GAO Report Ignores Time Value of Money Discount of NMTC

Published by Michael Novogradac on Tuesday, January 8, 2013 - 12:00am

Once again, the Government Accountability Office has issued a report that ignores the time value of money discount inherent in the new market tax credit (NMTC). On page 24 of its report, released today, “Tax Expenditures: Background and Evaluation Criteria and Questions” the GAO states:

“First, as we reported in 2010, when the demand for NMTCs was highest the tax credits sold for $0.75 to $0.80 per dollar, according to CDE representatives we interviewed. Therefore, the federal subsidy was reduced by 20 percent to 25 percent before any funds were made available to CDEs.” (emphasis added)

The report fails to point out that the NMTC federal subsidy is claimed over seven years, and the annual tax credit is slightly back-loaded, as the credit percentages are 5 percent for the first three years, then 6 percent for the next four years. As such, the effective cash cost to the federal government of the new markets tax credit over time versus an upfront cash grant is less than the nominal amount of tax credits.

If you assume the federal government’s blended borrowing rate is 2 percent, then the time value of money discount of the NMTC as opposed to an upfront cash grant is 6 to 8 percent. This means that 30 to 40 percent of GAO-identified reduction is attributable to the time value of money.

For additional analysis of the comparison of the seven year NMTC to an upfront cash grant program, I invite you to review the NMTC Working Group’s “Special Report: NMTC Program Outperforms Comparable Cash Grant Program.”