New Markets Tax Credit

The Credit Helps Fund a Variety of Projects in Low-Income Communities, but Could Be Simplified

GAO-10-334, Jan 29, 2010

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The Treasury Department's Community Development Financial Institutions (CDFI) Fund awarded $26 billion in New Markets Tax Credits (NMTC) through 2009 for investment in low-income communities. The NMTC allows investors to claim a tax credit totaling 39 percent of their investment in Community Development Entities (CDE) over 7 years which CDEs reinvest in qualified communities. This mandated report (1) describes where and how CDEs are using NMTCs, (2) assesses how CDEs use NMTCs to offer favorable financing terms to low-income community businesses and describes options for simplifying the NMTC, (3) describes how, if at all, NMTC investments support low-income community development, and (4) determines how effective IRS and the CDFI Fund have been in monitoring NMTC compliance. GAO analyzed CDFI Fund and CDE data, did case studies of CDEs, and interviewed relevant experts.

Since 2003, CDEs have made NMTC investments in all 50 states, the District of Columbia, and Puerto Rico, with about 65 percent for real estate. NMTCs are often used as "gap financing," accounting for a portion of total project costs. NMTC investments in low-income community businesses generally use leveraged structures, where equity is left in the businesses, or subsidized interest rate structures, where below-market interest rate loans are offered. Recently, investors appear to be paying less for tax credits than in previous years and they made fewer NMTC investments in 2009 than in previous years. The CDFI Fund does not collect data that could identify the portion of the subsidy channeled to businesses, such as data on credit pricing, transaction fees, and the amount of equity left in businesses. Two potential options (i.e., changing related parties tests or converting the NMTC to a grant program) could simplify the program and make additional funds available to businesses. CDEs have used the NMTC program to support a variety of investments, but project impacts are difficult to measure and likely vary depending on the project. GAO identified NMTC-supported projects for mixed-use facilities, housing developments, and community facilities, among other qualified business activities. The CDFI Fund does not collect data on incomplete or failed projects, which might be used, for instance, to improve credit allocation selections. Projects with NMTC financing likely contribute employment and other outcomes to low-income communities. Limitations with available data make it difficult to isolate project impacts and GAO's analysis does not allow it to determine whether the projects supported by NMTCs would have taken place absent the credit. Continued improvements could be made in collecting project-level data (e.g., removing double-counting of some outcomes). IRS monitors CDE and investor compliance with applicable laws, while the CDFI Fund monitors CDEs' compliance with their allocation agreements. IRS and CDFI Fund officials weighed the costs and benefits of options to monitor compliance and selected controls on that basis.

Status Legend:

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Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

  • In Process
  • Open
  • Closed - implemented
  • Closed - not implemented

Recommendations for Congressional Consideration

Recommendation: Should the program be extended beyond 2009, to ensure that the maximum amount of capital ends up in low-income community businesses, Congress may wish to consider offering grants to CDEs that would provide the funds to low-income community businesses. If it does so, Congress may wish to require Treasury to gather appropriate data to assess whether and to what extent the grant program increases the amount of federal subsidy provided to low-income community businesses compared to the NMTC; whether the grant program otherwise affects the success of efforts to assist low-income communities; and how costs for administering the program incurred by the CDFI Fund, CDEs, and investors would change. One option may be for Congress to set aside a portion of funds to be used as grants and a portion to be used as tax credit allocation authority under the current structure of the program in a future allocation round to facilitate comparison of the two program structures.

Agency Affected: Congress

Status: Open

Comments: As of April 2011, Congress has not taken steps to offer grants to Community Development Entities (CDEs) that would provide funds to low-income community businesses in lieu of the New Markets Tax Credit.

Recommendations for Executive Action

Recommendation: Should the program be extended beyond 2009 and absent a broader restructuring of the program, to ensure that the CDFI Fund has complete data on the amount of capital flowing to low-income community businesses from the sale of NMTCs to investors, the Secretary of the Treasury should direct the CDFI Fund Director to collect data that show the sale price of NMTCs from CDEs to investors, fees paid by QALICBs to close NMTC transactions, and the amount of equity that the CDE projects it will leave in the qualified active low-income community business (QALICB) at the end of the 7-year period during which investors can claim tax credits.

Agency Affected: Department of the Treasury

Status: Open

Comments: The Community Development Financial Institutions (CDFI) Fund indicated that it was taking steps to collect data on credit pricing in a new version of its Allocation Tracking System that is to be released in the early to middle part of 2011. The CDFI Fund plans to collect information on fees and the equity left in businesses as part of the next version of its Community Investment Impact System, the plans for which are under review by the Office of Management and Budget.

Recommendation: To more effectively assess the outcomes generated by the NMTC program in low-income communities, should the program be extended beyond 2009, the Secretary of the Treasury should direct the CDFI Fund Director to continue improving strategies for collecting NMTC project-level data that clearly identify the potential outcome of each project without the potential for double-counting the outcomes of some projects or undercounting the outcomes of others.

Agency Affected: Department of the Treasury

Status: Open

Comments: The Community Development Financial Institutions (CDFI) Fund is in the process of improving its instructions and corresponding data collection systems to provide unique identifiers for New Markets Tax Credit (NMTC) projects in which multiple Community Development Entities are contributing NMTC funds to the same project.

Recommendation: To ensure that the CDFI Fund understands which projects have stalled or are not going to be completed and whether the criteria for funding selection could be improved, the Secretary of the Treasury should direct the CDFI Fund Director to collect data on the failure rate of NMTC projects.

Agency Affected: Department of the Treasury

Status: Open

Comments: The Community Development Financial Institutions (CDFI) Fund is in the process exploring options to better detect New Markets Tax Credit failed projects through discussions with awardee focus groups.