THE WHITE HOUSE
Office of the Press Secretary
PRESS BRIEFING BY NATIONAL ECONOMIC ADVISOR GENE SPERLING ON NEW MARKETS INITIATIVE AGREEMENT The James S. Brady Press Briefing Room
10:25 A.M. EDT
MR. DORTON: Today we have National Economic Advisor Gene Sperling to give an on the record briefing about the landmark New Markets Renewal Communities Agreement between President Clinton and Speaker Hastert.
MR. SPERLING: Last night, the President and Speaker reached a landmark agreement on bringing capital and opportunity to America's untapped markets. As you recall, the Speaker had joined the President in November on the last leg of the President's second New Markets trip, and they had pledged to work together on bipartisan legislation. They shook hands on that, as you'll recall, at the State of the Union.
Over the last three to four months, we have been engaged in extensive negotiations with the Speaker's office, as well as with the House Ways and Means Committee, with J.C. Watts and Jim Talent, and members of the Black and Hispanic Caucus in the House of Representatives. The agreement that is reached is bold, comprehensive, and again, would mark an unprecedented commitment to bringing new incentives for capital investment in America's distressed and lower-income communities.
Let me describe the key elements. First of all, on the President's New Markets initiatives that he announced, the New Markets tax credit, which would be up to a 30 percent credit on investment in funds that invest in low-income areas, would be part of this agreement. This was the central tax piece, part of the President's New Market agenda. Secondly, also agreed to was the America's Private Investment Companies, APIC, which is meant to be the domestic component of our domestic counterpart of OPIC -- would provide for larger venture capital investments in distressed economic areas of our country.
The basic design is that where somebody raises a dollar, or let's say, raises $1 million, they are able to get a two-to-one match from the government in guaranteed lending. So, if somebody is able to raise $1 million, the government provides them $2 million of government-guaranteed lending. So, what this does is an incentive to raise equity capital in low-income areas, because for every dollar that's raised, you get $2 of preferred, cheaper financing.
The reason why this model has worked well in the OPIC context and has worked well in the SBIC -- Small Business Investment Company -- context is even though it is a very significant incentive to raise funds, the investors have to lose all their money before the government loses any of its money. And that has aligned the incentives in a way in which there has been very, very little loss to the government from this model. So, that is what the American Private Investment Companies -- or APICs -- does.
The third component of the New Markets package the President put forward was the New Market Venture Capital firms. This is similar to the APICs, except that it is designed to deal with smaller start-up, entrepreneurial firms, and allow them the kind of managerial assistance they need to get off the ground and get started.
Yesterday, when President Mbeki was here, we had Ray Moncrief from Kentucky Highlands, and Bill Bynum from the Economic Development Corporation in the Mississippi Delta. They are two of the leading examples of non-profits that help these kind of start-up companies in low-income areas. So that is one component. These three parts are the President's New Market initiative.
Secondly, there is a significant strengthening and expansion of the existing empowerment zones. Currently -- just to give you a little background on empowerment zones -- there were nine initial empowerment zones in the 1993 budget agreement. That was extended to 11 in the next year. Then, in 1997, 20 empowerment zones were added in the 1997 Balanced Budget Agreement.
So there are currently 31 empowerment zones, but the last 20 had never gotten the main tax incentive that the first nine had, which is a wage credit, which is very significant. It gives a wage credit of 20 percent of the first $15,000 in wages. So for any employee in an empowerment zone, their employer is able to get a $3,000 credit on the first $15,000 of wages. So it's a significant incentive to locate and to hire people in empowerment zones. That wage credit only existed in the initial nine empowerment zones; that will now exist for all 31 empowerment zones.
Also, all the empowerment zones will now have a zero capital gains rollover provision. And what that allows for is for capital gains made within the empowerment zones to be able to be rolled over with no taxes when the investment is put back into the empowerment zones. In addition, there will be a 60-percent capital gains exclusion for investment in small business in the empowerment zones.
So that is what is being done to strengthen the existing 31. Then there will be a new round of empowerment zones, of nine, that will take the total empowerment zones to 40.
The other major component of this is the renewal community proposal, which has been sponsored by J.C Watts, Jim Talent and Danny Davis -- J.C. Watts and Jim Talent are obviously prominent Republican members of Congress; Danny Davis is a Democrat from Illinois. The three of them have had a renewal community proposal for several years. Speaker Hastert has also championed it. This was what he asked us to work with in agreement for doing the provisions the President proposed.
The renewal communities are a form of empowerment zones, but have a slightly different form and a slightly different vision in that it relies on more incentives for streamlining and regulatory relief, and while it does not have as generous a wage credit as the empowerment zones, it does have a wage credit of 15 percent on the first $10,000. So while the credit in the empowerment zones could go up to $3,000, the wage credit in the renewal community could go up to $1,500.
It also has a zero capital gains rate for investments in companies, commercial real estate, as exists now for D.C. What the Speaker and Mr. Talent and Mr. Watts wanted was to have the same zero capital gains incentive that's in D.C. exist for the other 40 renewal communities.
Several members of the Black Caucus, including Chairman Clyburn and Representative Jefferson and Rangel also were entrusted in having different forms of capital gains relief in the renewal communities and empowerment zones. They also would have a commercial revitalization tax credit for taxpayers who rehabilitate or revitalize buildings in the renewal community.
So, the incentives between the empowerment zones and the renewal communities are balanced; they take a somewhat different form; there will be 40 renewal communities. So, where now there are 31 zones, this would grow now to 80. And we allow for two different forums to see what we can learn over the next several years about what works best in attracting investment and job growth.
In addition, there will be an expansion of the low-income housing tax credit. It will be expanded by more than 40 percent to build an additional 180,000 units of affordable housing for working families over the next five years. This had broad bipartisan support. We're very happy that the Speaker agreed to have this in the agreement.
Finally, a provision that was very important to particularly Congressman J.C. Watts was to allow faith-based organizations to qualify for substance abuse funding. This initiative would allow faith-based organizations who provide prevention and treatment programs to qualify on an equal basis with other non-profits, consistent with the 1996 Welfare Reform Act and the constitutional provisions that are relevant.
So, again, this has been an effort that has involved many, many people on both sides. On the Democratic side, Chairman Rangel, Mr. Clyburn; Roybal-Allard from the Hispanic Caucus, Sarah Jefferson -- many people; J.C. Watts and Jim Talent on the Republican side. I want to personally thank Ralph Hellman and Kiki Kless in the Speaker's Office for their good-faith negotiations over the last few months. And I'm happy to take any questions.
Q How much money is involved here? How much money in federal credits, and is there any direct payment to the --
MR. SPERLING: In terms of the budget costs, we are still doing a final estimate. My guess would be that over five years, this would be between $5 billion and $7 billion; and over 10 years, it would be probably close to $20 billion of costs to -- in terms of the federal budget cost.
But what's significant about this is the degree that this would leverage new investment. We believe the New Markets part alone would leverage up to $20 billion of investment. So, this is -- almost all of this investment is in the form of incentives that leverage additional private capital. So when you look at it in that context, it really is a historic agreement in terms of incentives to leverage private capital and to low-income areas.
Q In budget terms, how does that compare to what the President had been proposing? And would there be any offsets, or is it just in the scope of the budgets going forward would be accounted for?
MR. SPERLING: This is obviously larger than -- in terms of the low-income incentives, because it really includes the President's entire empowerment zone proposals, and his New Markets proposals. And it adds the renewal community. So I think when you're doing a bipartisan compromise, there's two ways you can do it. One is, you can both kind of trim down each other's packages; or you can try to work to include, really, the core of both ideas. That was -- the latter's the path we chose, and so obviously, as it includes some of their ideas and our ideas, the package is larger than either the Speaker's or the President's initiatives was alone.
Q Is it about twice as big or three times as big or just slightly larger -- do you have any --
MR. SPERLING: I would guess that our initiatives would have been $10 or $12 billion, and this probably added $5 or $6 billion on things that were important to them. That's over 10 -- I'm sorry -- the Republicans tend to focus on five-year numbers in their estimates, and I think the cost, obviously, because it doesn't start up as fast, would be less over the first five years, probably. We were aiming for $5 billion; it probably came in closer to $6 or $7 billion.
Q Gene, a lot of the stuff here are things we first saw last summer, I guess, when we went to Kentucky and the Delta and around --
MR. SPERLING: Right.
Q -- what are the major programmatic concessions here to the Republicans besides the faith-based substance abuse training?
MR. SPERLING: What are the concessions that we made?
Q Right. Which of this can they call their own, or which of these things are the ones that --
MR. SPERLING: I think the renewal community, the whole renewal community program -- well, let me make a comment. Just getting off the phone with the Speaker's office again, I really think what's very good about this initiative, unlike other compromises I've been in, is that I really believe both sides believe everything in this is positive. These reflect different ideas of reaching the same goal, which is using incentives to leverage private sector capital and private sector investment in lower-income areas and new markets.
This, for us, reflects the Third Way approach the President wanted for poor urban and rural areas, which was neither a laissez-faire approach, nor a direct, top-down government spending approach, but incentives that would encourage the private sector to find profits and create opportunities there.
So I think when you look at the 1997 Balanced Budget Agreement, I think there were clearly things in that package we did not like that we went along with as a means of getting the children's health package and other things. I think there were some things here that will be more controversial on our side and that were a little more difficult for us to agree with. But I think in the end we both felt good about it.
I think the renewal communities was, in a sense, I think they saw it as their version of empowerment zones. And they never meant -- and to their credit, they never meant to take the place of empowerment zones, they always wanted to do this in addition to empowerment zones as another way of using a slightly different set of incentives.
The zero capital gains tax rate was something that the Speaker pushed very hard for, and the agreement on the faith-based organizations providing drug treatment -- these were two things that were important to them and those were some of the things that came down to the end. For us, one thing I may not have mentioned was the second round empowerment zones had never received the funding that we had initially designed for them. They have agreed to do $200 million of funding, appropriations funding, for the 20 empowerment zones that had not gotten the funding. That was very important to us, because obviously the many mayors with empowerment zones felt we shouldn't go on and expand programs until we made whole the pledges made to them.
Getting the New Market tax credit as we proposed it was very important to us. That was a centerpiece of the President's New Markets Initiative, and we very much also wanted to see the low-income housing tax credit included. In the end, those three issues came together with the zero capital gains and the faith-based institutions. And on the faith-based institutions, a lot of that was just careful, painstaking exchanges of drafts until we were able to find something that met the goals of the Republicans and J.C. Watts, but also pass the constitutional test with our Justice Department and the policy test with our HHS.
Q Gene, on the faith-based, what kind of safeguards will there be? As you know, this has been controversial, especially in Texas where it's had questionable success and has been criticized -- there's been criticism that some of the religious groups have crossed the line and used this opportunity to try to spread their beliefs.
MR. SPERLING: What I would say is that our goal was to not go beyond what was in the 1996 Welfare Reform Act, or what was in -- I think Senator Frist's legislation in the Senate that passed by an overwhelming bipartisan vote. All I can tell you is that we were clearly concerned with those issues. We worked in good faith with the Speaker's Office, with our HHS and Justice Departments to make sure that this was something that clearly was acceptable constitutionally. And our goal -- what we were agreeing to was to simply not put them in a worse position than another non-profit and to ensure that the basic constitutional safeguards were met.
And I think the provisions in the language that were in the '96 Welfare Reform and would be in this, we believe would meet that test.
Q Can those safeguards really be assured, though, when they get down to the basic local level?
MR. SPERLING: I think this was something, again, was very important to the Speaker's office. We felt that -- one of the provisions that is in here is that in order for a faith-based organization that has a drug clinic prevention, they have to establish three years of success before they're allowed. So a state is able to certify that they've been in existence -- not just in existence, but that they've been successful for three years. So I think that gives the individual states an ability to look closely at who they're giving the money for, and I think that they were mindful of those concerns. And I think having the three years success requirement provides, we hope, a significant safeguard.
Q The report on the financial markets that Carol Parry is withdrawing her nomination from the Fed, is there any substance to that, or do you know her intentions?
MR. SPERLING: Not to my knowledge.
Q Gene, White House officials have indicated many times that they would not accept a tax cut until you understood the whole budget picture. It's been a rationale for sort of shooting down Republican proposals immediately. Is that still operative, and how is that consistent with what you're doing today?
MR. SPERLING: I think that because -- this was a special bipartisan commitment that the Speaker and the President made really before the State of the Union, and there was an understanding that we would keep this at a reasonable cost, that this would be a stand-alone provision.
And while we still share the basic concern that one should not have large tax cuts without having an overall framework for debt reduction, Social Security, and Medicare, we felt that the importance of ensuring that we used this time when the economy is strong to ensure we're doing more for low-income communities was a reason enough to allow for a $10 billion to $20 billion program over 10 years that has bipartisan agreement and is designed to help people living in the most distressed areas in our country.
Q If I could just follow up, basically, you're saying that it's small enough, the tax cut, and if everybody likes it, then you don't have to worry about the larger budget picture -- is that correct?
MR. SPERLING: No, I said that we had a special agreement on this in light of the relative size, the relative importance, and unlike so many tax cuts that pass in this place where they're motivated by special interests and for special reasons, this is the United States Congress, the Speaker of the House and the President of the United States deciding to put together a package not for the powerful, but for those who lack economic power and seek economic opportunity.
Q Gene, is there any significance to the timing of this, the day before the scheduled China vote -- some members who might stand to benefit as far as getting a new empowerment zone or other incentive package in their districts?
MR. SPERLING: No. We've been close for quite a while. I would say the following -- I think that over the last few weeks the Speaker and the President have had more reason to talk to each other, and I think that as they have talked, that has helped to kind of clear the path for some of the final issues that were being negotiated.
We've exchanged drafts with the Speaker -- offers and counteroffers -- with the Speaker's office probably 10, 12 times over the last few months. The interesting thing was the last -- on Thursday, we had been waiting for a reply to one of our offers for over a week. Normally, Ralph Hellman, their policy director, would send them to me directly.
On this occasion, the Speaker actually brought the offer with him and handed it to the President directly, in the East Room right before they went out for the Africa-CBI trade bill. And they spoke for probably the third or fourth time in 10 days. And I think that those of us who were negotiating felt we had a clear instruction to get to work and close the deal.
So this was a long time coming, and I think trying to get it done before Memorial Day and not letting it drag out into the summer was well in our interests because we still need to actually go through the mechanics of passing it in the House, and then we still have to go to the Senate where we're very hopeful that Senator Daschle and Majority Leader Lott will want to work on this. Clearly, many people in the Senate care about it; clearly, both of their states would benefit significantly from it.
Q But even coincidentally, do you think there's any effect on the China vote, or not?
MR. SPERLING: I don't know. There wasn't anything put in it regarding that. But I can't predict what effect it would have. I would say that people that we've invited down today for the signing who have been instrumental in this include both supporters and opponents of China PNTR.
Q The Secretary of Commerce just said there was a relationship between the timing of this getting resolved and the China vote. Is he wrong on that? About a half hour ago he said very specifically that it is one of the things that moved it along and got it done today.
MR. SPERLING: Well, he may have an opinion on whether it's helpful or harmful, but as the person who's been negotiating this, this has been a long time coming, for over three months, and we would have announced this any day that we could have closed on this agreement.
Q Gene, how do you choose the cities that get the money?
MR. SPERLING: There will be a competition, as done now, in which HUD basically chooses the urban and the Department of Agriculture has chosen the rural ones -- a competition. On the renewal communities, I believe they would take the same structure. I'm not entirely sure how they're going to choose the rural. Clearly, they would also have HUD choose the urban renewal community zones.
But it's been a competition, and in the first round, some of the cities people expected to win didn't, which drew some heat, but I think also showed that it really was a fair competition.
Q Gene, on the zero capital gains rate, you mentioned the District of Columbia is the only place where that exists now. Has the administration gathered any particular information, or has it reflected upon what that has meant for the District of Columbia as far as attracting investment? And on a technical question, I understand that rate applies if you hold the asset for five years.
MR. SPERLING: That's right, and let me make that clear. The D.C. does -- it is designed to not only bring in capital, but to bring in patient capital into lower-income areas. I think that it's hard to tell at this point what the exact impact of the D.C. initiative has been. It only passed a couple of years ago. But it is designed to bring in capital. You do have to hold it for five years, so it's not designed to encourage people to come in, make a quick buck and take their money out. It's encouraged to make people part of the community, investors and participants in the community. And in an empowerment zone, with the zero capital gains rollover, it will hopefully encourage them to reinvest their money.
But I think the fact that we did not know as much about it was one of the reasons that we had not supported this in the past. But again, the Speaker and Watts and Talent made a very strong case for this. And I think part of what we're trying to do is be respectful of different visions of how to bring incentives. They thought this was critical. And again, I should say that there are several Democrats, from Senator Lieberman to Congressman Jefferson, Congressman Clyburn, to some degree, Congressman Rangel, who also support having significant capital gain reductions in low-income areas.
Q Gene, what do you think will work better -- the renewal zones or the empowerment zones?
MR. SPERLING: For me, what I'm excited about was that 1993, there were no zones at all. And then we had nine. So for me to sit here now and announce that we have an agreement, a bipartisan agreement to have 80 of these type of zones with special incentives for investment, I think is just terrific. I hope it works.
I think that it would be -- I think one possibility is that as the years go by, perhaps people will get a sense of what they think works best in each and perhaps there will be legislation to harmonize them in the future, or maybe people will find that it's best to have two different competing models out.
But I think if you believe in this model of giving incentives for private capital, you have to be happy when there is this type of dramatic increase, even with slightly different forums.
Q Gene, you mentioned that there would be regulatory relief in the renewal communities. What is the nature of that relief?
MR. SPERLING: The nature of it is simply that -- the nature of it's simply is that in the empowerment zones, our philosophy on the applications has a lot been to make the community work together, come up with a strategic plan, and present that plan for how they're going to bring their community back.
One of the great things in the empowerment zones were some of the stories that came out of Detroit, for example, where people left meetings where they were working on their applications, saying this was the first time the civil rights groups and the auto companies and the unions had ever been in a room together, strategizing about what was best for Detroit. We think that process is very important for coming up with a strategy.
I think that in the renewal community, I think that their vision of it is that when they're looking for who to award that they would place a slightly higher emphasis on the degree that the community was providing regulatory relief, streamlining. So I don't think that they're inconsistent, but I think that it does reflect slightly different philosophies, and I think theirs goes under the vision that there may be regulatory burdens and zoning burdens that are inhibiting growth in some of these areas, and so they want that to at least be a factor to consider in the criteria. So it's a little bit of a different emphasis on the criteria for selection.
Q You're talking about local permitting and issues like that, not federal regulatory relief or OSHA exemptions or some other --
MR. SPERLING: Right. I think what they're saying is that under their vision of renewal communities when they were looking at the applications, they would give extra points where they saw more of the type of concern, the taking away zoning and regulatory barriers that they thought were not related enough to health and safety, and were simply serving as unnecessary burdens to entrepreneurship in those areas.
Q This isn't the first time someone has stood at that podium and told Americans living in depressed areas that help was on the way and that their lot in life would certainly improve, courtesy of the federal government. First of all, why should those folks believe it today, and at what rate should this help arrive, do you suspect?
MR. SPERLING: I think that what citizens in low-income areas should feel today is that while there is no silver bullet or single instant solution, that at least the federal government, in an election year, has gotten together in a bipartisan way and designed to make a major commitment to bringing in the capital and bringing in the investment opportunities that at least gives those communities a chance to start creating jobs, to start investing, to start bringing economic prosperity there.
I wouldn't -- I think it is a message of hope and opportunity to those areas. And I think that you will find significant excitement at a local level, among the community groups.
If you are a community group that's been trying to get investment into your area and you are out there trying to convince investors, take a chance -- take a chance on this area in the middle of Appalachia, or this poor urban area -- take a chance; you face a stiff challenge. If now you're able to say, hey, if you do that you can get a 30 percent tax credit right off; if you have a fund that invests, for every dollar you raise, you can get $2 of preferred financing from the government.
I think when you put all those things together, you really are empowering many of the local heroes in community groups across the country. You are giving them more tools, more empowerment to build jobs in their area. And I can tell you -- let me tell you, I would encourage you to talk to Ray Moncrief, the CEO of Kentucky Highlands, he was here talking to President Mbeki yesterday; talk to Bill Bynum from the Economic Committee for Corporation for Development in the Mississippi Delta; talk to Cathy Bassant who runs Community Development at Bank America; talk to Mark Willis, who runs community development at Chase Manhattan. I think this was not -- this was a plan that we designed by talking to the people who are on the front lines. And so, I think they've -- and what they told us was to be specific.
They said that under CRA and community development banking, that there had been an improvement in lending and mortgage accessibility. They said the problem was equity capital; there's not enough capital going into low-income areas, and even when there is, there isn't enough of the managerial assistance for the person who has the great idea, but may not be able to build up that network of managerial talent to do it.
And so when we designed the New Market Tax Credit, and when we designed APEC's and New Market capital firms, we were trying to address the need we heard from people on the front lines.
END 10:57 A.M. EDT