The small Prince George's County town of Capitol Heights hopes to overcome about 20 years of decline by taking a sophisticated "enterprise zone" approach for its business district that aims to lure developers with extensive tax breaks.

The 73-year-old town is the smallest among the first four jurisdictions across the state designated by the state government as enterprise zones: areas in which businesses will receive special state and federal tax credits to spur recovery.

In many ways, Capitol Heights town employes believe, what happens in Capitol Heights will test the premise of President Reagan's revival formula that once governmental tax relief is granted to enterprise, business will begin to recover.

Enterprise zones are a federal concept for bringing businesses to economically devastated areas. The program has been passed on to the states to administer. Developers are given tax write-offs to reduce start-up costs and to encourage hiring of the unemployed.

The municipal staff members say Capitol Heights, across from the District's eastern tip, has been eroding since the 1960s, when some middle-income residents began moving out and businesses followed.

The town's latest development proposal for about 70 acres of the central business district--a plan that competed with those prepared by much larger cities and several counties that also applied for enterprise zone status--was put together last fall by the "town public administration consultant," who functions as the town manager, and by the assistant manager.

It was typed and edited by the town's clerk-treasurer and receptionist and included drawings by the town's sole police officer. Assistant manager Ralph A. Lange said much of the work was done on the employes' own time in the cramped town hall, a modest building that was once a fire station.

"That was the dream 17 years ago when I first got into office: to change the whole town," said Mayor Leo P. Forami, whose own contribution to economic recovery was a successful campaign in the 1960s to build a Metrorail station in Capitol Heights. "We intended to tear down the old business section and build a new one. This was the idea, and now it looks like the dream is coming true," he said.

Capitol Heights, founded in 1910 as a moderate-income bedroom community, remains largely a town of clapboard houses and small stores. Its largest business is the Ford Lumber Co. "Between that and the Safeway store, that's about our only business," said town consultant Eugene A. Zamer, who left the Town Council in 1967 to begin long-term work on the economic recovery plan.

Few of the town's 3,200 residents work in Capitol Heights, he said.

The kind of business Capitol Heights wants to attract are medical and professional offices and "anything from computer specialists to printers," Zamer said. Construction of a $2.4 million building on Capitol Heights Boulevard to house some of the new offices is scheduled to begin this summer. As an inducement, county and town property taxes for the developer, Quick Concrete Inc., will be greatly reduced.

The same developer plans to build a three-level shopping mall--the town's first--across from the office building, just south of the Metro station.

Zamer regards this as a turnaround for a municipality where the commerce and tax bases have been fading perilously close to extinction. The few mom-and-pop stores that made up the old business strip on Central Avenue began closing in the mid-1960s, and most of those low-rise buildings have been demolished.

Town leaders began looking down the road to recovery in 1967, Zamer said.

"I'll never forget that one council meeting," he said. "I told the mayor and council, 'This town is going to die, and unless you commit yourselves, you're going to end up turning in the charter.' "

Town officials lobbied for--and got in 1980--the subway station that is Prince George's only underground Metro facility. They rezoned an area on the town's northern tip that they wanted to turn into a business district. Last year, they won the enterprise zone designation they hope will result in a rebirth for the town.

The designation, which also has gone to Hagerstown, Baltimore and Allegany, was the key piece in the combined efforts to attract private business to an otherwise unattractive, high-crime area, assistant town administrator Lange said.

When the long-awaited Metro station opened, none of the hoped-for development grew up around it, partly because there were few other inducements to locate there and partly because interest rates were too forbidding, Lange said.

Not relying solely on the tax relief aspect of enterprise zone development, Capitol Heights officials also have arranged for state-backed loans and have applied for a federal Urban Development Action Grant for Quick Concrete. A state economic development official said the town has an excellent chance of getting the grant.

Businesses in the zone will be given an 80 percent tax break on county and municipal property taxes for five years. The state will make up the difference to the town and Prince George's County for 40 percent of the full amount of taxes assessed on those properties.

What that means for Quick Concrete is a $200,000 savings in property taxes on its $2.4 million building over the next five years. For Capitol Heights, it means a $20,000 increase in revenues during that period, and afterward, a new property owner paying the full rate.

All that revenue "is money we would never have gotten" without the enterprise zone, Lange said.

Developers and town officials alike are hoping businesses can be wooed into the new office building by drastically lower rents than comparable buildings would charge elsewhere near a Metro station. A market study showed that with tax breaks, a low-interest loan and a federal grant, Quick Concrete will be able to charge $10 a square foot in rent, compared with the current market rate of $18 for comparable new space, Lange said.

Businesses also get a $500 tax credit for the first year for every new employe they hire. For hiring unemployed and minority workers--a goal of enterprise zone plans--businesses would get a $1,500 tax credit for each worker's first year, $1,000 for the second and $500 for the third year they continue to employ those workers.