Washington Wire: What’s Next for the New Markets Tax Credit?

Published by Michael Novogradac on Wednesday, July 1, 2015
Journal thumb July 2015

On June 15, the last currently authorized round new markets tax credit (NMTC) authority allocations were announced. Seventy-six community development entities (CDEs) were awarded $3.5 billion in NMTC allocation authority to spur investment in low-income communities around the country.

“Every community deserves a chance to succeed, and the New Markets Tax Credit Program is an economic development tool that spurs growth and breathes new life into neglected, underserved low-income communities,” said U.S. Treasury Secretary Jacob J. Lew in a press release announcing the allocations last month. “The tax credit allocation authorities announced today will go to community development organizations that will make much needed private sector investments in businesses and real estate projects located in the nation’s distressed urban and rural communities. Along with these investments come jobs, vital services, and opportunities where they are needed the most.”

Since the program’s inception, NMTC investments are estimated to have created nearly 600,000 new jobs and supported the construction of more than 160 million square feet of retail, manufacturing and office space. Moreover, NMTC allocatees consistently exceed the program’s conditions and commit to greater levels of investment than required. For example, the NMTC regulations generally require that at least 85 percent of qualified equity investment (QEI) proceeds be invested in qualified low-income community investments (QLICIs). All 76 of the Round 12 allocatees indicated that they would invest at least 95 percent of QEI dollars into QLICIs. In real dollars, this means at least $453 million more than what is required by the program will be invested in low-income communities. Similarly, all 76 of the allocatees committed to providing at least 75 percent of their investments in areas characterized by: multiple indicia of distress; significantly greater indicia of distress than required by NMTC program rules; or high unemployment rates. And even though there was no specific set-aside of tax credits for healthy food financing in the 2014 NMTC allocation round, 51 of the 76 allocatees (or 67.1 percent) indicated that they intend to devote some portion of their NMTC allocation to healthy food financing activities. See page 52 for a detailed discussion about Round 12.

As they work to deploy the Round 12 NMTCs, CDEs and investors must also now turn their attention and efforts toward supporting an extension for this highly effective program.

Need for Extension/Permanence
After Congress passed a retroactive one-year extension for 2014 in mid-December, the NMTC program expired once again on December 31, 2014, despite concerted efforts to secure a longer term extension in the 113th Congress.

Fifteen years since its creation, the NMTC is a proven community revitalization tool. And as federal spending for community development has waned in recent years, the NMTC has become even more crucial. The NMTC Coalition reports that community development funding for the departments of Housing and Urban Development (HUD), Agriculture, Commerce and Interior has been reduced by 75 percent as measure by share of GDP in the last 40 years.

In addition to the important community revitalization it supports, the NMTC is beneficial to the economy. Between 2003 and 2012, $31 billion in direct NMTC investments were made in businesses. And, that $31 billion in direct NMTC investments leveraged more than $63 billion in total capital investment in businesses located in low-income communities with high poverty and unemployment rates.

Moreover, the NMTC generates economic activity, providing a return on investment to the federal government. In 2012, NMTC-financed businesses generated $984 million in federal tax revenue. This is particularly important because the NMTC is estimated to have cost approximately $800 million in terms of lost tax revenue in 2012.

Because the program is successful, community development professionals have embraced the NMTC. Every year that allocation authority has been available, the program has been considerably oversubscribed. Demand for NMTC allocation authority in the 12th round exceeded supply by a ratio of nearly 4 to 1.

This steady and significant demand is evidence of a solid foundation upon which the NMTC could build if it were extended or made an indefinite part of the tax code. Also, just as making the low-income housing tax credit (LIHTC) permanent and exempt from the alternative minimum tax (AMT) led to greater efficiency and improved pricing for affordable housing tax credits, such an extension would also serve to increase efficiencies that the community development sector has been creating in the NMTC market.

Extension Legislation
The New Markets Tax Credit Extension Acts (H.R. 855/S. 591) would provide an indefinite extension for the NMTC. The bills would also increase annual NMTC allocation authority to approximately $4.8 billion with inflation adjustments, and exempts NMTC investments from the AMT. It’s worth noting that these bipartisan bills are consistent with the NMTC proposal contained in the Obama administration’s proposed fiscal year 2016 budget.

The original cosponsors of H.R. 855 are Reps. Pat Tiberi, R-Ohio, Richard Neal, D-Mass., and Tom Reed, R-N.Y. S. 591 was originally cosponsored by Sens. Roy Blunt, R-Mo., and Charles Schumer, D-N.Y. At the time of this writing, H.R. 855 had 50 cosponsors. Of those, 34 are Democrats and 16 are Republicans. On the Senate side, S. 591 has seven cosponsors, four Democrats and three Republicans. It should be noted that Sen. Blunt is pairing Democratic cosponsors with Republican cosponsors, and so there are likely many Senate Democrats who are in line waiting to cosponsor the bill.

In addition to these bipartisan bills, the NMTC is being championed by lawmakers who understand its contribution to the economy and low-income communities. Last month Reps. Mike Turner, R-Ohio, and Chaka Fattah, D-Pa., circulated a sign-on letter urging leaders of the House Ways and Means Committee to support an NMTC extension. The letter cited the NMTC’s investment and job generating track record and noted that the program generates enough revenue to pay for itself.

The Legislative Landscape
For the upcoming months, Congress is expected to focus the annual discretionary spending bills, finding offsets to pay for an extension of the highway funding bill and the ongoing tax reform effort. Meanwhile, the Obama administration has expressed a desire to use business tax reform as a vehicle for raising $140 billion in new revenue to finance the tax and spending priorities outlined in its proposed budget, including a permanent NMTC extension.

However, as has been noted in this publication in recent months, an appropriations stalemate is likely imminent. And, little common ground has been reported on the tax reform front. In early June, Senate Majority Leader Mitch McConnell, R-Ky., said “big, comprehensive tax reform” wouldn’t be possible until after the end of President Obama’s term.

The Senate Finance Committee’s working groups continued their work in June. The NMTC community submitted letters in support of the program and participated in a roundtable sponsored by the Infrastructure and Community Development Working Group. Reports from the working groups were expected the end of June, but it’s unclear to what extent the working groups’ reports will recommend specific reforms, and whether such reports will be made public.

In the House, the Ways and Means Chairman Paul Ryan, R-Wis. has indicated he would like to incorporate new highway bill funding into tax reform legislation, though the seven month extension recently proposed by House leadership suggests a deal on a long-term highway funding bill is at best a prospect of the distant future. One thing Ryan and Senate Finance Committee Chairman Hatch, R-Utah, have already agreed on is their opposition to the revenue increases in the administration’s proposed FY 2016 budget.

Possible Timing
Few observers expect a tax reform compromise before the fall, if one is possible at all. In a scenario that has become familiar, a number of fiscal deadlines are beginning to collect near the end of the calendar year. Based on current negotiations, congressional leaders will face decisions on another extension of the highway trust fund by the end of July and the deadline for increasing the federal debt limit in December. It’s possible an appropriations compromise and a “down payment” on tax reform, along with legislation to extend expired and expiring tax provisions, could also coalesce near the end of the year.

Supporting the Program
If there is a silver lining, it is that this extended timeline may allow the NMTC community additional opportunity to communicate the program’s importance to lawmakers.

There are a number of things the community development sector can do to support the NMTC. One of the most effective ways to demonstrate the program’s effect to senators and representatives is to show lawmakers how the NMTC is being used in their state or district. Arranging for a tour of an NMTC-financed business or participated in a ribbon-cuttings and grand openings allows them to meet their constituents who are benefiting from the program and hear how it has improved their communities.

And these NMTC site visits provide a great opportunity to build more cosponsors for NMTC legislation, H.R. 855 and S. 591. The more cosponsors the bills have, the more likely it is that the NMTC will be extended or made an indefinite part of the tax code.