If you missed the news, here it is again: the New Markets Tax Credit became a permanent part of the Internal Revenue Code when President Donald Trump signed the One Big Beautiful Bill last week. We thought it would be worth looking back on the origins of the program.
Below are some excerpts from our 20th Anniversary Report (2020).
NMTC ORIGINS
PREDECESSORS TO THE NMTC
The roots of the NMTC can be traced back to the 1980s. Beginning with the Tax Reform Act of 1986 (P.L. 99-514), Congress increasingly looked to the tax code to encourage community development activities. The 1986 Act established the Low Income Housing Tax Credit (LIHTC), which is now the nation’s largest financier of affordable housing.
The Omnibus Reconciliation Act of 1993 (P.L. 103-66) permanently codified the LIHTC and also created Renewal Communities, Empowerment Zones and Enterprise Communities, programs with defined geographies for revitalization. The 1993 act also created a pilot tax incentive for community development corporations. These programs not only served to assist individuals and families obtain affordable housing and build and grow small businesses, they helped provide investments in communities that revitalize local economies.
A TAX INCENTIVE FOR COMMUNITY DEVELOPMENT
The NMTC might not exist without the advocacy of a coalition of community development organizations called the Community Development Tax Credit Coalition (CDTCC), a national association of local, regional, and national organizations promoting and practicing economic development in economically disadvantaged urban and rural communities.
The coalition came together in December of 1998 with the shared vision of providing hard-pressed communities with new tools for revitalization. The economic prosperity of the 1990s passed over many long-distressed inner cities and rural areas. In 1999, nine years into an unprecedented period of economic expansion, it became clear that the tidal surge of economic activity was concentrated in a relatively small number of geographic areas. For many communities, the economic boom was a distant echo.
Before incorporating the coalition, many of its members had worked together with Rapoza Associates to advocate for the NMTC’s predecessor, the Community Development Corporations Tax Credit (CDCTC), a pilot program enacted in 1993. Under the program, individuals and corporations could claim a credit on their federal income taxes for cash grants and loans made to 20 CDCs selected competitively by the U.S. Department of Housing and Urban Development. Investors could claim a five-percent tax credit over ten years based on the amount their invested in the CDC. Investors could also claim their investment as a charitable deduction.
Many of the country’s most innovative and effective CDCs used the CDCTC to raise funds to encourage start-up businesses, support entrepreneurs, and create quality jobs with benefits. The pilot demonstrated that a generalized community development tax credit could succeed in delivering resources to community development organizations with roots in the War on Poverty and long- standing ties to the communities they served.
“The demonstration shows that the 1993 CDC tax credit can be a very good vehicle for promoting community development and that it should be reauthorized and expanded,” said the Brookings Institution in their 1998 report, “The CDC Tax Credit: An Effective Tool for Attracting Private Resources to Community Economic Development.”
THE PRESIDENT WEIGHS TAX INCENTIVES FOR COMMUNITY DEVELOPMENT
On the heels of his 1996 welfare overhaul, President Clinton believed strongly that he needed to do more to help low-income areas and people and began developing a new, broad, community development policy agenda. Within this framework, the idea of a community development tax credit began to gain momentum in the administration. The success of the Historic Rehabilitation Tax Credit and the Low-Income Housing Tax Credit in rehabilitating hundreds of buildings and creating hundreds of thousands of units of affordable housing also provided momentum for the effort.
As the White House worked to pass welfare reform, the Administration also first proposed a tax credit for Community Development Financial Institutions (through the newly created CDFI Fund).
The idea evolved over the next two years, and eventually, the policy shop gravitated to the idea of a tax credit modeled after the CDC Tax Credit. A September 8, 1998, memo from Bruce Reed and Elena Kagan to the White House Domestic Policy Council Staff mentioned the Brookings research:
The policy paper also suggested once again proposing a CDFI Tax Credit. Eventually, the ideas would blend into a general purpose tax credit for community development.
THE NEW MARKETS TAX CREDIT EMERGES
The White House first proposed the “New Markets Tax Credit” in their FY 1999 budget:
“To help spur $6 billion in new equity capital, this tax credit is worth up to 25 percent for investments in a wide range of vehicles serving these communities, including community development banks, venture funds, and the new investment company programs created by this initiative (see below). A wide-range of businesses could be financed by these investment funds, including small technology firms, inner-city shopping centers, manufacturers with hundreds of employees, and retail stores.”
In his 1999 State of the Union address, the Clinton stated, “I ask Congress to give businesses same incentives to invest in America’s new markets that they now have in to invest in foreign markets,” referring to Overseas Private Investment Corporation program, which incentivized investment in emerging markets.
On August 5, 1999, U.S. Representative Charles Rangel (D-NY) and U.S. Senator Jay Rockefeller (D-WV) introduced the New Markets Tax Credit Act of 1999 in their respective chambers. Senator Rockefeller made the following introductory remarks on the Senate Floor that day:
-Senator Jay Rockefeller (D-WV), August 5, 1999
The initiative also drew strong support from two leading Republicans, Congressman J.C. Watts (R- OK) and Congressman Jim Talent (R-MO), who introduced their own “New Markets Initiative” bill that – among other things – would have created a “New Markets Tax Credit.”
Congressman Jim Talent (R-MO), 1999
To promote this and other policies to support low-income communities, the President embarked on “New Markets” tour of low-income areas in 1999.
At a November 4, 1999 stop at Englewood High School in Chicago, Clinton was joined by local Democratic Representatives Bobby Rush (D-IL) and Danny Davis (D-IL), and Congressmen Talent (R-MO) and Watts (R-OK).
Poverty Tour (1999)
Negotiations continued throughout the next year, with a few key points of contention. A May 18, 2000 memo by Bruce Reed on “Outstanding Issues” with the New Markets Initiative described some of the more colorful points of contention between the White House and Ways and Means Committee Chairman Bill Archer (R- TX):
ENACTMENT
THE FINAL DETAILS AND ENACTMENT
With members of both parties on board, the New Markets initiative gained momentum. One of many outstanding questions: How large should they make the NMTC? How much of an incentive was needed to bring private sector investors into areas they had avoided for decades?
“When the FY 2001 budget was released, I called Michael Barr, Treasury’s point person on the NMTC,” recalls Bob Rapoza. “Before I take credit for this increase in the budget,” he joked, “can you tell me how it happened?” Barr told Rapoza that it was the President himself who had requested a larger program.
The Administration and Congress eventually reached a deal on a $25 billion package of community development incentives, the Community Renewal Tax Relief Act of 2000. The legislation authorized $15 billion toward the creation of the New Markets Tax Credit from 2001 to 2007.
The program was not added as a permanent part of the tax code. Efforts to extend the program would fall to the newly created New Markets Tax Credit Coalition (formerly the Community Development Tax Credit Coalition).
IMPLEMENTATION
President Clinton signed the NMTC into law in December of 2000, so the job of implementing the pro- gram fell to the incoming Bush administration. The program resided at the Department of Treasury’s Community Development Financial Institutions (CDFI) Fund, a relatively new agency created in 1994 by Riegle-Neal Interstate Banking and Branching Efficiency Act.
Until the launch of the NMTC, the CDFI Fund had mostly administered grant programs supporting the growing CDFI movement. The Department of Treasury had very little under its purview in terms of programmatic administration of community development initiatives, so this was new territory. However, the program benefited from the experience of key Treasury officials, such as Eric Soloman and Paul Handelman, who had experience monitoring and drafting guidance for other economic development tax credits.
“Treasury and the IRS are regularly lobbied by lawyers, accountants and consultants representing investors, developers, syndicators, and property management companies, but not tenant groups or groups representing low-income people,” Handelman told the Northern California Record in 2016. “In drafting guidance, I tried, along with others, to keep in mind the ultimate beneficiaries of the programs and how our guidance will affect them. I like to think that I kept Treasury focused on the true purpose of the programs, which is to help low-income people and low-income communities.”
The IRS released the first temporary regulations, along with the Community Development Entity (CDE) certification application in December 2001. For the next two years, CDFI Fund staff – along with Department of Treasury officials at the Internal Revenue Service – crafted procedures for administering the program, including the allocation application, program guidance, and regulations. By the time the first application round opened in September of 2002, the CDFI Fund had certified 1,021 CDEs.
The IRS would release its final NMTC regulations in December of 2004.
FIRST AWARDS & PROJECTS
FIRST ROUND AWARDS
In September 2002, the CDFI Fund received 345 applications requesting a total of $26 billion in allocation. The CDFI Fund awarded the $2.5 billion first round of NMTC allocation in March of 2003 to 67 CDEs from 40 states and the District of Columbia. The CDEs ranged from nonprofit CDFIs already active in the CDFI Fund’s programs to organizations with track records in historic tax credits and the low-income housing tax credit. Of the 67 CDEs, 22 targeted national or multi-state service areas while 45 targeted specific states or localities. Award sizes ranged from $500,000 to Northside Community Development Fund (Pittsburgh, PA) to $170 million to Phoenix Community Development and Investment Corporation, the largest ever award.
- New Orleans,
- LA
- (2003)
- CDE(s): Advantage Capital
- Wheeling,
- WV
- (2003)
- CDE(s): National Trust Community Investment Corporation
- Rock Hill,
- SC
- (2003)
- CDE(s): National Trust Community Investment Corporation
- Kapolei,
- HI
- (2003)
- CDE(s): Advantage Capital
- Durham,
- NC
- (2003)
- CDE(s): National Trust Community Investment Corporation
While the CDFI Fund announced the first NMTC awards in spring of 2003, most CDEs did not finalize allocation agreements until the fall of 2003. As is not uncommon with new programs, the deployment of the first round allocation was slower than the breakneck speed we can expect from today’s program. By the end of 2004, CDEs had deployed just over $1.1 billion of the $2.5 billion in first round allocation. For comparison, in 2018, CDEs deployed $5 billion in allocation in under 12 months.
That being said, as we noted in our inaugural NMTC Progress Report (2005), CDEs financed high impact projects in long-distressed communities in the first year of the program, including: the creation of the first new supermarket and shopping center in a low-income community in 30 years; economic revitalization and thousands of jobs in an urban community where past efforts foundered; development of a new facility for daycare and other community services that shows the potential to lead the way for other development; business expansion, job creation and opportunity in the heartland; and revitalization of the timber industry in northern Maine.
