Making the Program Better GAO Report Cites Options for Improving the New Markets Tax Credit

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Tax Credit Advisor, March 2010: In a new report, the Government Accountability Office describes the project and investment activity and patterns thus far under the federal new markets tax credit program, and outlines two options for enhancing the program.

GAO’s study: (1) describes where and how community development entities are using NMTCs; (2) assesses how CDEs use NMTCs to offer favorable financing terms to low-income community businesses and describes options for simplifying the NMTC; (3) describes how, if at all, NMTC investments support low-income community development; and (4) notes how effective the IRS and Community Development Financial Institutions Fund have been in monitoring NMTC compliance.

The study covers the program’s lifespan from 2000 through 2009. For the study, GAO reviewed collected data on projects, CDEs, and investment; interviewed program participants and experts; and examined nine case study projects.

Findings include that:

  • Through FY 2008, CDEs made about $12 billion in NMTC investments in 2,111 projects in all 50 states, the District of Columbia, and Puerto Rico. NMTC dollars have generally been used to fill funding gaps in projects, with about 65% invested in real estate projects.
  • California has led all states in the most NMTC investment ($1.2 billion) and number of projects (257).
  • CDEs have awarded all $26 billion in NMTC allocation authority available to date.
  • In 2009, aggregate dollar NMTC investment by CDEs was lower than the prior year for the first time. The study blames changed market conditions including reduced investor demand and sharply lower credit pricing.
  • The leveraged investment structure has been the preferred method for NMTC transactions.
  • The NMTC has funded a variety of projects in low-income communities. But it is a challenge to state with certainty that individual projects would not have been financed “but for” the new markets credit.

The report cites two possible options for improving the NMTC program. “To increase the effectiveness of how NMTC funds are dispensed to low-income businesses, changes to the application of the related entities test or replacing the tax credit with a grant are two options that could simplify NMTC transaction structures and increase the amount of equity investment available to low-income businesses.”

(Report: http://www.gao.gov/new.items/d10334.pdf)