New Markets Tax Credit Program Gets U.S. GAO Review

The U.S. General Accounting Office (GAO) has released a report describing its efforts to evaluate the New Markets Tax Credit (NMTC) Program created by Congress in 2000. The NMTC program, which has total equity of $15 billion, permits taxpayers to receive a credit against federal income taxes for making qualified equity investments in designated Community Development Entities (CDEs). Substantially all of the taxpayer's investment must in turn be used by the CDE to provide investments in low-income communities. Credit to the taxpayer totals 39 percent of the investment and is claimed over a seven-year credit period.

The GAO report attempts to highlight the NMTC program's goals, design and progress and – as mandated by the Community Renewal Tax Relief Act that brought the program into existence – to review how the program may be evaluated for effectiveness and compliance. The GAO says the program's goals are not explicitly stated in the 2000 legislation but that program supporters contend the goals are "to direct new business capital to low-income communities, facilitate economic development in these communities, and encourage investment in high-risk areas."

The report adds, "Although the legislation authorizing the NMTC Program requires that the investments be made in businesses and communities that meet certain eligibility standards, it does not specify that the investment be new capital, that performance measures be established to show that investment leads to economic development, or that the investment be in high-risk areas within eligible communities."

Applications received in response to the NMTC program go through a competitive review process to identify those applicants that the Community Development Financial Institutions (CDFI) Fund finds best suited to have the greatest impact by facilitating the flow of private sector capital into low-income rural and urban communities. The CDFI Fund, which administers the program with the Internal Revenue Service (IRS) and the Department of Treasury's Office of Tax Policy, uses some criteria for allocating the credits, but it is not required to do so by the program legislation. These criteria, the GAO notes, reflect the program's goals.

Evaluating the NMTC program's effectiveness can present difficulties, the GAO report states. Among the challenges is establishing a criterion that can gauge the extent to which economic development would occur in communities receiving investment if the program did not exist. Another difficulty exists in the NMTC program's relatively small potential to stimulate economic activity for a whole region, since investment is spread out over seven years. The GAO observes that "$15 billion of potential new investment – over seven years – may be too small to have a measurable impact in a target area that the CDFI Fund estimates could include 35 percent of the U.S. population and 40 percent of the land area."

Similar difficulties exist in evaluating the program's compliance, according to the GAO, and these challenges are further complicated when investors, CDEs and businesses "are involved at different levels of the program, and (the IRS and CDFI Fund) will have responsibility for administering, monitoring and enforcing compliance."

The report suggests that because some methods to evaluate the NMTC program have significant limitations, definitive conclusions cannot be reached. However, it leaves open the possibility that other evidence may attest to the program's effectiveness or compliance. For example, data on whether or not investors receiving credit had previously made similar investments in low-income communities can be a measure of effectiveness.

The CDFI Fund has not made its first credit allocations for the NMTC program, which is still in its early stages. The GAO report (GAO-03-223R) is available at http://www.gao.gov. More information on the NMTC program is available at: http://www.cdfifund.gov/programs/nmtc/