across 
America, with the resources of their universities and a local 
understanding of community needs, can coordinate on a level 
beyond most organizations. Their place-based structure and 
flexibility allows the federal government to play a supportive 
role rather than the lead role and empowers the local 
community. These services can address the changing economic 
infrastructure in under-served communities and facilitate 
leadership development programs for community leaders and 
elected officials. However, without proper base funding 
extension programs cannot live up to their potential. Funding 
for extension programs has been stagnant for years. Yet, wages 
and staffing needs increase overtime. This has caused either 
reallocation of staff or loss of much needed personnel. Thus, 
an important delivery mechanism and resource is depleted in 
under-served areas.
    2. This new approach will create a matrix of local, state 
and locally delivered federal services that reaches every 
community using local mechanisms. Under a matrix approach, the 
local delivery mechanisms of each federal or independent 
agency, including the Department of Agriculture, Department of 
Labor, the Department of Health and Human Services, the 
Department of Housing and Urban Development, Department of 
Commerce, Department of Transportation, Department of 
Education, Department of Energy, and the Environmental 
Protection Agency provide resources either through grants or 
direct assistance. Providing resources and enabling local 
community governments to grow and manage the human and public 
infrastructure necessary to maintain any community is necessary 
to attract solid private investment to these under-served 
communities. These federal and independent agencies already 
work directly with Extension Agents, Rural Development Centers, 
Councils of Governments, local officials, and other community-
based organizations. Therefore, federal funds that support 
local resources such as extension agents must be provided so 
communities have a fighting chance. These organizations 
currently coordinate resources among state and federal agencies 
and local governments; however, a focused effort is needed to 
extend and formally encourage coordination with under-served 
communities.
    3. Let us leave no doubt that the EZ/EC program has been a 
much needed initiative. However, new ideas in tax incentives 
are necessary to spur private investment in under-served 
communities. These incentives would focus on providing under-
served areas the expertise to solve problems, the know how to 
coordinate resources, and knowledge of what other communities 
have done to help themselves. Some examples of areas where tax 
incentives might be helpful are:
    -Encouraging companies to participate in distance learning 
opportunities for employees
    -Stimulate specialty businesses to promote community 
programs related to their industry. For example, sports product 
companies assisting with after-school programs or food product 
companies sponsoring food safety/nutrition programs in schools 
and for employees
    -Providing an incentive for companies to sponsor parenting 
classes
    -Encouraging businesses to sponsor youth organizations like 
4-H groups
    -Spurring private companies to coordinate courses in family 
economics and financial planning.
    These programs not only add benefit to the companies but 
provide needed resources to build strong communities. Research 
and Extension faculty provide training, modeling, and 
implementation of these programs and can work with business to 
implement these programs.

              USDA and The Land Grant University Resources

USDA--Rural Development

    As coordinator of the EZ/EC program, the USDA's Rural 
Development Office would be one of several crucial facilitators 
of a matrix model for under-served communities. By drawing from 
expertise throughout USDA and other parts of the government, 
the Rural Development office can facilitate crucial community 
infrastructure support from within a matrix of federal 
departments and independent agencies. In addition, they can 
contract with Land Grant Universities and extension faculty to 
provide telecommunications access for medical and training 
services, assists local governments in design of management 
systems and negotiating skills, and assists the private sector 
in developing markets and financing.

Cooperative State Research, Extension, and Education Service

    The Cooperative State Research, Extension, and Education 
Service (CSREES) is the USDA Agency designated as the federal 
partner working directly with the Land Grant University System. 
CSREES provides resources, planning, coordination, and 
accountability efforts for research, extension, and higher 
education programs within the Land Grant Universities. In 
addition, the county extension offices are a matrix unto 
themselves in a unique state-federal partnership between the 
nation's 105 Land Grant Universities, USDA, and other federal 
agencies. Local extension agents can serve a key role as 
liaisons and facilitators on behalf of the communities and 
empower community leaders with the ``How to Knowledge'' to 
address their local mix of economic challenges.

Land Grant Universities

    Small towns and rural places face numerous barriers of 
infrastructure, transportation, education, economic and other 
amenities that inhibit their full development. Knowledge and 
program content from the Land Grant University, located in each 
state, helps these community-elected officials build their 
knowledge of government accounting and management. Since their 
establishment, the land-grant colleges and universities have 
grown to represent to the world a unique system of widely 
accessible non-formal and higher education. Colleges of design 
and architecture can be tapped for advice and support for the 
community's infrastructure needs. Colleges of Human Science 
provide education and advice about childcare, human nutrition 
and health care and family financial management. The Colleges 
of Agriculture provide valuable support to both the rural 
communities and their families involved in food and fiber 
production. Rural Development Centers (detailed in the next 
paragraph) and Land Grant Universities have the ability to 
assess problems, build community coalitions toward planning and 
solutions, and access private and government resources. Within 
this structure, 1890 institutions contribute specialized 
expertise in serving predominately African-American communities 
and the 1994 institutions provide similar expertise for Native 
American communities.

Rural Development Centers

    Four Regional Rural Development Centers coordinate research 
and extension activities of the Land Grant Universities in 
their specific areas of the U.S. They serve specific regional 
needs and share resources across the U.S. The Southern Rural 
Development Center is located in Starkville, Mississippi. The 
Northeast Regional Center for Rural Development is located at 
Pennsylvania State University in University Park, Pennsylvania. 
The North Central Regional Center for Rural Development is 
located in Ames, Iowa at Iowa State University. And finally, 
the Western states are served by the Western Rural Development 
Center located in Logan, Utah at Utah State University. Federal 
support for these centers should be expanded to scale up their 
contribution potential to a nationally focused matrix for 
under-served communities.

National Rural Development Partnership and the Rural Policy 
Research Institute

    The National Rural Development Partnership, through 36 
State Rural Development Councils and National Rural Development 
Council, brings together federal, state, local and tribal 
governments, as well as the private for-profit and non-profit 
sectors, to work in partnership for the improvement of rural 
America's communities. Also, the Rural Policy Research 
Institute (RUPRI) located at the University of Missouri is 
actually a consortium of several universities and since its 
inception has involved over 176 scientists representing 16 
different disciplines at 67 universities all focused on policy 
analysis of the challenges, needs and opportunities facing 
rural America. Federal support for RUPRI should be expanded to 
scale up its potential contribution to a nationally focused 
matrix for under-served communities.

Other Related Resources/Organizations

    There are additional organizations that USDA's Rural 
Development Office would need to work with as facilitators. 
These organizations have extensive expertise in community 
modeling, research, place-based solutions, and coordinating 
multi-level government programs. They include but are not 
limited to the National Rural Development Partnership, National 
Association of Counties (NACo), and the regional Councils of 
Government within each state. Each organization has a network 
which can prevent cities and communities from ``reinventing the 
wheel'' and using resources efficiently and effectively.
    The National Association of Counties (NACo) represents over 
75 percent of the nation's population through the member 
counties. The association acts as a liaison with other levels 
of government, works to improve public understanding of 
counties, serves as a national advocate for counties and 
provides them with resources to help them find innovative 
methods to meet the challenges they face. NACo is involved in a 
number of special projects that deal with such issues as the 
environment, sustainable communities, volunteerism and 
intergenerational studies.
    Regional councils are organizations promoting regional 
approaches in dealing with the many problems facing America's 
communities. Typically, a regional council is created by joint 
agreement of the local governments they serve, usually in 
accordance with State ``enabling'' legislation. Both the State 
legislation and the joint agreement define the role, mission, 
duties, authority and geographic coverage of the regional 
council. Regional councils are governed by boards of directors 
that are comprised differently, depending on State legislation, 
but most are made up of local elected officials appointed by 
the local governments that created the council. Regional 
Councils are, therefore, actually local government 
organizations designed to study and recommend solutions to 
problems facing the region and to help their local government 
members plan for a healthy and prosperous regional community.
    All of the organizations above support and strengthen 
individual state efforts in rural areas by developing networks 
of private and public sectors. These organizations study the 
basic building blocks of rural society. In the context of 
globalization and changing demographics, the solutions required 
for these under-served communities are increasingly complex and 
multi-dimensional. There are increasing numbers of public 
issues which must be resolved. Each organization has similar 
abilities to support their home-state under-served communities, 
but could be strengthened by providing targeted public 
investments and encouraging partnerships to nurture this 
development through coordination of a full range of community 
resources drawn from across the government.

Conclusion and Program Recommendations

    We see an opportunity to build sustainable partnerships 
with rural stakeholders and to develop from the ground up 
national constituencies to support rural development. This 
national effort will provide a more efficient use of limited 
resources across the country, allow communities to find local 
solutions to local problems, and provide help to all 
communities at the level they need and not just most needy. 
Recent trends in declining local extension agents negatively 
impacts communities struggling to survive. With the proper 
support, we envision the Land Grant Universities as partners 
among equals in seeking a better life for rural people and a 
sustainable environment. Clearly, the people who live in these 
under-served places are the central actors, and will be the key 
developers if given the opportunity, knowledge, and resources 
that lead them to create their own solutions. A coordinated 
partnership among state, local, and federal governments can 
work with communities from a holistic perspective to meet the 
community's stated goals including self-sustained growth.
      

                                

Statement of Hon. Mark A. Macarro, Pechanga Band of Luiseno Indians, 
Temecula, CA

    I am pleased to have the opportunity to present written 
testimony on behalf of the Pechanga Band of Luiseno Indians in 
support of tax incentives to assist distressed communities. I 
appreciate the Subcommittee's interest in developing bipartisan 
legislation to revitalize and empower impoverished urban and 
rural communities through the infusion of capital and the 
development of new markets. As Congress begins to draft this 
legislation, it is critical that the unique needs of Indian 
Country are addressed in a useful way.

   The Pechanga Band of Luiseno Indians: An Economic Revitalization 
                                Success

    The Pechanga Band is a federally-recognized tribe with 
political jurisdiction and governmental authority over its 
reservation land of roughly 4,500 acres in the Temecula Valley 
of Southern California, and its 1,200 tribal members.
    After centuries of destitution, Pechanga Band members feel 
a new sense of optimism and pride from the strong economic 
foundation we have begun with the success of our first economic 
enterprise, an entertainment center, which is the main source 
of tribal government funding for long-needed and previously 
unaffordable infrastructure improvements on the reservation. We 
are now upgrading substandard roads and housing, building 
adequate sewage and water storage facilities. providing 
security and emergency services for our people. We also can 
provide basic and previously unattainable life-sustaining 
services to our tribal members -such as health and social 
services, senior housing, child care, supplementary education 
and scholarships for advanced degrees and job-skill training.
    In addition to employing our tribal members, Pechanga's 
economic development projects provide jobs that make life 
better for Indian and non-Indian people alike in the Temecula 
Valley. We are creating a demand for services and products that 
expand and support other local businesses. We take pleasure in 
the fact that we are beginning to be able to share with our 
neighbors and participate in the civic and charitable life of 
our community and throughout Indian Country.

  Well-Crafted Tax Exempt Bond and other Incentives will help Reverse 
                          Centuries of Poverty

    We are proud of our economic successes so far, but there is 
much more work to do. The Pechanga Development Corporation 
(PDC) must generate jobs and governmental revenues, as well as 
new businesses, that will provide a steady and continuous flow 
of revenues to fund governmental services.
    We urge serious commitment by Congress to enact targeted, 
commonsense and effective tax proposals that really will spur 
tribal and private sector investment and economic development 
in Indian Country, as a part of comprehensive community renewal 
legislation. In determining what is most likely to spur 
economic growth, we endorse the National Congress of American 
Indians (NCAI) recommendations based on the following 
principles:
     Indian tribal governments must be accorded the 
same status as State and local governments, and the ability of 
tribal members and their governments to determine their own 
development plans must be preserved;
     The role of tribal governments and nonprofit 
organizations in Indian Country economic development must be 
recognized and rewarded; and
     Tax incentives must be designed to increase the 
flow of loan and equity capital to Indian Country.

                            Recommendations

    1. Enact Tribal Tax Exempt Bond Authority.

    We concur with NCAI's recommendation that the community 
renewal bill include provisions based on those contained in the 
Tribal Government Tax-Exempt Bond Authority Amendments (H.R. 
1946), legislation that has been introduced by Representative 
Shadegg.
    Tax-exempt financing rules are overly restrictive for 
tribal private activity bonds. H.R. 1946 would remove some 
restrictions to give tribes the same rights state and local 
governments have to issue tax-exempt government and private 
activity bonds for such projects as low-income rental housing, 
electric generation facilities, water treatment plants, and 
solid waste disposal facilities.
    For tribal government bonds, the bill would remove the 
``essential government function'' restriction and instead 
require that the financed facilities be located on or near a 
reservation. Under current law, tribes can issue tax-exempt 
governmental bonds only for facilities used for essential 
governmental functions, like roads, sewers, schools. State and 
local governments do not have similar restrictions.
    For private activity bonds, the bill would allow tribal 
governments to issue these bonds for various kinds of tax-
exempt private activities so long as: the tribe keeps a 50% 
ownership interest in the financed facility; at least 95% of 
the net proceeds are used to finance tribal facilities; and no 
part of the bond issue proceeds is used for gaming.

2. Extend Investment and Employment Tax Credits.

    In addition, we urge the Congress to include provisions, 
along the lines of the Indian Reservation Jobs and Investment 
Act, (H.R. 1945), which would allow tax credits to companies 
which locate on reservations certain kinds of income-producing 
property. Such property would have to be connected to existing 
tribal infrastructure, such as roads, power lines, water 
systems, railroad spurs, and basic and advanced 
telecommunication facilities. In this time of restrained 
federal spending, tax credits can spur the private investment 
that many Indian communities urgently need for infrastructure 
and economic development, job creation, and economic 
empowerment in the 21st Century.

                               Conclusion

    We hope that we can count on Congress' firm commitment to 
include the strongest possible Indian provisions, such as tax-
exempt bond and investment tax credit proposals designed to 
spur economic development in Indian country, in the community 
renewal bill as it moves forward.
      

                                

Statement of George Herrera, United States Hispanic Chamber of Commerce

                              Introduction

    Mr. Chairman and members of the Committee, I am the 
President and Chief Executive Officer of the United States 
Hispanic Chamber of Commerce (USHCC). The USHCC seeks to 
advocate, promote and facilitate the success of Hispanic 
businesses. The primary agenda of the USHCC is and will remain 
an economic one. Since its inception, the USHCC has worked 
towards bringing the issues and concerns of the nation's more 
than one million Hispanicowned businesses to the forefront of 
the national economic agenda. Through a network of nearly 200 
Hispanic Chambers of Commerce and Hispanic business 
organizations, the USHCC serves as the national advocate for 
the growth and development of Hispanic entrepreneurs in the 
United States.
    Today, the USHCC would like to express concern over current 
tax incentives for communities that have not fully participated 
in the economic prosperity of our country. We support President 
Clinton's and Speaker Hastert's incentives. Mr. Chairman, even 
you have emphasized the fact that we cannot afford to exclude 
anyone from such incentives. However, Puerto Rico will be left 
behind unless this Congress acts on the job creation 
legislation introduced by Representative Crane and Senator 
Moynihan to restore wage tax incentives to U.S. companies 
investing and creating jobs in Puerto Rico.

                               Background

    In 1996, the only federal tax program designed to encourage 
employment and investment in Puerto Rico was terminated; 
Section 30A of the Internal Revenue Code. While existing 
investments were protected through a grandfather provision, no 
tax benefits were made available for new companies or existing 
companies planning to expand into new lines of business. This 
has had a very negative economic impact on Puerto Rico's 
economy. In effect, it discourages companies from growing and 
penalizes companies that have grown the most. Since 1996, for 
the first time in modern history, few U.S. stateside companies 
have established new business operations in Puerto Rico. 
Existing companies have little incentive to create new jobs and 
investments or replace old equipment. If this continues, Puerto 
Rico will suffer by being excluded from the current economic 
growth and prosperity being experienced throughout the United 
States.
    Under the leadership of Puerto Rico's Governor, Pedro 
Rossello, Puerto Rico has undertaken major efforts to diversify 
and expand key sectors of the economy, including manufacturing, 
tourism, research and development and trade. But even these 
efforts cannot indefinitely make up for the loss of all tax 
incentives for U.S. businesses. In 1998, Puerto Rico enacted a 
special incentive law providing additional tax benefits to 
companies that expand employment, invest capital, and conduct 
research and development in Puerto Rico. Puerto Rico is doing 
what it can at the local level. However, help is needed. Local 
efforts without a federal partnership cannot attract U.S. 
companies that are being lured to foreign locations such as 
Ireland, Singapore and other sites in this hemisphere.
    The loss of U.S. jobs in Puerto Rico to foreign locations 
is equally harmful to the states. More than 65 % of all Puerto 
Rico purchases come from the states in the mainland. In 1998, 
this surpassed $14 billion, a substantial portion of which was 
directly imported by Section 30A companies. This translates 
into over 225,000 direct jobs in the states. If Section 30A 
companies continue to move offshore, billions of dollars of 
goods now purchased from American suppliers will be lost to 
foreign suppliers. This may lead to the loss of additional U.S. 
jobs, growth and federal tax revenues. It is important to 
understand that job creation incentives in Puerto Rico create 
jobs both in Puerto Rico and the mainland; diminish federal 
expenditures for social programs; and generate U.S. tax 
revenues. The alternative leads to the growth of foreign 
manufacturing, loss of U.S. jobs and little or no U.S. tax 
revenues.

                   Minimum Wage Impact on Puerto Rico

    Moreover, the likely increase in the federal minimum wage 
thwarts efforts to create jobs in Puerto Rico. When Congress 
passed the 1996 Small Business Job Protection Act, which 
provided tax benefits for businesses affected by the 1996 
minimum wage increase, none of the tax breaks applied to any of 
the U.S. businesses located in Puerto Rico. Further, the 
revenues used to pay for these benefits were derived from the 
repeal of the job creation incentives for Puerto Rico. 
Therefore, minimum wage increases went into effect in Puerto 
Rico but U.S. businesses were not given an opportunity to 
offset the affect of the minimum wage increase the way their 
counterparts were given the opportunity in the United States.
    It would be unjust as well as counterproductive to exclude 
Puerto Rico once again. It is also important to note that 
Puerto Rico is more affected by the minimum wage increase than 
any other American jurisdiction. In fact, because of lower 
overall wage levels, over 50 percent of the workforce in Puerto 
Rico comes within $1 of the minimum wage and would be directly 
affected by this increase. This is a level that is much higher 
than that of the workforce in any of the states and even the 
workforce nationally. Congress should therefore allow U.S. 
businesses located in Puerto Rico to offset any negative 
effects that a minimum wage increase will have on its 
businesses and its economy by allowing these companies to enjoy 
any tax benefits included with the enactment of an increase in 
the minimum wage.

                     The Job Creation Tax Incentive

    There are other investment incentives being considered by 
this Committee, such as the community renewal proposals. 
However, because Puerto Rico does not fully participate in the 
U.S. tax system, it is insufficient to add Puerto Rico as a 
location that would be eligible for such incentives. Doing so 
would provide little to no direct benefit to Puerto Rico 
because in fact it would not apply to U.S. corporations in 
Puerto Rico. In the alternative, Section 30A job creation 
incentives provide exactly the kind of benefits to accomplish 
in Puerto Rico what these other incentives accomplish in the 
states. Section 30A rewards job creation and capital 
investments--the two elements necessary for economic growth. 
Congressmen Phil Crane, Charles Rangel, Jerry Weller and others 
are sponsoring H.R. 2138, legislation that would expand and 
extend Section 30A incentives for both existing and new 
businesses. This will encourage the development of new U.S. 
businesses and the growth of existing ones operating in Puerto 
Rico rather than in foreign locations.
    Community renewal and economic development initiatives 
provide Congress a perfect opportunity to enable all Americans 
to participate in the economic prosperity of our nation. 
Affording Puerto Rico an opportunity to compete fairly will 
demonstrate the inclusiveness embraced by this Congress, by 
ensuring that the benefits reach all citizens nationwide. On 
the other hand, if Puerto Rico, which has a poverty level twice 
that of the poorest state, and unemployment of approximately 
11%, is excluded from any job creation and economic development 
initiatives, a message of exclusion is sent to United States 
citizens residing in Puerto Rico and Hispanics throughout 
America.
    It is essential that Congress address this inequity 
immediately. Existing law further restricts the remaining 
Section 30A incentives to existing businesses until 2002 and 
eliminates them entirely after 2005. This creates a significant 
disincentive for businesses considering expansion in Puerto 
Rico at this very moment. Section 30A expansion would restore a 
positive incentive program before more jobs are lost. The USHCC 
is committed to keeping American jobs on American soil, and 
with your help this objective can be realized.
    Thank you.
      

                                

                              Congress of the United States
                                    House of Represenatives
                                                      April 3, 2000
The Honorable Amo Houghton, Chairman
Subcommittee on Oversight
Committee on Ways & Means
U.S. House of Representatives
1110 Longworth House Office Building
Washington, DC 20515

Re: Testimony to Subcommittee on Oversight Regarding Tax 
Incentives For Distressed Communities

Dear Mr. Chairman:

    The purpose of my letter is to forward to you a statement 
which I would appreciate having made part of the record of your 
Subcommittee's March 21, 2000, hearing on Tax Incentives for 
Distressed Communities. Additionally, I would like to request 
your assistance in including an Alaska Native Settlement Trust 
in any legislation which may be reported by the Ways and Means 
Committee as a result of your Subcommittee's hearing on this 
matter or as part of separate legislation.
    As you will recall, you and I, along with your fellow 
Subcommittee members J.D. Hayworth, Wes Watkins and Scott 
McInnis, and 17 other of our colleagues co-sponsored H.R. 2359 
last year to address a number of inequities and deficiencies in 
the existing settlement trust provision of the Alaska Native 
Claims Settlement Act. The purpose of such trusts is to 
``promote the heath, education, and welfare . . . and preserve 
the heritage and culture of Natives.''
    As my enclosed statement will set forth, Chairman Archer 
included a Settlement Trust provision in the House version of 
the major tax bill last year. Unfortunately, that provision did 
not include a key element of the Settlement Trust legislation 
that you and I and others co-sponsored. In order to remedy that 
deficiency and inequity and to concurrently make a significant 
contribution to helping distressed communities, remedial 
legislation similar, if not identical, to the bill you and 
others co-sponsored, is critically needed.
    I am enclosing an outline of a provision which is the 
result of consultations over the past two years with the 
Committees of jurisdiction, individual Member offices, and 
representatives of the Administration. My sense is that, while 
I still believe that the settlement trust provision you and I 
and others introduced as H.R. 2359 is a somewhat better 
approach, I am prepared to recommend that, in the alternative, 
we rely upon a modified approach outlined in the enclosed 
statement and outline.
    I know the Alaska Native community is, as I am, deeply 
appreciative of your stepping forward last year to assist this 
effort through your co-sponsorship of H.R. 2359. I believe that 
we now have a genuine opportunity to achieve something of great 
importance that will assist the descendants of the original 
inhabitants of Alaska as well as assist distressed communities 
within our state in the years to come.
    The Settlement Trust mechanism is particularly meritorious 
in that it utilizes funds which the Native Village and Regional 
Corporations generate themselves to help them attempt to 
address many health, education, welfare, economic, heritage and 
cultural issues facing communities. In short, this legislation 
represents a good investment and will have substantial and 
lasting benefits for distressed communities into the future.
    Thank you again for your co-sponsorship of Settlement Trust 
legislation and your assistance in advancing this cause within 
the Ways and Means Committee through the attachment of a 
Settlement Trust provision to appropriate legislation the 
Committee may report to the House in the days ahead.
    Warmest and best wishes.
            Sincerely,
                                                  Don Young
                                         Congressman for All Alaska
Enclosure: Statement dated March 21, 2000
      

                                

Statement of Hon. Don Young, a Representative in Congress from the 
State of Alaska

Mr. Chairman and Members of the Subcommittee on Oversight:

    Thank you for holding this oversight hearing on the 
important issue of ``Tax Incentives to Assist Distressed 
Communities.'' As Chairman of the authorizing Committee with 
oversight and legislative responsibility for the Alaska Native 
Claims Settlement Act (ANCSA), I appreciate this opportunity to 
bring to your attention an acute need for remedial tax 
legislation regarding a provision of ANCSA which holds promise 
for helping a number of economically distressed communities in 
Alaska.
    I would like to urge your Subcommittee's support for 
inclusion of a provision to address deficiencies in the 
existing Settlement Trust provision of ANCSA in any legislation 
which may ultimately be reported from the Ways and Means 
Committee in response to your Subcommittee's oversight hearing 
on March 21, 2000, or as part of other tax legislative 
initiatives this year. The provision on which I seek your 
assistance and support would make more workable, and enhance 
the public policy objectives of, the ANCSA Settlement Trust 
provision and thereby provide a measure of relief to a number 
of economically distressed Alaska Native communities.

                  Context for Native Claims Settlement

    As the Members of the Subcommittee may know, in 1971, the 
Congress enacted legislation to provide a settlement with 
Alaska's indigenous peoples regarding their aboriginal claims 
to lands and resources in areas in which their ancestors lived 
for thousands of years and which is today the State of Alaska. 
The context for that settlement was that oil had been 
discovered at Prudhoe Bay and our Nation sought to settle 
claims with the original habitants of Alaska, in part, to 
facilitate obtaining rights of way for the construction of the 
Trans-Alaska pipeline. A settlement with Alaska Natives not 
only was long overdue, it was needed to clear the way for the 
construction of a pipeline from Prudhoe Bay to Valdez, Alaska 
to transport petroleum reserves of the North Slope once they 
were developed and produced for further shipment to the lower 
48 states.

                    ANCSA Settlement Trust Provision

    To facilitate the Alaska Native land claims settlement, 
Congress authorized the establishment of Native Village and 
Regional Corporations, a bold new concept born from the 
experience of the economic hurdles continuing to be faced by 
lower 48 Indian Tribes as they sought to help provide 
critically needed assistance to members of their tribes.
    In an amendment to ANCSA in 1987, the Congress provided 
that Alaska Native Corporations could establish trust funds 
from their own resources (Settlement Trusts) ``to promote the 
health, education, and welfare . . . and preserve the heritage 
and culture of Natives.'' The overall purposes for such trusts 
are similar to those associated with certain trust funds for 
lower 48 Native Americans. In general, in the lower 48 Indian 
Tribe context, trust funds are established from appropriated 
funds, court awards or receipts from hydroelectric dams or oil 
and gas leasing on tribal land; their establishment does not 
generate a tax obligation for the beneficiary; they are not 
routinely taxed on their interest earnings; and while some 
distributions from such funds are taxable at the beneficiary 
level, others are not.
    Under current I.R.S. tax rulings, the Alaska Native 
Settlement Trust funds are established with private funding 
resources, i.e. the Alaska Native Corporations themselves; 
their establishment does generate an immediate tax obligation 
for the beneficiary if the Alaska Native Corporation has 
earnings and profits; interest earnings are taxed at the 
highest trust rate of 39.6%; and distributions by the trusts 
are taxed at the ordinary income tax rate of the beneficiary, 
subject to a tax audit for trust taxes paid by the trust in the 
current and prior years under a complex ``throwback rule.''
    Furthermore, under current law, a Settlement Trust 
beneficiary would be required to prepay taxes on his or her 
share of the property transferred to the trust (to the extent 
of the corporation's earnings and profits) irrespective of 
whether the beneficiary ever receives any distribution from the 
trust. Such a beneficiary easily could pay more in taxes than 
distributions he or she would ever receive from the trust. This 
is particularly true of elders.
    Although I am not advocating that Congress provide 
treatment to Alaska Native Settlement Trusts identical to lower 
48 Indian Tribal Trust Funds, many of our colleagues and I do 
believe that this Settlement Trust provision needs remedial 
work. Such Remedial amendment would make it more equitable and 
productive in terms of carrying out the purposes for which it 
was authorized and thereby provide the additional benefit of 
assisting economically distressed communities.

                      Unique Conditions in Alaska

    As you may know, much of Alaska remains predominately rural 
and in many cases, not just rural, but isolated and remote. For 
example, for many of our communities, people must oftentime 
receive emergency medical attention by personnel other than 
doctors or even nurses. In remote isolated villages in bad 
weather, frequently treatment other than first aid has to be 
conveyed to the medical caregiver by radio or telephone. If one 
faces a medical emergency and is lucky, he or she might be able 
to be air or boat evacuated to a larger location with better 
medical facilities.
    In many areas of Alaska, unlike even the most rural areas 
of the lower 48, there are simply no roads. In many 
communities, people have to move from place to place by 
airplane, boat, dogsled, snowmobile, or on foot. Our State 
remains a frontier in many ways. Higher education remains out 
of reach for many Alaska Native children. Native language and 
culture are in danger of being lost from numerous social, 
economic and cultural forces today. Although much of national 
welfare reform has been positive, such reform, nevertheless, 
poses a particularly difficult challenge for the future to many 
Alaska Natives who are from rural areas where job opportunities 
are historically severely limited or simply not available.
    In many of our rural Native communities in Alaska, 
sanitation is still a challenge similar to the way it was many 
decades ago in the lower 48. Many communities still use honey 
wagons for sewage disposal. . . others did so until only 
recently. Still others have only rudimentary sanitation 
facilities. Hepatitis rates, meningitis rates and teenage 
suicide rates are in a number of communities near or among the 
highest in the Nation. And, while rural communities have made 
progress over the years, many Alaska Native villages are still 
far behind similar rural areas of the rest of this Nation.
    Additionally, because so many Alaska Natives in rural 
Alaska have not had the opportunity for conventional work as 
one would have in most areas in the rest of the Nation, many do 
not have the benefits of Social Security having simply not 
qualified for such benefits over the years in conventional 
jobs. Many villages have 2 or 3 or at most a handful of ``for 
pay'' jobs available. Unemployment rates (i.e. ``not 
employed'') of 20% to 60% are commonplace. Seasonal and non-
seasonal unemployment in some regions can reach as high as 70% 
to 100%.
    Because of not having easy or inexpensive transportation to 
markets, developing job opportunities in most villages is 
challenging far beyond what one would face in a rural community 
in the lower 48 states. Although Native Villagers are more 
dependent today on a partial cash economy than they were 10 or 
20 years ago, today most rural Alaska Natives remain heavily 
reliant on a subsistence way of life. Nowhere else in our 
Nation are so many people so dependent on subsistence to place 
food on the table. The subsistence way of life and the heritage 
and culture of Alaska Natives are unique aspects of America 
and, are, and I hope you will agree, key parts of the diversity 
of our Nation that we in Congress should recognize, respect, 
assist, and conserve.
    Mr. Chairman and Members of the Subcommittee, this is part 
of the back drop for the provision that I am seeking your 
support for today.

  Recent Efforts to Remedy Inequities and Deficiencies of ANCSA Trusts

    Last year, 21 of our colleagues from both sides of the 
aisle and I introduced H.R. 2359 to address some of the 
inequities and deficiencies in the current ANCSA Settlement 
Trust provision. A similar bill (S.933) was introduced in the 
Senate.
    Also, last year the Senate-passed version of the Taxpayer 
Refund and Relief Act of 1999, contained a Settlement Trust 
provision which was fairly balanced and achieved the twin goals 
of permitting transfers to settlement trusts without immediate 
taxation of beneficiaries and providing a mechanism to defer 
some trust income to ensure trust longevity. As introduced, 
that provision was virtually identical to S.933 and H.R. 2359. 
Unfortunately, the comparable House-passed version of the 
Taxpayer Refund and Relief Act contained remedial taxation of 
beneficiaries upon transfer to the trust, but did not include 
other key provisions. The House version was adopted in 
conference.
    The attached outline of an alternative provision has been 
developed after numerous consultations over the past two years 
between the Settlement Trust Working Group from both Regional 
and Village Native Corporations and others within the 
Administration and relevant Congressional Committees and Member 
offices and staff. The enclosed proposal would greatly simplify 
the tax treatment of Settlement Trusts, correct deficiencies 
and inequities in the existing law, and would encourage the 
maintenance of these trusts to carry out the important purposes 
for which they were intended.
    The proposal would require that all income from Settlement 
Trusts be taxed currently to the Trust itself at the 15 percent 
rate (or 10 percent if capital gains). Under current law, 
income distributed is not taxed at the trust level, but is 
separately taxable to each beneficiary. The 15% tax rate is 
likely higher than what a blended rate would be for all Alaska 
Natives. Instead of sending many complex K-1 or 1099 forms to 
thousands of beneficiaries, tax would be collected annually at 
the Trust level. I understand that these forms, for even a 
small Native village Corporation, can easily reach a foot or 
two feet tall. With this proposal, there would be no need for 
the added cost of administering an IRS audit activity to check 
on the compliance with thousands of Alaska Native beneficiaries 
since the tax would be collected once from the Settlement 
Trust. Distributions in excess of the income of a Settlement 
Trust would be treated as if distributed directly by the Alaska 
Native Corporation to the Alaska Native beneficiaries, i.e., 
first as a dividend to the extent of earnings and profits, 
thereafter as a return of basis, and a capital gain to the 
extent the distribution exceeded the basis.
    Mr. Chairman, the extensive work that has occurred over the 
past few years to forge the foundation for this bill has been a 
genuine cooperative effort. A responsible, remedial Settlement 
Trust provision has strong bipartisan support and should have 
an even lower revenue estimate than the earlier provision 
incorporated in H.R. 2359, S.933 and in the Senate-passed tax 
bill last year.
    I strongly recommend and request that this alternative 
provision outlined as an enclosure to my statement be included 
in tax legislation which may be reported from the Ways and 
Means Committee regarding distressed communities and in any 
other appropriate tax legislation the Committee may pursue this 
year. I will soon provide to your Subcommittee and the full 
Committee actual legislative language for this provision.
    I deeply appreciate the consideration of this Subcommittee 
of my statement on this matter as well as the enclosed 
proposal, which holds such importance and promise for the 
original inhabitants of Alaska . . . and through them a number 
of economically distressed communities in rural Alaska.
    Enclosure: Outline of Alternative Alaska Native Settlement 
Trust Provision, March 21, 2000

    Outline of Alternative Alaska Native Settlement Trust Provision

    1. Taxation of All of Settlement Trust's Income to Trust.

    All of the income of an electing Settlement Trust for 
Alaska Native beneficiaries, whether or not distributed, would 
be taxable to the Trust itself. The rate of tax on all income 
would be 15 percent, except that capital gains would be taxed 
at the maximum capital gains tax rate of individuals in the 15 
percent bracket (currently 10 percent).

    2. No Immediate Taxation of Contributions to Settlement 
Trusts.

    As in section 1332 of H.R. 2488, the Taxpayer Refund and 
Relief Act of 1999 as passed by Congress and vetoed by the 
President, transfers to an electing Alaska Native Settlement 
Trust would not be taxable to the beneficiaries of the Trust 
when the contributions were made.

    3. No Additional Tax on Trust Income Distributed to Alaska 
Natives.

    Because the income has already been subjected to tax at the 
Settlement Trust level, it would not be taxable a second time 
when distributed to beneficiaries. Therefore no Form 1099 or K-
1 reporting would be required for this income. The trust 
throwback rule would not apply.
    4. Taxation of Distributions In Excess of Trust Income

    Distributions by an electing Settlement Trust to Alaska 
Native beneficiaries in excess of distributable net income plus 
undistributed net income would be treated as if they were 
distributed by the Alaska Native Corporation directly to the 
beneficiaries. Thus, the distributions would first be fully 
taxable to the beneficiaries in the year of the distribution to 
the extent of the previously undistributed earnings and profits 
of the Alaska Native Corporation at the time transfers were 
made to the Settlement Trust. (Reporting of such taxable 
distributions to the beneficiaries would be on Form 1099.) 
Further distributions from the electing Settlement Trust to the 
beneficiaries in excess of the earnings and profits accumulated 
at the time of the transfer to the Settlement Trust would be a 
return of capital to the extent of each beneficiary's basis in 
stock of the Alaska Native Corporation, and thereafter as 
capital gain. The earnings and profits of the Alaska Native 
Corporation would not be reduced upon transfer of monies into 
the Settlement Trust but would be reduced as taxable 
distributions made to beneficiaries out of the Alaska Native 
Corporation's earnings and profits, determined at the time of 
the contribution by the Alaska Native Corporation to the 
Settlement Trust. This concept was included in Section 1332 of 
H.R. 2488.

    5. Rationale

    Since many Alaska Natives are primarily in low tax 
brackets, taxation of the income currently to the Trust at a 
rate of 15% is more than fair to the Government.
    Distributions of trust income by an electing Settlement 
Trust would be non-taxable, eliminating the need for a K-1 or 
Form 1099. The trust throwback rule would be inapplicable. 
Taxation of the amounts transferred by the Alaska Native 
Corporation to the Settlement Trust in excess of Trust income 
would be taxed to the beneficiaries as ordinary income to the 
extent of the Alaska Native Corporation's earnings and profits 
at the time of transfer to the Trust (unless distributions by 
the Alaska Native Corporation dissipated these earnings and 
profits), and thereafter as return of basis or capital gain as 
in the Conference Committee version of last year's legislation.
    This approach in this legislative provision would be very 
efficient from a revenue perspective because all of the income 
would be taxed to one entity when it is earned, without 
application of the net operating losses of the Alaska Native 
Corporation, and no further paperwork or IRS audit resources 
would be necessary.

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