To promote freedom, fairness, and economic opportunity by establishing a National Enterprise Zone system to promote prosperity in economically depressed areas.

July 22, 2004

Mr. BROWNBACK introduced the following bill; which was read twice and referred to the Committee on Finance

To promote freedom, fairness, and economic opportunity by establishing a National Enterprise Zone system to promote prosperity in economically depressed areas.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

(a) SHORT TITLE- This Act may be cited as the `National Enterprise Zone Act of 2004'.

(b) TABLE OF CONTENTS- The table of contents of this Act is as follows:

Sec. 1. Short title; table of contents.

Sec. 2. Findings.

Sec. 3. National Enterprise Zones.

SEC. 2. FINDINGS.

The Congress finds--

(1) a higher level of private sector economic activity is necessary to alleviate poverty and unemployment in economically depressed regions of the United States;

(2) removing tax disincentives to reside or do business in economically depressed areas is an effective means of promoting economic growth, development, employment, a higher standard of living, and a higher qualify of life in economically depressed areas;

(3) lower marginal tax rates on work, savings, and investment in economically depressed regions will promote employment, business activity, and development in economically depressed areas; and

(4) improved taxation of business investment in plants, equipment, and inventories in economically depressed areas will encourage business to operate in those areas.

SEC. 3. NATIONAL ENTERPRISE ZONES.

(a) IN GENERAL- Chapter 1 of the Internal Revenue Code of 1986 is amended by inserting after subchapter Y the following new subchapter:

`Subchapter Z--National Enterprise Zones

`Sec. 1400M. National Enterprise Zone designation procedure.

`Sec. 1400N. National Enterprise Zone eligibility criteria.

`Sec. 1400O. Effect of National Enterprise Zone designation on individuals, estates, and trusts.

`Sec. 1400P. National Enterprise Zone individual taxable income.

`Sec. 1400Q. Effect of National Enterprise Zone designation on corporations.

`Sec. 1400R. National Enterprise Zone corporate taxable income.

`Sec. 1400S. Conduct of an active trade or business within a National Enterprise Zone by corporations, partnerships, and sole proprietors.

`Sec. 1400T. Definitions and special rules.

`SEC. 1400M. NATIONAL ENTERPRISE ZONE DESIGNATION PROCEDURE.

`(a) NOMINATED ZONE- The governor of a State or United States Territory or the Mayor of the District of Columbia may nominate one or more zones for consideration by the Secretary. This nomination shall take the form of a written application submitted in the manner and form prescribed by the Secretary. Such application shall contain all of the information necessary to determine whether a nominated zone meets the National Enterprise Zone eligibility criteria.

`(b) APPLICATION DEADLINE- The nomination application shall be submitted after January 1 and before February 28 of the year prior to the proposed effective date of the zone.

`(c) DEFICIENCIES DEADLINE- The Secretary shall inform the nominator of any procedural noncompliance by the nominator with the application procedures or of any needed information that may be missing from the application by issuing a deficiency notice no later than April 30 of the year that the application was submitted.

`(d) CURING DEADLINE- The nominator shall cure any deficiencies set forth in the Secretary's deficiency notice by May 31 of the year in which the deficiency notice was issued. Failure to timely cure such deficiencies shall constitute the withdraw of the nomination application.

`(e) DESIGNATION DEADLINE- The Secretary shall make a determination with respect to any nomination application no later than September 30 of the year in which the application was received. If the Secretary finds that a nominated zone meets the National Enterprise Zone eligibility criteria set forth in section 1400N, then the Secretary shall designate such zone as a National Enterprise Zone no later than September 30 of the year that the application was submitted. If the Secretary finds that a nominated zone does not meet the National Enterprise Zone eligibility criteria set forth in section 1400N or that the application does not contain sufficient information to determine whether a nominated zone meets the National Enterprise Zone eligibility criteria set forth in section 1400N, then the Secretary shall decline to designate such zone as a National Enterprise Zone and shall, not later than October 31 of the year the application was submitted, provide to the nominator a rejection notice setting forth with particularly the reasons why the application was rejected.

`(f) NO PREJUDICE WITH RESPECT TO PREVIOUSLY NOMINATED ZONES- Whether a zone or a substantially similar zone has been nominated in previous years shall not be regarded by the Secretary as relevant when evaluating whether to designate a nominated zone as a National Enterprise Zone.

`(g) APPLICATION CONTENTS- The application submitted by the nominator shall contain--

`(1) an enumeration of all of the census tracts to be included in the zone;

`(2) census data for each tract with respect to median household income in that tract;

`(3) census data for each tract with respect to the poverty rate in that tract;

`(4) the laws of the State or Territory that conforms to the requirements of section 1400N; and

`(5) such other information as the Secretary may require.

`(h) EFFECTIVE DATE OF ZONE DESIGNATION- The effective date of the designation of any zone as a National Enterprise Zone pursuant to this section shall be January 1 of the year following its designation. A designation shall continue indefinitely, subject to annual eligibility reviews under subsection (i).

`(i) ANNUAL ELIGIBILITY REVIEW- Between January 1 and April 30 of the sixth year of a National Enterprise Zone's initial effective date and each year thereafter, the Secretary shall undertake a review of each National Enterprise Zone designation whereby the Secretary shall determine whether the zone continues to meet the National Enterprise Zone Eligibility Criteria established by section 1400N. If this review determines that a National Enterprise Zone no longer meets the National Enterprise Zone Eligibility Criteria established by section 1400N, then the Secretary shall revoke the designation effective the end of the calendar year. No later than June 30 after such determination, the Secretary shall issue a notice to the nominator and to all taxpayers making National Enterprise Zone elections with respect to such zone in the taxpayer's previous taxable year that the designation will be revoked at the end of the calendar year for such National Enterprise Zone. The Secretary shall publish the annual eligibility review results for all National Enterprise Zones no later than June 30 of each year.

`SEC. 1400N. NATIONAL ENTERPRISE ZONE ELIGIBILITY CRITERIA.

`(a) NATIONAL ENTERPRISE ZONE ELIGIBILITY CRITERIA- A National Enterprise Zone must--

`(1) be composed of contiguous census tracts (none of which may be part of an existing National Enterprise Zone);

`(2) have greater than 10,000 residents;

`(3) have a poverty rate 2 times the national poverty rate;

`(4) have a median household income less than 60 percent of the national median household income;

`(5) have an unemployment rate 2.5 times the national average unemployment rate; and

`(6) be located entirely within a State or Territory that the Secretary certifies has enacted conforming laws within the meaning of subsection (e).

`(b) SPECIAL RULE FOR SMALL INCORPORATED CITIES OR SMALL COUNTIES- Paragraph (2) of subsection (a) shall not apply to a zone if the zone comprises an entire incorporated city or an entire county provided that such incorporated city or county existed on the date of enactment of this subchapter.

`(c) NO OVERLAP WITH EXISTING ZONES OF DIFFERENT TYPE- No part of a National Enterprise Zone may also be a part of--

`(1) a zone designated under subchapter U as an Empowerment Zone, an Enterprise Community, or a Rural Development Investment Area; or

`(2) a zone designated as a District of Columbia Enterprise Zone under subchapter W.

The nominator of a proposed National Enterprise Zone may indicate in his application that some or all of an existing zone described in the previous sentence shall lose its designation as an Empowerment Zone, Enterprise Community, Rural Development Investment Area, or District of Columbia Enterprise Zone upon its designation as all or part of a National Enterprise Zone. Such existing zone shall lose such designation upon its designation as all or part of a National Enterprise Zone in a manner prescribed by the Secretary.

`(d) DATA- No later than November 30 of each year, the Secretary shall designate which data as of which date shall be used by nominators to perform the calculations required in subsection (a) in applications made the following year.

`(e) CONFORMING LAWS- A State or Territory shall be deemed to have enacted conforming laws if--

`(1) it is in substantial compliance with the No Child Left Behind Act of 2001; and

`(2) its tax laws provide for either--

`(A)(i) a substantially similar income tax base with respect to business income arising from the conduct of an active trade or business within a National Enterprise Zone as that provided for Federal income tax purposes; and

`(ii) tax rates no higher than that imposed on businesses without a National Enterprise Zone; or

`(B) the imposition of no income tax with respect to business income arising from the conduct of an active trade or business within a National Enterprise Zone.

`SEC. 1400O. EFFECT OF NATIONAL ENTERPRISE ZONE DESIGNATION ON INDIVIDUALS, ESTATES, AND TRUSTS.

`(a) INDIVIDUAL ALTERNATIVE NATIONAL ENTERPRISE ZONE TAX- If for any taxable year, any individual taxpayer who is resident in a National Enterprise Zone for the entire taxable year has any National Enterprise Zone taxable income, then, in lieu of any tax imposed by section 1 or section 55, such individual taxpayer may elect, in a form prescribed by the Secretary, to pay a tax for such taxable year which shall consist of the sum of--

`(1) a tax computed on the taxable income of the individual taxpayer for such taxable year reduced by the amount of National Enterprise Zone tentative taxable income of such individual taxpayer for such taxable year (if greater than zero), at the rates and in the manner as if this subsection had not been enacted; plus

`(2) a tax of 17 percent of the National Enterprise Zone taxable income for the taxable year.

`(b) INDIVIDUAL TAXPAYER- For purposes of this section, an individual taxpayer shall include an--

`(1) individual;

`(2) married individual filing a joint return;

`(3) surviving spouse;

`(4) head of household;

`(5) married individual filing a separate return;

`(6) estate; or

`(7) trust.

`(c) CERTAIN INDIVIDUALS, ESTATES AND TRUSTS-

`(1) JOINT FILERS- In the case of married individuals filing a joint return, both individuals must have been residents in a National Enterprise Zone for their entire taxable year in order to be eligible under this section.

`(2) INDIVIDUALS RESIDENT IN MULTIPLE ZONES- Individuals who are residents of 2 or more National Enterprise Zones during their taxable year but are residents of a National Enterprise Zone for their entire taxable year shall be eligible under this section.

`(3) ESTATES AND CERTAIN TRUSTS- The estate of an individual and testamentary trusts of an individual shall be eligible under this section if the decedent was a resident of a National Enterprise Zone for at least two complete taxable years prior to the individual's death.

`SEC. 1400P. NATIONAL ENTERPRISE ZONE INDIVIDUAL TAXABLE INCOME.

`(a) NATIONAL ENTERPRISE ZONE INDIVIDUAL TENTATIVE TAXABLE INCOME- National Enterprise Zone tentative individual taxable income shall be equal to taxable income (as defined by section 63 and computed without regard to section 179(e)) plus the additions set forth in subsection (b) less the deductions set forth in subsection (c).

`(b) ADDITIONS TO TAXABLE INCOME TO DETERMINE NATIONAL ENTERPRISE INDIVIDUAL TENTATIVE TAXABLE INCOME- The following amounts shall be added to taxable income for purposes of determining National Enterprise Zone individual tentative taxable income--

`(1) any amount excluded by section 103;

`(2) any amount excluded by section 105;

`(3) any amount excluded by section 106; and

`(4) any amount excluded by section 125.

`(c) DEDUCTIONS FROM TAXABLE INCOME TO DETERMINE NATIONAL ENTERPRISE INDIVIDUAL TENTATIVE TAXABLE INCOME- The following amounts shall be deducted from taxable income for purposes of determining National Enterprise Zone individual tentative taxable income--

`(1) the taxpayer's distributive share of any partnership item (within the meaning of section 702) that is not attributable to the conduct of an active trade or business within a National Enterprise Zone;

`(2) the taxpayer's pro rata share of any S corporation item (within the meaning of section 1366) that is not attributable to the conduct of an active trade or business within a National Enterprise Zone; and

`(3) income derived from business that does not constitute the conduct of an active trade or business within a National Enterprise Zone.

`(d) NATIONAL ENTERPRISE ZONE INDIVIDUAL TAXABLE INCOME- National Enterprise Zone individual taxable income for any taxable year shall be National Enterprise Zone tentative individual taxable income for such taxable year less--

`(1) net savings (as defined in subsection (e)) for such taxable year;

`(2) capital gains for such taxable year subject to tax under section 1(h), but only if the property the disposition of which gave rise to the gain was acquired by the taxpayer at a time the taxpayer was a resident of a National Enterprise Zone;

`(3) expenditures made to acquire inventory property during such taxable year;

`(4) the amount, if any, the taxpayer elects to deduct pursuant to 179(e) for such taxable year that exceeds the limitations in section 179(b);

`(5) deductions reduced pursuant to section 68; and

`(6) amounts by which the exemption was reduced pursuant to section 151(d)(3).

`(e) NET SAVINGS-

`(1) GENERAL RULE- Net savings means deposits or contributions to nonqualified financial accounts less withdraws or distributions from nonqualified financial accounts held.

`(2) NONQUALIFIED FINANCIAL ACCOUNTS- A nonqualified financial account means an account maintained with a bank (other than a checking account), a regulated investment company, an investment bank, or a brokerage firm that is not a qualified trust or account within the meaning of subchapter D.

`(f) TAX UPON LEAVING ZONE- The cumulative sum of net savings deducted pursuant to subsection (d)(1) (if greater than zero) shall be includible in gross income and taxed at a 17 percent rate upon a person becoming a non-resident of a National Enterprise Zone.

`SEC. 1400Q. EFFECT OF NATIONAL ENTERPRISE ZONE DESIGNATION ON CORPORATIONS.

`(a) CORPORATE ALTERNATIVE NATIONAL ENTERPRISE ZONE TAX- If for any taxable year, any corporation (other than an S corporation) has any National Enterprise Zone taxable income, then, in lieu of any tax imposed by section 11 or section 55, such corporation may elect, in a form prescribed by the Secretary, to pay a tax which shall consist of the sum of--

`(1) a tax computed on the taxable income of such corporation for the taxable year reduced by the amount of National Enterprise Zone tentative corporate taxable income for such taxable year (if greater than zero), at the rates and in the manner as if this subsection had not been enacted; plus

`(2) a tax of 17 percent of the National Enterprise Zone taxable income for such taxable year.

`SEC. 1400R. NATIONAL ENTERPRISE ZONE CORPORATE TAXABLE INCOME.

`(a) IN GENERAL- National Enterprise Zone Corporate tentative taxable income for any taxable year shall be taxable income (computed without regard to section 179(e)) arising from the conduct of an active trade or business within one or more National Enterprise Zones during such taxable year.

`(b) ADJUSTMENTS- National Enterprise Zone Corporate taxable income for any taxable year shall be equal to National Enterprise Zone Corporate tentative taxable income for such taxable year less--

`(1) expenditures made to acquire inventory property held in a National Enterprise Zone in such taxable year; and

`(2) the amount, if any, the taxpayer elects to deduct pursuant to 179(e) for such taxable year that exceeds the limitations under section 179(b).

`SEC. 1400S. CONDUCT OF AN ACTIVE TRADE OR BUSINESS WITHIN A NATIONAL ENTERPRISE ZONE BY CORPORATIONS, PARTNERSHIPS, AND SOLE PROPRIETORS.

`(a) ACTIVE TRADE OR BUSINESS- For purposes of this subchapter, the conduct of active trade or business means the conduct of a trade or business that derives no more than 5 percent of its gross income from passive activities (as defined by section 469(c)).

`(b) INCOME AND EXPENSES WITHIN A NATIONAL ENTERPRISE ZONE-

`(1) GROSS INCOME- Gross income from within a National Enterprise Zone shall mean--

`(A) compensation for labor or personal services performed by a natural person who is based in a National Enterprise Zone;

`(B) rentals or royalties from property located in a National Enterprise Zone;

`(C) gains, profits, and income derived from the sale of inventory property held within a National Enterprise Zone; and

`(D) income from the sale of property that is produced, created, fabricated, manufactured, extracted, processed, cured, aged, grown, or harvested within the zone.

`(2) EXPENSES- Expenses shall be allocated and apportioned to the income producing activities to which they are related. Expenses which are not allocable or apportioned to any specific income producing activities shall be allocated on the basis of gross income such that the ratio of the expense allocated to the National Enterprise Zone is the same as the ratio of gross income within the National Enterprise Zone to all gross income within the United States of the taxpayer or, in the case of a corporation that is a member of a controlled group of corporations (within the meaning of section 1563), the controlled group of such taxpayer.

`(c) ALTERNATIVE FORMULARY METHOD-

`(1) IN GENERAL- A corporation (or controlled group in the case of a corporation that is a member of a controlled group), partnership, or sole proprietor that so elects, in a form and manner prescribed by the Secretary, may determine the share of its income, expense, and other items attributable to the conduct of an active trade or business within a National Enterprise Zone by multiplying its apportionment ratio by the amount of the income, expense, and other items for purposes of determining its National Enterprise Zone Corporate taxable income.

`(2) APPORTIONMENT RATIO- The apportionment ratio shall be the ratio of--

`(A) the sum of--

`(i) the remaining basis in depreciable property held in zone for the entire taxable year;

`(ii) the inventory held in a zone at the end of the taxable year; and

`(iii) the compensation paid to zone-based employees during the taxable year; to

`(B) the sum of--

`(i) the remaining basis in depreciable property held in the United States for the entire taxable year;

`(ii) the inventory held in the United States at the end of the taxable year; and

`(iii) the compensation paid to employees within the United States during the taxable year.

`(3) MANDATORY USE OF ALTERNATIVE FORMULARY METHOD- If--

`(A) a taxpayer derives greater than 10 percent of its gross income from sales to related parties (as defined in section 1313(c)); or

`(B) expenses of a taxpayer attributable to purchases from related parties (as defined in section 1313(c)) account for greater than 10 percent of its expenses,

then the taxpayer must use the alternative formulary method described in paragraph (1).

`SEC. 1400T. DEFINITIONS AND SPECIAL RULES.

`(a) BASED IN A NATIONAL ENTERPRISE ZONE- A person is based in a National Enterprise Zone if that person works out of an office, factory, store, or other facility located in a National Enterprise Zone not less than 80 percent of the hours worked by such person in a calendar year. In the case of a person that works for an employer for less than the full calendar year or was engaged in the conduct of an active trade or business within a National Enterprise Zone for less than the full calendar year, then a person shall be deemed based in a National Enterprise Zone if that person worked out of an office, factory, store, or other facility located in a National Enterprise Zone not less than 80 percent of the hours worked by such person while employed by such employer or engaged in the conduct of an active trade or business within a National Enterprise Zone.

`(b) INVENTORY-

`(1) INVENTORY PROPERTY- For purposes of sections 1400P and 1400R, inventory property shall mean property described in section 1221(a)(1) and any expenditures capitalized pursuant to section 263A.

`(2) NO DOUBLE COUNTING- The deductions afforded by section 1400P(d)(3) and 1400R(b)(1) are in lieu of the deduction provided upon the sale of inventory property.

`(c) NOMINATOR- Nominator means the governor of a State or Territory or the Mayor of the District of Columbia who nominated a zone by application to be a National Enterprise Zone.

`(d) RESIDENCY- For purposes of this subchapter, an individual is a resident in a National Enterprise Zone for an entire taxable year if--

`(1) such individual's principal residence (within the meaning of section 121) is located within the National Enterprise Zone; and

`(2) such individual was present (within the meaning of section 7701(b)(3)) in the National Enterprise Zone no fewer than 245 days during the taxable year.'.

(b) CONFORMING AMENDMENTS-

(1) Section 179 of the Internal Revenue Code of 1986 is amended by inserting at the end the following new subsection:

`(e) NO LIMITATION ON AMOUNT IN NATIONAL ENTERPRISE ZONES-

`(1) IN GENERAL- The limitations under subsection (b) shall not apply with respect to property placed in service in a National Enterprise Zone.

`(2) PROPERTY REMOVED FROM NATIONAL ENTERPRISE ZONES- Property to which this subsection applies which is removed from service within a National Enterprise Zone but not disposed of by the taxpayer shall be treated as if it had been, as of the date of the removal, disposed of by the taxpayer and repurchased by the taxpayer at a price equal to what its remaining basis would have been if the election under this section had not been exercised with respect to the property.'.

(2) Subsection (d) of section 243 of such Code is amended by adding at the end the following new paragraph:

`(5) A domestic corporation which is subject to taxation under this chapter shall include any corporation organized under the laws of the Commonwealth of Puerto Rico for any taxable year for which such corporation has made an election under section 1400Q.'.

(c) CLERICAL AMENDMENT- The table of subchapters for chapter 1 of such Code is amended by inserting after the item relating to subchapter Y the following new item:

`Subchapter Z--National Enterprise Zones.'.

(d) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after January 1, 2006.

END