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Growth Strategies

Inner-City Innovation

Clinton and Congress move toward increasing incentives for entrepreneurs ready to take on low-income communities.
Magazine Contributor
3 min read

This story appears in the February 2000 issue of Entrepreneur. Subscribe »

First, there were Empowerment Zones (EZ) and Enterprise Communities (EC). HUBzones followed. Now President Clinton and House Speaker Dennis Hastert (R-IL) are negotiating on a third federal program to lure small businesses to inner cities: a so-called New Markets Initiative.

Clinton proposed the program in early 1999 as part of his fiscal 2000 SBA budget. But Congress turned its nose up and did nothing with the bundle of programs, which focused on establishing one-stop financing offices in poverty-stricken inner cities. In November, though, Clinton and Hastert met to discuss the idea.

Any compromise will probably combine elements of New Markets with elements from a bipartisan proposal called Renewal Communities. Both concepts are aimed at similar suburban targets: census tracts with poverty rates above 20 percent or family median incomes below 80 percent of the statewide average. Reps. Jim Talent (R-MO), chair of the Small Business Committee, J.C. Watts Jr. (R-OK) and Danny Davis (D-IL) have been the prime movers behind Renewal Communities, which build on the EZ concept. The Clinton administration has designated 147 EZs and ECs since 1994 from the hundreds of communities that have applied. Businesses located in these areas qualify for federal grants and fairly limited federal tax benefits.

Renewal Communities would offer businesses expanded tax incentives, such as capital gains tax relief, increased expensing, and commercial building renovation tax credits. In addition, cities and counties would have to waive some state and local occupational licensing regulations and other barriers to business entry. The Talent/Watts/Davis approach has been unacceptable to some members of Congress, though, because it could provide vouchers to religious groups, which would use the money to provide drug- and alcohol-abuse treatment.

The New Markets Initiative would offer businesses a different incentive: access to financing provided by venture capitalists and lending companies that would receive SBA-backed funding. For example, there would be a pilot program to create 10 new market-lending companies which would be nondepository institutions. It would make SBA-guaranteed loans under the 7a loan program. Also, the proposal would provide tax credits to individuals who invested in those new, inner-city financial companies. "These would be like remote SBA offices serving as one-stop capital shops," says Mike Stamler of the SBA.

As long as they met low-income criteria, Renewal Communities (or New Markets) could offer businesses their federal benefits. There would be no competitive application process as there is with EZs and ECs, so there could be thousands of Renewal Communities or New Market areas. Many would be co-located with HUBzones, the federal program established in 1997 that gives a federal contracting preference to companies that employ local residents.

But Republicans don't like the idea of setting up a new layer of federal bureaucracy as a way of launching distressed areas toward regeneration. Jack Horner, an aide to Watts, also raises the concern that the owners of these New Market financial companies would live outside the distressed area and therefore be divorced from any real feel for its future.

Democrats and Republicans found little to compromise on in the 1999 congressional session, but they are still negotiating. The political distance between Renewal Communities and New Markets is pretty short. It shouldn't take too much stretching to reach across the divide this year.

Stephen Barlas is a business reporter who covers the Washington beat for 15 magazines.

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