NMTC Has Record of Success and Wide Support: The Time for Permanence is Now
Published by Michael J. Novogradac on Monday, October 2, 2023
The new markets tax credit (NMTC) has clearly earned a permanent place in the nation’s tax code.
The community development tax incentive–enacted in 2000, with the first round of allocation awards in 2003–has a 20-year record of spurring high-impact, catalytic investments in low-income communities. These results have led local and state community development stakeholders to endorse the NMTC, while generating ever-increasing bipartisan, bicameral Congressional support.
Yet the tax credit has been relying on periodic legislative extensions. The time is now to make the NMTC permanent–and doing so would drive even greater investment into low-income communities.
Making the NMTC permanent would encourage many existing investors to increase their capital commitments, while motivating new investors to enter the market. The result would be increased competition among investors, which would further enhance the incentive’s capital-raising power and drive ever greater investment in low-income communities.
Making the NMTC permanent would also incent investors to devote more resources to boosting organizational infrastructure. The same is true for other stakeholders, such as professional service providers, which would further strengthen and streamline capital raising, closings, fundings and ongoing compliance. The greater certainty provided by permanency would lead community development entities (CDEs)–the linchpin of NMTC induced community development–to include NMTC capital raising strategies in their long-term planning, which would facilitate earlier and firmer commitments to deserving community development investments. All of this, individually and in combination, would further enhance transactional and operational efficiency, driving greater and more strategic investment in low-income communities.
Conversely, uncertainty about the long-term availability of NMTCs–particularly when the incentive nears an expiration date (in this case, 2025)–leads stakeholders to embrace the incentive with a touch of caution, which limits long-term investments in organizational infrastructure and forces CDEs to expend resources searching for alternative capital sources with greater long-term predictability.
“It’s sort of difficult when you’re tracking extensions–with permanency, you could beef up the infrastructure of your internal programs,” said Leah Rogan, managing director of NMTCs at Enterprise, one of the nation’s largest CDEs. “Permanency is a big driver and [making the NMTC permanent] would allow the initiative to be more proactive instead of reactive.”
Earlier this year, congressional supporters of the NMTC introduced legislation in the House and Senate to permanently extend the incentive. The New Markets Tax Credit Extension Act of 2023 (S. 234, H.R. 2539)–which would more aptly be called the New Markets Tax Credit Permanency Act of 2023–would make the credit an indefinite part of the Internal Revenue Code (IRC) with annual allocation rounds of $5 billion, adjusted for inflation. The legislation would also allow taxpayers to use the NMTC to offset the alternative minimum tax, which would open the gates for investment from individuals.
Support for the legislation is widespread. As of Sept. 1, there were 78 co-sponsors in the House (48 Republicans and 30 Democrats) and 18 co-sponsors in the Senate (nine Republicans, nine Democrats). This is the sixth straight session of Congress in which there has been strong, bipartisan support for NMTC permanence.
Proven Community Development Tool
There’s little debate about the effectiveness of the incentive. The Community Development Financial Institutions (CDFI) Fund–which administers the credit–says that for every $1 invested by the federal government, the NMTC generates $8 in private investment. In the first 18 rounds of allocation (plus an extra round of recovery NMTCs in 2008), the CDFI Fund awarded $71 billion in tax credit issuance authority, which led to a broad range of development, including the construction of 77 million square feet of manufacturing space, 118 million square feet of office space and 77 million square feet of retail space. More importantly, the use of NMTCs continues to evolve–with increased emphasis on rural investment, investments in underserved states and supporting businesses that have notable social impact in addition to job creation.
Congress demonstrated its belief and recognition of the effectiveness of the NMTC by authorizing additional allocation authority to help spur recovery from natural disasters and economic turmoil. For example, when Congress passed the American Recovery and Reinvestment Act of 2009–legislation to assist in the recovery from the Great Recession–it added an extra $3 billion in NMTC allocation authority.
While making the NMTC permanent has broad support, the challenge is finding a legislative vehicle to do so.
History of Starts and Stops
The Community Renewal Tax Relief Act of 2000 (the final piece of legislation signed by President Bill Clinton) authorized $15 billion in NMTC issuance authority through 2007. Following the CDFI Fund’s $3.9 billion allocation in October 2007 (the fifth such round), the program expired.
The following year, during the Great Recession, the NMTC was extended for two years–followed months later by legislation to create an additional $3 billion in NMTCs to help spur economic recovery in distressed areas.
Then began a series of scrambles to keep extending the incentive: In late 2010, Congress extended the credit for two years. In early 2013, the NMTC received a one-year retroactive extension, followed by another one-year retroactive extension in 2014.
In 2015, the NMTC was given a bit of statutory predictability–when the Protecting Americans from Tax Hikes (PATH) Act extended the tax incentive for five years. This was followed by yet another one-year extension in 2019. Then in 2020, the NMTC was given another period of stability, the one we are in now, when it was extended for five-years in the Consolidated Appropriations Act, 2021.
It’s been nearly 23 years since enactment, with eight subsequent extensions (two of them retroactive and only two for more than two years). With the 19th round set for allocation this fall, the NMTC has been a constant part of the community development sphere, but without the same long-term assurance other incentives have enjoyed.
Compare the NMTC’s history to that of the low-income housing tax credit (LIHTC), originally enacted in October 1986 for three years. After short-term extensions of one year and then six months, the LIHTC expired June 30, 1992.
Like the NMTC, the incentive had bipartisan support and legislation that included provisions to make the LIHTC permanent passed Congress twice. Both bills–which included myriad other provisions–were vetoed by President George H.W. Bush. But barely a year after its final expiration, the LIHTC became an indefinite part of the IRC when Clinton signed the Omnibus Budget Reconciliation Act of 1993.
The LIHTC took less than seven years from introduction to receive permanence. Permanent status was a catalyst for the incentive as it encouraged more investors to commit capital to affordable housing, credit allocating agencies (through the National Council of State Housing Agencies) to develop national recommended practices and state housing agencies to further refine and target the use of the tax incentive.
LIHTC permanency also bolstered equity pricing. The ultimate beneficiaries of better equity pricing were the residents of LIHTC-financed housing, as more housing was built, more lower income households were served and more amenities and services could be provided. A classic win-win-win situation.
Make NMTC Permanent in 2023
Congress should make the NMTC permanent this year. Policy-wise, doing so would increase investment in low-income communities. Practically speaking, making the NMTC permanent this year would cost (for budget scoring purposes) notably less than enacting permanency in 2024, 2025 or later.
Novogradac’s New Markets Tax Credit Working Group–which is open for membership on Novogradac’s website–is working for permanency and has asked the CDFI Fund to also consider combining allocation rounds in coming years to ensure the CY 2025 allocations are made in 2025.
Making the NMTC permanent would create long-term stability, increased competition and better institutional infrastructure.
The NMTC has been on probation since 2000. The time for permanence is now.
New Markets Tax Credit Legislative Timeline
Dec. 21, 2000
President Bill Clinton signs the Consolidated Appropriations Act, 2001 (which included the Community Renewal Tax Relief Act), creating the NMTC with $15 in allocation through 2007.
Dec. 22, 2005
President George W. Bush signs the Gulf Opportunity Zone Act of 2005 into law, creating Gulf Opportunity Zones (GO Zones) and issues an additional $1 billion in NMTC authority over 2005-2007 to CDEs whose significant mission is GO Zones.
Oct. 3, 2008
President Bush signs the Emergency Economic Stabilization Act of 2008, which extends the NMTC for two years through 2009.
Feb. 17, 2009
President Barack Obama signs the American Recovery and Reinvestment Act of 2009, which provides an additional combined $3 billion in allocation for 2008, 2009 rounds as part of an economic stimulus package.
Dec. 17, 2010
President Obama signs the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act, 2010 extending the NMTC through 2011.
Jan. 1, 2013
President Obama signs the American Taxpayer Relief Act of 2012, which retroactively extends the NMTC through January 2014 as part of “fiscal cliff” package.
Dec. 19, 2014
President Obama signs the Tax Increase Prevention Act of 2014, which retroactively extends NMTC through the end of 2014.
Dec. 18, 2015
President Obama signs the Protecting Americans from Tax Hikes (PATH) Act, which extends the NMTC five years through 2019.
Dec. 20, 2019
President Donald Trump signs the Taxpayer Certainty and Disaster Tax Relief Act of 2019, which extends the NMTC one year through 2020.
Dec. 27, 2020
President Trump signs the Consolidated Appropriations Act, 2021, which extends NMTC five years through 2025.