Message to the Congress Transmitting Proposed Enterprise Zones Legislation

March 23, 1982

To the Congress of the United States:

I am transmitting to the Congress today legislation entitled, ``The Enterprise Zone Tax Act of 1982.'' This legislation authorizes the establishment of an Enterprise Zone program, which is an experimental, free market-oriented program for dealing with the severe problems of our Nation's economically-depressed areas.

In my January 26 State of the Union message, I indicated that we would propose legislation for a new effort to revive the decaying areas of America's inner cities and rural towns. We have now completed work on this new effort and it is embodied in the proposed ``Enterprise Zone Tax Act.'' Therefore, I am requesting today that the bill be referred to the appropriate committees and I urge its early enactment.

The Concept of Enterprise Zones

The Enterprise Zone concept is based on utilizing the market to solve urban problems, relying primarily on private sector institutions. The idea is to create 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 private sector firms and entrepreneurs to create jobs -- particularly for disadvantaged workers -- and expand economic activity.

Enterprise Zones are based on an entirely 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 1960's, 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. In its basic thrust, Enterprise Zones are the direct opposite of the Model Cities Program of the 1960's.

Enterprise Zones will not require appropriations at the Federal level, except for necessary administrative expenses. States and cities will still have the option of allocating discretionary Federal funds for their Enterprise Zones if they desire, or to appropriate additional funds of their own for such zones.

Enterprise Zones must be more than just a Federal initiative. State and local contributions to these zones will be critically important in the selection of the zones, and probably determine whether individual zones succeed or fail. In the spirit of our new policy of Federalism, State and local governments will have 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:

First, tax reduction at the Federal, State and local levels to lessen this obvious burden on economic activity.

Second, regulatory relief at the Federal, State and local levels to reduce burdens which can be equally costly.

Third, new efforts to improve local services, including experimentation with private alternatives to provide those services. Eliminating inefficiencies of monopolized government services and increasing reliance on the private sector are key parts of the overall Enterprise Zone theme. Experience has shown that these efforts can save taxpayers substantial sums while significantly improving services at the same time.

Finally, involvement in the program by neighborhood organizations. These organizations can contribute much to the improvement of Enterprise Zone neighborhoods. They can also help to ensure that local residents participate in the economic success of the zones.

By combining all these elements we will create the right environment to help revive our Nation's economically-depressed areas.

The Structure of the Enterprise Zone Program

Title I of the Act describes the program structure and how the zones will be established.

The initial designation and establishment of each zone will depend on local leadership and initiative. To obtain the Federal incentives for Enterprise Zones, State and local governments must first nominate the zones within the eligible areas as defined by the Federal legislation.

These areas will include all areas in UDAG-eligible jurisdictions which have recently experienced significant unemployment, poverty or population loss. Based on these criteria, there will be more than 2,000 cities, rural areas and Indian reservations with Enterprise Zone eligible areas.

The Secretary of HUD will be authorized to designate up to 25 zones in each of three years for the application of the Federal incentives. The actual numbers designated will depend on the number and quality of the applications.

The Enterprise Zone program is, thus, a potential source of economic assistance to distressed areas of all types, shapes and sizes, all across the country. Rural areas as well as large urban areas will be eligible to become Enterprise Zones.

After State and local nomination, these governments will apply to the Secretary of HUD for Federal designation to allow the Federal incentives to apply to their zones.

Federal designation of nominated zones will not be automatic or routine. Rather, the Secretary will evaluate the various applications on a competitive basis, choosing the best applications for the limited number of Federal designations available each year. A key criterion in this competitive process will be the nature and strength of the State and local incentives to be contributed to the zones, consistent with the overall Enterprise Zone theme of creating an open market environment by removing government burdens. Other important factors will also be considered.

In evaluating State and local contribution packages, the Federal Government will be highly flexible. For example, the Secretary of HUD will not insist upon any particular item of tax or regulatory relief. A weakness of incentives in one area, such as tax relief, could be offset by greater strength in another area, such as regulatory relief. It should be remembered, however, that the incentive packages will be competitively evaluated against each other.

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

-- The Federal Tax Incentives of the Enterprise Zone Program

Title II of the Act describes the Federal tax incentives to apply within Enterprise Zones, which include:

a 3- or 5-percent investment 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 $1,500 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 $450 per worker to qualified zone employees for wages earned in zone employment;

the 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 extension of the operating loss carry-over period for Enterprise Zone businesses, and permission for Enterprise Zone tax credits to be carried over for this period as well.

The Federal tax reductions applying to Enterprise Zones will be substantial. They will include reductions for employers, employees, entrepreneurs and investors. They will include incentives for capital investment, for hiring workers, particularly disadvantaged workers, for increasing work effort, and for starting and building up new businesses. They will include reductions in corporate income taxes, individual income taxes and capital gains taxes.

The Treasury Department estimates that with this tax package the designation of 10 to 25 zones in the first year of the program will result in $124 - $310 million in lost Federal tax revenues for that year. The cost of the program will increase in future years as additional zones are designated and as zone activity increases.

-- Federal Regulatory Relief

Title III of the Act describes the Federal regulatory relief to apply within Enterprise Zones. Under these provisions, State and local governments will be authorized to request relief for their approved zones from any Federal regulation, unless it would directly violate a requirement imposed by statute. Federal regulatory bodies will be authorized to weigh these requests under Congressionally-mandated standards, and to relax these regulations when it is in the public interest to do so, given the goals of the Enterprise Zone program.

This special authority would expressly not apply, however, to any regulations to carry out a statute or Executive Order designed to protect any person against discrimination because of race, color, religion, sex, martial status, national origin, age or handicap. It would also expressly 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.

It should be emphasized that there will be no authority for any Federal regulatory relief within an Enterprise Zone without a request for such relief from both the State and local governments governing the zone.

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 neighborhood organizations. More traditional urban efforts, such as job training, minority business assistance or infrastructure grants, can also be contributed to the zone.

Consistent with the Administration's policy of Federalism, the Federal Government will not dictate to State and local governments what they must contribute to the zones. The program is designed for creative and innovative experiments by State and local governments within the zone areas. The program retains the flexibility for these governments to tailor their contributions to suit local needs and preferences.

The State and local contributions to the zones need not be costly. Regulatory relief, service improvements through privatization, and private sector involvement all entail no budgetary cost.

Even the cost of State and local tax relief should be modest because of the weak economic activity currently existing in potential Enterprise Zone areas. If the program is successful in stimulating new economic activity, these losses will be substantially offset by increased revenues from the new activity, State and local expenditures would be reduced as individuals who formerly received government aid are employed in the zone.

The legislation we advance today is based on the pathbreaking work of many Members from both sides of the aisle who offered Enterprise Zone bills in prior sessions of Congress. We commend these efforts and anticipate that these innovative individuals will 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. This bold, new concept deserves to be given a chance to work. As I said in my State of the Union Address, some will say our mission is to save free enterprise, but, I say that with your help, we must free enterprise so that together we can save America.

Ronald Reagan

The White House,

March 23, 1982.