General government: New Markets Tax Credit (2011-66)
Converting the New Markets Tax Credit to a grant program may increase program efficiency and significantly reduce the $6 billion, 5-year revenue cost of the program.
Year Identified: 2011
Area Number: 66
Area Type: Cost Savings & Revenue Enhancement
6 Total Action(s)
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.
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.
No legislative action has been identified as of March 2022. Section 112 of division EE of the Consolidated Appropriations Act, 2021, extended NMTC through 2025 (Pub. L. No. 116-260, 134 Stat. 1182, 3050 (2020). However, this act did not offer grants in lieu of credits, as GAO suggested in January 2010. The Joint Committee on Taxation estimated this extension cost approximately $5.7 billion. The President's Fiscal Year 2022 Budget proposed permanently extending the NMTC. Offering grants in lieu of NMTCs could result in a greater portion of the federal subsidy reaching low-income community businesses.
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.
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.
The Department of the 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. However, Treasury has taken steps toward addressing this action. The Community Development Financial Institutions Fund (CDFI Fund), which administers the NMTC program, completed new empirical research assessing the extent to which other government programs are being combined with the NMTC. The findings of this research (issued in August 2017) indicate 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.
As of February 2022, CDFI Fund officials said that they intend to solicit public comments on additional data to be collected from the Community Development Entities. The CDFI Fund plans to use these data to identify NMTC-financed projects that may have excessive public funding. Once fully implemented, these additional actions could help ensure that low-income community projects do not receive more government assistance than required to finance a project.
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.
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.
The Community Development Financial Institutions Fund (CDFI Fund), which administers the NMTC program, has taken steps to limit the risk of unnecessary duplication, as GAO recommended in July 2014. The CDFI Fund completed 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 also did not find sufficient evidence to support specific caps limiting investor rates of return. Still, in response to GAO's July 2014 recommendation, the CDFI Fund has developed plans to use findings and methods from this research to create guidance and tools that the Community Development Entities (CDE) can use to analyze the depth of public funding in NMTC projects. CDFI Fund officials told GAO in December 2017 that the fund is also preparing to use the research's findings and methods to improve their oversight and analysis of NMTC projects. These additional analyses and reviews will help both the CDEs and the CDFI Fund to identify projects with potentially excessive or duplicative subsidies.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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