Bankers’ pleas to save a popular tax credit aimed at spurring economic development in low-income and rural communities have so far fallen on deaf ears in Washington.
Even with banks and other proponents urging Congress to make the New Markets Tax Credit permanent, the House has passed a tax bill that would do away with the tax credit next year while the Senate appears content to let it expire in 2019.
The New Markets Tax Credit awards roughly $3.5 billion of tax credits per year to investors in commercial developments in low-income and distressed areas. The tax credit is crucial to attracting investors and lenders to such projects, and proponents say that if it is discontinued many developments in low-income communities simply won’t be funded.
“The reason it exists is it provides an incentive to draw that private capital into areas that are disadvantaged ... where the perceived risk might be entirely too high for private sources of capital,” said Matt Philpott, senior vice president of New Markets and Historic Tax Credit production at U.S. Bancorp. “It provides that cushion to make investing in those areas more comfortable.”
Originally launched in 2000, the New Markets Tax Credit program has been extended several times, with broad bipartisan support, most recently in 2015. Calling it “an essential tool for community revitalization,” a coalition of more than 2,000 financial institutions, businesses, nonprofits and local governments sent a letter to House and Senate leaders in October asking them to make the tax credit permanent as part of any tax reform legislation. U.S. Bancorp, Wells Fargo, Citizens Financial Group, Huntington Bancshares, Fifth Third Bancorp and the American Bankers Association were among the many banks and bank trade groups that signed on to the letter.
Bankers and their community development partners say the beauty of the tax credit is its flexibility. Unlike the low-income housing tax credit, which both tax plans would keep in some fashion or another, the New Markets Tax Credit program can be used for a range of projects, from community health centers to grocery stores to mixed-use developments.
“It’s really the only economic development program that the federal government has like this. There really isn’t anything else,” said Esther Schlorholtz, director of community investment at the $8 billion-asset Boston Private Bank & Trust.
Under the program, community development entities apply to the Community Development Financial Institutions Fund to compete for New Markets Tax Credit allocations. Once awarded tax credits, community development organizations then use those tax credits to entice equity investors into providing funding for developments in low-income communities. The investor then claims a tax credit worth 39% of their equity stake in the project, with that tax benefit spread out over the next seven years.
Without the tax credit, equity investors might not find these deals so appealing. Without the equity, banks would have a tough time justifying the financing of some of these deals, though they do get Community Reinvestment Act credit for them, Schlorholtz said.
“It just isn’t financially feasible to finance without an equity piece coming in,” she said. “That’s really the fundamental issue. By taking away those incentives, it just means those projects won’t move forward.”
Schlorholtz estimates that Boston Private has made about $100 million in leveraged loans to New Markets Tax Credit projects since around 2006. One of the more recent projects was a mixed-used development in Boston’s Roxbury neighborhood that will ultimately provide retail and low-income housing and will serve as the headquarters for a local nonprofit. Working together with private investors and community development entities, the bank has also financed a number of charter schools and health clinics in low-income communities.
The CDFI Fund estimates that the New Markets Tax Credit program has generated at least $8 of private investment for every $1 the federal government has invested, and over its lifetime has created about 275,000 permanent jobs and hundreds of thousands more construction jobs.
Still, Congress is looking to slash taxes by some $1.5 trillion over the next decade and to achieve that goal it would need to eliminate a range of tax breaks, both large and small.
Under the Senate’s tax plan, the New Markets Tax Credit would remain in place until 2019 and then not be reauthorized, while the House tax plan approved by the full chamber on Thursday would eliminate the tax credit immediately.
And even if tax reform is not passed — a real possibility given some moderate Republicans’ misgivings with certain provisions of the Senate bill — Congress could still choose not to reauthorize the program when it expires in two years.
Bankers largely support tax reform because they believe corporate tax cuts will boost economic growth, but they would like to see the New Markets Tax Credit preserved in some form.
U.S. Bancorp’s Philpott said that the uncertain fate of the tax credit has made some developers and investors reluctant to commit to projects. Giving the program permanent status, or at least preserving the next two rounds of allocations, at $3.5 billion each, would give those parties the certainty they need to move forward with their plans.
“I would make a pitch for preserving the tax credit,” Philpott said. “I’m hopeful that when the dust settles Congress will see its way to restoring these tax credits to allow the market to stabilize.”
Michael Novogradac, managing partner at the San Francisco accounting firm Novogradac, agreed that the sudden elimination of the tax credit cold disrupt projects already in the works.
“Over two rounds, that’s $7 billion of below-market financing that’s gone,” he said. “I look at that and say, ‘There will be a large number of community investments and community projects, small-business lending, charter schools, historic renovations in distressed areas that will not get done.’ ”