March 7, 1983
To the Congress of the United States:
I am transmitting to the Congress today legislation entitled, "The Enterprise Zone Employment and Development Act of 1983.'' This legislation will provide for the creation of meaningful jobs within the private sector and the long-term revitalization of our Nation's most depressed areas. It is offered as one element of a comprehensive jobs package intended to attack unemployment, including such other elements as supplemental unemployment benefits, tax credits for hiring the long-term unemployed, a summer youth program, and additional funds for job training and relocation assistance.
In my January 25 State of the Union message, I indicated that we would reintroduce Enterprise Zone legislation in the 98th Congress. While this legislation carries forward the tax and regulatory relief measures of our earlier proposal in the 97th Congress, it contains several important additions which reflect the combined wisdom of the growing coalition supporting this idea, including the ideas of the small business community, State and local officials, labor organizations and the many members of Congress who studied and debated our earlier legislation. We are confident that the net result is strong, farsighted legislation designed to unleash the creative energies of our free market economy in our most distressed urban areas. In these difficult days of high unemployment, the legislation is drafted to be of direct, primary benefit to disadvantaged workers and the long-term unemployed.
The high level of success experienced by the dozen or so State and local Enterprise Zone programs is very encouraging. Prompt Federal action is warranted to bolster State and local efforts, and it is in that spirit that I urge the early enactment of this legislation.
The Concept of Enterprise Zones
The Enterprise Zone program will improve the private sector's ability to provide new employment opportunities, and in turn, urban regeneration. It creates a productive free market environment in economically depressed areas by reducing taxes, regulations and other government burdens on economic activity. The removal of these burdens will create and expand economic opportunity within the zone areas, allowing business firms and entrepreneurs to create jobs -- particularly for disadvantaged workers -- and expand economic activities.
Enterprise Zones are a fresh approach for promoting economic growth in the inner cities. The old approach relied on heavy government subsidies and central planning. A prime example was the Model Cities program of the 1960s, which concentrated government programs, subsidies and regulations in specific, depressed urban areas. The Enterprise Zone approach would remove government barriers, freeing individuals to create, produce and earn their own wages and profits.
Mindful of the need to control public expenditures, Enterprise Zones require no Federal appropriations other than necessary administrative expenses. Of course, states and cities have the option of allocating existing Federal funds for their Enterprise Zones if they desire, or to appropriate additional funds of their own for such zones.
Enterprise Zones are more than just a Federal initiative. State and local contributions to these zones will be critically important in the competitive, Federal designation of zones, and probably determine whether individual zones succeed or fail. In keeping with Constitutional requirements of federalism, State and local governments retain broad flexibility to develop the contributions to their zones most suitable to local conditions and preferences.
The Elements of Enterprise Zones
The Enterprise Zone program includes four basic elements:
-- Tax reduction at the Federal, State and local levels to lessen the economic impediments to business investment and employment.
-- Regulatory relief at the Federal, State and local levels to reduce costly burdens which are unnecessary to legitimate health and safety concerns.
-- New efforts to improve local services, including experimentation with private alternatives to provide those services.
-- Neighborhood involvement so that local residents participate in the economic success of their zones. For example, resident owned Enterprise Zone businesses might provide local services which were previously monopolized by government.
By combining all these elements we will create the right economic environment for our Nation's depressed areas.
The Structure of the Enterprise Zone Program
Title I of the Act describes the program's structure and how the zones will be established.
The initial designation or establishment of each zone will depend on local leadership and initiative. To obtain the Federal incentives for Enterprise Zones, State and local governments must nominate eligible areas to the Secretary of HUD.
As defined by the Act, eligible areas include all UDAG eligible jurisdictions which have significant unemployment, poverty or population loss. Based on these criteria, currently more than 2,000 cities, rural areas and Indian reservations qualify. The Enterprise Zone program is a potential source of economic assistance to distressed areas of all types, shapes and sizes, all across the country.
The Secretary of HUD will be authorized to designate up to 75 zones over a three-year period. The actual number designated will depend on the number and quality of the applications.
Federal designation of nominated zones is not automatic. The Secretary of HUD will evaluate the various applications on a competitive basis, choosing the best applications for the limited number of Federal designations authorized. The key criterion in this competitive process will be the nature and strength of the State and local efforts to remove government burdens and to revitalize Enterprise Zone areas.
Thus, the Federal evaluation of State and local contributions will be highly flexible and not prescriptive. In this regard, the Secretary of HUD will not insist upon any particular item of tax and regulatory relief. A weakness of State and local incentives in one area, such as tax relief, could be offset by greater strength in another area such as regulatory relief.
Each Enterprise Zone will last for the period chosen by the nominating State and local governments. The Federal incentives will apply to an approved zone for this entire period, up to a maximum of 20 years plus a 4-year, phase-out period.
The Federal Incentives of the Enterprise Zone Program
Title II of the Act describes the Federal Tax incentives applying within Enterprise Zones, which include:
- a 5 percent tax credit for capital investments in personal property in an Enterprise Zone;
- a 10 percent tax credit for the construction or rehabilitation of commercial, industrial or rental housing structures within a zone;
- a 10 percent tax credit to employers for payroll paid to qualified zone employees in excess of payroll paid to such employees in the year prior to zone designation, with a maximum credit of $1,750 per worker;
- a special, strengthened tax credit to employers for wages paid to qualified zone employees who were disadvantaged individuals when hired, with the credit equal to 50 percent of wages in each of the first 3 years of employment, and declining by 10 percentage points in each year after that;
- a 5 percent tax credit, up to $525 per worker to qualified zone employees for wages earned in zone employment;
- elimination of capital gains taxes for qualified property within Enterprise Zones;
- the designation of suitable Enterprise Zone areas as Foreign Trade Zones, providing relief from tariffs and import duties for goods subsequently exported to other countries;
- the continued availability of Industrial Development Bonds to small business in Enterprise Zones, even if the availability of such bonds is terminated elsewhere; and
- the permission for excess Enterprise Zone tax credits to be carried back three years and forward up to the life of the zone.
The Federal tax reductions applying to Enterprise Zones are substantial. They include reductions for employers, employees, entrepreneurs and investors. They include incentives for attracting venture capital, hiring workers, particularly disadvantaged workers, and starting and building up new businesses. They include the reduction, and in some cases elimination, of corporate income taxes, individual income taxes and capital gains taxes.
The cost of the Enterprise Zone tax package should be minimal given the small amount of tax revenue presently generated in Enterprise Zones. Moreover, as the Enterprise Zone concept succeeds, the tax revenue attendant to increased economic activity should offset the tax losses in the initial years.
Title III of the Act describes the Federal regulatory relief applying within Enterprise Zones. Under these provisions, State and local governments may request relief for their Enterprise Zones from any Federal regulation, unless it would directly violate a requirement imposed by statute. There is no authority for any Federal regulatory relief within an Enterprise Zone without a request for such relief from both the State and local governments.
This regulatory relief authority expressly does not apply, however, to regulations designed to protect any person against discrimination because of race, color, religion, sex, marital status, national origin, age or handicap. It also does not cover any regulation whose relaxation would likely present a significant risk to the public safety, including environmental pollution. The minimum wage law would not be covered by this authority because it is specifically imposed and spelled out by statute.
The Role of State and Local Governments
While these Federal incentives are substantial, strong State and local contributions to the zones will be necessary for the program to succeed.
These contributions can be from each of the four basic categories noted earlier: tax relief; regulatory relief; improved local services; and increased participation by neighborhood organizations. More traditional urban efforts, such as job training, minority business assistance or infrastructure grants, can also be contributed to the zone. Once again, consistent with the Administration's policy of restoring the Constitutional principle of federalism, the Federal government will not dictate to State and local governments what they must contribute to the zones.
The State and local contributions to the zones need not be costly. For example, regulatory relief, service improvements through privatization, and private sector involvement all entail no budgetary cost. Finally, as with the Federal tax relief, the cost of State and local tax relief should be modest because of the little economic activity currently existing in potential Enterprise Zone areas. State and local expenditures would be reduced as individuals who formerly received government aid are employed in the zone.
The legislation I am sending you today is based on the work of many Members from both sides of the aisle. I encourage these innovative individuals to work for early, bipartisan passage of this legislation.
More than government expenditures and subsidies, residents of economically-depressed areas need opportunities. This is the focus of the Enterprise Zone program. The program will identify and remove government barriers to entrepreneurs who can create jobs and economic growth. It will spark the latent talents and abilities already in existence in our Nation's most depressed areas. The success of State Enterprise Zones confirms that the concept deserves to be given a chance to work on the Federal level.
Ronald Reagan
The White House,
March 7, 1983.