Community Development: Limited Information on the Use and Effectiveness of Tax Expenditures Could Be Mitigated through Congressional Attention
Released: 2012-03-30T00:00:00

Letter

Background

Tax expenditures are preferential provisions in the tax code, such as exemptions and exclusions from taxation, deductions, credits, deferral of tax liability, and preferential tax rates that result in forgone revenue for the federal government. The revenue that the government forgoes is viewed by many analysts as spending channeled through the tax system. However, tax expenditures and their relative contributions toward achieving federal missions and goals are often less visible than spending programs, which are subject to more systematic review. Many tax expenditures—similar to mandatory spending programs—are governed by eligibility rules and formulas that provide benefits to all those who are eligible and wish to participate. Tax expenditures do not compete overtly with other priorities in the annual budget, and spending embedded in the tax code is effectively funded before discretionary spending is considered. Tax expenditures generally are not subject to congressional reauthorization and, therefore, lack the opportunity for regular review of their effectiveness.

Some We have long recommended greater scrutiny of tax expenditures.tax expenditures may be ineffective at achieving their social or economic purposes, and information about their performance as well as periodic evaluations can help policymakers make more informed decisions about resource allocation and the most effective or least costly methods to deliver federal support. Performance measurement is the ongoing monitoring and reporting that focuses on whether programs have achieved objectives in terms of the types and levels of activities or outcomes of those activities. Program evaluations typically examine a broader range of information on program performance and its context than is feasible to monitor on an ongoing basis. A “program” may be any activity, project, function, or policy that has an identifiable purpose or set of objectives, including tax expenditures. In the context of community development programs, impact evaluations can be a useful tool to assess the net effect of a program by comparing program outcomes with an estimate of what would have happened in the absence of the program. This form of evaluation is employed when external factors are known to influence the program’s outcomes, in order to isolate the program’s contribution to achievement of its objectives. Importantly, challenges in performance measurement and evaluation are not unique to tax expenditures as agencies have encountered difficulties in measuring the performance of spending programs as well.

Pub. L. No. 111-352, 124 Stat. 3866 (2011). GPRAMA amends the Government Performance and Results Act of 1993, Pub. L. No. 103-62, 107 Stat. 285 (1993). choices in setting priorities as government policymakers address the rapidly building fiscal pressures facing our national government.

Overlap Exists in the Design of Community Development Tax Expenditures

Multiple Tax Expenditures Fund Community Development Activities

For fiscal year 2010, we identified 23 tax expenditures that fund community development activities. Appendix II lists each tax expenditure with information on its estimated cost, type, and taxpayer group, as well as enactment and expiration dates. Five tax expenditures primarily promote community development in economically distressed areas, including Indian reservations; these programs cost the federal government approximately $1.5 billion in fiscal year 2010. Nine tax expenditures both support community development and address other federal mission areas, such as rehabilitating historic or environmentally contaminated properties for business use as well as constructing a range of transportation facilities, such as airports and docks, and water and hazardous waste systems. These multipurpose tax expenditures cost the federal government approximately $8.7 billion in fiscal year 2010. Two large state and local bond tax expenditures also may support community development, although community development activities account for only a portion of the total costs of those tax expenditures. Finally, the federal government has periodically offered temporary tax relief following certain disasters, including six packages of tax provisions focused on specific areas as well as one provision available for any presidentially declared disaster area. Figure 1 illustrates the mix of various tax expenditures that support community development.

The federal government has five tax expenditures primarily to promote community development in economically distressed areas, such as low- income communities and Indian reservations. As noted below, all but one of these programs have expired.

The Empowerment Zones and Renewal Communities (EZ/RC) programs ($730 million in revenue losses in fiscal year 2010) were established to reduce unemployment and generate growth in economically distressed communities that were designated through a competitive process. Initially, the EZ program offered a mix of grants and tax incentives for community and economic development, but later EZ rounds and the RC program offered primarily tax incentives for business development. While eligibility varied slightly by program and round, the 40 EZ- and 40 RC-designated communities were selected largely on the basis of poverty and unemployment rates, population, and other area statistics based on Decennial Census data.tax provisions expired at the end of 2011.

The RC tax provisions expired at the end of 2009, and the EZ

The New Markets Tax Credit (NMTC) ($720 million in revenue losses in fiscal year 2010) encourages investment in impoverished, low- income communities that traditionally lack access to capital. Whereas the EZ/RC programs target designated communities, the NMTC targets Census tracts where the poverty rate is at least 20 percent or where median family incomes do not exceed 80 percent of such incomes within a state or a metropolitan area. In January 2010, we reported that 39 percent of the Census tracts qualified for the NMTC program and 36 percent of the U.S. population lived in these Census tracts. The NMTC expired at the end of 2011.

Two tax expenditures—Tribal Economic Development Bonds and Indian employment credit—target Indian tribal reservations. Indian tribes are among the most economically distressed groups in the United States, and tribal reservations often lack basic infrastructure commonly found in other American communities, such as water and sewer systems as well as telecommunications lines. Created under the American Recovery and Reinvestment Act of 2009 (the Recovery Act), the temporary bond authority ($10 million in revenue losses in fiscal year 2010) provided tribal governments with greater flexibility to use tax-exempt bonds to finance economic development projects. The $2 billion bond authority was to be allocated by February 2010, but Treasury and IRS have extended deadlines to reallocate unused bond authority. The Indian employment credit expired at the end of 2011.

The Recovery Act also created temporary Recovery Zone bonds— including Recovery Zone Economic Development Bonds and Recovery Zone Facility Bonds allocated among the states and counties and large municipalities within the states based on unemployment losses in 2008. These bond authorities ($60 million in outlays in fiscal year 2010) expired at the end of 2010.

Four of the five community development tax expenditures targeted to economically distressed areas have a statutory limit, such as a specified number of community designations, volume cap, or allocation amount, as shown in table 1. Although the allocation processes varied, these tax expenditures resemble grants in that an agency—either a federal agency or a state or local government—selects the qualifying communities, community development entities (CDE), or projects to receive the limited allocation available.

For the EZ/RC program, communities nominated by their state and local governments had to submit a strategic plan showing how they would meet key EZ program principles or a written “course of action” with commitments to carry out specific legislatively mandated RC activities. In selecting the designated communities, HUD and USDA were required to rank EZ nominees based on the effectiveness of their plans, but HUD was required to designate RCs based in part on poverty, unemployment, and, in urban areas, income statistics. For designated EZs and RCs, state and local governments were responsible for allocating certain tax provisions with specified limits, including the RC Commercial Revitalization Deduction and EZ Facility bonds.

For the NMTC program, the annual tax credit allocation limit was $3.5 billion for fiscal years 2010 and 2011. The CDFI Fund awards tax credit allocations to winning CDE applicants based on application scoring by peer review panels. The CDEs, in turn, invest in qualified low-income community investments. As of November 1, 2011, the CDFI Fund had allocated $29.5 billion in NMTC authority available from 2001 to 2010 and announced $3.6 billion in 2011 tax credit allocations on February 23, 2012.

For more on the selection process, see GAO, Community Development: Federal Revitalization Programs Are Being Implemented, but Data on the Use of Tax Benefits Are Limited, GAO-04-306 (Washington, D.C.: Mar. 5, 2004).

For the Recovery Zone bond programs, the national volume cap was $10 billion for Recovery Zone Economic Development Bonds and $15 billion for Recovery Zone Facility Bonds. State and local governments were responsible for allocating bond issuance authority to specific projects. Tribal Economic Development Bonds had a national volume cap of $2 billion. Tribal governments applied for allocations to issue bonds for specific projects.

Other tax expenditures available in economically distressed communities are comparable to entitlement programs for which spending is determined by statutory rules for eligibility, benefit formulas, and other parameters rather than by Congress appropriating specific dollar amounts each year.taxes) available to all qualified claimants, regardless of how many taxpayers claim the tax expenditures, how much they claim collectively, or how much federal revenue is reduced by these claims. For example, businesses may claim Indian employment tax credits for employing Indian tribal members and their spouses without limit on the numbers or total Such tax expenditures typically make funds (through reduced amounts of claims. Similarly, businesses located in EZs and RCs may claim the EZ/RC Employment Credit and the Work Opportunity Tax Credit for employing eligible residents within an EZ or RC area without an aggregate limit on such tax credits.

The term "brownfield site" means real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant.

Both tax credits cannot be claimed for a single rehabilitation project. Eligible expenditures include costs incurred for rehabilitation and reconstruction of certain older buildings. Rehabilitation includes renovation, restoration, and reconstruction and does not include expansion or new construction. end of 2009, and the expensing of environmental remediation costs expired at the end of 2011.

Two tax expenditures fund production of affordable rental housing for low-income households—the Low-Income Housing Tax Credit (LIHTC) and tax-exempt rental housing bonds. Under the LIHTC, a 9 percent tax credit is available for new construction or substantial rehabilitation projects not otherwise subsidized by the federal government, and a 4 percent tax credit is available for the projects receiving other federal subsidies including rental bond financing. Affordable housing projects must satisfy one of two income-targeting requirements: 40 percent or more of the units must be occupied by households whose incomes are 60 percent or less of the area median gross income, or 20 percent or more of the units are occupied by households whose incomes are 50 percent or less of the area median gross income. For fiscal year 2010, two grant programs also helped provide gap financing for LIHTC housing development following disruption of the tax credit market in 2008.

Federally tax-exempt and tax credit bonds issued by state and local governments also contribute to community development and other federal mission areas by financing infrastructure improvements and other projects. For example, state and local governments may issue private activity bonds to finance airports, docks, and other transportation infrastructure; large business projects tied to the employment of residents in Empowerment Zones; and water or wastewater facilities that enable communities to meet community facilities needs and support development. Qualified Zone Academy Bonds (QZAB)—the authority for which expired at the end of 2011—may be used for renovating school facilities, purchasing equipment, developing course materials, or training personnel at qualified public schools in economically distressed areas including designated EZs or RCs. Whereas private activity bonds are used to support specific private activities and facilities often intended to generate economic development, state and local governments may also issue tax-exempt public-purpose state and local bonds and Build America Bonds (BAB) to help finance public infrastructure and facilities. In 2008, we reported that a majority of state and local bonds issued in 2006 were allocated for education or general purposes; for the latter category, it was not clear what activities or facilities were funded by the bonds.that community development activities comprise only a portion of governmental bonds, we did not sum the revenue losses for the two Given general bond provisions to avoid overstating federal support for community development.

As shown in table 2, all of the multipurpose community development tax expenditures involve other entities in addition to IRS in administering the tax benefits. Five multipurpose tax expenditures resemble grants in that state and local governments oversee the allocation process to select qualifying projects to receive the limited allocation available. For the LIHTC for example, state housing finance agencies (HFA) award 9 percent credits to developers for low-income housing projects based on each state’s qualified allocation plan, which generally establishes a state’s funding priorities and selection criteria. Although the federal government does not set specific limits for general-purpose state and local bonds and BABs, private activity bond financing—including for rental housing and water systems—is generally subject to an annual volume cap for each state, and QZABs and bond financing for certain transportation facilities also have statutory allocation limits.

The rehabilitation and brownfields tax expenditures resemble entitlement programs in that these tax incentives have no allocation limits and are available to all eligible claimants. In addition to IRS’s role in administering tax law, other federal and state agencies play a role in certifying that the properties are eligible for tax benefits. For the 20 percent rehabilitation tax credit for certified historic structures, the NPS, with the assistance of State Historic Preservation Offices, certifies historic structures, approves rehabilitation applications, and confirms that completed rehabilitation projects meet the Secretary of Interior’s Standards of Rehabilitation. For the brownfields tax expenditures, state environmental agencies certify eligible properties.

The federal government has offered various mixes of temporary tax incentives and special rules to stimulate business recovery and provide relief to individuals after certain major disasters. See appendix VI for a detailed list of 45 tax benefits made available for specific disaster areas. Business recovery is a key element of a community’s recovery after a major disaster. To assist New York in recovering from the September 11, 2001, terrorist attacks, Congress passed a 2002 package with seven tax benefits targeted to the Liberty Zone in lower Manhattan. In the aftermath of the 2005 Gulf Coast hurricanes, Congress enacted the Gulf Opportunity Zone Act of 2005 (GO Zone Act) offering 33 tax benefits in part to promote business recovery and provide debt relief for states. A 2007 Kansas disaster relief package provided 13 tax benefits for 24 counties in Kansas affected by storms and tornadoes that began on May 4, 2007. A 2008 midwest disaster relief package targeted 26 tax benefits for selected counties in 10 states affected by tornadoes, severe storms, and flooding from May 20 through July 31, 2008. Also in 2008, Congress enacted a package offering eight tax benefits available to any individual or business located in any presidentially declared disaster area during calendar years 2008 and 2009.

The preponderance of the disaster tax incentives offered in the six legislative packages we examined were modifications of existing tax expenditures, including increased allocations for the NMTC, LIHTC, rehabilitation tax credits, and tax-exempt bond financing. Several tax packages have offered accelerated first-year depreciation allowing businesses to more quickly deduct costs of qualified property, as well as partial expensing for qualified disaster cleanup and environmental remediation costs. Other tax incentives available for individuals in disaster areas included increased tax credits for higher education expenses and relief from the additional 10 percent tax on early withdrawals of retirement funds. An eligible disaster area may encompass communities that were economically distressed before the disaster as well as other communities, and taxpayers in the qualified area may be eligible for some tax incentives even if they did not necessarily sustain losses in the disaster. For those disaster tax incentives available to individuals and businesses as long as they meet specified federal requirements, the full cost to the federal government depends on how many taxpayers claim the provisions on their tax returns.

Community Development Tax Expenditures Overlap in Design with Some Limits on Combining Multiple Tax and Spending Programs

For community development, tax expenditures are not necessarily an either/or alternative, and they may be combined to support certain community development activities. The design of each community development tax expenditure we reviewed appears to overlap with that of at least one other tax expenditure, as the following examples illustrate.

Five tax expenditures targeted similar geography—economically distressed areas including tribal areas—although the specific areas served varied. Within the EZ- and RC-designated communities, a variety of tax incentives were available to help reduce unemployment and stimulate business activity.

Seven bond tax expenditures share a common goal to finance infrastructure development.necessarily duplicative in that they allow flexibility in tax-exempt bond financing for similar projects with different ownership characteristics. For example, water and sewer facilities can be financed through public-purpose governmental bonds if a governmental entity is the owner and operator or through private activity bonds if the owner and operator is a private business.

The various bond authorities are not

Multiple tax expenditures—including the NMTC, several EZ/RC incentives, as well as the rehabilitation and brownfields tax expenditures—can be used to fund commercial buildings. Within this broad area of overlap, the tax expenditures are not necessarily duplicative in that some target certain types of buildings. The various tax expenditures that can be used to fund commercial buildings have geographic or other targets that sometimes coincide and sometimes do not. Therefore, for example, the 20 percent rehabilitation tax credit targets certified historic structures and the 10 percent rehabilitation credit is available for other older structures, but these eligible structures may or may not fall within the low-income communities eligible for NMTC assistance.

Various tax benefits made available for certain disaster areas were largely modifications of existing tax expenditures.

The community development tax expenditures we reviewed also may potentially overlap with federal spending programs. As discussed above, our May 2011 report identified overlap among 80 economic development spending programs administered by four agencies—Commerce, HUD, SBA, and USDA.economic development spending programs that are similar to the areas of community development tax expenditure overlap discussed above.

Appendix VII discusses areas of overlap among the Disaster tax aid may also potentially overlap with federal financial assistance offered through disaster assistance grants and loans.

Areas of overlap with multiple tax expenditures funding the same community development project may not represent unnecessary duplication, in part, because some tax expenditures are designed to be used in combination. As an example, the 4 percent LIHTC is designed to be used in combination with rental housing bonds. In another example, the 20 percent historic preservation tax credit may be used in combination with other community development tax expenditures, including the NMTC and LIHTC. Under the Housing and Economic Recovery Act of 2008, state HFAs are allowed to consider historic preservation as a selection factor in their qualified allocation plans to promote redeveloping historic structures as affordable housing.

As shown in table 3, federal tax laws and regulations impose limits on how community development tax expenditures can be combined with each other and spending programs to fund the same individual or project. For example, employers cannot double dip by claiming two employment tax credits for the same wages paid to an individual. Whereas business investors may claim accelerated depreciation for LIHTC and NMTC projects, businesses generally may not claim accelerated depreciation for For the rehabilitation private facilities financed with tax-preferred bonds.tax credits and brownfield tax incentives, taxpayers may not claim costs funded by federal or state grants. Also, rehabilitation costs claimed for the 20 percent credit cannot be counted towards the adjusted basis of a property for the purposes of calculating the amount of other federal tax credits claimed for the same project; as a result, the effective tax savings on using the 20 percent credit with other federal tax credits are less than the sum of tax savings provided by each of the credits and deductions if they could be used together without this restriction. The information on tax law and regulatory limits listed in table 3 is not exhaustive; additional limits may apply in other federal laws and regulations.

An area of potential overlap also exists among the tax expenditures subsidizing community development activities and CRA regulatory requirements for depository institutions in helping to meet the credit needs of the communities in which they operate. Banks earn positive consideration toward their CRA regulatory ratings by investing in projects also receiving certain tax benefits. In 2007, we reported that investors used NMTC and LIHTC to meet their CRA requirements. At that time, over 40 percent of NMTC investors reported that they used the tax credit to remain compliant with CRA. NMTC investors using the tax credit to meet CRA requirements also viewed it as very or somewhat important in their decision to make the investment. Nearly half of NMTC investors we surveyed in 2007 reported that they made other investments eligible for LIHTC, and nearly three-quarters of those investors using both tax credits were also required to comply with the CRA.

Federal community development financing is fragmented with multiple federal agencies administering related spending programs as well as with multiple federal, state, and local agencies helping administer certain tax expenditures. As we have previously reported, mission fragmentation and program overlap may sometimes be necessary when the resources and expertise of more than one agency are required to address a For example, IRS, NPS, and state historic complex public need.preservation offices are involved in administering the 20 percent historic preservation tax credit for rehabilitating historic structures. NPS oversees compliance with technical standards for historic preservation, and IRS oversees financial aspects of the tax credit. NPS and IRS have partnered with IRS providing guidance including frequently asked questions about the tax credit on the NPS website. At the same time, fragmentation can sometimes result in administrative burdens, duplication of efforts, and inefficient use of resources. Applicants may need to apply for tax expenditures and spending programs at multiple agencies to address the needs of a distressed area or finance a specific project. For example, owners and developers seeking to restore an historic structure for use as affordable rental housing would need to apply separately to NPS for the 20 percent historic rehabilitation credit as well as to the state HFA for a LIHTC allocation.

Limited Information and Measures Are Available to Assess the Performance of Community Development Tax Expenditures

Achieving results for the nation increasingly requires that federal agencies work together to identify ways to deliver results more efficiently and in a way that is consistent with limited budgetary resources. Agencies and programs working collaboratively can often achieve more public value than when they work in isolation. To address the potential for overlap and fragmentation among federal programs, we have previously identified collaborative practices agencies should consider implementing in order to maximize the performance and results of federal programs that share common outcomes. These practices include defining common outcomes; agreeing on roles and responsibilities for collaborative efforts; establishing compatible policies and procedures; and developing mechanisms to monitor, assess, and report on performance results.

GAO-11-318SP. the extent possible, data sharing is a way to reduce collection costs and paperwork burdens imposed on the public.

IRS Does Not Collect Basic Information for Some Community Development Tax Expenditures and Has Some Information for Tax Credits and Bonds

In general, IRS only collects information necessary for tax administration or for other purposes required by law. As a result, IRS does not collect basic information about the numbers of taxpayers using some community development tax expenditures. We have consistently reported that IRS does not have data on the use of various expensing and special depreciation incentives available to encourage investment in EZ/RC communities, tribal reservations, and disaster areas. For tax credits, IRS has data on the numbers of taxpayers and aggregate amounts claimed, but data often do not tie use of the tax credits to specific communities. Location information is critical to identifying the community where an incentive is used and determining the effect of the tax benefit on local economic development. For bonds, IRS collects data on the amount of bonds issued and broad purpose categories for governmental bonds and allowable uses for qualified private activity bonds. As we reported in 2008, while the information collected is useful for presenting summary information, it provides only a broad picture of the facilities and activities for which the bonds are used.sufficient for IRS to administer the tax code, it provides little information for use in measuring performance. As a result, information often has not been available to help Congress determine the effectiveness of some tax expenditures or even identify the numbers of taxpayers using some provisions. Table 4 summarizes the types of information, including limitations and potential gaps, IRS collects for different types of community development tax expenditures.

Previous Studies Provide Limited Information on the Effectiveness of Select Tax Expenditures in Promoting Community Development

Scarcity of Literature for Select Tax Expenditures’ Effectiveness

Our systematic review of literature for select community development tax expenditures generally found few studies that attempted to assess the effectiveness of programs in promoting certain measures of community development, such as reducing poverty or unemployment rates. We reviewed government studies and academic literature on the following community development tax expenditures: the NMTC, EZ tax program, disaster relief tax provisions, and the rehabilitation tax credits. In reviewing this literature, we focused on studies that attempted to analyze the impact of the tax expenditures on community development through empirical methods. We also summarized our prior observations and recommendations on options to improve tax expenditure design and considerations in authorizing similar community development tax programs. For the NMTC, we did not identify any empirical studies issued since our last report in January 2010. For the EZ program, we identified several studies published since our most recent report in March 2010 that attempted to measure the effect of the program on some measure of community development, as described below. We identified one study on the rehabilitation tax credits that attempted to measure one aspect of community development. We did not identify any empirical studies on disaster tax relief provisions. The scarcity of literature on some tax expenditures may be due to the fact that establishing that a community development tax expenditure or spending program has causal impact on economic growth in a specific community can be challenging. Table 6 below summarizes key methodological issues in attempting to measure effectiveness of the tax expenditures we selected.

As we reported in 2010, making definitive assessments about the extent to which benefits flow to targeted communities as a direct result of NMTC investments presented challenges. For example, the small size of the NMTC projects relative to the total economic activity within an area made it difficult to detect the separate effect of a particular project. Many of the eligible communities may already have significant business activities that could mask NMTC impacts. Limitations associated with available data also made it difficult to determine whether benefits generated in a low- income community outside the scope of a particular project are the direct result of the NMTC program. As discussed above, CDFI Fund is collecting additional data on the use of the NMTC that may provide further insights into its use and impact on communities. For example, CDFI Fund is now collecting data on the amount of equity that CDEs estimate will be left in the businesses at the end of the 7-year period in which tax credits can be claimed. Collecting this information may provide CDFI Fund with additional information on the credit’s cost-effectiveness.

Our 2007 NMTC report used statistical methods to attempt to measure the credit’s effectiveness, but determined that further analysis is needed to determine whether the economic costs of shifting investment are justified. Our analysis did find that the credit may be increasing investment in low-income communities, although this finding was not, in and of itself, sufficient to determine that the credit was effective. Increased investment in low-income communities can occur when NMTC investors increase their total funds available for investment or when they shift funds from other uses. A complete evaluation of the program’s effectiveness would require determining the costs of the program, including any behavioral changes by taxpayers that may be introduced by shifted investment funds. Neither our statistical analysis nor the results of a survey we administered allowed us to determine definitively whether shifted investment funds came from higher-income communities or from other low-income community investments.

The related entities test requires that the CDE have no more than a 50 percent ownership stake in a qualified low-income community business. program which expired at the end of 2011.should require Treasury’s CDFI Fund to gather data to assess whether and to what extent the grant program increases the amount of federal subsidy provided to low-income community businesses compared to the NMTC; how costs for administering the program incurred by the CDFI Fund; CDEs, and investors would change; and whether the grant program otherwise affects the success of efforts to assist low-income communities.

If it does so, Congress We did not identify any empirical studies on the effectiveness of the NMTC since our last report, but CDFI Fund has contracted with the Urban Institute for an evaluation of the NMTC that may lead to additional insights into the program’s effectiveness. In 2010, the Urban Institute published a literature review to inform a forthcoming evaluation, including challenges inherent in evaluating economic and community development CDFI Fund reports that the Urban Institute is programs in general. primarily relying on surveys to CDEs and businesses to conduct the evaluation. The Urban Institute conducted a preliminary briefing on the study's results with CDFI Fund in January 2012. After submitting a draft report to CDFI Fund, the Urban Institute will issue a final report in the spring 2012.

Martin D. Abravanel, Nancy M. Pindus, Brett Theodus, Evaluating Community and Economic Development Programs: A Literature Review to Inform Evaluation of the New Markets Tax Credit Program, The Urban Institute, September 2010.

While Some Studies Have Found Improvements in EZ Communities, Establishing Clear Program Results Is Difficult

Our prior work has found improvements in certain measures of community development in EZ communities, but data and methodological challenges make it difficult to establish causal links. Our 2006 report found that Round 1 EZs that received a combination of grant and tax benefits did show improvements in poverty and unemployment, but we did not find a definitive connection between these changes and the EZ program. Our 2010 report on the EZ/RC program reviewed seven academic studies of Round 1 projects and found that the evaluations used different methods and reported varying results with regard to poverty and unemployment. For example, one study concluded that the program reduces poverty and unemployment, while another study found that the program did not improve those measures of community development. As with the NMTC, our prior EZ/RC work has demonstrated challenges in measuring the effects of the program. For example, data limitations make it difficult to thoroughly evaluate the program’s effectiveness in that use of the EZ/RC Employment Credit cannot be tied to specific communities. Demonstrating what would have happened in the absence of the credit is difficult. External factors, such as national and local economic trends, can make it difficult to isolate the effects of the EZ/RC tax incentives.

Since our 2010 EZ/RC report, we noted that more recent studies comparing employment, housing values, and poverty rates in EZ communities with similarly economically distressed areas have yielded mixed results. Two studies have found lower unemployment in the designated areas where the provisions have been used relative to similar non-EZ areas. Specifically, one study reviewed federal and state enterprise zones and found positive impacts on local labor markets in terms of the unemployment rate and poverty rate. In addition, the researchers found positive, but statistically insignificant, spillover effects to neighboring Census tracts. The second study focused on Round 1 of the EZ program and found that the EZ designation substantially increased employment in zone neighborhoods, particularly for zone residents. Importantly, the researchers examined Round 1 of the program that relied on a mix of tax benefits and grant funding. In addition, another study found that EZ program results seem to vary among different types of businesses within the designated zones. For example, researchers found that EZ tax incentives increase the share of retail and service sector establishments but decreases the share of transportation, finance, and real estate industries. They noted that the effectiveness of the EZ wage credit may be affected by the types of industries that are located in the designated area. However, while these studies have found that certain economic outcomes are associated with an area being eligible for EZ incentives, due to data limitations the studies cannot estimate the extent to which these outcomes vary with the amount of incentives actually used in an area.

Both JCT and the Congressional Research Service (CRS) conducted literature reviews and reported modest effects and methodological limitations in making any definite assessments on the effectiveness of EZs. JCT reported that studies generally found modest effects overall with relatively high costs. In addition, it is difficult to determine whether the spending or tax incentives were responsible for any increases in economic activity. CRS’s review of academic literature found modest, if any, effects of the program and called into the question their cost- effectiveness. According to CRS, one persistent issue in evaluating the potential impact of EZs is the inherent difficulty of identifying the effect of the programs apart from overall economic conditions.

With the expiration of the RCs at the end of 2009 and EZs at the end of 2011, we have made observations in prior work that Congress can consider if these or similar programs are authorized in the future. Without adequate data on the use of program grant funds or tax benefits, neither the responsible federal agencies nor we could determine whether the EZ/EC funds had been spent effectively or that the tax benefits had in fact been used as intended. If Congress authorizes similar programs that rely heavily on tax benefits in the future, it would be prudent for federal agencies responsible for administering the programs to collect information necessary for determining whether the tax benefits are effective in achieving program goals. In 2010, the U.S. Census Bureau began releasing more frequent poverty and employment updates at the Census tract level than it has traditionally provided. This information could be a useful tool in determining the effects of such programs on poverty and employment in designated Census tracts.

Limited Data Collection and Methodological Challenges in Establishing Comparison Areas May Inhibit Evaluations of Effectiveness on Disaster Provisions

Though we identified literature that discussed use of disaster tax provisions and their design, none of the articles attempted to measure empirically the impact the incentives had on promoting community development. A potential challenge in designing tax relief for disaster areas is that those communities within the zones most affected by the disaster may be slower to respond to the incentives than other areas within the zone. Our prior work on the GO Zone reported that bonds were awarded on a first-come, first-served basis that led to awarding bond allocation to projects in less damaged areas in the zone because businesses in these areas were ready to apply for and issue bonds before businesses in more damaged areas could make use of the incentive.

Thus, assessing the impact of disaster relief on an entire zone may not reflect how the provisions affected specific areas within the zone. Another key challenge in evaluating disaster relief tax expenditures is the difficulty in establishing a comparison area where a “comparable” disaster has taken place but government programs or tax provisions were not available. Moreover, evaluations of disaster relief tax expenditures may be difficult because IRS collects limited information on the use of temporary disaster aid, as discussed above.

Literature on the Rehabilitation Tax Credits Has Often Not Focused on Community Development Aspects

While we identified numerous articles focused on historic restoration funded with the federal rehabilitation tax credits and the potential benefits of historic preservation in adapting currently vacant or underused property, we identified only one study that attempted to empirically measure the impact of the tax credit on community development. The study analyzed rehabilitation investment in the Boston office building market between 1978 and 1991 and found that the percentage of investment spending that would have occurred without the tax credit varied over time from about 60 to 90 percent. Another study we reviewed used economic modeling to quantify some community development outputs associated with the 20 percent rehabilitation tax credit, such as estimated jobs and projected income data.the study did not assess whether a rehabilitation project would have occurred in the absence of the credit nor did it compare community development in a project community with development in similar communities. As we previously reported, a complete evaluation of a credit’s effectiveness also requires determining the costs of the program and an assessment of the program’s economic and social benefits.

A challenge in attempting to evaluate how the rehabilitation tax credits affect measures of community development is that the credits have a dual purpose and are not solely intended to promote community development. Evaluators may have difficulty reviewing the program’s effectiveness because they lack specific data on the geographic locations of the projects. In addition, the small size of the rehabilitation tax credit projects relative to the total activity in the area’s economy makes it difficult to isolate the economic effects of the credit.

Conclusions

The annual federal commitment to community development is substantial, with revenue losses from community development-related tax expenditures alone totaling many billions of dollars. However, all too often even basic information is not available about who claims tax benefits from community development tax expenditures and which communities benefit from the activities supported by the tax expenditures. Further, relatively few evaluations of the effectiveness of community development tax expenditures have been done and when they have been done, results have often been mixed about their effects. These issues are familiar and long-standing for tax expenditures generally. We have made recommendations to OMB in 1994 and 2005 to move the Executive Branch forward in obtaining and using information to evaluate tax expenditures’ performance, which can help in comparing their performance to that of related federal efforts.

GPRAMA offers a new opportunity to make progress on these issues. For those limited areas where OMB sets long-term, outcome-oriented, crosscutting priority goals for the federal government, a more coordinated and focused effort should ensue to identify, collect, and use the information needed to assess how well the government is achieving the goals and how those efforts can be improved. We look forward to progress in achieving GPRAMA’s vision for a more robust basis for judging how well the government is achieving its priority goals. The Administration’s interim crosscutting policy goals include some that identify tax expenditures among the contributing programs and activities. OMB’s forthcoming guidance should be helpful in further drawing tax expenditures into the GPRAMA crosscutting performance framework.

Clearly, community development is but one of many areas where OMB could choose to set priority goals, and the interim goals to date encompass 1 of the 23 tax expenditures we reviewed. In this regard, Congress has a continuing opportunity to express its priorities about the goals that should be selected, including whether community development should be among the next cycle of goals. Whether or not OMB selects community development as a priority goal area, Congress also has the opportunity to urge more evaluation and focus Executive Branch efforts on addressing community development performance issues through oversight activities, such as hearings and formal and informal meetings with agency officials. Given the overlap and fragmentation across community development tax and spending programs, coordinated congressional efforts, such as joint hearings, may facilitate crosscutting reviews and ensure Executive Branch efforts are mutually reinforcing.

While GPRAMA provides a powerful opportunity to review how tax expenditures contribute to crosscutting goals, progress is likely to be incremental and require sustained focus. Evaluating the impact of community development efforts is inherently difficult and definitive performance conclusions often cannot be drawn. Data limitations are not easy or inexpensive to overcome, and resources to evaluate programs must compete with other priorities even as the federal government copes with significant fiscal challenges. Thus, judicious choices will need to be made as efforts to improve tax expenditure performance information available to policymakers continue.

Matters for Congressional Consideration

Congress may wish to use GPRAMA’s consultation process to provide guidance on whether community development should be among OMB’s long-term crosscutting priority goals as well as stress the need for evaluations whether or not community development is on the crosscutting priority list. Congress may also wish to focus attention on addressing community development tax expenditure performance issues through its oversight activities.

Agency Comments and Our Evaluation

We provided a draft of this report for review and comment to the Director of OMB, the Secretary of the Treasury, the Commissioner of Internal Revenue, as well as representatives of three federal agencies helping administer certain community development tax expenditures—the Director of the CDFI Fund, the Secretary of Housing and Urban Development (HUD), and the Secretary of the Interior (Interior). The Deputy General Counsel of OMB, the Director of HUD’s Office of Community Renewal, the GAO Audit Liaison of Interior, and the Director of the CDFI Fund provided general comments. The first three provided email comments and the last provided a comment letter which is reprinted in appendix VIII. Only the HUD comments addressed our matters for congressional consideration directly, stating that the report provided minimal justification for them. Although the Secretary of the Treasury and Commissioner of Internal Revenue did not provide written comments, Treasury’s Office of Tax Analysis and IRS’s Office of Legislative Affairs provided technical changes, which we incorporated where appropriate.

While not commenting on our matters for congressional consideration, OMB staff reiterated the view that the Administration has made significant progress in addressing tax expenditures. OMB staff cited assorted Fiscal Year 2013 budget proposals which it estimated would save billions of dollars by eliminating certain spending through the tax code and modifying other tax provisions. Some of the budget proposals relate to tax expenditures covered in this report, and we updated the text to reflect the President’s latest proposals. We also updated our report to reflect the release of new interim crosscutting priority goals and that the Administration has identified some tax expenditures that contribute to these goals, as required under GPRAMA. OMB staff said that this is a significant step forward and will be important for broader GPRAMA implementation over 2012 and 2013. We agree that this inclusion of tax expenditures along with related other programs in the GPRAMA goals is an important step toward providing policymakers with the breadth of information needed to understand the full federal effort to accomplish national objectives. Finally, OMB staff expressed concern that we were suggesting that tax expenditures be addressed through a “one size fits all” framework. We do not believe this report or earlier products suggest that assessing the performance of tax expenditures be done in only one way. We have emphasized the need for greater scrutiny of tax expenditures and more transparency over how well they work and how they compare to other related federal programs.

In its comments, HUD described the report as substantive and comprehensive in addressing community development tax incentives with accurate information about the EZ/RC tax expenditures and HUD’s role in their administration. However, HUD expressed the view that we had minimal justification for our matters for Congress to consider using the GPRAMA consultation process to express congressional priorities related to community development and to focus attention on community development tax expenditures’ performance through its oversight activities. We disagree. The basic issues we found in this review—the all too often lack of even basic information about tax expenditures’ use and the relative paucity of evaluations of their performance—are among the key issues that could be mitigated through GPRAMA crosscutting goals and Congress’s oversight activities. HUD also said we had skirted the issue of identifying programs with the greatest probability for elimination due to duplication, fragmentation, and overlap. This was not among our review’s objectives and we believe the type of information we present can assist Congress in understanding what information is available to support such decisions. As we have previously reported, agencies engaging Congress in identifying which issues to address and what to measure are critical, and GPRAMA significantly enhances requirements on the consultation process. With the release of the interim crosscutting goals, we believe that Congress has a continuing opportunity to express its priorities regarding community development ahead of the next goal cycle due in February 2014. HUD also noted the expiration of some tax expenditures and sought clarification about their inclusion in the report. Our report includes recently expired tax expenditures and where applicable discusses our prior findings and suggestions for Congress to consider if it wishes to extend the tax expenditures that have expired or create similar new ones. HUD also provided technical and editorial comments which we incorporated as appropriate.

In its comments, Interior disagreed with several findings. Interior characterized our report as expressing the view that unwarranted overlap, fragmentation, or duplication existed involving the 20 percent historic rehabilitation credit that Interior’s NPS helps administer. Interior agreed that the tax credit—which has a primary purpose to preserve and rehabilitate historic buildings—has a two-fold mission to also promote community development by revitalizing historic districts and neighborhoods. However, Interior disagreed that the historic rehabilitation tax credit overlaps or duplicates with other community development tax expenditures. Interior stated that only the tax credit has a specific purpose to preserve historic buildings, that the tax credit is not targeted to certain census tracts or low-income areas, and that Congress generally did not exclude historic tax credit users from also using other federal programs. In addition, Interior said that the administration of the historic rehabilitation tax credit was not fragmented, but instead was an example of joint administration that effectively draws upon the best resources of two federal agencies in a coordinated way to implement the law. Finally, Interior disagreed with our finding that limited information is available about the effectiveness of the 20 percent historic rehabilitation tax credit.

Our report does not characterize any overlap, fragmentation, or duplication as “unwarranted.” Rather, we provide a factual description based on standard definitions used in many GAO reports of the relationships between the various tax expenditures that have at least a partial purpose of supporting community development. We make the same point that Interior raises as well—that Congress was aware of and often designed rules to govern the interrelationships among these tax expenditures. Accordingly, our report says these interrelationships do not necessarily represent unnecessary duplication. Based on Interior’s comments, however, we further clarified our text to note that one of the differences between the historic rehabilitation credit and the other community development tax expenditures is that the rehabilitation credit targets certain older structures. Regarding Interior’s comment about fragmentation in the credit’s administration, our report describes the roles of IRS and NPS and says fragmentation may sometimes be necessary when the resources and expertise of more than one agency are required, such as in the case of NPS overseeing technical standards for historic preservation. As we reported, however, fragmentation can result in administrative burdens when an applicant needs to apply at multiple agencies to finance a specific project, such as restoring a historic building as low-income housing. Finally, regarding Interior’s comments on the effectiveness of the rehabilitation tax credit, we continue to note that little is known about the effectiveness of the credit as a community development program given that we identified only one empirical analysis of the effect of the tax credit on community development. Interior pointed specifically to reports based on an economic model NPS helped fund. However, as our report states, the modeling reports did not assess what would have happened in the absence of the historic rehabilitation tax credits or compare development in tax credit project communities to similar communities.

In its comment letter (reprinted in app. VIII), the CDFI Fund said that it appreciated GAO’s ongoing efforts to improve and strengthen performance measurement and evaluation of community and economic development programs. The CDFI Fund said that it has committed resources to systematically evaluate the impacts of the NMTC program and proposed to develop tools that would have provided standard benchmarking and estimation techniques for measuring outcomes and coordinating reporting for projects with multiple sources of funding. Our literature review for this report drew on a study contracted by the CDFI Fund that provided an overview of the inherent challenges in evaluating community development programs. The literature review will inform a forthcoming independent evaluation of the NMTC to be issued later this spring. The CDFI Fund also provided technical comments which we incorporated as appropriate.

The CDFI Fund said that it continued to have strong reservations with our 2010 option for Congress to consider offering grants in lieu of NMTC tax credits if it extends the NMTC program. As stated in our 2010 report and reiterated as a cost saving option in our 2011 duplication report, our analysis suggests that converting the NMTC to a grant program would increase the amount of the equity investment that could be placed in low- income businesses and make the federal subsidy more cost-effective.

Our 2010 report addressed both concerns that the CDFI Fund reiterated in its comments on this report.

As arranged with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after the date of this report. At that time, we will send copies of this report to the Director of the Office of Management and Budget, the Secretary of the Treasury, the Commissioner of Internal Revenue, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have questions about this report, please contact me at (202) 512-9110 or brostekm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Other key contributors to this report are listed in appendix IX.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to (1) identify tax expenditures that promote community development, and areas of potential overlap and interactions among them; (2) assess data and performance measures available and used to assess performance for community development tax expenditures; and (3) determine what previous studies have found about the effectiveness of selected tax expenditures in promoting community development.

Identification of Community Development Tax Expenditures and Interactions

While both the U.S. Department of the Treasury (Treasury) and the Joint Committee on Taxation (JCT) annually compile a list of tax expenditures and estimates of their cost, the Treasury and JCT lists differ somewhat in terms of what is listed as a tax expenditure and how many specific provisions may be combined in a listed tax expenditure. Our count of community development tax expenditures is based on the Treasury and JCT published tax expenditure lists, detailed below. Where a single tax expenditure listing encompasses more than one tax code provision, we separately describe those provisions to provide a more detailed perspective of the mix of tax assistance available for community development.

Federal agencies do not have a standard definition of what constitutes community or economic development. To identify community development tax expenditures, we developed a list of community development activities based on various federal sources and compared these activities to the authorized uses of tax expenditures. As a starting point for developing the list of activities, we used the definition of the community and regional development budget function and its three subfunctions—urban community development, rural and regional development, and disaster relief and insurance.JCT list tax expenditures by budget function.

We also used descriptions of spending programs under the community and regional development budget function as detailed in the 2010 Catalog of Federal Domestic Assistance (CFDA). We further reviewed descriptions of allowable uses under the Community Development Block Grant (CDBG)—the largest single spending program in the budget function. Finally, we reviewed the community development definition for the Community Reinvestment Act (CRA) and identified certain tax expenditures that banks can use in meeting CRA community investment tests. We included tax expenditures targeted to certain geographies, such as low-income areas or designated disaster areas, or specific populations, such as Native Americans. Table 7 summarizes the definition of community development for purposes of this report.

We compiled a preliminary list of tax expenditures for fiscal year 2010 listed under community and regional development budget function by Treasury and JCT. Our universe included expired tax expenditures listed by either Treasury or JCT which had estimated revenue losses or outlays in fiscal year 2010. While the tax expenditure lists published by Treasury and JCT are generally similar, specific tax expenditures reported by each under the community and regional development budget function differed, as shown in table 8. Four tax expenditures were listed by both under the community and regional development budget function. Another four tax expenditures were reported by both Treasury and JCT but appeared under community and regional development function on one list and under a different budget function on the other list. Fourteen tax expenditures were reported under the community and regional development budget function by either Treasury or JCT, including eight tax expenditures supporting disaster relief and recovery.

Whereas JCT lists six disaster tax packages as tax expenditures, Treasury officials told us that disaster-related revenue losses were included in Treasury estimates for specific tax expenditures made available in disaster areas. For example, revenue losses from additional allocations of the Low-Income Housing Tax Credit for the GO Zone were incorporated into Treasury’s Low-Income Housing Tax Credit estimate. To avoid double-counting, we dropped two tax expenditures—credit to holders of Gulf and Midwest tax credit bonds, and employee retention credit for employers in certain federal disaster areas—listed separately by Treasury that were included in the JCT disaster package estimates. We used JCT and Internal Revenue Service (IRS) documents to identify specific tax code provisions within the disaster relief tax expenditures on JCT’s list. Appendix VI lists 45 tax provisions and special rules in the six disaster relief tax expenditures included in JCT’s list. We did not sum disaster revenue loss estimates to avoid double counting amounts already included in estimates for specific tax expenditures.

Using our list of community development activities as criteria, we also identified tax expenditures reported by Treasury under other budget functions that appeared to be at least partially intended to support activities we had identified as community development activities. Table 9 includes six tax expenditures reported by Treasury under other budget functions and our rationale for inclusion.

Table 10 shows how we categorized the community development tax expenditures as primarily promoting community development versus supporting community development and other federal mission areas.

We shared the preliminary universe of community development tax expenditures with Treasury, IRS, Office of Management and Budget (OMB) and CRS. We also shared the preliminary universe with federal agencies helping administer specific community development tax expenditures, including the Community Development Financial Institutions (CDFI) Fund which administers the New Markets Tax Credit; the Department of Housing and Urban Development (HUD) which helps administer the Empowerment Zones and Renewal Communities programs; and the National Park Service (NPS) which helps administer rehabilitation tax credits. We asked these agencies to review the preliminary universe and confirm that the tax expenditures could be used to promote community development, delete tax expenditures that were listed incorrectly or are duplicative, or add tax programs that we had omitted.

Based on feedback from federal agencies, we refined the universe of community development tax expenditures as appropriate. We excluded six tax expenditures reported under the community and regional budget function, as shown in table 11. As discussed above, we excluded two disaster tax expenditures listed by Treasury to avoid double counting disaster aid packages listed by JCT. Similarly, we excluded a District of Columbia tax expenditure listed by JCT to avoid duplication with Treasury’s estimate for Empowerment Zones and Renewal Communities. We excluded three tax expenditures listed by Treasury or JCT under the community and regional development budget function that were not specifically linked to community development activities. Our final universe does not include various energy tax expenditures that may be claimed for bank investments used to meet CRA regulatory requirements nor tax expenditures for deductible charitable contributions. Although certain charitable contributions may fund organizations or activities that contribute to community development, we excluded charitable contribution tax deductions from the universe based on external feedback that it is not feasible to isolate the community development portion of the large charitable contributions tax expenditures or link the charitable aid to specific communities.

See appendix II for our final universe of 23 community development tax expenditures. This count reflects the number of tax expenditures as reported on the Treasury or JCT lists. Whereas appendix II lists the Empowerment Zones and Renewal Communities (EZ/RC) as a single tax expenditure consistent with Treasury’s list, appendix IV details the various tax incentives available in EZs and RCs. We used Treasury revenue loss estimates for each tax expenditure except in cases where only JCT reported a tax expenditure. Where appropriate, we summed revenue loss estimates to approximate the total federal revenue forgone through tax expenditures that support community development. Certain tax expenditures, including tax credit and direct payment bonds, also have associated outlays, and we included those outlays in presenting total costs. While sufficiently reliable as a gauge of general magnitude, the sum of the individual tax expenditure estimates does not take into account interactions between individual provisions.

To identify areas of potential overlap among the tax expenditures, we used the definitions from our March 2011 report on duplication in government programs:

Overlap occurs when multiple agencies or programs have similar goals, similar activities or strategies to achieve them, or similar target beneficiaries;

Fragmentation refers to circumstances where multiple agencies or offices are involved in serving the same broad area of national need; and

Duplication occurs when two or more agencies or programs are engaged in the same activities or provide the same services to the same beneficiaries.

Using information from prior GAO products, publications from CRS, IRS, JCT, Office of the Comptroller of Currency (OCC), and OMB; as well as documentation from other federal agencies helping administer specific tax expenditures, we compiled publicly available information about each tax expenditure’s design and implementation, including descriptions; specific geographies or populations targeted; volume caps and other allocation limits; and roles of entities within and outside the federal government in administration. Based on the information we collected and the clarifications that the agencies provided, we determined that this descriptive information was sufficiently reliable for the purposes of this engagement to identify potential duplication, overlap, and fragmentation. We reviewed the Internal Revenue Code and IRS regulations to identify allowable interactions or limits on using community development tax expenditures together. Where specified in tax law and regulations, we also identified interactions and limits on using tax expenditures with other federal spending programs. The review of allowable interactions and limits was not exhaustive—we did not search documentation from all federal agencies carrying out community development programs, and regulations for related spending programs may also document interactions between those programs and the community development tax expenditures.

Tax Expenditure Information and Performance Measures

To determine what data and performance measures are available and used to assess community development tax expenditures, we identified the data elements and types of information that IRS and federal agencies collect. We also reviewed tax forms, instructions, and other guidance and interviewed IRS officials to determine the types of information that IRS collects on how the tax expenditures in our universe are used. For certain community development tax expenditures in our universe where other federal agencies help with administration—the New Markets Tax Credit, Empowerment Zone/Renewal Community tax incentives, and the rehabilitation tax credits—we reviewed prior GAO reports, and interviewed and collected information from the CDFI Fund, HUD, and NPS to identify their roles in helping administer the tax expenditures and any measures the agencies use to review tax expenditure performance. We also interviewed officials and reviewed documentation from OMB, Treasury, IRS, HUD, and NPS about efforts to assess performance for community development tax expenditures and any crosscutting reviews of related tax and spending programs. For the purposes of this report, we focused on information collected by federal agencies. State and local entities also collect information on some of the tax expenditures included in our universe. For example, housing finance agencies collect data on low-income housing tax credit projects. Similarly, state and local bond financing authorities may have additional data on specific projects and activities funded with federally subsidized bond financing.

Previous Studies of Selected Tax Expenditures

To determine what previous studies have found about effectiveness for selected tax expenditures, we conducted a literature review for selected tax expenditures—the Empowerment Zone/Renewal Community tax programs, the New Markets Tax Credit program, and tax expenditures available for certain disaster areas. We selected these tax expenditures because they account for most of the 2010 revenue loss for the tax expenditures that primarily promote community development. The EZ tax incentives and the NMTC expired after December 31, 2011. For the EZ/RC and NMTC programs, we focused on literature published since our 2010 reports on these programs. We also selected the rehabilitation tax credits; these multipurpose tax expenditures support community development as well another federal mission area, and they can be used in combination with other community development tax expenditures. We searched databases, such as Proquest, Google Scholar, and Econlit, for studies through May 2011. To target our literature review on effectiveness, we identified studies that attempted to measure the impact of the incentives on certain measures of community development, such as the poverty and unemployment rate. We reviewed studies that met the following criteria: studies that include original data analysis, studies based on empirical or peer-reviewed research, and studies not derived from or sponsored by associations representing industry groups and other organizations that may benefit from adjustments to laws and regulations concerning community development tax expenditures.

Using these criteria, we identified and reviewed eight studies on the EZ/RC programs published since our most recent report on the topic. For NMTC, although we did not identify any new studies meeting our criteria, we included a literature review study contracted by CDFI Fund that was intended to provide the groundwork for a forthcoming evaluation and provides an overview of inherent challenges in evaluating community development programs. Additionally, we summarized our prior findings about the selected tax expenditures, and these findings are not generalizable to the universe of community development tax expenditures. For the rehabilitation tax credits, we identified one study that used empirical methods to measure one aspect of community development. We also included an academic study prepared with assistance from NPS that highlights some limitations in attempting to evaluate the effectiveness of the rehabilitation tax credits. For disaster relief incentives, we identified peer reviewed articles that made potentially useful qualitative points, but the articles did not use rigorous or empirical methods to examine effectiveness. See the bibliography for a listing of the studies we reviewed in detail.

We conducted this performance audit from January 2011 through February 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Universe of Community Development Tax Expenditures and Estimates of Revenue Losses and Outlays for Fiscal Year 2010

Budget function(s)

Expiration date (if applicable)

Empowerment Zones and Renewal Communities (EZ/RC)

8/10/1993 (EZ); 12/21/2000 (RC)

Tax expenditures supporting community development and other federal mission areas 6. $5,650

Low-Income Housing Tax Credit (LIHTC) 20 percent credit for rehabilitation of historic structures environment (Treasury); commerce and housing (JCT)

10 percent credit for rehabilitation of structures (other than historic)

N/A Community and regional development (Treasury); commerce and housing (JCT)

Number Tax expenditure 9.

Budget function(s)

Expiration date (if applicable) 12/31/2009 environment (Treasury); commerce and housing (JCT)

N/A Community and regional development (Treasury); Transportation (JCT)

Exclusion of interest on bonds for water, sewage, and hazardous waste facilities environment (Treasury); community and regional development (JCT)

6/28/1968 (water and sewage facilities); 10/22/1986 (hazardous waste facilities)

Credit for holders of qualified zone academy bonds (QZAB)

Exclusion of interest on public purpose state and local bonds Build America Bonds $1,850 General purpose fiscal assistance (Treasury); community and regional development (JCT)

Budget function(s)

Expiration date (if applicable)

N/A: Not applicable. The EZ and RC programs offered packages of tax incentives in specific designated communities. Appendix IV lists seven EZ and six RC tax incentives.

JCT indicated a revenue loss of less than $50 million. The exclusion of interest on public-purpose state and local bonds has been in effect, in one form or another, since the enactment of the Revenue Act of 1913, ch. 16, 38 Stat. 114. JCT indicated a revenue loss of less than $50 million in fiscal year 2010. JCT did not quantify revenue losses for this tax expenditure.

Appendix III: Multiple Tax Expenditures Fund Community Development, Fiscal Year 2010

Total – tax expenditures primarily promoting community development in distressed areas Tax relief for certain presidentially declared disaster areas

See Appendix VI for tax provisions and special rules available for disaster relief and recovery for specific presidentially declared disaster areas Low-Income Housing Tax Credit Exclusion of interest on rental housing bonds Rehabilitation of older structures, subtotal 20 percent credit for rehabilitation of historic structures 10 percent credit for rehabilitation of structures (other than historic)

Total – tax expenditures supporting community development and other federal mission areas Bond tax expenditures that may support community development

Total – bond tax expenditures that may support community development

Includes both Recovery Zone Economic Development Bonds and Recovery Zone Facility Bonds. We did not sum total costs of disaster package tax expenditures listed by JCT to avoid double counting estimated revenue losses for Treasury tax expenditures we identified as promoting community development.

Total includes $190 million in revenue losses, and $10 million in outlays for fiscal year 2010.

Appendix IV: Community Development Tax Expenditures by Description, and Targeted Geographies and Populations

Number Tax expenditure Tax expenditures primarily promoting community development 1.

Empowerment Zones and Renewal Communities (EZ/RC)

Businesses in designated Empowerment Zones (EZ) or Renewal Communities (RC) are eligible to claim various tax incentives, listed below. These incentives may help reduce unemployment, generate economic growth, and stimulate community development and business activity.

30 urban EZs, 10 rural EZs, 28 urban RCs and 12 rural RCs located throughout the United States. These areas consist of Census tracts that are economically depressed and meet statutory or regulatory requirements (based on 1990 Census data) for (1) poverty level, (2) overall unemployment, (3) total population, and (4) maximum required area of EZs or RCs. Additionally, the boundaries of RCs were expanded based on 2000 Census data. The eligibility requirements differed by round, by program, and between urban and rural nominees; for example, round I urban EZs (selected in 1993) were selected using 6 indicators of general distress, including incidence of crime and narcotics use and amount of abandoned housing, while urban and rural ECs (selected in 2000) were selected using 17 indicators, including number of persons on welfare and high school dropout rates.

Employment credit (EZ/RC)

Businesses may claim an annual tax credit of up to $3,000 or $1,500 for each employee living and working for the employer in an EZ or RC area, respectively.

Businesses in EZs and RCs, and employees living and working for the employer in EZs or RCs.

Businesses may claim a tax credit of up to $2,400 for each new employee age 18 to 39 living in an EZ/RC, or up to $1,200 for a youth summer hire ages 16 or 17 living in an EZ or RC.

Businesses in EZs and RCs, and employees living and working for the employer in EZs or RCs aged 18-39, or youth summer hires ages 16 or 17 living in an EZ or RC.

New construction and rehabilitation projects in RCs.

Businesses may claim an accelerated method of depreciation to recover certain business costs of new or substantially rehabilitated commercial buildings located in an RC; states may allocate up to $12 million annually per RC for the provision.

Increased Section 179 deduction (EZ/RC)

Businesses may claim an increased deduction of up to the smaller of $35,000 or the cost of eligible property purchases (including equipment and machinery) for businesses in an EZ/RC.

Businesses incurring costs for tangible personal property, such as equipment and machinery, for use in EZs or RCs.

Number Tax expenditure

Description State and local governments can issue tax-exempt bonds to provide loans to qualified businesses to finance construction costs in EZs. State and local government entities can issue up to $60 million for each rural EZ, $130 million for each urban EZ with a population of less than 100,000, and $230 million for each urban EZ with a population greater than or equal to 100,000. These bonds are not subject to state volume caps.

Targeted geographies and populations Large business projects tied to the employment of residents in EZs.

Rollover of capital gains (EZ)

Owners of businesses located in EZs may be able to postpone part or all of the gain from the sale of a qualified EZ asset that they hold for more than 1 year.

Businesses located in EZs.

Increased exclusion of capital gains (EZ)

Taxpayers can exclude 60 percent of their gain from the sale of small business stock in a corporation that qualifies as an enterprise zone business.

Enterprise zone businesses located in EZs.

Exclusion of capital gains (RC)

Owners of businesses located in RCs can exclude qualified capital gains from the sale or exchange of a qualified community asset held more than 5 years.

Businesses located in RCs.

New Markets Tax Credit (NMTC)

Investors are eligible to claim a tax credit for investing in certified Community Development Entities (CDE) for 39 percent of the investment over 7 years. CDEs, in turn, invest in qualified low-income community investments such as mixed-use facilities, housing developments, and community facilities, which may contribute to employment in low-income communities.

Low-income communities defined as Census tracts (1) in which the poverty rate is at least 20 percent, or (2) outside a metropolitan area in which the median family income does not exceed 80 percent of median statewide family income or within a metropolitan area in which the median family income does not exceed 80 percent of the greater statewide or metropolitan area median family income. Low-income communities also include certain areas not within Census tracts, tracts with low population, and Census tracts with high-migration rural counties.

Number Tax expenditure 3.

Description State and local governments issuing Recovery Zone Economic Development Bonds (RZEDB) allow investors to claim a tax credit (equal to 45 percent of the interest rate established between the buyer and the issuer of the bond). States and localities also had the option of receiving a direct payment from the U.S. Treasury of equal value to the tax credit. Bond proceeds were to be used to fund (1) capital expenditures paid or incurred with respect to property located in the designated recovery zone (e.g., Empowerment Zones or Renewal Communities); (2) expenditures for public infrastructure and construction of public facilities; and (3) expenditures for job training and educational programs. Individuals and corporations can exclude Recovery Zone Facility Bond (RZFB) interest income from their taxable income. Bond proceeds are used by state and local governments to finance projects pertaining to any trade or business, aside from exceptions listed below. More specifically, RZFBs may be issued for any depreciable property that (1) was constructed, reconstructed, renovated, or acquired after the date of designation of a “recovery zone;” (2) the original use of which occurs in the recovery zone; and (3) substantially all of the use of the property is in the active conduct of a “qualified business,” which is defined to include any trade or business except for residential rental facilities or other specifically listed projects under Internal Revenue Code 144(c)(6)(B), including golf courses, massage parlors, and gambling facilities.

Targeted geographies and populations RZEDBs and RZFBs target any area designated “recovery zones”, including (1) areas having significant poverty, unemployment, rate of home foreclosures, or general distress; (2) areas that are economically distressed by reason of the closure or realignment of a military installation pursuant to the Defense Base Closure and Realignment Act of 1990; or is (3) any area for which an Empowerment Zone or Renewal Community was in effect as of February 17, 2009.

Indian reservations. temporary category of tax-exempt bonds, could exclude that interest income from their taxable income.. Indian tribal governments were allowed greater flexibility to use the bonds to finance economic development projects, which in turn were to promote development on Indian reservations. Previously, Indian tribal governments could only issue tax-exempt bonds for essential government services.

Number Tax expenditure 5.

Description Businesses on Indian reservations are eligible to claim a tax credit for employing Indian tribal members and their spouses. The credit is for 20 percent of the first $20,000 in wages and health benefits paid to tribal members and spouses. This credit is intended to provide businesses with an incentive to hire certain individuals living on or near an Indian reservation.

Targeted geographies and populations Businesses on Indian reservations, and Indian tribal members and spouses.

Tax expenditures supporting community development and other federal mission areas 6.

Low-Income Housing Tax Credit (LIHTC)

State housing finance agencies (HFA) award the tax credits to owners of qualified rental properties who reserve all or a portion of their units for occupancy for low-income tenants. Once awarded LIHTCs, project owners typically attempt to obtain funding for their projects by attracting third-party investors that contribute equity to the projects. These investors can then claim the tax credits. This arrangement of providing LIHTCs in return for an equity investment is generally referred to as “selling” the tax credits. The credit is claimed over a 10-year period, but a project must comply with LIHTC requirements for 15 years. A 9 percent tax credit—intended to subsidize 70 percent of the qualified basis in present value terms—is available for the costs for new construction or substantial rehabilitation projects not otherwise subsidized by the federal government. An approximately 4 percent tax credit—intended to subsidize about 30 percent of the qualified basis in present value terms—is available for the acquisition costs for existing buildings. The 4 percent credit is also used for housing financed with tax-exempt rental housing bonds. The low-income housing tax credit program is intended to stimulate the production of affordable rental housing nationwide for low-income households.

Households with income at or below 60 percent of an area’s median gross income (AMGI). Qualified Census tracts and difficult development areas are eligible for additional credits. In a qualified Census tract, 50 percent or more of the households have incomes of less than 60 percent of the area’s median income. In a difficult development area, construction, land, and utility costs are high relative to the area’s median income.

Number Tax expenditure 7.

Description Building owners and private investors may qualify to claim a 20 percent tax credit for costs to substantially rehabilitate buildings that are on the National Register of Historic Places or are otherwise certified as historic by the National Park Service (NPS). To be eligible for the credit, buildings must be used for offices; rental housing; or commercial, industrial, or agricultural enterprises. Building owners must hold the building for 5 years after completing the rehabilitation or pay back at least a portion of the credit. The credit is intended to attract private investment to the historic cores of cities and towns. The credit is also intended to generate jobs, enhance property values, and augment revenues for state and local governments through increased property, business and income taxes.

Targeted geographies and populations Certified historic buildings either listed individually in the National Register of Historic Places, or located in a registered historic district and certified by NPS as contributing to the historic significance of that district.

10 percent credit for rehabilitation of structures (other than historic)

Individuals or corporations may claim a 10 percent tax credit for costs to substantially rehabilitate nonhistoric, nonresidential buildings placed into service before 1936. These structures must retain specified proportions of the buildings’ external and internal walls and internal structural framework. To be eligible for the credit, buildings must be used for offices or commercial, industrial, or agricultural enterprises. Qualified spending must exceed the greater of $5,000 or the adjusted basis (cost less depreciation taken) of the building spent in any 24-month period. The credit is intended to attract private investment to the historic cores of cities and towns. The credit is also intended to generate jobs, enhance property values, and augment revenues for state and local governments through increased property, business and income taxes.

Nonresidential buildings placed into service before 1936; especially those located in older neighborhoods and central cities.

Tax-exempt organizations may exclude gains or losses from the unrelated business income tax when they acquire and sell brownfield properties on which there has been an actual or threatened release of certain hazardous substances. This exclusion reduces the total cost of remediating environmentally damaged property and may attract the capital and enterprises needed to rebuild and redevelop polluted sites.

Environmentally contaminated sites identified as brownfields held for use in a trade or business on which there has been an actual or threatened release or disposal of certain hazardous substances. The exclusion does not target specific geographies or populations.

Number Tax expenditure 10.

Description Firms may deduct expenses related to controlling or abating hazardous substances in a qualified brownfield property. This deduction subsidizes environmental cleanup and may help develop and revitalize urban and rural areas depressed from environmental contamination.

Targeted geographies and populations Environmentally contaminated sites identified as brownfields held for use in a trade or business on which there has been an actual or threatened release or disposal of certain hazardous substances. The deduction does not target specific geographies or populations.

Individuals and corporations can exclude private activity bond interest income from their taxable income. Bond proceeds are used by state and local governments to finance the construction of multifamily residential rental housing units for low- and moderate-income families. Low-income housing construction partly financed with the tax-exempt bonds may be used with the 4 percent low-income housing tax credit.

Households with incomes at or below 60 percent of an area’s median gross income (AMGI).

Individuals and corporations can exclude private activity bond interest income from their taxable income. Bond proceeds are used by state and local governments to finance the construction of government-owned airports, docks, and wharves; mass commuting facilities such as bus depots and subway stations; and high-speed rail facilities and government-owned sport and convention facilities.

Infrastructure such as airports, docks, wharves, mass commuting facilities, and intercity rail facilities. The bond provision does not target specific geographies or populations.

Individuals and corporations can exclude private activity bond interest income from their taxable income. Bond proceeds are used by state and local governments to finance the construction of water, sewage, and hazardous waste facilities.

Infrastructure such as water treatment plants, sewer systems and hazardous waste facilities; the bond provision does not target specific geographies or populations.

Number Tax expenditure 14.

Credit for holders of qualified zone academy bonds (QZAB)

Description Banks, insurance companies, and other lending corporations that purchase qualified zone academy bonds are eligible to claim a tax credit equal to the dollar value of their bonds multiplied by a Treasury-set credit rate. Or, issuers had the option for qualified zone academies to receive a direct payment from the Treasury of equal value to the tax credit. School districts with qualified zone academies issue the bonds and use at least 95 percent of the bond proceeds to renovate facilities, provide equipment, develop course materials, or train personnel in such academies. Business or nonprofit partners must also provide at least a 10 percent match of QZAB funds, either in cash or in-kind donations, to qualified zone academies. The bond program helps school districts reduce the burden of financing school renovations and repairs.

Targeted geographies and populations Public schools below the college level that (1) are located in an Empowerment Zone, Enterprise Community or Renewal Community, or (2) have at least 35 percent of their student body eligible for free or reduced-cost lunches.

Individuals and corporations can exclude governmental bond interest income from their taxable income. State and local governments generally use bond proceeds to build capital facilities such as highways, schools, and government buildings.

Capital facilities owned and operated by governmental entities that serve the public interest. The bond provision does not target specific geographies or populations.

Individuals and corporations could claim a tax credit equal to 35 percent of the interest rate established between the buyer and the issuer of the bond. State and local governments issuing BABs also had the option of receiving a direct payment from the Treasury of equal value to the tax credit. Bond proceeds were intended to be used for stimulating development of public infrastructure in communities, as well as to aid state and local governments. If issuers choose to receive a direct payment, then they must use bond proceeds for capital expenditures.

No specific geographies or populations are targeted.

Number Tax expenditure Disaster relief and recovery tax expenditures 17. New York Liberty Zone

Areas of Lower Manhattan affected by terrorist attacks occurring on September 11, 2001.

Hurricane Katrina disaster area (consisting of the states of Alabama, Florida, Louisiana, Mississippi), including core disaster areas determined by the President to warrant individual or individual and public assistance from the federal government following Hurricane Katrina in August 2005.

Gulf Opportunity Zone (GO Zone)

Counties and parishes in Alabama, Florida, Louisiana, Mississippi and Texas that warranted additional, long-term federal assistance following Hurricanes Katrina, Rita and Wilma in 2005 were designated as Katrina, Rita and/or Wilma GO Zones.

Individuals and corporations affected by the September 11, 2001, terrorist attacks were eligible for seven tax provisions. These provisions included tax-exempt bonds targeted toward reconstruction and renovation; a special depreciation allowance for certain property that was damaged or destroyed; and a tax credit for businesses to hire and retain employees in the New York Liberty Zone. Individuals and corporations affected by hurricanes Katrina, Rita, and Wilma, which struck between August-October 2005, were eligible to claim 33 GO Zone tax provisions. These provisions include tax-exempt bond financing, expensing for certain clean-up and demolition costs, and additional allocations of the New Markets Tax Credit for investments that served the GO Zone.

Twenty-four counties in Kansas affected by storms and tornadoes that began on May 4, 2007.

Number Tax expenditure 21.

Description Individuals and corporations affected by severe storms, tornadoes or flooding in 10 states from May 20-July 31, 2008 were eligible for a package of 26 tax benefits, including tax- exempt bond financing, increased rehabilitation tax credits for damaged or destroyed structures, and suspensions of limitations on claiming personal casualty losses. Qualified small or farming businesses affected by disasters in federally declared disaster areas are eligible to claim a net operating loss for up to 3 years after the loss was incurred, instead of the usual 2 years generally permitted. This credit may allow small and farming businesses in communities declared disaster areas to recoup a portion of their losses following a disaster.

Targeted geographies and populations Selected counties in 10 states affected by tornadoes, severe storms and flooding occurring from May 20-July 31, 2008.

Individuals and businesses located in any geography declared a disaster area in the United States during tax years 2008 and 2009.

Qualified small businesses and farming businesses located in any federally declared disaster area. Qualified small businesses are sole proprietorships or partnerships with average annual gross receipts (reduced by returns and allowances) of $5 million or less during the 3-year period ending with the tax year of the net operating loss.

For more information on the bond financing by Indian tribal governments, see GAO, Federal Tax Policy: Information on Selected Capital Facilities Related to the Essential Governmental Function Test, GAO-06-1082 (Washington, D.C.: Sept.13, 2006) and U.S. Department of the Treasury, Report and Recommendations to Congress reqarding Tribal Economic Development Bond provision under Section 7871 of the Internal Revenue Code (Washington, D.C.: Dec. 19, 2011).

Appendix V: Community Development Tax Expenditures by Volume Caps, Other Allocation Limits, and Administration

Number Tax expenditures primarily promoting community development 1.

Volume cap or other allocation limits?

Involves administration by a federal agency outside IRS?

Involves administration by nonfederal entity?

Empowerment Zones and Renewal Communities (EZ/RC)

Varied. Five EZ and four RC tax incentives did not have any volume caps or allocation limits.

Yes; HUD oversaw EZ programs in urban areas, and the USDA oversaw EZ programs in rural areas. HUD is responsible for outreach efforts and serves as a promoter for EZs and RCs. HUD and IRS established a partnership regarding the EZ/RC tax incentives, where both HUD and IRS provide representation at workshops and conferences.

Yes; state and local governments nominate communities for EZ and RC designation. Nominated EZ communities had to submit a strategic plan showing how they would meet key program principles, while nominated RCs had to submit a written “course of action” with commitments to carry out specific legislatively mandated activities.

Limit of up to an annual total of $12 million per RC.

No; IRS has sole federal responsibility for the administration of the CRD program. HUD collected data from local administrators used for commercial projects in RCs.

Yes; state governments allocate CRD authority to eligible businesses engaged in commercial projects within RCs.

Limits on issuing EZ facility bond volume were up to $60 million for each rural EZ, up to $130 million for each urban EZ with a population of less than 100,000, and $230 million for each urban EZ with a population greater than or equal to 100,000.

No; IRS has sole federal responsibility for the administration of EZ facility bond program. HUD collected information from local administrators of EZs on the use of facility bonds used for construction projects in EZs.

Yes; state and local governments issue EZ facility bonds to finance construction costs.

Number 2.

Tax expenditure New Markets Tax Credit (NMTC) Yes; the maximum amount of annual investment eligible for NMTCs was $3.5 billion each year in calendar years 2010 and 2011.

Volume cap or other allocation limits?

Involves administration by a federal agency outside IRS? Yes; the Treasury Community Development Financial Institutions (CDFI) Fund certifies organizations as community development entities (CDE), CDFI Fund also provides allocations of NMTCs to CDEs through a competitive process. The CDFI Fund is responsible for monitoring CDEs to ensure that CDEs are compliant with their allocation agreements through the New Markets Compliance Monitoring System and, on a more limited basis, by making site visits to selected CDEs. The CDFI Fund also provides IRS with access to CDFI data for monitoring CDEs’ compliance with NMTC laws and regulations.

Involves administration by nonfederal entity? Yes; once a CDE receives an allocation of tax credits, the CDE can offer the tax credits to investors, who in turn acquire stock or a capital interest in the CDE. The investor can gain a potential return for a “qualified equity investment” in the CDE. In return for providing the tax credit to the investor, the CDE receives proceeds from the offer and must invest “substantially all” of such proceeds into qualified low-income community investments.

Yes; the Recovery Zone Economic Development Bond (RZEDB) and Recovery Zone Facility Bond (RZFB) programs had national volume caps of $10 billion and $15 billion, respectively.

Yes; Treasury determined the amount of RZEDB and RZFB volume cap allocations received by each state and the District of Columbia based on declines in employment levels for each state and the District during 2008 relative to declines in national employment levels during the same period.

Yes; each state was responsible for allocating shares of RZEDB and RZFB volume caps to counties and large municipalities based on declines in employment levels for such areas during 2008 relative to declines in employment levels for all counties and municipalities in such states during the same period. State and local governments issued RZEDBs, and had the option of allowing investors to claim a tax credit for the bonds. States and localities also had the option of receiving a direct payment from the Treasury of equal value to the tax credit.

Number 4.

Volume cap or other allocation limits? Yes; the bond program had a $2 billion national volume cap.

Involves administration by a federal agency outside IRS? Yes; Treasury allocated bond capacity to Indian tribal governments in consultation with the Secretary of Interior, and the Department of Interior (Interior) maintains updated lists of Indian tribal entities that are eligible to apply for allocations of bond volume. Interior may also issue letters to Indian tribal entities indicating federal recognition of such entities in order to demonstrate eligibility for the bond program.

Involves administration by nonfederal entity? Yes; Indian tribal governments applied for Tribal Economic Development Bonds, issued the bonds, and used proceeds from bond sales to finance economic development projects or nonessential governmental activities. Indian tribal governments had the option of allowing investors to claim a tax credit for the bonds. Indian tribal governments also had the option of receiving a direct payment from the Treasury of equal value to the tax credit.

Tax expenditures supporting community development and other federal mission areas 6.

Low-Income Housing Tax Credit (LIHTC)

Yes; in 2010, the allocation limit was the greater of $2.10 per- capita or $2.43 million for each state, U.S. territory, and the District of Columbia. The per capita amount is subject to cost of living adjustments.

No; the IRS has sole federal responsibility for the administration of LIHTC program. However, the program is closely coordinated with HUD housing programs for the computation of the area median gross income (AMGI) used to determine household eligibility and maximum rents, as well as the definition of income. he IRS also uses HUD’s Uniform Physical Condition Standards to determine whether the low-income housing is suitable for occupancy. HUD also maintains a LIHTC database with information on the project address, number of units and low-income units, number of bedrooms, year the credit was allocated, year the project was placed in service, whether the project was new construction or rehabilitation, type of credit provided, and other sources of project financing.

Yes; state housing finance agencies (HFA) award LIHTCs to owners of qualified low- income housing projects based on each state’s qualified allocation plan, which generally establishes a state’s selection criteria for how its LIHTCs will be awarded. Additionally, state HFAs monitor LIHTC properties for compliance with Internal Revenue Code requirements, such as rent ceilings and income limits for tenants, and report noncompliance to the IRS.

Number 7.

Involves administration by a federal agency outside IRS? Yes; the Secretary of Interior sets Standards of Rehabilitation for claiming the tax credit. Within Interior, NPS maintains a National Register of Historic Places; approves applications for rehabilitation projects proposing use of the 20 percent rehabilitation tax credit; and certifies whether completed projects meet the Secretary’s standards and are eligible for the tax credit. NPS may inspect a rehabilitated property at any time during the five-year period following certification of rehabilitation for claiming the 20 percent preservation tax credit, and NPS may revoke certification if work was not done according to standards set by the agency. NPS also notifies the IRS of such revocations or dispositions so the tax credit may be recaptured.

Involves administration by nonfederal entity? Yes; state historic preservation offices (SHPO) review applications and forward recommendations for historic designation of structures to NPS, provide program information and technical assistance to applicants, and conduct site visits. SHPOs may also inspect a rehabilitated property at any time during a five- year period following completion of a rehabilitation project using the tax credit.

10 percent credit for rehabilitation of structures (other than historic)

Yes; NPS determines whether buildings in historic districts do not contribute to such districts and, consequently, are not deemed to be historic structures. Such decertification is required before owners of such structures can claim for the 10 percent tax credit.

Yes; SHPOs review decertification applications and forward recommendations to NPS, provide program information and technical assistance to applicants.

Yes; EPA maintains a National Priority List of properties; such listed properties are ineligible for the tax incentive.

Yes; state environmental agencies certify brownfield properties on which there has been an actual or threatened release or disposal of certain hazardous substances. Following certification, taxpayers may incur eligible remediation expenditures and claim the tax provision.

Number 10.

Involves administration by a federal agency outside IRS? Yes; EPA maintains a National Priority List of properties; such listed properties are ineligible for the tax incentive.

Involves administration by nonfederal entity? Yes; state environmental agencies certify brownfield properties on which there has been an actual or threatened release or disposal of certain hazardous substances. Following certification, site owners may claim the tax deduction, including for some expenditures incurred from prior tax years.

Yes, the bond provision is subject to the private activity bond annual volume cap for each state.

Yes; state and local governments, typically housing finance agencies, may issue bonds and use proceeds from bond sales to finance the construction of multifamily residential rental housing units for low- and moderate-income families.

Varied; bond for the construction of mass commuting facilities, and 25 percent of bond issues for privately-owned intercity rail facilities, are included in the private activity bond annual state volume cap (government-owned facilities are exempted).

Yes; state and local governments may issue bonds, and use proceeds from bond sales to finance construction of airports, docks, wharves, mass commuting facilities and intercity rail facilities.

Yes, the bond provisions are subject to the private activity bond annual volume cap for each state.

Yes; state and local governments may issue bonds, and then use proceeds from bond sales to finance capital improvements for water, sewer and hazardous waste facilities.

Number 14.

Tax expenditure Credit for holders of qualified zone academy bonds (QZAB)

Volume cap or other allocation limits? Yes; the bond provision has national volume caps of $1.4 billion in 2010, and $400 million in 2011.

Involves administration by a federal agency outside IRS? Yes; Treasury determines the credit rate of QZABs and allocates shares of QZAB volume to state education agencies on the basis of the states’ respective populations of individuals below the poverty line (as defined by OMB).

Involves administration by nonfederal entity? Yes; state education agencies determine the share of QZAB volume allocated to qualified zone academies, and issues QZABs following approval by local education agencies. Local education agencies issue QZABs after applying for and obtaining permission from states. Business or nonprofit partners provide at least a 10 percent match of QZAB funds, either in cash or in-kind donations, to qualified zone academies.

Exclusion of interest on public purpose state and local bonds Build America Bonds (BAB)

Yes; state, and local governments may issue bonds, and then use proceeds from bond sales to finance eligible projects—primarily public infrastructure projects such as highways, schools, and government buildings.

Number Disaster relief and recovery tax expenditures 17. New York Liberty Zone

Volume cap or other allocation limits?

Involves administration by a federal agency outside IRS?

Involves administration by nonfederal entity?

Varied. Authority to designate up to $8 billion in tax-exempt private activity bonds (New York Liberty bonds) and $9 billion in advance refunding bonds.

Yes; the Governor of the State of New York and the Mayor of New York City were allowed to issue tax-exempt New York Liberty bonds, and use proceeds to finance reconstruction and renovation projects within the New York Liberty Zone. The Governor and Mayor were allowed to issue advance refunding bonds to pay principal, interest, or redemption price on certain prior issues of bonds issued for facilities located in New York City (and certain water facilities located outside of New York City).

Katrina Emergency Act Gulf Opportunity Zone (GO Zone) Varied.within the tax expenditure package have volume caps or other revenue loss limitations.

Varied; multiple provisions within the tax expenditure package involved administration by federal agencies besides IRS.

Varied; multiple provisions within the tax expenditure package involved administration by state and local governments and other entities.

The maximum amount of advance refunding for certain governmental and qualified 501(c)(3) bonds that may have been issued was capped at $4.5 billion in the case of Louisiana, $2.25 billion in the case of Mississippi, and $1.125 billion in the case of Alabama.

State and local governments in the GO Zone— Alabama, Louisiana, and Mississippi—issued advance refunding bonds.

Gulf Tax Credit Bonds had a volume cap of $200 million for Louisiana, $100 million for Mississippi, and $50 million for Alabama.

Yes; Treasury determines the credit rate of Gulf Tax Credit Bonds.

State and local governments in the GO Zone— Alabama, Louisiana, and Mississippi—issued Gulf Tax Credit Bonds to help pay principal, interest, and premiums on outstanding state and local government bonds.

Number

Volume cap or other allocation limits? The maximum aggregate face amount of GO Zone Bonds that may have been issued in Alabama, Louisiana or Mississippi was capped at $2,500 multiplied by the population of the respective state within the GO Zone; no other states were eligible for tax- exempt bond financing.

Involves administration by nonfederal entity? State and local governments in the GO Zone— Alabama, Louisiana, and Mississippi—issued bonds, though state governments approved projects for bond financing.

Increased credit cap and other modified provisions for use of the Low-Income Housing Tax Credit (LIHTC)

A special allocation of the LIHTC was issued for each of three years (2006, 2007 and 2008) to each of the States within the GO Zone. Each year’s special allocation was capped at $18.00 multiplied by the population of the respective state in the GO Zone. In addition, the otherwise applicable LIHTC ceiling amount was increased for Florida and Texas by $3,500,000 per State.

See above description of the LIHTC regarding the involvement of state housing finance agencies (HFA).

An additional allocation of the New Markets Tax Credit (NMTC) in amounts equal to $300 million for 2005 and 2006, and $400 million for 2007, were to be allocated among qualified community development entities (CDE) to make qualified low- income community investments within the Gulf Opportunity Zone.

See above description of the NMTC regarding involvement of the Community Development Financial Institutions (CDFI) Fund.

See above description of the NMTC regarding the involvement of CDEs.

Number 21.

Volume cap or other allocation limits? Varied. Multiple provisions within the tax expenditure package have volume caps or other revenue loss limitations.

Involves administration by a federal agency outside IRS? Varied; multiple provisions within the tax expenditure package involved administration by federal agencies besides IRS.

Involves administration by nonfederal entity? Varied; multiple provisions within the tax expenditure package involved administration by state and local governments.

The maximum amount of Midwestern Tax Credit Bonds that may have been issued was capped at: (1) $100 million for any state with an aggregate population located in all Midwest disaster areas within the state of at least 2,000,000; (2) $50 million for any state with an aggregate population located in all Midwest disaster areas within the state of at least 1,000,000 but less than 2,000,000; and (3) $0 for any other state.

Yes; Treasury determines the credit rate of Midwestern Tax Credit Bonds.

State governments in the Midwest disaster area issued Midwestern tax credit bonds to help pay principal, interest and premiums on outstanding state and local government bonds.

The maximum aggregate face amount of Midwestern disaster zone bonds that may have been issued in any state in which a Midwestern disaster area was located, was capped at $1,000 multiplied by the population of the respective state within the Midwestern disaster zone; no other states were eligible for tax- exempt bond financing.

State and local governments in the Midwest disaster area issued bonds.

Number

Tax expenditure Increased credit cap and other modified provisions for use of the Low-Income Housing Tax Credit (LIHTC)

Volume cap or other allocation limits? A special allocation of the LIHTC was issued for each of three years (2008, 2009, and 2010) to any state in which a Midwest disaster area was located. Each year’s special allocation was capped at $8.00 multiplied by the population of the respective state in a Midwest disaster area.

Involves administration by nonfederal entity? See above description of the LIHTC regarding the involvement of state housing finance agencies (HFA).

Yes; for the provision allowing expensing of environmental remediation costs from disasters, state environmental agencies certify brownfield properties on which there has been an actual or threatened release or disposal of certain hazardous substances as a result of a federally declared disaster.

State and local governments had the authority to issue RZEDBs and RZFBs from February 17, 2009 through December 31, 2010.

Tribal governments are authorized to issue tax-exempt bonds only if substantially all of the proceeds are used for essential governmental functions or certain manufacturing facilities.

Appendix VI: Tax Provisions and Special Rules Available for Disaster Relief and Recovery in Specific Presidentially Declared Disaster Areas

Legislation targeted towards the New York Liberty Zone and the Gulf Opportunity Zones (GO Zone) allowed an additional advance refunding to redeem certain prior tax- exempt bond issuances from state and local governments. The provision allowed state and local governments to refund, or refinance, bonds that are not redeemed within 90 days after the refunding bonds are issued.

Residential rental property may be financed with tax- exempt facility bonds issued by state and local governments, if the financed project is a “qualified residential rental project” with required ratios of residents with certain income limitations. Under the provision, the operator of a qualified residential rental project may rely on the representations of prospective tenants displaced by reason of certain disasters to determine whether such individual satisfies the income limitation for a qualified residential rental project.

Description Mortgage revenue bonds are tax-exempt bonds issued by state and local governments to make mortgage loans to qualified mortgagors for the purchase, improvement, or rehabilitation of owner-occupied residences, and are typically required to exclusively finance mortgages for “first-time homebuyers.” Qualified mortgage revenue bonds, may be issued in targeted disaster areas without a first-time homebuyer financing requirement. Additionally, the permitted amount of qualified home-improvement loans increases from $15,000 to $150,000 for residences in a disaster zone.

State and local governments in GO Zones and the Midwest disaster area may have issued tax credit bonds in areas affected by certain disasters. 95 percent of these bonds must be used to (1) pay principal, interest, or premium on outstanding bonds (other than private activity bonds) issued by state and local governments, or (2) make a loan to any political subdivision (e.g., local government) of such state to pay principal, interest, or premium on bonds (other than private activity bonds) issued by such political subdivision. These bonds differed from tax-exempt bonds in that rather than receiving tax- exempt interest payments, bondholders were entitled to a federal tax credit equal to a certain percentage of their investment.

Description In certain disaster areas, tax-exempt bonds for qualified private activities may have been issued and were not restricted by aggregate annual state private activity bond limits. These bonds allow state and local governments to finance the construction or rehabilitation of properties following a disaster.

Treasury named Series I inflation-indexed savings bonds purchased through financial institutions as “Gulf Coast Recovery Bonds” from March 29-December 31, 2006, in order to encourage public support for recovery and rebuilding efforts in areas devastated by Hurricanes Katrina, Rita, and Wilma. Proceeds from the sale of the bonds were not specifically designated for hurricane relief and recovery efforts.

The provision provided a temporary tax credit of 30 percent to qualified employers for the value of employer- provided lodging to qualified employees affected by certain disasters. The amount taken as a credit was not deductible by the employer.

Certain disaster relief tax packages included a credit of 40 percent of the qualified wages (up to a maximum of $6,000 in qualified wages per employee) paid by an eligible employer that conducted business in a disaster zone and whose operations were rendered inoperable by the disaster.

Description For 2005, the Hope Scholarship Credit rate was 100 percent on the first $1,000 of qualified tuition and related expenses, and 50 percent on the next $1,000 of qualified tuition and related expenses. For 2005, the Hope credit was temporarily increased for students attending eligible educational institutions in the GO Zone to 100 percent of the first $2,000 in qualified tuition and related expenses and 50 percent of the next $2,000 of qualified tuition and related expenses, for a maximum credit of $3,000 per student. For 2006, this provision increased the tax credit again to 100 percent of the first $2,200 of qualified tuition and related expenses (instead of $1,100 under standard law in 2006), and 50 percent of the next $2,200 of qualified tuition and related expenses (instead of $1,100) for a maximum credit of $3,300 per student (instead of $1,650). For 2008 and 2009, the Hope scholarship credit was extended to students attending eligible educational institutions in the Midwestern disaster area, based on increased credit rates enacted in 2006.

Individual taxpayers are typically allowed to claim a nonrefundable credit, the Lifetime Learning Credit, equal to 20 percent of qualified tuition and related expenses of up to $10,000 (resulting in a total credit of up to $2,000) incurred during the taxable year on behalf of the taxpayer, the taxpayer’s spouse, or any dependents. The Lifetime Learning Credit rate was temporarily increased from 20 percent to 40 percent for students attending institutions in certain disaster areas.

Description The provision increased from 20 to 26 percent, and from 10 to 13 percent, respectively, the preservation credits with respect to any certified historic structure or qualified rehabilitated building located in certain disaster areas, provided the qualified rehabilitation expenditures with respect to such buildings or structures were incurred during an established period of time following the disaster.

The LIHTC cap amount increased for affected states within the GO Zones and the Midwestern disaster area. Also, rules concerning implementation of the LIHTC were modified for the GO Zone; in the case of property placed in service from 2006-2008 in a nonmetropolitan area within the GO Zone, LIHTC income targeting rules are applied by using a national nonmetropolitan median gross income standard instead of the area median gross income standard typically applied to low-income housing projects.

The provision allowed an additional allocation of NMTCs in an amount equal to $300 million for 2005 and 2006, and $400 million for 2007, to be allocated among qualified community development entities to make qualified low- income community investments within the Katrina GO Zone.

Description Individuals whose principle residence were in certain disaster areas or were otherwise displaced from their homes by disasters may have elected to calculate their Earned Income Tax Credit and Refundable Child Credit for the taxable year when the disaster occurred using their earned income from the prior taxable year.

Employers hiring and retaining individuals who worked in certain disaster areas were eligible to claim up to $2,400 in Work Opportunity Tax Credits per employee (or 40 percent of up to the first $6,000 of wages). Employees in other targeted categories for the tax credit (e.g., qualified veterans or families receiving food stamps) are typically required to provide certification from a designated local agency of their inclusion in such groups on or before they begin work, or their employer provides documentation to said agencies no later than 28 days after the employee begins work. However, employees who worked and/or lived in certain disaster areas do not require certification from such agencies for employers to qualify for the tax credit.

Tax provision or special rule Deductions Carryback of net operating losses (NOL)

Under present law, a net operating loss (NOL) is, generally, the amount by which a taxpayer’s business deductions exceed its gross income. In general, an NOL may be carried back 2 years and carried over 20 years to offset taxable income in such years. NOLs offset taxable income in the order of the taxable years to which the NOL may be carried. This provision provided a special 5-year carryback period for NOLs to the extent of qualified disaster losses in any presidentially declared disaster area during 2008 and 2009.

Individuals and corporations affected by certain disasters may have carried back NOLs, for a period of 5 years, of the sum of the aggregate amount of deductions from such disasters, including deductions for qualified casualty losses; certain moving expenses; certain temporary housing expenses; depreciation deductions with respect to qualified property in disaster areas for the taxable year the property was placed into service; and certain repair expenses resulting from applicable disasters.

A NOL to a farming business may have been carried back for five years if such loss was attributable to any portion of qualified timber property which was located in the Katrina or Rita GO Zones.

Description The provision provided an election for taxpayers who incurred casualty losses attributable to certain disasters with respect to public utility property located in applicable disaster zones. Under the election, such losses may be carried back 5 years immediately preceding the taxable year in which the loss occurred. If the application of this provision resulted in the creation or increase of a NOL for the year in which the casualty loss is taken into account, the NOL may be carried back or carried over as under present law applicable to NOLs for such year.

The provision provided an election for taxpayers to treat any GO Zone public utility casualty loss caused by Hurricane Katrina as a specified liability loss to which the present-law 10-year carryback period applies. The amount of the casualty loss is reduced by the amount of any gain recognized by the taxpayer from involuntary conversions of public utility property (e.g. physical destruction of such property) located in the GO Zone caused by Hurricane Katrina. Taxpayers who elect to use this provision are not eligible to treat the loss as part of the 5-year net operating loss carryback provided under another provision of the GO Zone Act (see 5-year NOL carryback of public utility casualty losses mentioned above).

The provision suspended two limitations on personal casualty or theft losses to the extent those losses arise in certain disaster areas and are attributable to such disasters. First, personal casualty or theft losses meeting the above requirements needed not exceed $100 per casualty or theft; present law at the time contained a required threshold of $100. Second, such losses were deductible without regard to whether aggregate net losses exceed 10 percent of a taxpayer’s adjusted gross income, which was standard under present law at the time the disasters took place. The provision treats personal casualty or theft losses from the pertinent disaster as a deduction separate from other casualty losses.

Description The provision removed one limitation on personal casualty or theft losses to the extent those losses arise in federally declared disaster areas during 2008 and 2009. More specifically, losses were deductible without regard to whether aggregate net losses exceed 10 percent of a taxpayer’s adjusted gross income, which was standard under present law at the time the disasters took place. The provision treats personal casualty or theft losses from federally declared disasters as a deduction separate from other casualty losses. However, present law at the time contained a required threshold of $100 for meeting requirements to claim losses, and this provision increases the threshold to $500. These rules are in effect for all federally declared disaster areas in 2008 and 2009 aside from those areas declared “Midwestern disaster areas” from flooding, tornadoes, and storms in 2008. The portion of the provision increasing the limitation per casualty to $500 only applies to 2009.

Under present law, a taxpayer’s deduction for charitable contributions of inventory generally is limited to the taxpayer’s basis (typically cost) in the inventory, or if less, the fair market value of the inventory. Under this provision, a C Corporation was eligible to claim an enhanced deduction for qualified book donations. An enhanced deduction is equal to the lesser of (1) basis plus one-half of the item’s appreciation (basis plus one-half of fair market value in excess of basis) or (2) two times basis.

Description Under present law, a taxpayer’s deduction for charitable contributions of inventory generally is limited to the taxpayer’s basis (typically cost) in the inventory, or if less, the fair market value of the inventory. Under this provision, any taxpayer, whether or not a C corporation, engaged in a trade or business was eligible to claim an enhanced deduction for donations of food inventory. An enhanced deduction is equal to the lesser of (1) basis plus one-half of the item’s appreciation (i.e., basis plus one- half of fair market value in excess of basis) or (2) two times basis. For taxpayers other than C corporations, the total deduction for donations of food inventory in a taxable year generally may not exceed 10 percent of the taxpayer’s net income for such taxable year from which contributions of apparently wholesome food are made.

The provision allowed a taxpayer using a vehicle while donating services to charity for the provision of relief related to certain disasters to compute charitable mileage deduction using a rate equal to 70 percent of the business mileage rate in effect on the date of the contribution, rather than the charitable standard mileage rate generally in effect under law.

The provision allowed for qualified contributions up to the amount by which an individual’s contribution base (adjusted gross income without regard to any NOL carryback) or corporation’s taxable income exceeds the deduction for other charitable contributions. Contributions in excess of this amount are carried over to succeeding taxable years subject to limitations under law.

The provision allowed an additional first-year depreciation deduction equal to a percentage of the adjusted basis of qualified property; the percentage varies depending on the disaster area where the property is located, e.g., 30 percent for New York Liberty Zone, 50 percent for GO Zones, Kansas Disaster Zone, and other areas in the U.S. declared disaster areas under national disaster relief.

A taxpayer was permitted a deduction for 50 percent of qualified disaster clean-up costs, such as removal of debris or demolition of structures, paid or incurred for an established period of time following certain disasters.

Under the provision, a taxpayer may have elected to treat any repair of business-related property affected by presidentially declared disasters, including repairs that are paid or incurred by the taxpayer, as a deduction for the taxable year in which paid or incurred.

Description Taxpayers may typically elect to deduct (or “expense”) certain environmental remediation expenditures that would otherwise be chargeable to a capital account, in the year paid or incurred. The deduction applies for both regular and alternative minimum tax purposes. The expenditure must be incurred in connection with the abatement or control of hazardous substances at a qualified contaminated site. The provision was extended beyond present law for qualified contaminated sites located in the GO Zone and Midwestern disaster zones, as well as federally declared disaster areas in 2008 and 2009. The length of such extensions depended on the applicable disaster zone.

Qualified improvements made on leasehold property in the New York Liberty Zone could have been depreciated over a 5-year period using the straight-line method of depreciation, instead of the 39-year period standard under present law. Qualified leasehold property improvements included improvements to nonresidential real property, such as additional walls and plumbing and electrical improvements made to an interior portion of a building.

Description In lieu of depreciation, a taxpayer with a sufficiently small amount of annual investment may elect to expense qualified property placed in service for the taxable year under section 179 of the Internal Revenue Code. Taxpayers in certain disaster areas were eligible to increase the maximum dollar amount of Section 179 expensing for qualified property, which is generally defined as depreciable tangible personal property that is purchased for use in the active conduct of a trade or business. Taxpayers in the New York Liberty Zone could deduct an additional amount up to the lesser of $35,000 or the cost of the qualified Section 179 property put into service during the calendar year. Taxpayers in the GO Zone, Kansas Disaster Zone or disaster zones covered under “National Disaster Relief” could deduct an additional amount up to the lesser of $100,000 or the cost of the qualified Section 179 property put into service during the calendar year.

The provision doubled, for certain taxpayers, the present- law expensing limit of $10,000 for reforestation expenditures paid or incurred by such taxpayers for certain periods of time with respect to qualified timber property in the Katrina, Rita and Wilma GO Zones. For example, single taxpayers may have claimed $20,000 instead of $10,000 for eligible reforestation expenditures.

Description The Internal Revenue Code allowed an additional first- year depreciation deduction equal to 30 or 50 percent of the adjusted basis of qualified property, including (1) property to which the modified accelerated cost recovery system applies with an applicable recovery period of 20 years or less, (2) water utility property, (3) certain computer software, or (4) qualified leasehold improvement property placed in service by December 31, 2005. Under this provision, the Secretary of Treasury had authority to further extend the placed-in-service date (beyond Dec. 31, 2005), on a case-by-case basis, for up to 1 year for certain property eligible for the December 31, 2005 placed-in-service date under present law. The authority extended only to property placed in service or manufactured in the Katrina, Rita or Wilma GO Zones. In addition, the authority extended only to circumstances in which the taxpayer was unable to meet the December 31, 2005 deadline as a result of Hurricanes Katrina, Rita, and/or Wilma.

The provision provided an additional exemption of $500 for each displaced individual of a taxpayer affected by certain disasters. The taxpayer may have claimed the additional exemption for no more than four individuals; thus the maximum additional exemption amount was $2,000.

Individuals whose principal residence was located in the Hurricane Katrina core disaster area or certain portions of the Midwestern disaster area on the date that a disaster was declared may generally exclude any nonbusiness debt from gross income, such as a mortgage, that is discharged by an applicable entity on or after the applicable disaster date for an established time period. If the individual’s primary residence was located in the Hurricane Katrina disaster area (outside the core disaster area) or other portions of the Midwestern disaster area, the individual must also have had an economic loss because of the disaster.

A taxpayer may have elected not to recognize gain with respect to property that was involuntarily converted, or destroyed, if the taxpayer acquired qualified replacement property within an applicable period, which is typically 2 years. The replacement period for property that was involuntarily converted in certain disaster areas is 5 years after the end of the taxable year in which a gain is realized. Substantially all of the use of the replacement property must be within the affected area.

Description The provision provided a temporary income exclusion for the value of in-kind lodging provided for a month to a qualified employee (and the employee’s spouse or dependents) affected by certain disasters by or on behalf of a qualified employer. The amount of the exclusion for any month for which lodging is furnished could not have exceeded $600. The exclusion did not apply for purposes of Social Security and Medicare taxes or unemployment tax.

Under the provision, reimbursement by charitable organizations to a volunteer for the costs of using a passenger automobile in providing donated services to charity for relief of certain disasters was excludable from the gross income of the volunteer. The reimbursement was allowed up to an amount that did not exceed the business standard mileage rate prescribed for business use.

The provision provided an exception to the 10 percent early withdrawal tax in the case of a qualified distribution of up to $100,000 from a qualified retirement plan, such as a 401(k) plan), a 403(b) annuity, or an IRA. Income from a qualified distribution may have been included in income ratably over 3 years, and the amount of a qualified distribution may have been recontributed to an eligible retirement plan within 3 years.

Description In general, under the provision, a qualified distribution received from certain retirement plans in order to purchase a home in certain disaster areas may be recontributed to such plans in certain circumstances. The provision applies to an individual who receives a qualified distribution that was to be used to purchase or construct a principal residence in a disaster area, but the residence is not purchased or constructed on account of the disaster.

Under this provision, residents whose principal residence was located in designated disaster areas and who suffered economic loss as a result of such disasters may borrow up to $100,000 from their employer plan. In addition to increasing the aggregate plan loan limit from the usual $50,000, the provision also relaxed other requirements relating to plan loans.

The provision permits certain retirement plan amendments made pursuant to changes made under Section 1400Q of the Internal Revenue Code, or regulations issued there under, to be retroactively effective. In order for this treatment to apply, the plan amendment is required to be made on or before the last day of the first plan year beginning on or after January 1, 2007, or such later date as provided by the Secretary of the Treasury. Governmental plans are given an additional 2 years in which to make required plan amendments.

The Secretary of the Treasury was required to provide certain administrative relief to taxpayers affected by certain presidentially declared disasters. Such relief allows for postponement of actions required by law, such as filing tax returns, paying taxes, or filing a claim for credit or refund of tax, for an applicable period of time following a disaster.

The provision authorized the Secretary of the Treasury to make such adjustments in the application of federal tax laws to ensure that taxpayers did not lose any deduction or credit or experience a change of filing status by reason of temporary relocations caused by applicable disasters. Any adjustments made under this provision must insure that an individual is not taken into account by more than one taxpayer with respect to the same tax benefit.

Total provisions by disaster relief packages

(h)

The Katrina Emergency Act package was enacted by the Katrina Emergency Tax Relief Act of 2005 (Pub. L. No. 109-73), and targeted the Hurricane Katrina disaster area (consisting of the states of Alabama, Florida, Louisiana, and Mississippi), including core disaster areas determined by the President to warrant individual or individual and public assistance from the federal government following Hurricane Katrina in August 2005. On enactment, JCT projected total budget effects of $6,109 million for fiscal years 2006 through 2015.

The Gulf Opportunity Zone package was enacted by the Gulf Opportunity (GO) Zone Act of 2005 (Pub. L. No. 109-135). Counties and parishes in Alabama, Florida, Louisiana, Mississippi and Texas that warranted additional, long-term federal assistance following Hurricanes Katrina, Rita and Wilma in 2005 were designated as Katrina, Rita and/or Wilma GO Zones. Portions of the Katrina and Rita GO Zones overlapped with counties and parishes eligible for relief under the Katrina Emergency Tax Relief Act. The Gulf Opportunity Zone tax package also included some nondisaster-related tax provisions: election to treat combat pay as earned income for purposes of the Earned Income Tax Credit; modifications of suspension of interest and penalties where IRS fails to contact taxpayer; authority for undercover operations; disclosure of tax information to facilitate combined employment tax reporting; disclosure of return information regarding terrorist activities; disclosure of return information to carry out contingent repayment of student loans; and various tax technical corrections. On enactment, JCT projected total budget effects of $8,715 million for the disaster provisions for fiscal years 2006 through 2015. The Kansas disaster relief package was enacted by the Food, Conservation, and Energy Act of 2008 (Pub. L. No. 110-246). The Kansas disaster relief package targeted 24 counties in Kansas affected by storms and tornadoes that began on May 4, 2007. On enactment, JCT projected total revenue effects of $63 million for the disaster provisions for fiscal years 2008 though 2018. The Midwest disaster relief package was enacted by the Emergency Economic Stabilization Act of 2008, Energy Improvement and Extension Act of 2008, and Tax Extenders and the Alternative Minimum Tax Relief Act of 2008 (Pub. L. No. 110-343). The Midwest disaster relief package targeted selected counties in 10 states affected by tornadoes, severe storms and flooding occurring from May 20-July 31, 2008. The listed components associated with the Midwest disaster relief package do not include rules outlining IRS reporting requirements for contributions to disaster relief; these rules apply for tax returns due after December 31, 2008. On enactment, JCT projected total revenue effects of $4,576 million for the Midwest disaster provisions for fiscal years 2009 through 2018. The National disaster relief package was enacted by the Emergency Economic Stabilization Act of 2008, Energy Improvement and Extension Act of 2008, and Tax Extenders and the Alternative Minimum Tax Relief Act of 2008 (Pub. L. No. 110-343). The National disaster relief package targeted individuals and businesses located in any geography declared a disaster area in the United States during tax years 2008 and 2009. Certain provisions of the National Disaster Relief Act of 2008 do not apply to the Midwest disaster areas because the Heartland and Hurricane Ike Disaster Relief Act, part of the same legislation that resulted in the National Disaster Relief Act, provides other tax benefits. On enactment, JCT projected total revenue effects of $8,091 million for fiscal years 2009 through 2018. The numbers of provisions across the six disaster relief packages exceeds the total number of provisions because some tax provisions and special rules were part of more than one disaster package.

Appendix VII: Potential Duplication, Overlap, and Fragmentation among Economic Development Spending Programs

In March 2011 and more recently in May 2011, we reported on the potential for duplication among 80 federal economic development programs at four agencies—the Departments of Commerce (Commerce), Housing and Urban Development (HUD), and Agriculture (USDA) and the Small Business Administration (SBA). According to the agencies, funding provided for these 80 programs in fiscal year 2010 amounted to $6.2 billion, of which about $2.9 billion was for economic development efforts, largely in the form of grants, loan guarantees, and direct loans. Some of these 80 programs can fund a variety of activities, including such noneconomic development activities as rehabilitating housing and building community parks.

Our work as of May 2011 suggested that the design of each of these 80 economic development programs appears to overlap with that of at least one other spending program in terms of the economic development activity that they are authorized to fund, as shown in table 12. For example, 35 programs can fund infrastructure, and 27 programs can fund commercial buildings. Some of the 80 economic development programs are targeted to economically distressed areas.

In February 2012, we reported our findings to date on overlap and fragmentation among 53 economic development programs that support entrepreneurial efforts. Based on a review of the missions and other related program information for these 53 programs, we determined that these programs overlap based not only on their shared purpose of serving entrepreneurs but also on the type of assistance they offer. Much of the overlap and fragmentation among these 53 programs is concentrated among programs that support economically distressed and disadvantaged businesses. In ongoing work that will be published as a separate report, we plan to examine the extent of potential duplication among the 53 programs.

Appendix VIII: Comments from the Department of the Treasury

Appendix IX: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above MaryLynn Sergent, Assistant Director; Elizabeth Curda; Jeffrey DeMarco; Edward Nannenhorn; Melanie Papasian; Mark Ryan; and Sabrina Streagle made key contributions to this report.

Bibliography

To determine what is known about the effectiveness of selected community development tax expenditures, we conducted a literature review of studies that addressed the following tax expenditure provisions: (1) the Empowerment Zone/Renewal Community tax programs; (2) the New Markets Tax Credit program; (3) tax expenditures available for certain disaster areas; and (4) rehabilitation tax credits, including the 20 percent tax credit for preservation of historic structures and the 10 percent tax credit for the rehabilitation of structures (other than historic). We searched databases, including Proquest, Google Scholar, and Econlit, for studies through May 2011. We focused on studies that attempted to measure the impact of the selected tax incentives on certain measures of community development, such as the poverty and unemployment rate.

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Related GAO Products

2012 Annual Report: Opportunities to Reduce Duplication, Overlap, and Fragmentation, Achieve Savings, and Enhance Revenue. GAO-12-342SP. Washington, D.C.: February 28, 2012.

Follow-up on 2011 Report: Status of Actions Taken to Reduce Duplication, Overlap, and Fragmentation, Save Tax Dollars, and Enhance Revenue. GAO-12-453SP. Washington, D.C.: February 28, 2012.

Managing for Results: Opportunities for Congress to Address Government Performance Issues. GAO-12-215R. Washington, D.C.: December 9, 2011.

Economic Development: Efficiency and Effectiveness of Fragmented Programs Are Unclear. GAO-11-872T. Washington, D.C.: July 27, 2011.

Efficiency and Effectiveness of Fragmented Economic Development Programs Are Unclear. GAO-11-477R. Washington, D.C.: May 19, 2011.

Managing for Results: GPRA Modernization Act Implementation Provides Important Opportunities to Address Government Challenges. GAO-11-617T. Washington, D.C.: May 10, 2011.

Performance Measurement and Evaluation: Definitions and Relationships. GAO-11-646SP. Washington, D.C.: May 2, 2011.

Indian Issues: Observations on Some Unique Factors that May Affect Economic Activity on Tribal Lands. GAO-11-543T. Washington, D.C.: April 7, 2011.

Government Performance: GPRA Modernization Act Provides Opportunities to Help Address Fiscal, Performance, and Management Challenges. GAO-11-466T. Washington, D.C.: March 16, 2011.

Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington D.C.: March 1, 2011.

Recovery Act: Opportunities to Improve Management and Strengthen Accountability over States’ and Localities’ Uses of Funds. GAO-10-999. Washington, D.C.: September 20, 2010.

Community Development Block Grants: Entitlement Communities’ and States’ Methods of Distributing Funds Reflect Program Flexibility. GAO-10-1011. Washington, D.C.: September 15, 2010.

Revitalization Programs: Empowerment Zones, Enterprise Communities, and Renewal Communities. GAO-10-464R. Washington, D.C.: March 12, 2010.

New Markets Tax Credit: The Credit Helps Fund a Variety of Projects in Low-Income Communities, but Could Be Simplified. GAO-10-334. Washington, D.C.: January 29, 2010.

Disaster Recovery: Past Experiences Offer Insights for Recovering from Hurricanes Ike and Gustav and Other Recent Natural Disasters. GAO-08-1120. Washington, D.C.: September 26, 2008.

Gulf Opportunity Zone: States Are Allocating Federal Tax Incentives to Finance Low-Income Housing and a Wide Range of Private Facilities. GAO-08-913. Washington, D.C.: July 16, 2008.

Tax Expenditures: Available Data Are Insufficient to Determine the Use and Impact of Indian Reservation Depreciation. GAO-08-731. Washington, D.C.: June 26, 2008.

Tax Policy: Tax-Exempt Status of Certain Bonds Merits Reconsideration, and Apparent Noncompliance with Issuance Cost Limitations Should Be Addressed. GAO-08-364. Washington, D.C.: February 15, 2008.

HUD and Treasury Programs: More Information on Leverage Measures’ Accuracy and Linkage to Program Goals is Needed in Assessing Performance. GAO-08-136. Washington, D.C.: January 18, 2008. 21st Century Challenges: How Performance Budgeting Can Help. GAO-07-1194T. Washington, D.C.: September 20, 2007.

Leveraging Federal Funds for Housing, Community, and Economic Development. GAO-07-768R. Washington, D.C.: May 25, 2007.

Tax Policy: New Markets Tax Credit Appears to Increase Investment by Investors in Low-Income Communities, but Opportunities Exist to Better Monitor Compliance. GAO-07-296. Washington, D.C.: January 31, 2007.

Empowerment Zone and Enterprise Community Program: Improvements Occurred in Communities, but the Effect of the Program is Unclear. GAO-06-727. Washington, D.C.: September 22, 2006.

Federal Tax Policy: Information on Selected Capital Facilities Related to the Essential Governmental Function Test. GAO-06-1082. Washington, D.C.: September 13, 2006.

Rural Economic Development: More Assurance Is Needed That Grant Funding Information Is Accurately Reported. GAO-06-294. Washington D.C.: February 24, 2006.

Telecommunications: Challenges to Assessing and Improving Telecommunications for Native Americans on Tribal Lands. GAO-06-189. (Washington, D.C.: January, 11, 2006).

Results-Oriented Government: Practices That Can Help Enhance and Sustain Collaboration among Federal Agencies. GAO-06-15. Washington, D.C.: October 21, 2005.

Government Performance and Accountability: Tax Expenditures Represent a Substantial Federal Commitment and Need to Be Reexamined. GAO-05-690. Washington, D.C.: September 23, 2005.

A Glossary of Terms Used in the Federal Budget Process. GAO-05-734SP. Washington, D.C.: September 2005.

Community Development: Federal Revitalization Programs Are Being Implemented, but Data on the Use of Tax Benefits Are Limited. GAO-04-306. Washington, D.C.: March 5, 2004.

New Markets Tax Credit Program: Progress Made in Implementation, but Further Actions Needed to Monitor Compliance. GAO-04-326. Washington, D.C.: January 30, 2004.

September 11: Overview of Federal Disaster Assistance to the New York City Area. GAO-04-72. Washington, D.C.: October 31, 2003.

Tax Administration: Information Is Not Available to Determine Whether $5 Billion in Liberty Zone Tax Benefits Will Be Realized. GAO-03-1102. Washington, D.C.: September 30, 2003.

Economic Development: Multiple Federal Programs Fund Similar Economic Development Activities. GAO/RCED/GGD-00-220. Washington, D.C.: September 29, 2000.

Tax Policy: Tax Expenditures Deserve More Scrutiny. GAO/GGD/AIMD-94-122. Washington, D.C.: June 3, 1994.