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Extend and modify the New Markets Tax Credit

The New Markets Tax Credit (NMTC) was designed to stimulate the flow of capital into low-income and economically-distressed areas by giving investors a tax incentive to invest in qualified Community Development Entities (CDEs). The CDEs, in turn, provide capital directly to low-income areas by investing in projects or organizations located or operating in qualified census tracts.  Investors receive a tax credit equal to 5 percent of the investment amount in each of the first three years following their initial investment, and a credit equal to 6 percent of the investment amount in each of the following four years. In total, investors receive a credit equal to 39 percent of the initial investment amount. Investors are required to maintain their investment in the CDE for the entire seven-year period.

CDEs are certified by a branch of the Treasury, the Community Development Financial Institutions Fund (CDFI), and participate in a competitive process for the right to receive tax-preferred financing. A qualified CDE is an corporation, partnership, or other entity that is engaged in the development of a low-income area, defined as a census tract with a poverty rate in excess of 20 percent, or with a median family income below the greater of the median income for metropolitan areas or statewide median income (only the latter criterion is used for non-metro areas). Qualifying CDEs must invest at least 85 percent of their tax-preferred financing in the development of a low-income community. CDEs may be community development banks, venture funds, or for-profit subsidiaries of community development corporations, among others.  Through 2008, CDFI has authorized $19.5 billion in NMTC financing.

The American Recovery and Reinvestment Act (ARRA) increased the annual limit on allowable tax-preferred investment from $3.5 billion to $5 billion in 2008 and 2009 and allowed investors to claim the tax credits against the AMT in 2009.¹ The NMTC expired at the end of 2009.

The president’s 2011 budget proposes to extend the NMTC for two additional years at a cost of $3.4 billion over 11 years. The extension would allow for the higher allocation amounts implemented under ARRA—$5 billion per year—and continue the practice of allowing the NMTC to be deductible against the AMT.

Footnote

1.The $1.5 billion in additional allowable investment in 2008 was directed towards rejected applicants or those recipients who did not receive their full requested allocation.

Additional Resources
Tax Policy Briefing Book: Tax Incentives for Economic Development: What tax incentives promote the economic development of low-income communities?
New Markets Tax Credit: The Credit Helps Fund a Variety of Projects in Low-Income Communities, but Could Be Simplified (GAO-10-334), Government Accountability Office, January 2010