Two New Reports on the “New Markets Tax Credit”

August 11, 2014

This week, the Government Accountability Office (GAO) released a report on “New Markets Tax Credits” (NMTC) at the request of Senator Tom Coburn (R-OK). In addition, Senator Coburn also released a report of his own outlining the program.

New Market Tax Credits were introduced in 2000 as part of the Community Renewal Tax Relief Act of 2000. The NMTC were meant to encourage investment in low-income areas that don’t have access to capital.

The credit works by giving an investor a tax credit equal to 39 percent of the initial investment the investor makes in a project. This means for every $100 in an investment, an investor will receive a $39 tax credit. The credit is distributed over seven years. From 2003 to 2013, the program has cost the federal government $40 billion.

While the credit is meant to help fund projects in low-income areas, it has actually benefitted banks substantially. GAO and Coburn’s report outline significant issues with the program.

Multiple Overlapping Programs

The GAO raises the concern that banks have been benefitting from NMTC and other public funds for the same projects. According to the GAO, it is common that projects receive public dollars from multiple programs and sources. 62 percent of all NMTC projects received other public funding. 33 percent of all projects received other federal funding and 21 percent received funding from multiple government sources. For example, the GAO found that banks most commonly receive “Historic Tax Credits,” tax-exempt bonds, and New Market Tax Credits for the same project.

Using Other Public Funds to Maximize Credit Size             

Not only do investors receive other public funds on top of the New Market Tax Credit, but these other public funds have been used to increase the basis by which the NMTC was calculated. The GAO highlights one instance in which a bank received $1.2 million in a New Market Tax Credit with only a $500,000 initial investment. It did so by taking advantage of $2.5 million in state and federal loans. In other words, it used public funds in order to receive additional public funds.

Tax Dollars Not Spent Efficiently

While the GAO does admit that the complexity and lack of transparency makes it difficult to measure the effectiveness of the program, Coburn’s report highlights some instances where it is questionable whether the tax dollars were used appropriately. One example from Coburn’s report is the Atlanta Aquarium. $40 million in tax credits were allocated to the $120 million project to expand a dolphin exhibit. While supporters of the projected claimed it created local jobs, they also admitted that the aquarium didn’t need the tax credit. In other words, the tax dollars would have been better spent elsewhere.

Reform or Abolish?

This tax credit is another good example of how programs may be intended for one group, but are captured by another due to its poor structure. The New Market Tax Credit, which was meant for low-income neighborhoods, has actually been a significant boon to banks according to the GAO. Banks have been able to take advantage of its complexity and lack of transparency to receive large credits.

It is true that GAO’s recommendation of issuing and enforcing more rules may help reduce the waste in the project. However, the question should be asked whether we should be promoting targeted economic development through the tax code at all.

The tax code is meant to raise revenue for government. Offering tax incentives through the tax code hides government spending, creates unnecessary complexity, and—in this case—doesn’t necessary accomplish intended goals.

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