RUTHFULLY YOURS

Now that Dr. Ben Carson has moved closer to being confirmed as President-Elect Trump’s candidate for secretary of the Department of Housing and Urban Development (HUD), the new administration can begin planning to fulfill promises outlined in a 10-point “plan for urban renewal,” which promised “tax holidays for inner-city investment and new tax incentives to get foreign companies to relocate in blighted American neighborhoods.”  It also pledges to “empower cities and states to seek a federal disaster designation for blighted communities in order to initiate the rebuilding of vital infrastructure, the demolition of abandoned properties, and the increased presence of law enforcement.”

This language sounds like a resurrection of Jack Kemp’s “enterprise zone” model, an idea that reappeared in the Clinton years as “empowerment zones” and with George W. Bush as “Go-Zones,” and can now provide a model for President Trump’s campaign promise to jump-start the rebuilding of inner cities and enlist the private sector in helping to complete this task.

The key to the empowerment zone concept is that it attempts to solve the problems of inner-city unemployment and poverty without direct, substantial government expenditure.  It also uses a number of incentives – investment and employment tax credits, regulatory relief, capital gains exclusions, employee training, business incubators, low-interest loans, and other tools – to draw investment into areas that, absent the incentives, would be unlikely to have materialized.

Dr. Carson himself articulated an interesting twist on finding tax revenue to fund the administration’s ambitious plans.  He has said that Trump will “be working on empowering people in empowerment zones throughout cities, using a lot of the money from overseas that is stuck over there because of our tax situation,” meaning they hope to convince U.S. companies, many of whose profits are currently offshore, to bring the corporate taxes due on those monies back to America, necessarily with the incentive of a reduced tax rate.

The beauty of deriving a new stream of revenue from repatriated corporate profits, of course, is that it does not cannibalize existing tax revenues and instead provides a new source of taxes which, absent the incentives, would otherwise not be realized.  Given that an estimated $2.4 trillion of profits from Fortune 500 companies has been “permanently reinvested” offshore to avoid onerous U.S. federal income taxes, even a reduced, irresistible corporate tax rate of, say, 10% (less than one third current rates) could theoretically yield $200 billion, some or all of which could be earmarked for investing in the rehabilitation and improvement of distressed urban centers.  In fact, corporations could be further incentivized by slashing the tax rates even more if companies agree to either relocate some of the business units into the new zones or, if they cannot relocate, pay into a managed fund that would be used specifically in the zones.

If Dr. Carson’s latest turn on the empowerment zone concept is to work for targeted, distressed American cities, he has many approaches that have succeeded before, along with some he should enhance.  Among them:

• Customize zone requirements and benefits, and have on-site offices to facilitate fast-track permitting and variances, assembling available abandoned and seized property, issuing tax abatements, providing regulatory relief, fast-tracking loan applications, and offering technical assistance.  Distinct empowerment zones will need to be set up to accommodate the specific economic, housing, labor, and social needs of each targeted inner-city location.  A particular bundle of incentives – whether to encourage housing creation or attract capital – can be determined for each geographic area as needed.  Just as important is the on-site presence and input of state and local officials, redevelopment authorities, bankers, the SBA, and other experts to identify and provide clear title for abandoned property, expedite applications and permitting, lend technical expertise, and generally facilitate the often cumbersome and tortuous process of qualifying for government-conceived programs.  HUD could also help fund this initiative: its 2016 budget, for example, provides for $250 million, as part of its Choice Neighborhoods program, to transform blighted neighborhoods with distressed housing into upgraded, mixed-income neighborhoods.

• Ease the use of low-income housing tax credits (LIHTC) and create a targeted version for each empowerment zone city.  Housing is often a key component of empowerment zones; the task of creating new housing, or replacing distressed housing, is made even more critical when safe and accessible housing is necessary for employees of new businesses created in the zones.  While mixed-use, mixed-income housing is always preferable in creating viable neighborhoods, often the initial efforts within the empowerment zones are to provide housing to the area’s poorest residents, a task made attractive to investors through the use of low-income housing tax credits.  Created by the Tax Reform Act of 1986, the LIHTC program gives state and local agencies the ability to leverage of nearly $8 billion in annual budget authority to issue tax credits for the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households.  According to HUD’s database, an average of over 1,420 projects and 107,000 units were created annually between 1995 to 2014.  Developers can avail themselves of yearly tax credits; additionally, and more important for drawing investor capital into low-income housing markets, the credits can be bundled and syndicated to corporate investors as a way of reducing taxes with higher marginal rates.  The tax credits have been allotted on a state-by-state basis, often through a cumbersome application process in which credits frequently go unused, so one of Secretary Carson’s first tasks should be to streamline the application and granting process.

• Encourage innovative lending programs, in which private investors, banks, or community development corporations create first-time ownership opportunities and sometimes share in the tax benefits and future appreciation of the properties.  The Urban Homestead Act of 1999 facilitated the disposition of government-owned units and land that are given to low-income residents who pledge to move in and rehabilitate or improve the properties.  That notion is a good one, except that low-income residents frequently lack the resources and experience to make home ownership – particularly of distressed properties – a reality.  Instead, some of this housing would be suitable for re-use as shared-equity property, in which investors assume, with the new homeowners, some of the risk and costs of making new homes habitable.  Banks or corporate investors (who would purchase bundled property shares) who make loans in the zones could receive tax concessions.  The upside?   Housing experts such as Howard Husock have argued that too often, planners overlook the reality that neighborhoods of owners rather than renters – even poor owners – are more likely to flourish than those comprising demoralizing tracts of projects and government-subsidized housing, in which residents have no stake or possibility for growing equity and creating personal wealth.

• Create jobs relevant to the targeted cities.  Critics of the empowerment zone concept have noted that the zones are designed more to attract capital than labor.  But that view overlooks the obvious benefit to job creation inherent in the expansion and founding of thriving businesses in the zones.  If new empowerment zones are developed around an anchor corporation, incentives for job creation should be tailored for the employment needs of the specific locations, so that, for instance, high-tech businesses are not created in neighborhoods where the employee pool lacks the skills and training opportunities to avail itself of such jobs.  Employers who hire local residents (especially welfare-to-work or young, underemployed individuals) receive higher per-employee tax credits than would be available for employees living outside the zone, and zone employees are also able to claim tax deductions from the income.  Extra incentives should also be offered when employees are trained for roles in businesses new to the region; this approach has the double benefit of encouraging new types of businesses to relocate to the zones and for helping to evolve a new, better trained workforce.  Maryland also experimented with creating Health Enterprise Zones (HEZ), designed to attract primary care physicians and health care organizations into underserved minority neighborhoods by modifying regulations and offering income, property, and hiring tax credits to health care providers willing to relocate to the HEZ.

• Utilize the intellectual and financial resources of a university to incubate small and emerging businesses.  As a logical outgrowth of its teaching and research assets, a local university could help create satellite incubators for creating new businesses and assisting newly founded, entrepreneurial ones, particularly those owned by neighborhood residents.  In Detroit, for example, TechTown, founded in partnership with Wayne State University, Henry Ford Health System, and GM, has helped some 1,500 small businesses and entrepreneurs create 1,200 jobs, with management, marketing, and startup capital, as well as shared office space and career training.  Were university-associated research centers, high-tech, or biotech labs to locate in the zones as major magnets, smaller collateral businesses – such as printers and copy shops, restaurants, day care centers, and other service businesses – can flourish and help provide additional employment opportunities for local residents and a more livable overall neighborhood.

• Reduce the capital gains tax rate and modify “passive loss” rules.  The former cut could apply only on the sale of newly built or substantially rehabbed low-income property inside the zones, provided that the affordability is preserved after the sale through deed restrictions.  Long-term property tax abatements, on both rental housing and commercial space built or rehabilitated in the zones, has historically served to attract investment.  Another attractive incentive for businesses in the zones is Section 179 of the IRS tax code, which allows businesses to “expense,” rather than amortize, the full purchase price of equipment and/or software purchased or financed during the tax year.

• Loosen codes and encourage housing creation.  Local government can help ease, rather than constrict, affordable housing creation by the private sector by being flexible in interpreting zoning, safety, and building requirements.  A compelling example of this approach was the story of the Baltic, a single-room occupancy project in San Diego, in which developers negotiated concessions from the city to create 120-square-foot “living units” in a 207-room building with a density equivalent to more than 700 units an acre – well beyond what existing regulations would have permitted.  Other concessions from the building and zoning departments enabled the for-profit developer to build much needed, affordably priced units that existing codes would have normally disallowed.

While opponents of tax concessions for Fortune 500 companies and businesses inside empowerment zones point out that a loss of tax revenues through incentives and abatements is still an expense for taxpayers, many would agree that such lost revenues are more than compensated for through the creation of much needed new jobs; new and upgraded housing for low-and moderate-income residents; the rehabilitation of distressed real property; fresh streams of property, corporate, and income taxes; and, most importantly, immeasurable social benefits to American cities trying to recover from decades of urban disintegration, joblessness, and despair.