Indiana lawmakers are mulling a bill that would give state tax breaks to small banks for investing in local development.
The legislation is being pushed by the Community Bankers Association of Indiana. It is modeled after the Treasury Department's New Markets Tax Credit program, which provides federal tax credits to lenders investing in community development.
Under the Indiana bill, sponsored by state Rep. Bill Crawford, D-Indianapolis, Indiana banks and thrifts whose investments qualify for the federal credit would also get state credit. Louisiana is believed to be the only other state with a similar law.
S. Joe DeHaven, the trade group's president and chief executive, said its members see the credits as a way to bring economic development money into a state that desperately needs capital but lacks investors.
The association created the CBAI Community Development Inc. to make federal credits available to its members and wants to multiply their effect by adding the state tax benefit.
"Now we've just got to go out and help [Rep. Crawford] get a hearing and sell it," Mr. DeHaven said.
For the bill to pass in the current legislative session, which is scheduled to end April 29, the House Ways and Means Committee would have to report it out by Feb. 24. Mr. DeHaven said he is hopeful that it will pass this session.
"In the conversations we have had with various representatives, we have not encountered any opposition," he said.
The trade group spent much of 2003 working on an application for the New Markets program after Frank A. Hoffman, a tax lawyer with the Indianapolis firm of Kreig DeVault LLP, brought it to the bankers' attention.
After 9/11, Mr. Hoffman said, financing dried up for small businesses he was working with, but banks were still interested in affordable housing tax credits. He searched for a program for businesses and learned about the New Markets Tax Credit, which had taken effect in late 2000.
"It was an opportunity to bring capital to finance transactions that wouldn't be done" otherwise, Mr. Hoffman said.
Community development organizations must apply for the federal tax credit and then distribute it to participants - often banks and thrifts - according to the amount invested.
The Treasury has given credits totaling $6 billion to 129 organizations. A third round of applications is being evaluated, and new awards will be announced in May.
CBAI Community Development is eligible for $19.5 million in tax credits, which would let it make $50 million of loans. Mr. Hoffman said the credits could make a loan workable that otherwise might not fit into a bank's underwriting criteria.
Banks invest in CBAI Community Development, and when a bank makes a loan to a business in a low-income market, CBAI uses investment funds to make a subordinate, interest-free loan to the same business. The result: It either receives a smaller bank loan or uses the CBAI loan to reduce the interest rate the bank charges.
Mr. Hoffman said New Markets lets borrowers get either 20% more money or an interest rate 20% to 25% below market.
Combining the federal credit with a state one would make the money go even further, which would help Indiana communities, particularly rural ones, he said.
"The rural communities need this type of subsidy because they don't have the Fortune 500 companies looking at them," he said.
Mr. DeHaven said CBAI has about a dozen loans in the underwriting stage and hopes to have all $50 million worth of projects in place by June.
