This week, the Congressional Research Service (CRS) released “Recently Expired Community Assistance Related Tax Provisions (“Tax Extenders”), a short policy analysis of the New Markets Tax Credit, Empowerment Zones, Qualified Zone Academy Bonds, and American Samoa Economic Development Credit. The report appears to be identical to another CRS report on tax extenders issued in May of 2014. CRS reports are public domain reports prepared at the request of Congress, and while it is not the policy of CRS to proactively release their reports to the public, they often “leak”, as was the case with this report.
The brief report mostly gives an overview of the mechanics of the NMTC along with a short legislative history, but it also includes several mild criticisms of the NMTC that merit a response. From the CRS report:
Opposition to the NMTC is partly based on the belief that corporations and higher-income investors primarily benefit from the provision or that the NMTC leads to an economically inefficient allocation of resources. For instance, while banks and other investors might benefit directly from the credit, Freedman (2009) found that benefits of the NMTC to selected low income communities were modest. The study concluded that poverty and unemployment rates fall by statistically significant amounts in tracts that receive NMTC-subsidized investment relative to similar tracts that do not. From a national economic perspective, the impact of the NMTC would be greatest in the case where the investment represents net investment in the U.S. economy rather than a shift in investment from one location to another. Gurley-Calvez et al. (2009) found that corporate NMTC investment represented a shift in investment location but a portion of individual NMTC investment (roughly $641 million in the first four years of the program from 2001 to 2004) represented new investment.
Is the NMTC an economically inefficient allocation of government resources? Clearly not. Every dollar of tax revenue forgone by the federal government generates eight dollars of investment in low income communities. You will be hard pressed to find an economic development program that leverages private sector investment more efficiently toward the achievement of a specific policy goal.
CRS also cites a Matthew Freedman study analyzing the spillover effects of the NMTC. Freedman’s 2009 study – which compared census tracts receiving NMTC investments to similar census tracts without NMTC investments –found modest but significant impacts in census tracts with NMTC-investments. Freedman analyzed the early years of the program, using CDFI Fund transaction data for NMTC projects closing between 2003 and 2009. In order to determine whether a NMTC project improved conditions in a low income census tract, Freedman compared poverty and unemployment data between two time periods: the 2000 Census and the 2005 to 2009 American Community Survey. This approach was problematic, as Freedman concedes:
“The neighborhood outcomes of interest are measured as changes between 2000 and 2005-2009. To the extent that NMTC-subsidized projects take place later in the decade or take some time to have an impact on neighborhood conditions, these outcome measures may not fully capture their effects and the IV estimates presented in subsequent sections should be scaled up. In other words, the overlap in the period during which we observe outcomes and the period in which investment occurs may introduce a degree of measurement error that will tend to bias me toward finding no effects of investment on neighborhood conditions.”
The reality is that it takes time for spillover effects to manifest in communities and become apparent in the latest economic data. Though Freedman’s conclusions were largely positive, 2009 was probably too early to study the long term effects of the program.
A second study cited by CRS (Gurley-Calvez – $) analyzed the extent to which the NMTC increases total investment in the United States (rather than simply shifting investment from wealthier communities to poorer communities or crowding out investment). As they put it:
“Our analysis addresses whether the NMTC increases investment among participating investors, which represents an overall increase of investment in the economy to the extent that NMTC investors are not crowding out investments that would have been made by others. Substantial crowd out seems unlikely as the NMTC was established to attract funds to communities that traditionally receive suboptimal levels of investment. Furthermore, the selection criteria for awarding tax credits emphasize funding projects and areas that would not have received investment funds in the absence of the credit.”
Gurley-Calvez found that a portion of investments – $641 million between 2001 and 2004 – represented “new” investments would not have otherwise occurred in wealthier communities. This makes a certain amount of intuitive sense. One of the reasons why the NMTC was established is that there are good business opportunities in underserved low income communities, but because of market failures and lack of investor familiarity, private sector capital cannot reach those untapped opportunities. Low income communities’ inability to access capital is a Catch-22 that perpetuates economic distress and impedes economic growth, sometimes for generations at a time. By providing a shallow incentive against federal taxes, the NMTC helps mitigate this market failure and ease the flow of capital to underserved areas. Connecting investors to economically underutilized regions is someone analogous to opening up trade between two territories. Removing capital barriers allows investors to realize new opportunities to meet untapped demand, theoretically generating “new” investment that would not have otherwise occurred elsewhere. Furthermore, once investors establish a foothold in these previously untapped “new markets”, familiarity grows and future investments are more likely to occur.
From a policy perspective, the extent which the NMTC is “moving investment around” and generating “new” investment is somewhat beside the point, as the NMTC was principally intended to direct investment to low income communities, regardless of the source of the investment. Thus far, the Credit has been very successful at achieving this goal, delivering over $60 billion in capital to low income communities. Transaction-level data from the CDFI Fund shows that while all NMTC investments target low income communities, more than 74% of NMTC investments go to severely distressed communities with high levels of poverty and unemployment that far exceed statutory requirements for economic distress. The program is working as intended, delivering capital to businesses in some of the most distressed communities in the country and financing projects that would not reach completion “but for” the gap financing provided by the NMTC. A 2009 GAO study found that 88% of NMTC investments in low income community businesses would not have occurred without the NMTC subsidy.
