New Market Tax Credits Fail to Deliver

Great post by Nicole Kaeding of Cato.

"Created in 2000 as part of the Community Renewal Tax Relief Act, the federal New Markets Tax Credit (NMTC) program provides tax credits to “spur new or increased investments into operating businesses and real estate projects in low-income areas.” Two new reports, one from the Government Accountability Office (GAO) and the second from Senator Tom Coburn’s office, question the effectiveness of NMTC in accomplishing that goal.

The program provides tax credits to investors in low-income neighborhood development projects equaling 39 percent of the investment value over seven years. For example, a $1 million investment provides a $390,000 tax credit to the investor—a healthy sum. Congress has provided $40 billion in tax credits since 2003 with banks and other financial institutions receiving “nearly 40 percent of all NMTC[s]” since 2007.

But the program’s structure is flawed. According to GAO, the Treasury Department—which oversees the program—does not have adequate oversight of the program. For instance, the Treasury is unable to determine if a project has failed even after receiving seven years of tax credits. Treasury’s reporting on numerous aspects of the program is incomplete and missing.

Like many federal programs originally premised on helping low-income areas, the NMTC program now spreads the subsidies widely. In fact, the program’s structure results in “virtually all of the country’s census tracts” being eligible for the program according to the Congressional Research Service.

NMTC projects are heavily subsidized. They frequently receive additional government funding from other programs. Sixty-six percent of projects from 2010 to 2012 received funding from other federal, state, or local sources, with 33 percent receiving additional federal funds. This program is one of 23 community development tax programs and 80 discretionary economic development programs.

Projects often receive NMTCs, historic tax credits, and benefits from tax-exempt bond issuances, which adds up to heavy subsidization. For instance, a streetcar project in St. Louis received $15 million from NMTC allocations, $25 million from a federal Urban Circulator grant, a Surface Transportation Program grant, and a grant from the Congestion Mitigation & Air Quality Improvement Program. “The trolley’s total cost of $43 million is almost completely paid for through federal funding,” according to Coburn’s office.

We are used to superb investigative reports from Senator Coburn’s office profiling waste in government. His staff has done it again with the new NMTC report, which provides numerous silly and wasteful examples of NMTC projects. Many tax credits have benefited wealthy investors for low-value projects or projects that should have been funded privately or by local governments.

The NMTC program funded the expansion of the world’s largest aquarium in Atlanta. The new dolphin exhibit, with ticket prices of $65, received $40 million. Money was spent producing an original music score to accompany the performance. Project supporters publicly acknowledge that private funding was available for the aquarium’s expansion.

The program also funded a classic car museum in Washington state,  a baseball stadium in Kentucky, and a NFL Youth Center in Indianapolis as part of the city’s Super Bowl bid. These projects are surely not the low-income development Congress envisioned when starting the program.

Unfortunately, these reports are not the first to document the NMTC program’s failings. GAO has issuance reports in 2004, 2007, and 2010 highlighting the program’s numerous flaws. Yet, Congress continues to reauthorize the program wasting billions of dollars.

The GAO report suggests that the Treasury Department should increase monitoring of the program. This is a good, first step to reforming the program. Ideally, Congress should follow Senator Coburn’s proposal and let this unneeded program expire."