Senate Bill Seeks to Extend NMTCs, Requires Rural Targeting of Investments
By A. J. Johnson & Caitlin Jones
4 min read
Tax Credit Advisor February, 2006: New Markets Tax Credit proponents have high hopes that when Congress passes tax reconciliation legislation, it will include a provision that would extend the NMTC program through 2008.
The NMTC provision is contained in a small section of the Senate’s tax reconciliation measure, S. 2020, which was passed last November. Section 204 of the bill would amend the Internal Revenue Code to extend the NMTC program for another year beyond 2007, its current expiration date, providing $3.5 billion in tax credit allocation for the 2008 calendar year.
The section also contains language requiring that some of the investments from NMTCs be distributed in rural areas. Specifically, it would amend Section 45D(i) of Internal Revenue Code to “ensure that non-metropolitan counties receive a proportional allocation of qualified equity investments.” There was no elaboration on how this should be done.
S 2020 must now be reconciled with the House of Representative’s version of tax reconciliation, H.R. 4297. The House bill does not contain S. 2020’s NMTC provisions.
Praise for the Extension
NMTC proponents praised the quest for a one-year extension as a pragmatic way of keeping the program alive in a time of fiscal austerity.
“I think it’s a very good thing to do it for just one year,” said Jerome Breed, a partner at Powell Goldstein Frazer & Murphy LLP. “It sets a precedent that will make it substantially easier to get future extensions.” Breed urged NMTC participants to contact their members of Congress to express support for the NMTC provisions of S. 2020. The bill was sponsored by Sen. Chuck Grassley (R-Iowa).
Given the current budget-cutting mood, NMTC advocates say that it would be difficult at this time to get Congress to agree to a five-year extension of the tax credits, which had been the preferred approach. “˜This was the tack taken by Rep. Ron Lewis (R-Ky.) and Sen. Olympia Snow (R.-Me.) who last September introduced parallel bills to extend the NMTC program from 2008 through 2012, with $3.5 billion in new tax credits to be allocated in each of those five years.
“We will be quite happy to get through the one-year extension,” said Bob Rapoza, president of Rapoza Associates, which manages the New Markets Tax Credit Coalition, an industry association based in Washington, D.C. Rapoza said that a conference committee is expected to take up the tax reconciliation package soon, and could bring it to a vote by mid-March.
Questions About “Non-Metropolitan” Investments
NMTC proponents said that the provision requiring that some NMTC investments go to rural areas is also a good idea, provided it is structured properly.
“Programmatically, it’s a good thing to widen the reach of the program,” said Randy Kahn, a vice president at GMAC Commercial Holding Capital Corp. Broader distribution of NMTC investments is good public policy, he said, and could help in the campaign to obtain permanent status for the program.
On the other hand, the provision might be tough to administer, said market participants. “How do you track the investments to make sure they go to non-metropolitan areas?” asked Breed. “And how do you define “˜non-metropolitan area’ in the first place – and where do suburbs fit in?”
Kahn said there are also questions about how the Community Development Financial Institutions Fund, which administers NMTC program, would decide what is a “proportional” allocation of qualified equity investments. In addition, with investments flowing to small rural Community Development Entities, there could be a problem in getting all investment out in a timely way, he said. The CDFI Fund requires that equity investments be made within five years of the tax credit allocation.
Kahn said that he hopes that any requirement to make non-metropolitan equity investments would provide incentives for investment in rural areas, rather than penalties for not doing so. “My hope would be that a carrot is used rather than a stick,” he said.
An Uphill Battle in Congress
NMTC proponents said that even the quest for a one-year extension poses difficulties. For starters, they say, there are the contentious larger issues that must be dealt with by the tax bill conferees, such as the issue of reducing the cost to taxpayers of the Alternative Minimum Tax.
“These things tend to suck the oxygen out of an effort to extend an existing tax program,” said Breed.
S. 2020 also requested $1 billion in new NMTC allocation in 2005, 2006, and 2007 for Gulf Coast communities struck by Hurricane Katrina. These provisions have already been included in the “Gulf Opportunity Zone Act of 2005,” which was approved by Congress and signed by President Bush in December.
Supporters of S. 2020 feel encouraged by the new NMTCs authorized for Hurricane Katrina relief, and hope that the success of this initiative will increase chances for extending the credit through 2008.
