Approximately 62% of projects benefiting from a federal tax credit also received other forms of federal, state or local assistance between 2010 and 2012, according to a report released Monday by the Government Accountability Office.
The New Markets Tax Credit (NMTC) is designed to encourage investment in low-income communities by providing a tax credit equal to 39% of an investment over a period of seven years, and more than $40 billion has been allocated through the program since 2003.
According to the GAO:
The program expired in 2013 but legislation has been proposed to extend it, and the President requested a permanent extension in his fiscal year 2015 budget proposal.
Under NMTC, the Treasury Department grants tax credit authority to Community Development Entities (CDE’s), which are partnerships made up of either public or private entities, “such as local government or financial institutions.” The CDE’s then use the tax credits to attract private investment for “qualified low-income community investments, which include, but are not limited to, investments in operating businesses and residential, commercial, and industrial projects.”
However, some investors “have developed financial structures that increase the amount of other funding from either private or public sources that are used with the NMTC,” enabling them to increase the amount of a federal subsidy to a project. Although the practice is not illegal, “and can result in projects being undertaken that would not otherwise have been started for lack of sufficient funding,” it also reduces transparency and can increase the costs associated with a project.
The report goes on to note:
In some cases the complexity of the structures may be masking rates of return for NMTC investors that are above market rates.
In one specific instance, an investor was able to claim a 24% rate of return by leveraging other forms of public financing to increase the base for claiming the NMTC.
Treasury and the IRS have not updated their guidance to address the new financial structures, and lack “controls to limit the risk of unnecessary duplication in government subsidies or above market rates of return.” Without such guidance and controls, the report warns, “the impact of the NMTC program on low-income communities could be diluted.”
The GAO conducted a survey of NMTC projects originating between 2010 and 2012 and found that the practice of combining other sources of public funds with the NMTC is “widespread.” Of the NMTC projects surveyed, 62% received other forms of public funding, and 21% receiving additional funding from multiple other public programs, which the GAO says, “raises questions about unnecessary duplication.”
To address such questions, the GAO recommends that the Treasury Department issue guidance and enforce controls “to limit the risk of unnecessary duplication at the project level in funding or assistance from government programs and to limit above market rates of return.”
This report, by Peter Fricke, was cross-posted by arrangement with the Daily Caller News Foundation.