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On the Eve of its 20th Anniversary, Reauthorization of the NMTC would Ensure Continued Support of Low-Income Communities
As the 20th anniversary of the creation of the new markets tax credit (NMTC) by the Community Renewal Tax Relief Act of 2000 nears, the incentive is even more important and vital for targeting investments in low-income communities than ever before. The COVID-19 pandemic has shed light on the continued, and growing, disparity between low-income communities and other areas.
The NMTC is authorized only through the end of calendar year 2020. Community development advocates are calling for making the NMTC permanent, through NMTC legislation and as part of broader bills like H.R. 2, the Moving Forward Act. H.R. 2 is $1.5 trillion House infrastructure package that highlights the importance of affordable housing and community development when considering a well-rounded, comprehensive plan for future infrastructure development. On the legislative front, COVID-19 relief will likely be a main priority along with funding the government past Sept. 30. Extending and expanding the NMTC should not get lost in the shuffle because the incentive can play a key role in the country’s long-term economic recovery, ensuring that low-income communities are not left behind.
The Effect of the NMTC to Date
The NMTC has generated significant positive results and benefits for low-income communities. With the recent calendar year (CY) 2019 NMTC allocations, the Community Development Financial Institutions (CDFI) Fund has made 1,254 awards, totaling $61 billion in tax credit authority over the life of the incentive. The $61 billion includes $3 billion in American Recovery and Reinvestment Act of 2009 allocations and $1 billion of special allocation authority for the recovery and redevelopment of the Gulf Opportunity Zone. In July, the CDFI Fund announced $3.55 billion in NMTC allocation awards for the CY 2019 round. Awards were made to 76 community development entities (CDEs), from a pool of 206 applicants who requested $14.7 billion in tax credit allocation authority. That translates to a little more than one-third of all applicants being awarded NMTC authority with the amount requested exceeding 4.1 times the amount of NMTC authority available.
The group of awardees, which are headquartered in 30 states and the District of Columbia, includes 12 minority CDEs (15.8 percent of awardees) and 14 rural CDEs (18.4 percent). Historically, for every $1 invested by the federal government, the NMTC incentive generates more than $8 of private investment. The NMTC statute requires that at least 85 percent of qualified equity investment (QEI) proceeds be invested in qualified low-income community investments (QLICIs). The CY 2019 awardees have all committed to investing at least 95 percent of QEI dollars into QLICIs–this translates into $450 million more than the minimum amount required that will be invested in low-income communities at a time when these areas are being disproportionately impacted by the COVID-19 pandemic.
The 20th anniversary of the incentive’s creation provides an opportunity to reflect on the positive effects of the NMTC. Of the 337 CDEs that have received allocations since 2001, 30 have received more than $500 million that has been used to support operating business–the bulk of awards, approximately 75 percent, is or will be used for this purpose–and finance and support real estate development, finance other CDEs, purchase loans from other CDEs, and provide financial counseling and other services in low-income communities on a national and multi-state level. As shown below, the focus has not always been on financing and supporting operating businesses–in 2011, the percentage of awards likely to be used for real estate activities dropped below 50 percent of the total allocations awarded for the first time since a breakdown of where investments went was provided.
The monthly NMTC Qualified Equity Investment Report made available by the CDFI Fund further corroborates the demand for NMTCs. The August reports indicates that of the $61 billion in allocation authority awarded to date, only approximately $5.3 billion or 9 percent remains to be issued to investors. This amount includes the CY 2019 allocations of $3.5 billion awarded in July.
The New Markets Tax Credit Coalition also released recently the 2020 New Markets Tax Credit (NMTC) Progress Report. This report, the 16th edition to date, details a survey of 65 CDEs. The responding CDEs reported using $2.7 billion in NMTC allocation in 2019 to finance 288 investments that amounted to $4.5 billion in investment to low-income communities and 1.7 million people served. The financing resulted in 57,414 jobs, 35,440 of which are permanent. The progress report provides a useful snapshot of the good work done by the NMTC, until the next annual release of the CDFI Fund’s summary report on NMTC investments is available. Data provided in the most recent summary report, which details activity through fiscal year 2017, reinforces the flexibility of the NMTC with respect to the types of businesses financed with flexible or non-traditional rates and terms.
The Next Allocation Application Round
Stakeholders are already considering when the $5 billion 2020 round, the final round currently authorized, will open. In the last five rounds, the quickest turnaround from prior round award announcement was 61 days in 2014. If the next round were to follow suit, that would mean the 2020 round would open the week of Sept. 14. The longest turnaround time in the last five rounds was 166 days in 2017. If the next round followed that same timing, that would mean a 2020 round opening at the beginning of 2021. The CDFI Fund has said publicly that it expects to open the 2020 round late summer/early fall. That would mean the turnaround time would have to be similar to 2014, which puts the round opening sometime after Labor Day with a due date likely late October/early November before the Thanksgiving holiday.
As the country continues to weather the COVID-19 pandemic, the importance of the NMTC is clear to those in Congress who have championed its expansion and permanence. The Moving Forward Act proposes to expand and make the NMTC program permanent, providing an additional allocation of $500 million for the 2019 allocation round, increasing the total allocation from $3.5 billion to $4 billion. The bill also provides a temporary increase in allocation amounts for 2020 ($7 billion) and 2021 ($6 billion). Finally, the bill sets the allocation amounts at $5 billion for 2022 and all years thereafter. Beginning in 2022, the legislation would index the allocation amount to inflation and provide alternative minimum tax relief to taxpayers claiming the NMTC.
Increased allocation authority means that many more CDEs will receive the NMTC awards needed to increase investments in low-income communities. Permanence brings the added benefit of increased efficiency for the NMTC, resulting in increased equity pricing and more subsidies per tax credit dollar to low-income community businesses. Democratic presidential candidate Joe Biden had also shown his support for the NMTC, releasing platforms for his administration that includes a set of policy recommendations that calls for expanding and making permanent the NMTC and doubling the funding for CDFIs.
As the end of the fiscal year nears, the two likely vehicles two which NMTC reauthorization can be attached are a COVID-19 relief bill, which itself would likely be tied to a continuing resolution to fund the government past Sept. 30, or a year-end tax extenders bill. Whatever the vehicle, to ensure the NMTC continues to be a powerful tool used to drive investment to distressed, low-income communities, and that the outsized demand for credits is met, permanent authorization should be enacted.