Skip to main content

New Markets Tax Credit: The Credit Helps Fund a Variety of Projects in Low-Income Communities, but Could Be Simplified

GAO-10-334 Published: Jan 29, 2010. Publicly Released: Jan 29, 2010.
Jump To:
Skip to Highlights


The Treasury Department's Community Development Financial Institutions (CDFI) Fund awarded $26 billion in New Markets Tax Credits (NMTC) through 2009 for investment in low-income communities. The NMTC allows investors to claim a tax credit totaling 39 percent of their investment in Community Development Entities (CDE) over 7 years which CDEs reinvest in qualified communities. This mandated report (1) describes where and how CDEs are using NMTCs, (2) assesses how CDEs use NMTCs to offer favorable financing terms to low-income community businesses and describes options for simplifying the NMTC, (3) describes how, if at all, NMTC investments support low-income community development, and (4) determines how effective IRS and the CDFI Fund have been in monitoring NMTC compliance. GAO analyzed CDFI Fund and CDE data, did case studies of CDEs, and interviewed relevant experts.

Since 2003, CDEs have made NMTC investments in all 50 states, the District of Columbia, and Puerto Rico, with about 65 percent for real estate. NMTCs are often used as "gap financing," accounting for a portion of total project costs. NMTC investments in low-income community businesses generally use leveraged structures, where equity is left in the businesses, or subsidized interest rate structures, where below-market interest rate loans are offered. Recently, investors appear to be paying less for tax credits than in previous years and they made fewer NMTC investments in 2009 than in previous years. The CDFI Fund does not collect data that could identify the portion of the subsidy channeled to businesses, such as data on credit pricing, transaction fees, and the amount of equity left in businesses. Two potential options (i.e., changing related parties tests or converting the NMTC to a grant program) could simplify the program and make additional funds available to businesses. CDEs have used the NMTC program to support a variety of investments, but project impacts are difficult to measure and likely vary depending on the project. GAO identified NMTC-supported projects for mixed-use facilities, housing developments, and community facilities, among other qualified business activities. The CDFI Fund does not collect data on incomplete or failed projects, which might be used, for instance, to improve credit allocation selections. Projects with NMTC financing likely contribute employment and other outcomes to low-income communities. Limitations with available data make it difficult to isolate project impacts and GAO's analysis does not allow it to determine whether the projects supported by NMTCs would have taken place absent the credit. Continued improvements could be made in collecting project-level data (e.g., removing double-counting of some outcomes). IRS monitors CDE and investor compliance with applicable laws, while the CDFI Fund monitors CDEs' compliance with their allocation agreements. IRS and CDFI Fund officials weighed the costs and benefits of options to monitor compliance and selected controls on that basis.


Matter for Congressional Consideration

Matter Status Comments
Should the program be extended beyond 2009, to ensure that the maximum amount of capital ends up in low-income community businesses, Congress may wish to consider offering grants to CDEs that would provide the funds to low-income community businesses. If it does so, Congress may wish to require 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 NMTC; whether the grant program otherwise affects the success of efforts to assist low-income communities; and how costs for administering the program incurred by the CDFI Fund, CDEs, and investors would change. One option may 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 in a future allocation round to facilitate comparison of the two program structures.
No legislative action has been identified as of February 2024. 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 2025 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.

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of the Treasury Should the program be extended beyond 2009 and absent a broader restructuring of the program, to ensure that the CDFI Fund has complete data on the amount of capital flowing to low-income community businesses from the sale of NMTCs to investors, the Secretary of the Treasury should direct the CDFI Fund Director to collect data that show the sale price of NMTCs from CDEs to investors, fees paid by QALICBs to close NMTC transactions, and the amount of equity that the CDE projects it will leave in the qualified active low-income community business (QALICB) at the end of the 7-year period during which investors can claim tax credits.
Closed – Implemented
In August 2011, the Community Development Financial Institutions (CDFI) Fund began collecting data on the sale price of New Markets Tax Credits (NMTCs), associated fees, and the equity the Community Development Entity (CDE) projects it will ultimately leave in the business benefiting from the NMTC. Having this data helps the CDFI Fund better understand the benefits of the NMTC program in relation to its costs and gives Treasury and the Congress useful information on how to best structure the program.
Department of the Treasury To more effectively assess the outcomes generated by the NMTC program in low-income communities, should the program be extended beyond 2009, the Secretary of the Treasury should direct the CDFI Fund Director to continue improving strategies for collecting NMTC project-level data that clearly identify the potential outcome of each project without the potential for double-counting the outcomes of some projects or undercounting the outcomes of others.
Closed – Implemented
In August 2012, the Community Development Financial Institutions (CDFI) Fund implemented new reporting requirements whereby Community Development Entities (CDEs) reporting project outcomes to the CDFI Fund for projects with New Markets Tax Credit (NM TC) investments from multiple CDEs would either have to designate a "Lead CDE" to serve as the single point of reporting for the project or participating CDEs would be required to develop a coordinated approach to reporting that avoids double counting outcomes. Having this information will help the CDFI Fund better understand the outcomes of NM TC projects by receiving more reliable information that does not contain the potential for double counting.
Department of the Treasury To ensure that the CDFI Fund understands which projects have stalled or are not going to be completed and whether the criteria for funding selection could be improved, the Secretary of the Treasury should direct the CDFI Fund Director to collect data on the failure rate of NMTC projects.
Closed – Implemented
In August 2011 and August 2012, the Community Development Financial Institutions (CDFI) Fund implemented new requirements that Community Development Entities (CDEs) provide project failure information by reporting on the status of New Markets Tax Credit (NMTC) loans, NMTC projects being refinanced, and the amount "charged-off" in cases where NMTC investments have been restructured. Collecting data on the failure rate of NMTC projects gives the CDFI Fund a better understanding of the projects best suited for NMTC financing and could improve its ability to make better future decisions about how to allocate credit funding.

Full Report

Office of Public Affairs


Community developmentCost analysisData collectionFinancial institutionsInterest ratesInvestmentsMonitoringPerformance measuresProgram evaluationTax administrationTax creditGovernment allocation