History and Purpose
The New Markets Tax Credit (NMTC) was designed to increase the flow of capital to businesses and low income communities by providing a modest tax incentive to private investors. Over the last ten years, the NMTC has proven to be an effective, targeted and cost-efficient financing tool valued by businesses, communities and investors across the country.
The NMTC expires on December 31, 2019. The New Markets Tax Credit Extension Act of 2017, introduced by Neal (D-MA), and Reed (R-NY), would extend the NMTC indefinitely. Senators Blunt (R-MO) and Cardin (D-MD) introduced S. 384, which is nearly identical to its House counterpart.
History of the New Markets Tax Credit and How it Works
The NMTC was authorized in the Community Renewal Tax Relief Act of 2000 (PL 106-554) as part of a bi-partisan effort to stimulate investment and economic growth in low income urban neighborhoods and rural communities that lack access to the patient capital needed to support and grow businesses, create jobs, and sustain healthy local economies.
The NMTC program attracts capital to low income communities by providing private investors with a federal tax credit for investments made in businesses or economic development projects located in some of the most distressed communities in the nation – census tracts where the individual poverty rate is at least 20 percent or where median family income does not exceed 80 percent of the area median.
A NMTC investor receives a tax credit equal to 39 percent of the total Qualified Equity Investment (QEI) made in a Community Development Entity (CDE) and the Credit is realized over a seven-year period, 5 percent annually for the first three years and 6 percent in years four through seven. If an investor redeems a NMTC investment before the seven-year term has run its course, all Credits taken to date will be recaptured with interest.
The Impact of New Markets Tax Credit Investments
- Between 2003 and 2015, $42 billion in direct NMTC investments were made in businesses and these NMTC investments leveraged nearly $80 billion in total capital investment to businesses and revitalization projects in communities with high rates of poverty and unemployment.
- Between 2003 and 2015, the NMTC generated more than 1,000,000 jobs, at a cost to the federal government of less than $20,000 per job.
- By law, all NMTC investments must be made in economically distressed communities. However, more than 72 percent of all NMTC investments have been in communities exhibiting severe economic distress, including unemployment rates more than 1.5 times the national average, a poverty rate of 30 percent or more, or a median income at or below 60 percent of the area median.