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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 identified. The NMTC expired at the end of 2014. In his fiscal year 2016 budget request, the President proposed that the NMTC be extended permanently. Bills have been proposed in the 114th Congress that would extend the NMTC for 2 years through 2016 (S. 1946), extend it through 2016 for entities serving in 2012 to 2015 disaster areas (S. 1795 and H.R. 3110), and make it permanent (S. 591 and H.R. 855). If Congress extends the credit as it has in the past, another opportunity exists to offer grants in lieu of credits, as GAO suggested in January 2010.  Also, in the President’s 2016 budget request, the Office of Management and Budget reported the expected 5-year revenue cost to be about $4 billion. Offering grants in lieu of NMTCs could result in a greater portion of the federal subsidy reaching low-income community businesses.

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:

No executive action taken. 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. Treasury said, in September 2015, that the Community Development Financial Institutions Fund (CDFI Fund), which administers the NMTC program, plans to procure new empirical research assessing the extent to which other government programs are being used to leverage the NMTC. Treasury has said that this research would help examine the various types of public support used for community development projects and assess the depth of the subsidy necessary to mitigate risk and attract new private capital to businesses located in low-income communities. In November 2015, CDFI officials reported to GAO that they had awarded a contract for this research and that they were reviewing and finalizing a workplan; however GAO has not yet obtained a copy of this contract. CDFI officials anticipated that the contract will be completed in March 2017. Having this additional research would help inform future Treasury guidance on other public funds that may be leveraged and combined with NMTC in low-income community projects. 

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 August 2015, the CDFI Fund said that it intends to issue guidance with the release of its latest version of its data gathering system in fall 2015, but as of November 2015, the guidance had not been released.This guidance should help ensure that CDEs accurately report on sources of public funds which in turn should help limit the risk of unnecessary duplication and limit above market rates of return, as detailed in GAO’s July 2014 report.

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 useful data from the sheets were already being collected through other data-gathering tools used by the Fund. According to Treasury, the CDFI Fund had previously added 13 new questions to its annual data reporting instructions for CDEs and stated that these new questions closely mirrored the information gathered on the disclosure sheet. Treasury also noted that CDEs are required to retain a copy of the disclosure sheet, and that CDFI Fund staff can access this information when they conduct reviews of New Markets Tax Credit (NMTC) projects. GAO has requested additional documentation from Treasury to verify that these steps have been taken.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.

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.

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.

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