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NMTCs Yields Rise with Lower Tax Rates
The new markets tax credit (NMTC) is often compared to the low-income housing tax credit (LIHTC), and commentators often note that the NMTC sells for less than the LIHTC on a dollar per credit basis. This difference is largely attributable to the fact that the NMTC reduces income tax basis and the LIHTC does not. In essence, the NMTC is a taxable credit.
The taxable credit nature of the NMTC creates an interesting result when combined with tax reform. If top tax rates are reduced in tax reform, assuming the same dollar price per NMTC, investor yields rise!
Why does this happen? Because the NMTC is a taxable credit, investors generally have overall gain at the end of their investment term. If top tax rates go down, the gain recognized in year seven and beyond is taxed at a lower rate. This translates into an overall rise in investor yield.
Novogradac & Company ran some calculations to assess the magnitude of the effect. Depending on the assumptions, investor yields will rise 50 to 100 bps.