One of the major community development initiatives expected to move in this Congressional session is the President’s New Markets Tax Credit program (NMTC). The New Markets Tax Credit is designed to encourage $15 billion in private sector equity investments for business growth in low- and moderate-income rural and urban communities.
How would NMTC work?
If the New Markets Tax Credit is enacted, investors will be able to claim a tax credit worth 25 percent of the amount of capital invested over five years in community development entities. To provide flexibility and attract a range of investors, diverse community development organizations would be available to assist investors with equity investments and other forms of patient capital. This tax credit will encourage private investors who may never have considered investing in neglected communities to do so. Because community development credits cannot redeem the equity interest for at least five years, capital stays in the community. The New Markets Tax Credit will create new relationships between investors, community development entities, and small businesses, which will foster continued support and lasting investment.
Community development entities (CDEs) will use the private sector funds to invest in such enterprises as co-operatives, microenterprises, community facilities, and commercial facilities. For example, Coastal Enterprises Incorporated – a CDC in Maine – could use the credit to provide loans for working capital and equipment, and also to support a diverse set of beneficiaries including daycare centers, fisheries, healthcare facilities, retail, biotech companies, and wholesalers.
Status of NMTC
The New Markets Tax Credit has been proposed by President Clinton in his fiscal year 2000 and 2001 budgets. Clinton’s NMTC proposal for FY2001 is $15 billion – almost triple his FY2000 proposal of $6 billion.
The NMTC is contained in H.R. 2713, sponsored by Representative Rangel (D-NY) and in S. 1526, sponsored by Senators Rockefeller (D-WV) and Robb (D-VA). The House bill and the Administration’s proposal are identical with regard to term and targeting. Community groups prefer the Senate version because it provides a term of seven years instead of five and targets by population as well as place.
Businesses operating in rural markets or distressed urban areas lack access to affordable, patient capital. Long-term investments are both the most difficult to secure and the most useful in terms of community development efforts. It takes at least seven years, and more likely ten years, for a business investment to reach the point of maturity. This is true of most equity investments and most certainly the type of investment that would be required by the New Markets Tax Credit. A five-year term may be too short to nurture the growth and development of private business enterprises operating in emerging markets. A longer term would provide the opportunity to keep this much-needed capital in the communities.
For targeting, the formula proposed by the Administration and the House includes 40% of the communities around the country, but excludes many pockets of poverty and populations of low-income people living within census tracts that do not meet the poverty or median income criteria. CDEs, the vehicles by which the Credit funds will be distributed, have demonstrated their ability to reach those often “hidden” populations not served by census-driven targeting. If the targeting for the New Markets Tax Credit is changed to include low-income populations, enterprises can be developed so that low-income people, not only low-income areas, will benefit. By targeting both place and population, the NMTC will be able to reach more people in need.
If enacted in the Senate version, the NMTC could be a valuable tool for creating an integrated business approach to community development by leveraging private capital and private sector creativity to bolster community development, job creation, and economic opportunity. As it currently stands, the House/Administration version would be much more limited in its effectiveness.
What you can do
Ask your legislators to sign on as a supporter of New Markets, and especially ask your representatives to support the stronger Senate provisions.
For more information on the New Market Tax Credit, contact NCCED at (202) 289-9020 x112; www.ncced.org.
For a different view on the New Market Tax Credit, see Shelterforce #113.