Inside the New Markets Tax Credit Program: Who is the Real Winner?

Abstract

Congress established the New Markets Tax Credit (NMTC) program on December 21, 2000, as part of the Community Renewal Tax Relief Act. The purpose of the NMTC program is to encourage investment in low-income communities by providing incentives, in the form of tax credits against federal income taxes, for community development lenders and capital markets that invest in impoverished communities with limited access to capital. While the NMTC program is unfamiliar to many--even those in the commercial banking field—numerous reports exist both in favor of and in opposition to the program. Those in favor, such as reports by the NMTC Coalition and Deloitte, argue that the NMTC program has succeeded in this goal of bridging the gap between low-income community businesses and big banks. Those in favor also argue that the program should be expanded, as it has spurred investment in and brought wealth to low-income communities. Those in opposition to the NMTC program argue that NMTC projects have become overly complex and thus less transparent, the application process is too lenient, investors receive excessive returns, and other governmental funding programs perform similar functions of the NMTC. Two noteworthy arguments criticizing the program come from the Government Accountability Office and Senator Tom Coburn. After analyzing arguments both for and against, and conducting additional research, the author of this paper has found that the NMTC program appears to be functioning as intended; however, there is room for improvement. Legislation to continue and expand NMTC funding is currently pending in both chambers of Congress, which should be approved based on the program's track record of success. The demand for NMTC funding far exceeds its availability. Thus, increasing the amount of available funding would reduce the need for participants to double dip. 

Comments from Mentors

“Roshan’s research idea came from a work experience she had in an internship. The New Markets Tax Credit program was intriguing to her because of the opportunities it could provide to new businesses and impoverished communities. She devoted a great amount of time to understand the program, its benefits, and its problems. I was impressed with her ability to clearly explain a complex government program and to recommend changes that would enhance the program effectiveness. Roshan’s final paper and presentation are examples of the high quality work she delivers consistently.”

--Dr. Barbara Wood