On Sunday, April 26, the Portland Press Herald ran the second article in its two-part series on the Maine New Markets Capital Tax Credit. The two articles question many of the aspects and investments of the state program, and also question the efficacy of the federal New Markets Tax Credit (NMTC) program. As the NMTC Coalition’s focus is exclusively on the federal credit, we will confine our comments to the efficacy of just the federal NMTC program.
First and foremost, there is a clear record of success when it comes to the federal New Markets Tax Credit. The federal NMTC is a tool that is available to economically distressed communities, promoting revitalization by encouraging the private sector to make investments in areas they otherwise would not, which has resulted in the creation of nearly 750,000 jobs between 2003 and 2013.
The Portland Press Herald article—by selectively citing elements from a 2014 report by the U.S. Government Accountability Office (GAO), as well as a flawed report by former Senator Tom Coburn— fails to capture an understanding of what is necessary to rebuild our low income communities and address the challenges of attracting investments in economically distressed areas where the private markets provides insufficient capital. The principal impediment to economic growth in many of our urban neighborhoods and rural communities is the lack of patient, flexible capital.
The NMTC is the principal federal tool for increasing the flow of private sector capital to distressed communities. In fact, a 2007 survey conducted by the GAO acknowledged that 88 percent of federal NMTC investors would not have made their investments, if not for the incentive of the Credit. The survey also found that 69 percent of investors had not previously made any investments in these communities, which illustrates that the federal NMTC is doing what was intended—encouraging private investments in distressed communities and neighborhoods to drive economic growth, and to create and retain jobs.
Under the federal NMTC, investors receive a modest return, while businesses and economic development projects receive substantial benefits from NMTC financing. The return on the federal credit is 39 percent over seven years, a little over six percent per year. Federal NMTC investments are in some of the poorest communities in the country and this return is at low end of the annual return for similar risk based capital, which is six to 13 percent annually.
Additionally, federal law requires Community Development Entities (CDEs) to invest at least 85 percent of Qualified Equity Investments (QEIs) into projects. According to the GAO’s survey for 2011-2012, fees and retentions only totaled 7.1 percent of total NMTC Qualified Equity Investments (QEIs). Most recently, an Urban Institute Report, which was cited in the 2014 GAO report that was mentioned in the news article, indicated that CDEs invested 97 percent of QEIs into businesses and projects. In other words, the two most recent GAO reports on NMTC indicate that investment rates are well above the requirements established in law and regulation.
Since the federal NMTC was implemented in 2003, $31 billion in direct NMTC investments were made in businesses, and these investments leveraged more than $60 billion in total capital investment in businesses located in communities with high rates of poverty and unemployment. The federal NMTC program has achieved significant, tangible results in terms of job creation and retention, access to affordable and healthy food, improved health care facilities, as well as jumpstarting the manufacturing sector.
Unlike state administered programs, the federal program is closely monitored by the CDFI Fund and IRS at the U.S. Department of the Treasury. Intense competition and consideration of prior CDE performance incentivizes efficiency. In the most recent competition for Credits, the CDFI Fund received more than $23 billion in applications for Credits, when only $3.5 billion was authorized for 2013. The allocation application includes questions related to prior performance of the applicant, including how past NMTC use has benefited low income businesses and distressed communities. The application requires applicants to quantify past loans and investments. If CDEs cannot demonstrate they have used NMTC financing wisely, they will not receive future allocations.
While the NMTC Coalition is unaware of the specifics surrounding the Maine deals, we support all efforts to ensure the federal program is being used efficiently and effectively, spurring the private investments needed to serve the economic and community development needs of low income communities.