Background

Enacted on December 21, 2000, the New Markets Tax Credit is designed to generate $15 billion in new private sector equity investment to encourage private sector investment in low-moderate income rural and urban communities nationwide.  This tax credit will encourage private investors who may never have considered investing in neglected communities to do so.  Because community development credits may not redeem the equity interest for at least five years, capital stays in the community.  The U.S. Treasury Department will make available $15 billion in tax credits to private investors in community development entities-allocating $1 billion in 2001; $1.5 billion in 2002-3; $2 billion in 2004-5; and $3.5 billion in 2006-7.

How the New Markets Tax Credit Works

Investors in a qualified community development entity (CDE) would receive a tax credit for their investment -- worth 30 percent of the amount invested (net present value) -- over seven years.

CDEs include community development corporations (CDC), community development financial institutions (CDFI), small business investment corporations (SBIC), and others.  CDEs would apply to the Treasury Department for an allocation of New Markets Tax Credits  (NMTC). The credits would be awarded competitively based on a CDE's performance, accountability, and record of success providing capital or technical assistance to disadvantaged businesses or communities.

Once a CDE secures an allocation of credits, it would sell the tax credit certificates to private investors. In return, investors would receive a tax credit certificate from the CDE to attach to their federal income tax forms-claiming a 5% tax credit for the first three years and a 6% credit in the last four years.

The CDE would then use the capital generated from the sale to provide loans, equity, and other forms of credit to qualified low-income community businesses, including non-profit corporations, in targeted distressed areas.

A NCCED 2000 survey of CDCs found that ninety percent of respondents believe the New Market Tax Credit would enhance their organization's activities to revitalize the nation's most distressed communities.  Additionally, 87 percent said the structure would work in their communities.  Respondents also stated that they could use $327 million in tax credits to capture private sector investment by participating in the program.

Status

The NMTC was part of the last bill signed by President Clinton on December 21, 2000.   The Treasury Department will publish regulations by early Spring.  In general, the legislation provides for $15 billion in activity from 2001-2007, with $1 billion in activity in 2001.  The term of the credit is seven years and credits are available 5% for the first three years and 6 % for the last 4 years.  The net present value of the credit is 30%. A CDE will have five years to market the credits.

What You Can Do

Support NCCED's Recommendations for New Markets implementation.  NCCED's survey found that the success of the New Markets Initiatives depends on three factors:

1.     Complicated Programs Require Technical Assistance Capacity.  Ninety-three percent of respondents reported that technical assistance in marketing the tax credit would be helpful.  This finding is consistent with other longer-term tax credit programs, such as the Low Income Housing Tax Credit.  Tax credits can be complicated to use and require some time to become fully utilized.  Congress did not include any capacity enhancement for CDEs.

2.     Definition of a Community Development Entity.  Seventy-nine percent of respondents reported that the definition of a "community-based development entity" is helpful.  However, they also emphasized that it must provide safeguards to ensure that quality business and enhanced ownership opportunities truly benefit low-wealth populations.  Respondents said that the definition should target organizations led by low-income residents.

3.     Targeting of Low-Income Places (or Populations).  By targeting both place and population, the NMTC will be able to reach more people in need.

NCCED will be working with the Department of Treasury on the rules to ensure that they help CDEs use the program.  Some of the issues we expect to focus on are:

• Direct Investment by CDE Section (d) and Section (f)(2).  The final bill modifies the definition of Qualified Low Income Community Investments to include capital as well as equity investments (Section (d)(1)(A)).  This is important because it enables a CDE to use New Markets to invest in a business it owns.  Capital flows to enterprises owned by the CDE; equity implies new investments.  This provision, when coupled with the provisions relating to priority for allocations, not only makes it possible for CDEs to provide direct investment, it also gives a priority in the allocation to organizations with a track record.  (A priority also goes to any eligible entity proposing to make investments in un-related businesses.) 
  
  
• Low Income Communities -- Section (e)(1)-(3).  The legislation contains a new formulation on targeting that is not the CDFI definition we wanted but may be able to effectively implement.  The bill includes the basic provision that has been in there from the outset, census tracks with 20% poverty rates or median incomes not exceeding 80% of metropolitan median or the greater of metropolitan median or statewide median for non-metro tracks.  The law authorizes the Secretary to designate low-income areas with census tracks as lowiincome communities if the boundary of such area is continuous, meets the 20/80% test and has a demonstrated lack of investment capital.
  
  There is nothing in the law to prohibit a CDE from applying for more than one area.  Nor does it prescribe a minimum or maximum size for target areas.  While it might be a little cumbersome, it may be possible to apply for a number of target areas and accomplish at least some of what we were aiming for.  It will not be as flexible as target population, but should provide a little more room to maneuver than the original statute.
  

• Recapture -- Section (b) and Section (g).  Under the original legislation, a CDE would be subject to recapture because of the operational issues arising from administering loan or investment funds.  The law (section (b)(1)(B)) provides the Secretary of the Treasury with the authority to determine 'substantially all' regarding use of Credits. With this authority, Treasury will be able to provide guidance to CDE's on requirements regarding spend out rates, returns of investments or loan repayments in the later stages of the credit, and other related issues.
  
  
• Use with Other Subsidies -- Section (i)(1).  The law prohibits use of the credit with other federal direct or indirect tax subsidies.  (At one point the legislation carries a prohibition on any federal subsidies.)
  
  

For more information: National Congress for Community Economic Development, 1030 15^th Street, NW, Suite 325, Washington, DC, 20005, (202) 289-9020, fax (202) 289-7051; http://www.ncced.org or http://www.ncced.org/policy/NMTCanalysis.htm.