Recent Commentary Misrepresents Story of the New Markets Tax Credit

Published by Michael Novogradac on Monday, March 21, 2011 - 12:00am

As a regular reader of Accounting Today, I was disappointed by the commentary published on February 23, 2011 on entitled “Gaming the New Markets Tax Credit,” by Michael Cohn, editor-in-chief.  I believe the commentary was narrow and misrepresented the story of the New Markets Tax Credit (NMTC) program.

The NMTC was created and passed by Congress in 2000 as a tool that the Clinton Administration foresaw would help lower-income communities overcome false perceptions of market risk as well as facilitate additional private capital investments in projects and businesses that could not attract such capital otherwise. According to a Government Accountability Office report on the NMTC program, the great majority of investors have made investments in NMTC projects only because of the availability of the tax credit. Without this tax credit it is nearly certain that few, if any, of the investors that invested private capital in projects that have been funded to date would have done so. In the report “New Markets Tax Credit Program: Promoting Investment in Distressed Communities,” published October 20, 2008 by the CDFI Fund, the department within the U.S. Treasury responsible for monitoring and administering the NMTC program, the CDFI Fund indicates that on average, each $1 of federal tax revenue forgone as a result of the NMTC is estimated to induce more that $14 of investments in low-income communities.

Mr. Cohn and the reports his editorial references make the claim that investors have managed to manipulate the NMTC program. This could not be further from the truth. In fact, one of the criticisms of the program concerns the complicated rules and regulations that govern the program. The rules cannot be manipulated and they are strictly monitored by the IRS and the CDFI Fund.

One of the rules that the editorial attacks is the definition of a low-income community. To make this determination, IRC §45D(e)(1) defines “low-income community” based on a census tract’s poverty rate or percentage of area median family income. The editorial asserts that one of the reasons the poverty rates used are being “manipulated” is because they include students from nearby universities that live in the area.  First, the Census Bureau is very clear in that it doesn’t include students living in dormitories in its poverty calculations.  Furthermore, if, for example, you were to look at the data for the census tract in which the Blackstone Hotel in Chicago is located, and remove all persons in the age range of the typical college student (18-24 years old), the poverty rate would go from 26.3% to 22.3%, still above congressional requirements.

Some have also argued that the family poverty rate would be a better measurement than the individual rate used now. It is widely known that the individual rate is used in nearly every government program because it is believed to be the best measurement of poverty. The family poverty rate looks at the number of families within its sample and each family constitutes a single unit, regardless of family size. So a three-person family in poverty is the same as a seven-person family in poverty; the individual poverty calculation counts 10 people in poverty because it deems everyone in each of those families to be in poverty.  That is the justification for using the individual rate because it presents a more accurate picture of the total number of people in poverty.

In his editorial, Mr. Cohn focuses on a small sample of NMTC projects and ignores the wide variety of projects that have been funded. The diversity of projects that NMTC investments have supported include, among others, charter schools, health-care facilities, condominiums, timberlands, child-care providers, supermarkets, restaurants, museums, hotels, performing arts centers, pharmacies, convenience stores, manufacturers, processors, distributors, trucking companies, printing companies, waste management companies, energy companies, sporting goods stores, business incubators, office buildings, shopping centers, substance abuse treatment facilities, car dealerships, florists and recording studios.  Each of these types of projects not only benefit the local communities by creating jobs, often for low-income persons, but also benefit the local, state and federal economies directly and indirectly by encouraging other investments and through enhanced tax revenues. According to research performed by the NMTC Coalition, an estimated 500,000 jobs have been created or retained by leveraging an average of $8 of investment for every $1 of cost to the federal government. Not only are these jobs created in low-income communities that meet the basic definition above, they are often in communities with high rates of unemployment and other indicia of economic distress. 

While the town of Clarksdale, Mississippi is waiting on its first NMTC investment, the state of Mississippi has received more than $275 million in NMTC investments through 2009 based upon data released by the CDFI Fund. There are lots of good stories about what the NMTC program is doing all over the country.  In fact, the NMTC Coalition highlights some great examples of completed projects in the first 10 years of the program in its 10th Anniversary Report. The entire story of the NMTC program should be considered, including the tremendous benefits it has already delivered to this country’s economically distressed low-income communities.