New Markets: Trickle-Down With a Twist

The New Markets program recently passed in the House (H.R. 4923), a tax subsidy scheme to divert capital into low- to moderate-income areas, is yet another variation on the administration’s long-held strategy of benefiting places – not necessarily people.

The New Markets Initiative is a tax break for those with money, but there are no reciprocal obligations that directly benefit low-income people. New Markets:

  • Does not require any jobs to be created (or retained), let alone jobs for low-income people.
  • Has no local hiring preferences.
  • Has no requirement to pay livable wages.
  • Has no requirement (or incentive) to assist minority-owned or women-owned businesses.
  • Has no “anti-pirating” clause to diminish the tendency of businesses to move where wages are lower while harvesting tax give-aways.

It’s the old gimmick of trickle-down: maybe if some economic activity transpires in the vicinity of low-income people, they might somehow benefit.

How the Tax Subsidy Would Work

The economic core of “New Markets” is a tax credit for those who purchase equity investments (stock or a partnership) in a “qualified community development entity” (CDE). A CDE must use at least 85 percent of this money in a “low-income community investment.”

Such investments can be loans to, or equity investments in, “low-income community businesses,” which include any business getting at least 50 percent of its gross income from activities “substantially” carried out by its employees in a low-income community. The Joint Committee on Taxation stresses in its technical explanation of H.R. 4923 that there is no requirement that employees of the business be residents of that community. Low-income community investments can also be services like financial counseling to businesses or residents in low-income communities.

All together, H.R. 4923 would allow up to $15 billion in New Markets investments over seven years. The lost tax revenue on those subsidized investments is money that could have directly gone to assist low-income people.

CDEs in the Middle

Whether anything positive happens for low-income people from New Markets hinges upon the character of the CDEs.

A CDE might be a CDC (Community Development Corporation) familiar to you, and trusted. In that case, something good might come of a New Market tax break in your neighborhood. But there are no guarantees.

The law does not require the CDE to be a nonprofit. The law does require that the CDE have as its “primary mission” either serving or providing investment capital for low-income communities or low-income people. This would tend to give CDCs an edge. Another advantage for CDCs is that the law gives priority to entities with a record of successfully providing capital or technical assistance to “disadvantaged businesses or communities.” Consequently, sham entities might end up lower on the list. (However, the law does not prescribe how much priority is to be given.)

The law also requires CDEs to “maintain accountability” to residents of low-income communities. This feature, while vague, could potentially prevent abuse. However, there is a loop-hole: accountability can be through resident members of the CDE’s governing board (which is good), or through an “advisory board,” which could be ignored or vilified as many CDBG advisory bodies are.

What is a Low-Income Community?

Whether the program will even benefit truly disadvantaged areas is questionable. The law offers three definitions of a low-income community:

  • A census tract with a poverty rate of 20 percent.
  • A metropolitan area census tract with a median income below 80 percent of the median for the entire metro area, or below 80 percent of the statewide median income – whichever is greater.
  • A nonmetro area census tract (or county) with a median income below 80 percent of the statewide median.

In many urban areas, most of the census tracts could qualify under the section option above. For over 25 years, 80 percent of the median has translated on the ground to “moderate” income, not “low” income. This year, the national median income is $50,200.

Since the definition of low-income community is so weak, the presence of some lower income people could be exploited to reap the tax credit revenue without directly benefiting them. For example, since accountability is defined in relation to the community, a CDE governing board or advisory committee could be composed entirely of affluent people who live in a technically low-income area, with actual low-income residents left out.

What Happens Next?

The Senate is expected to take up New Markets when it returns from recess. Two Senate bills contain New Markets provisions: S. 2936 (the “Robb Bill”) and S. 2779 (the “Santorum Bill”). Both Senate bills have a very modest improvement that would allow CDEs to assist “low-income people” (those at 80 percent of the median income) who do not live in a “low-income community.” Tell your senators to address the lack of obligations to low-income residents, and to require genuine accountability to low-income people by requiring at least 51 percent of a CDE’s governing board to be low-income people or their representatives.

Ed Gramlich can be contacted at 202-342-0567; gramliche@commchange.org. For longer version of this article click here. For a differing view, see “New Markets Initiative Expected This Year,” Shelterforce #110.

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