Friday, July 05, 2002

Empowerment takes new focus

Grants may give way to tax breaks

By By Derrick DePledge
Enquirer Washington Bureau

        WASHINGTON — The Bush administration has concluded that tax breaks are the best way to promote economic growth in some of the nation's poorest urban neighborhoods.

        President Bush is recommending no more grant money for those communities added to the federal empowerment-zone program in 1999. The proposal, being challenged by some in Congress, would reverse a Clinton administration policy favoring both tax breaks and grant money to help revitalize inner-city neighborhoods.

        An Enquirer review of 15 urban empowerment zones — including the one in Cincinnati — found that most have yet to take advantage of many of the tax breaks and are only just starting to make progress on economic development.

        Most also have spent only a fraction of the federal money available, although Cincinnati officials say they have committed millions more to projects that are under way.

        The government has not provided stable federal funding to these empowerment zones. Nor has it created comprehensive performance standards, making it impossible to compare progress with earlier zones or determine whether the projects are on the right track.

        The Bush administration relied heavily on studies of earlier empowerment zones — not the ones at risk of losing federal money now — to draw the conclusion in its proposed budget that there is “no convincing evidence” that grants are effective.

        “It's much too early for anyone to come to a conclusion that this program has been or has not been a success,” says Michael Allan Wolf, a professor of law and history at the University of Richmond in Virginia who has monitored empowerment zones.

        Donald Mains, deputy assistant secretary for economic development at the U.S. Department of Housing and Urban Development, said the Bush administration has no intention of abandoning the zones.

        It's just that tax incentives, rather than grants, provide a greater opportunity for economic revitalization, he said.

        The Bush administration clearly indicated its preference when it decided in January to add another eight communities to the empowerment zone program.

        The new zones — including Hamilton — will receive no federal money, but businesses can choose from a broader selection of tax breaks and regulatory relief.

        Mr. Mains said the intent is to replace the “top-down” approach of direct federal aid with the “bottom up” approach of tax breaks.

        “We would like to turn people's heads to realize the power of these tax incentives,” he said.

        With little concrete data available, the Bush administration consulted studies on the original empowerment zones to bolster its decision to end federal funding for the 15 urban zones.

        The main study, prepared by Abt Associates and the Urban Institute for HUD and released in November, looked at the performance of the six original empowerment zones and found mixed results.

        Job growth was higher in four of the six zones compared to nearby neighborhoods and the number of zone residents with jobs in zone businesses had increased, as had the number of minority owned businesses.

        A survey of zone businesses found that many were not aware of all the tax breaks available and even fewer took advantage of them. In 2000, the study found, 11 percent of businesses used an employment tax credit, 4 percent used greater expense deductions and 3 percent used a work opportunity tax credit. Larger businesses were much more likely to apply for the incentives.

        Researchers concluded that the tax breaks had only a modest influence on business behavior.

        “I think there is zero evidence on their side,” said Avis Vidal, an educator at Wayne State Univer sity in Detroit and one of the study's authors.

        HUD officials acknowledge the difficulty in applying the study's findings to other empowerment zones, given the wide disparity in federal funding and the fact that the study looked at only the first five years of a 10-year program. HUD cautioned that the study was not designed to answer whether empowerment zones are effective in revitalizing urban areas.

        One of the challenges of reviewing performance is that each community set diverse goals, es pecially in the critical area of job creation and retention.

        In Columbia, S.C., for example, zone officials estimated they would create and retain 385 jobs over 10 years. In Norfolk, Va., the estimate was 12,443 jobs. The Cincinnati goal was to create 10,000 jobs over 10 years.

        Interviews with zone officials found that three of the 15 urban zones — Boston, Columbus and Santa Ana, Calif. — claim to have already exceeded job goals.

        Because so many variables influence the economy and the quality of life, it is hard to establish precisely what impact the empowerment zones have had on neighborhoods. No one expected, or still expects, that even a federal investment of $100 million over 10 years for each zone could erase generations of poverty and neglect.

        Harold Cleveland, the Cincinnati empowerment corporation's chief executive officer, says the zone would soon wither without the $22 million in federal grants since 1999. The government, he says, is reneging on a promise to spend up to $100 million over 10 years in Cincinnati.

        “We're not going to change the world in a year,” Mr. Cleveland says. “Any substantial change has to be measured over the long term.”

        He said the corporation has committed spending to about three dozen employment and training projects that have created an estimated 750 jobs. Some of the jobs were created at Nu-Blend Paints in Over-the-Rhine, which received a one-time grant of $258,000 to recycle and resell paint.

        Bill Wojcik, Nu-Blend's executive director, has plans to convert part of his warehouse into low-cost rental space for community groups. He wants to train residents as painters.

        “If it goes to the tax credits only, we can't exist,” he says.

        Organizers of an economic boycott of Cincinnati have made full federal funding of the city's empowerment zone one of their demands. They also argue that the city has failed to honor a commitment to spend $208 million in support of the empowerment corporation's programs.

        Many House Republicans have had serious doubts about the empowerment zone program from its inception. Not only did Republicans oppose the $100 million promise of the Clinton administration, but Republican leaders created a competing federal program to test their belief that tax breaks work better than federal grants.

        Rep. Steve Chabot, R-Ohio, whose district covers the empowerment zone in Cincinnati, says state and local governments routinely use tax breaks to attract new businesses.

        “This is how communities compete with each other for business,” he says. “I think it can be a tool for the empowerment zones.”

        Mr. Chabot says grant funding for the zones, if provided at all, should be weighed by lawmakers annually rather than given as a federal entitlement.

        “Unfortunately, there is considerable skepticism in many quarters that the money gets used for overhead and staff and is never actually used to put people to work,” he says. “The money just goes up into the ether.”

        Martin Regalia, vice president and chief economist at the U.S. Chamber of Commerce, said broad-based tax breaks are more efficient than narrowing the incentives to specific neighborhoods and, in effect, creating a competitive imbalance within a community.

        “You pit neighborhoods against each other and you do it artificially,” Mr. Regalia said.

        Mr. Mains, at HUD, also acknowledges that the final answer on which track works best may not be known for several years.

        “Who knows?” he said. “Somebody may show that it's the combination of grants with tax incentives that may be the ideal.”

        Ledyard King of Gannett News Service contributed to this report.


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