government icon, source: Eyewire

General Government: New Markets Tax Credit

Converting the New Markets Tax Credit to a grant program may increase program efficiency and significantly reduce the $4 billion, 5-year revenue cost of the program.

Action:

Congress should consider offering grants in lieu of credits to Community Development Entities (CDE) if it extends the program again. If it does so, Congress should require the Department of the Treasury to gather appropriate data to assess whether and to what extent the grant program increases the amount of federal subsidy provided to low-income community businesses compared to the New Markets Tax Credit (NMTC); how costs for administering the program incurred by the Community Development Financial Institutions Fund, CDEs, and investors would change; and whether the grant program otherwise affects the success of efforts to assist low-income communities. One option would be for Congress to set aside a portion of funds to be used as grants and a portion to be used as tax credit allocation authority under the current structure of the program to facilitate comparison of the two program structures.

Progress:

No legislative action has been identified as of September 2017. The Consolidated Appropriations Act, 2016, extended NMTC through 2019 (Public Law 114-113). However, this act did not offer grants in lieu of credits, as GAO suggested in January 2010. The Joint Committee on Taxation estimates the cost of this extension to be approximately $2.6 billion. Offering grants in lieu of NMTCs could result in a greater portion of the federal subsidy reaching low-income community businesses.

Implementing Entity:

Congress

Action:

The Secretary of the Treasury should issue guidance on how funding or assistance from other government programs can be combined with the New Markets Tax Credit (NMTC), including the extent to which other government funds can be used to leverage the NMTC by being included in the qualified equity investment.

This action was identified in GAO’s July 2014 report, New Markets Tax Credit: Better Controls and Data Are Needed to Ensure Effectiveness (GAO-14-500) and was added to the Action Tracker in April 2015.

Progress:

Although the Department of the Treasury (Treasury) has not issued guidance on how funding or assistance from other government programs can be combined with the NMTC, as GAO recommended in July 2014, it has taken steps toward addressing this action. Specifically, the Community Development Financial Institutions Fund (CDFI Fund), which administers the NMTC program, awarded a contract in September 2015 for new empirical research assessing the extent to which other government programs are being used to leverage the NMTC.  The report on this research (issued in August 2017) found that some NMTC projects, especially those using other government funds to leverage the NMTC, potentially received more government funds than needed to close a financing gap. The report recommended that Treasury further evaluate the use of other public funds, specifically combinations of federal and state NMTCs. Treasury guidance on how other public funds may be leveraged and combined with NMTC could help ensure that low-income community projects do not receive more government assistance than required to finance a project.

Implementing Entity:

Department of the Treasury

Action:

The Secretary of the Treasury should ensure that controls are in place 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 (i.e., returns that are not commensurate with the New Markets Tax Credit (NMTC) investor’s risk).

This action was identified in GAO’s July 2014 report, New Markets Tax Credit: Better Controls and Data Are Needed to Ensure Effectiveness (GAO-14-500) and was added to the Action Tracker in April 2015.

Progress:

The Community Development Financial Institutions Fund (CDFI Fund), which administers the NMTC program, has developed a plan to issue guidance to help ensure that Community Development Entities (CDE) accurately report on sources of public funds and projected internal rates of return, as GAO recommended in July 2014. In January 2016, the CDFI Fund released updated guidance that explains in more detail how CDEs should report data on the use of other public sources in financing NMTC projects. The updated guidance should help ensure that CDEs accurately report on sources of public funds. CDFI Fund officials are also evaluating changes to guidance on how CDEs are to report different project rates of return. The CDFI Fund awarded a contract in September 2015 for new empirical research assessing the extent to which other government programs are being used to leverage the NMTC. The report on this research (issued in August 2017) found that NMTC projects using the leveraged structure described in GAO’s July 2014 report were more likely to receive higher-than-expected rates of public funding. The report cautioned, however, that limits on the use of leveraged structures could have significant effects on the types of NMTC projects financed, and that some projects in highly distressed communities may need more public funding to attract private investment. The report recommended that the CDFI Fund conduct further research on the relationship between distress and the depth of public funding, and develop tools to help CDEs better evaluate appropriate levels of public funding in their NMTC projects. Additional research will help inform further analysis on the need for any controls to limit rates of return and unnecessary duplication with other public sources, as detailed in GAO's July 2014 report.

Implementing Entity:

Department of the Treasury

Action:

The Secretary of the Treasury should ensure that the Community Development Financial Institutions (CDFI) Fund reviews the disclosure sheet that Community Development Entities (CDE) are required to provide to low-income community businesses to determine whether it contains data that could be useful for the Fund to retain.

Progress:

The Department of the Treasury (Treasury) reported that as of May 2015, the CDFI Fund had reviewed the CDE disclosure sheets provided to low-income community businesses, as GAO recommended in July 2014, and determined that most of the useful data from the sheets were already being collected through other data-gathering tools used by the Fund. In January 2016, CDFI Fund officials reported that they did an initial comparison of the data on the disclosure sheets to the data in the Community Investment Impact System (CIIS), which is the system CDEs use to submit reports to the CDFI Fund. Officials said they were continuing to investigate any differences between the disclosure sheets and CIIS, and had procured empirical research to help inform their review. The final report on this research (published in August 2017) recommended that the CDFI Fund consider collecting data from the disclosure sheets as GAO had recommended. Having this additional information should be helpful in evaluating many of the transaction costs associated with structuring NMTC-financed projects, costs that can reduce some of the benefits available to low-income community businesses.

Implementing Entity:

Department of the Treasury

Action:

The Secretary of the Treasury should ensure that the Community Development Financial Institutions (CDFI) Fund clarifies the instructions for reporting the amount of any equity which may be acquired by the low-income community business at the end of the 7-year New Markets Tax Credit (NMTC) compliance period.

This action was identified in GAO’s July 2014 report, New Markets Tax Credit: Better Controls and Data Are Needed to Ensure Effectiveness (GAO-14-500) and was added to the Action Tracker in April 2015.

Progress:

The Department of the Treasury has implemented GAO’s July 2014 recommendation to clarify instructions to Community Development Entities (CDE) on reporting data on the status of NMTC-financed projects at the end of the NMTC compliance period, including data on any equity which may be acquired by the low-income community businesses. In April 2015, the CDFI Fund issued instructions to CDEs for completing a new closeout report to be completed at the end of the 7-year NMTC compliance period. This new closeout report includes data on loan status, project status, and the dollar value of any equity remaining in the low-income community businesses. Having more complete and accurate data on the performance of NMTC-financed investments, including the amounts of any equity remaining in the low-income community investments, should help in evaluating the effectiveness of the NMTC program.

Implementing Entity:

Department of the Treasury

Action:

The Secretary of the Treasury should also ensure that the Community Development Financial Institutions (CDFI) Fund clarifies the instructions it provides to Community Development Entities (CDE) about reporting loan performance and make the reporting of that data mandatory.

This action was identified in GAO’s July 2014 report, New Markets Tax Credit: Better Controls and Data Are Needed to Ensure Effectiveness (GAO-14-500) and was added to the Action Tracker in April 2015.

Progress:

The Department of the Treasury has implemented GAO’s July 2014 recommendation to make reporting of all loan status data mandatory and has clarified its instructions to CDEs for reporting these data. In September 2014, the CDFI Fund issued new guidance to CDEs for completing their annual submissions of data on NMTC-financed projects. In prior year guidance, CDEs were not required to complete all data fields regarding the status of loans to low-income community businesses. These data fields included information about how well the CDEs’ investments were performing, such as whether the loan was currently or previously delinquent or whether the loan had been restructured or charged-off. Because most of these fields were optional, GAO found that this information was incomplete and unreliable for reporting on the performance of NMTC-financed projects. Making reporting of this information mandatory should improve the reliability and usefulness of information on these low-income community investments.

Implementing Entity:

Department of the Treasury
  • portrait of
    • James R. McTigue, Jr.
    • Director, Strategic Issues
    • mctiguej@gao.gov
    • (202) 512-9110