Policy Analysis | March 2015

States and the Federal New Markets Tax Credit Program

Sujit CanagaRetna

(Information Compiled on February 4, 2015)

The New Markets Tax Credit Program (NMTC Program) was established by Congress in 2000 to spur new or increased investments into operating businesses and real estate projects located in low-income communities. The NMTC Program attracts investment capital to low-income communities by permitting individual and corporate investors to receive a tax credit against their federal income tax return in exchange for making equity investments in specialized financial institutions called Community Development Entities (CDEs). The credit totals 39 percent of the original investment amount and is claimed over a period of seven years (5 percent for each of the first three years, and 6 percent for each of the remaining four years). The investment in CDEs cannot be redeemed before the end of the seven-year period.

In 1994, the Community Development Financial Institutions Fund, or CDFI Fund, was created under aegis of the U.S. Department of the Treasury to promote economic revitalization and community development through investment in and assistance to community development financial institutions (CDFIs). The CDFI Fund achieves its purpose by promoting access to capital and local economic growth through initiatives such as the NMTC Program. Since its inception, the CDFI Fund has made 836 awards allocating a total of $40 billion in tax credit authority to CDEs through a competitive application process. This $40 billion includes $3 billion in Recovery Act Awards and $1 billion of special allocation authority to be used for the recovery and redevelopment of the Gulf Opportunity Zone.

More about the program can be found here here and more about the eligibility criteria and application material at the same site. A New Markets Program Fact Sheet is available here.

Importantly, when President Barack Obama enacted the Tax Increase Prevention Act of 2014 (the “Act’) in mid-December 2014, many programs that expired at the end of 2013, including the New Markets Tax Credit Program, were reauthorized. Specifically, the Act authorizes $3.5 billion in allocations for the New Markets Tax Credit Program and these allocations must be used by December 31, 2019. Many states have programs similar to the federal New Markets Tax Credit Program.

Along with the overview of the Program presented below, the following links remain of interest:

  • An article entitled New Market Tax Credits: Separating Fact from Fiction that provides additional information on the program and dispels some of the myths associated with it.
  • A Government Accountability Office (GAO) report released in July 2014 entitled New Markets Tax Credit: Better Controls and Data Are Needed to Ensure Effectiveness.
  • Information from the Mississippi Development Authority, the state of Mississippi’s economic development agency regarding participating in the New Markets Tax Credit Program.
  • Information from the New Mexico Finance Authority regarding the availability of New Markets Tax Credit Program loan funds dedicated solely to New Mexico businesses.
  • A power point presentation on the New Markets Tax Credit Program. Of particular interest are the three case studies cited in this report: (1) Detroit Thermal Systems in Romulus, MI; (2) Le Centre on Fourth - Rehabilitation of the Stewart Dry Goods Building in Louisville, KY; and (3) Rebuild Morgan County in West Liberty, KY.
  • News release from Ohio Governor John Kasich on five entities receiving tax credits to aid investments in Ohio’s low-income communities.