New Markets Tax Credit Coalition Blog
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.
As discussed on the NMTC Coalition membership call this afternoon, the Broad Tax Extenders Coalition is collecting signature for a sign-on letter that will be sent to Congress the week of November 10th. The letter–open to associations, coalitions, and nonprofits–will urge Congress to act during the Lame Duck session and extend the tax provisions that expired at the end of 2013.
To sign your organization on to the letter, please click the link below and fill out the appropriate information, listing your organization exactly how you would like it to be listed on the letter. Please note that only your organization’s name will be listed on the final letter. The other information collected is used for keeping a record of who signed a particular organization on to the letter.
Senate Finance Committee Chairman Ron Wyden (D-OR), today issued the following statement on the need to renew expired tax provisions to give certainty and relief to American workers and businesses:
“Today, American businesses of all sizes are making their required quarterly tax payments to the IRS and trying to chart their path forward for 2014 and beyond. At a time when entrepreneurs and innovators should be identifying investments to support their business strategies and pursuing growth opportunities, Congress’s failure to renew expired tax provisions is forcing these companies to make “no interest loans” to the federal government through higher taxes. It’s unacceptable that inaction by Congress is denying American business the clarity and certainty they need to plan for tomorrow.
This is a real issue that is impacting those at the heart of our country’s economic growth.
How? For example, because Congress has not renewed increased expensing limits under Section 179, industrious Oregon wine makers will be forced to pay more for a new wine press needed today to expand their business, or they may be forced to choose between new equipment and hiring new employees.
Also, with renewable energy incentives like the wind productive tax credit in question, hundreds of millions of dollars in job-creating investments are at risk, and the United States is falling further behind its economic competitors, like Germany and China, in transforming its energy markets.
Finally, congressional inaction also severely complicates the ability of underwater homeowners to reduce their mortgage debt without being socked with a big tax bill.
Today, with taxes due, continuing inaction on renewing expired tax provisions is diverting business investment, driving unnecessarily higher taxes, and slowing economic growth. We cannot let this uncertainty drag on.
The Finance Committee came together this spring to produce the EXPIRE Act in a cooperative, bipartisan way. It wasn’t easy, but it got done. Now is the time to revive the EXPIRE Act and renew these important tax provisions while we push ahead on comprehensive reform.”
Federal and state NMTC financing will improve financial stability of Head Start program serving over 1,000 children.
Portland, Ore. United States Senator Ron Wyden applauded the success of an $18 million investment in federal and state New Markets Tax Credits for Albina Head Start.
The investment—a partnership with National Community Fund, a Community Development Entity affiliated with United Fund Advisors, — will enable Albina Head Start to lower its debt burden and expand services to low-income families. The investment consists of $10 million in federal and $8 million in state New Markets Tax Credits.
A Comment on Reports by GAO and Senator Coburn
Today, two reports were released on the New Markets Tax Credit (NMTC), one by the Government Accountability Office (GAO) and another by Senator Tom Coburn (R-OK), respectively “Better Controls and Data are Needed to Ensure Effectiveness” and “Banking on the Poor.” In both his press release and report, which were released concurrently with the GAO report that he commissioned, Senator Coburn offered his long-standing criticism of the NMTC, claiming that businesses that receive financing are examples of the government choosing favorites.
WASHINGTON, D.C. –Two reports were released on the New Markets Tax Credit (NMTC), one by the Government Accountability Office (GAO) and another by Senator Tom Coburn (R-OK), respectively “Better Controls and Data are Needed to Ensure Effectiveness” and “Banking on the Poor.” In both his press release and report, which was released concurrently with the GAO report that he commissioned, Senator Coburn offered his long-standing criticism of the NMTC, claiming that the projects result in the government choosing favorites.
“Washington doesn’t pick the winners and losers when it comes to the NMTC. It is a market driven program based in a philosophy that communities know best, they just need access to capital,” said Bob Rapoza, spokesperson for the NMTC Coalition. “Through public-private partnerships, the Credit brings community revitalization projects to fruition that likely would not have gone forward if not for NMTC financing.”
The NMTC Coalition further substantiates this claim by pointing to a prior report in which the GAO found that 88 percent of investors would not have made their investments, but for the incentive of the Credit.
The Coburn report notes that the impetus for the New Markets Tax Credit is to help struggling communities. He contends it does not succeed in this, writing that “Most of the country, however, is considered a low-income community for purposes of the program.” However, data from the U.S. Department of Treasury indicates that the NMTC has delivered more than $60 billion in capital to businesses and revitalization projects nationwide in some of the poorest communities; these investments have generated over 550,000 jobs and of the 74,134 census tracts in America, only 30,099 (41%) qualify. Moreover, according to the NMTC Coalition’s survey of 2013 NMTC projects, 80 percent of investments went to severely distressed census tracts that far exceed the statutory requirements for investment.
The Senator’s report profiled 19 projects to which it objected. Yet, analysis of the profiles of those communities indicate they are among the poorest in the country, with an average poverty rate of over 32 percent and an unemployment rate of 11.7 percent at the time the project was financed. In these high distress communities, the NMTC delivered $770 million in financing and created over 7,700 jobs.
“The hallmark of the credit is its flexibility, which allows for diversity in projects based on needs and opportunities identified by citizens and local leaders—the vast majority of which include child and health care facilities, grocery stores, and manufacturing facilities,” said Rapoza.
Like the report from Senator Coburn, the GAO report ignores the challenges of investing in low-income communities and the success that the NMTC has in spurring revitalization in urban neighborhoods, small towns and farming communities. Furthermore, GAO does not provide an accurate analysis of the operations of the NMTC. In one such case, the GAO overestimated an investor return by 400 percent through faulty analysis. In this case, GAO authors used incomplete information based on one example in a second-party report that they could not independently verify. Consequently, GAO implies the financial structures used in NMTC transactions allow investors to receive an unduly large return on their investments, claiming a 24 percent annual return to the investor, when actual NMTC investor returns align with market rates of 6 to 7 percent annually.
“Unfortunately, some conclusions are based on misinterpreted data and flawed calculations. The Coburn report builds on those errors to cast a sensationalized and inaccurate portrayal of the NMTC,” Rapoza adds.