New Markets Tax Credit Bill Will Aid Community Revitalization
Clarification on Details Important to Community Groups
Carol Wayman, Allison Moy, and Steve Pruitt
November 22, 2000
The National Congress for Community Economic Development undertook a survey of the leaders of community-based development organizations to learn their opinions on the proposed New Market Tax Credit Initiative (the Initiative). The purpose of the study was to learn if groups supported or opposed the Initiative and its components, and to gain further understanding of how the program might operate when enacted by Congress and signed by President William J. Clinton.
The survey solicited numerous responses and opinions from organizations about the various components of the Initiative. The survey mostly sought nominal data, for example whether or not the state/local government offers a tax credit program; the organization's use of a tax credit program; and support or opposition to various components of the bill. The two interval level variables included the amount of tax credits that could be used by the organization and the age of the organization. The reason for the study was to ascertain if one of the largest new anti-poverty initiatives being considered by Congress in more than a decade is supported by the organizations expected to implement it and benefit from it.
NCCED undertook a written survey on various components of the New Market Package. The survey was faxed to 400 community-based development organizations in mid-August 2000. There are 3,600 community-based development organizations nationwide. For purposes of analysis, NCCED focused on its members that are community-based development organizations, which are nonprofits that focus on low-income areas and serve low-income people. Their boards of directors include community residents who direct the activities of the organization.
NCCED was interested to learn if community organizations had specific concerns regarding the implementation of the New Market Tax Credit. We were also interested to see if geographic focus and/or experience of an organization might lead some groups to support (or oppose) components of the Initiative.
Of the 400 surveys sent out, 79 were returned for a participation rate of 19.75 percent. This is a somewhat lower participation rate than NCCED's usual surveys of CDCs that receive twenty-five to thirty-five percentage response. It is believed that the timing of the survey (e.g., around summer vacations) was the main factor that resulted in a lower turnout. The lack of knowledge about the tax credit might also have lowered participation.
In addition, the experience of the organization (greater than/less than five years of operation) or the location of the organization (rural or urban/suburban) did not indicate a statistically significant difference in responses to any particular factor. This could be due to the small response rate or a negligible difference. The results did not include response rates high enough to calculate a chi-square analysis based on contingency tables.
Of those responding, ninety percent said that the New Market Tax Credit would enhance their organization's activities.
The 79 groups stated that they could use $327 million in tax credit to capture investment. One group estimated that this program could leverage six dollars for every New Market dollar provided.
CDCs report that the New Market Initiative would interest investors and encourage them to invest in community businesses. New Markets would allow organizations to complete more deals, reverse the outflow of cash, and help local businesses find equity support. New Markets could also allow organizations and the businesses they assist with obtaining lower interest, longer-term debt financing. Organizations were supportive of initiatives that allowed investors to invest in CDCs that in turn allowed CDCs to invest in individual business deals. Specific projects could include:
Ø Developing child care facilities;
Ø Raising capital to expand lending and investment programs, including microenterprise capital pools;
Ø Creating commercial, office, hotel, and retail shopping developments;
Ø Developing business incubators;
Ø Renewing business districts in urban and rural areas; and
Ø Redeveloping brownfields.
Complicated Programs Require Technical Assistance Capacity. Ninety-three percent of respondents reported that technical assistance in marketing the New Market Tax Credit would be helpful. This finding is consistent with other longer-term tax credit programs. Tax credits can be complicated to use and require some time to become fully utilized. Grant dollars are more familiar to nonprofits. They write the proposal and wait for the check to arrive. Tax credits provide a license to fish. Community groups still need to find partners and sell them on a new and complicated financial deal. The New Market Tax Credit also requires a multi-year commitment.
The need for technical assistance was reported even by sophisticated organizations. Eighty-eight percent of the respondents have been operational for five years or more, yet fifty-two percent had not used a tax credit program (three percent of respondents did not answer the question), although eighty-three of all respondents reported that their state had a tax credit program.
Tax credits often require bringing in outside expertise. Of the forty-three percent of CDCs that use a tax credit program, seventy-seven percent employ consultants for implementing the program. Sixty five percent reported that they would partner with other community development entities. In fact, it was noted that the program would require collaboration to be truly effective.
As in most designs, the details make all the difference. The survey pointed out a few "sticky points" that might need further clarification to ensure that the nation's 3,600 community based organizations (and thousands of other' community development entities) could use the program.
Definition of a Community Development Entity. Seventy-nine percent of respondents reported that the definition of a "community-based development entity" would be helpful to their organization. However, some organizations reported that the definition was too broad, and would encourage more for profit organizations to set up nonprofits to benefit from deals. Government entities might also be permitted to participate which would decrease funding for true CDEs.
Safeguards would need to be in place to ensure that quality business and enhanced ownership opportunities truly benefited the low-wealth populations. Respondents said that the definition should direct the program to low-income led organizations. There was some question of how the credit would position CDCs in the deal. There was some disagreement on the New Market's use of other government program definitions. Programs at the U.S. Department of Housing and Urban Development, the Office of Community Services, and the Community Development Financial Institutions support some groups that others do not consider community-based or serving low-income people. Other CDCs report good relationships with those programs and support their definitions. Other very successful CDCs are unable to access those funding sources due to the regulations on primary mission or census tract and prefer a broader definition.
Targeting of Low-Income Places (or Populations). Eighty-one percent of respondents support assistance provided to groups that serve populations or places that are low-income. Rural areas report not being able to use the program if it is only limited to place-based (census tract) assistance. In rural areas, poverty is spreading regionally and therefore cannot be measured by census tract. Additional comments noted that the targeting should be as flexible as possible to avoid further poverty concentration.
Complication of the New Markets Program. Sixty-five percent reported that they would partner with other CDE organizations to implement the credits. The list of potential partners included banks, state community development associations, intermediaries (like LISC, CDFIs, and NCCED), businesses, and local and regional organizations.
This study is the first of its kind to explore the opinions of community development entities on the New Market Initiative. It indicates that, overall, the responding CDCs are supportive of the New Market Initiative. Responding CDCs would be able to use at least $327 million in credits from the program. However, their use of the program is contingent upon targeting assistance to groups directed by low-income community residents, operating in low-income areas, and serving low-income populations. Due to the complexity of the program, technical assistance would be needed to ensure the effective use of the credits and program components for those who need it the most.
Future analysis from more community development entities (in addition to CDCs) could provide a further picture on the possible impact of the New Markets Program. Also, more detailed information needs to be shared with community development organizations. In some questions, nearly 35 percent did not answer questions due to their lack of familiarity with the Initiative's components.
For further information, contact Carol Wayman, Director of Policy at NCCED at (202) 289-9020 x112.