Study Suggests Key to Spurring Community Development is Size of NMTC Investment, Not Quantity of Investments

Published by Michael Novogradac on Tuesday, January 19, 2016 - 12:00am

Bigger may be better when it comes to investing in distressed communities, according to research released Dec. 22, 2015 entitled “What Matters More for Economic Development, the Amount of Funding or the Number of Projects Funded? Evidence from the Community Development Financial Investment Fund.” The report’s authors answered the title question definitively as it relates to the New Markets Tax Credit (NMTC) program, based on data from California.

Findings

The study attempted to quantify the effectiveness of the NMTC in attracting new business to disadvantaged areas. Using the publicly available National Establishments Time Series database (which tracks establishments over time using Dun and Bradstreet archival establishment data) alongside confidential CDFI Fund-provided data on the exact location of each NMTC allocatee, the authors determined that a higher level of NMTC funding per project resulted in an increase in the number of new businesses in the distressed communities. At the same time, the authors found that the number of projects funded has no effect on attracting new businesses to the area.

More specifically, the authors found that for the NMTC, the greater the average amount of funding per project, the greater the average number of new businesses that locate in eligible areas. However, they found no statistically significant effect of the number of NMTC projects funded on the number of new businesses in that area.

Conclusions

This suggests that the size of the tax credit investment, not the number of NMTC projects funded, is the driver of growth in distressed communities. In particular, the lack of a cap is a primary factor in considering the effectiveness of the NMTC program. However, as the authors themselves noted, there has not been much research done using location-specific data on the impact that the NMTC has had on revitalizing distressed neighborhoods. As such, this report is an exciting first glimpse at what specific and accurate data can tell us about the effect of NMTC projects in distressed communities. Additionally, the authors caution that their findings are based on data from only two programs in California, and they encourage researchers to continue their work and consider other parts of the U.S. to determine whether the impact of the NMTC is similar in all census tracts. One clear finding of the study, though, is the relative effectiveness of the NMTC in achieving its goals.