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Establishing a New Markets Tax Credit Program in California
Over the past three legislative sessions, the California Legislature heard a variety of bills that would establish a state new markets tax credit program. Assembly Bill 185 was the latest in this series of measures promoting the new markets tax credit model as a means to help drive new capital into historically underserved and undercapitalized communities.
The Assembly Committee on Jobs, Economic Development, and the Economy (JEDE), developed this website to provide background on the new markets tax credit model, the federal New Markets Tax Credit Program, new markets programs in other states, and the economic development challenges facing California's lowest income communities.
Objective - Attract New Private Capital to Low Income California Communities
New markets tax credits are designed to attract private capital to very low-income neighborhoods including money from national investment pools. The federal General Accounting Office reports that the presence of the federal credit attracts capital for projects that may otherwise be overlooked.
In its August 2014 report, the U.S. Treasury reports that there is over $4 billion in capital raised through federal New Markets Tax Credits that has not been deployed. There are over 100 CDEs with nationwide service areas. Of those CDEs with nationwide service areas, the report shows that over $2.4 billion of these funds are with community development entities (CDEs) with national service areas. These national CDEs prefer making investments in low income neighborhoods located in states with the own NMTC Program.
Attracting net new capital to California is one of the unique features of a state tax credit. There is tremendous competition for private investment and a state credit maximizes California's opportunity to access this capital.
The federal NMTC program, enacted by Congress in 2000 and extended numerous times, authorizes up to $3.5 billion of investment in low-income areas nationwide. The Program is administered by the Community Development Financial Institution Fund (CDFI Fund) within the U.S. Treasury. Since inception, the CDFI Fund has made 836 awards allocating a total of $40 billion in tax credit authority to CDEs through a competitive application process.
Impact Federal Program - Between 2003 and 2012, investments in federal New Markets Tax Credits leveraged over $60 billion, of which $31 billion was raised directly from the tax credits, the remainder coming from other sources. The federal credits directly generated 561,873 jobs, including 207,550 full-time jobs and 354,323 construction jobs.
Examples of NMTC projects in California can be found here.
Additional information on the impact of the federal credit; tax credit agreement between the CDE and U.S. Treasury; compliance, monitoring and evaluation; and federal law and regulation, is available on the CDFI Fund Webpage.
Fourteen states have approved state-level new markets tax credit programs including Alabama, Arkansas, Florida, Illinois, Kentucky, Louisiana, Maine, Mississippi, Missouri, Nebraska, Nevada, and Oregon. [more]
Small Businesses Capital Needs
Accessing capital repeatedly scores in the top five challenges small business face in becoming established, remaining competitive, and expanding. While funds may be available within communities for larger size businesses, smaller businesses often need more flexible terms, credit enhancements, and a variety of financial products that traditional financial institutions, on their own, do not offer.
Examples of products a small business might need, but are not generally available through a traditional financial institution include patience capital, in the form of equity investments, and working capital to help cover payroll and other overhead while products and services are provided, but customer invoices haven't been paid. Here is a link to examples of California NMTC financail assistance.
Why a State Credit?
The purpose of a state-level tax credit is to make California more attractive to community development entities and CDFIs that have previoulsy received an allocation from the federal New Markets Tax Credit Program. Many CDEs have multi-state service areas and over 100 CDEs have nationwide service areas.
The authors beleive that having a state-level credit will rsult in California receiving a larger share of the qualified low-income community investments, raised through the federal tax credit program.
NMTC programs drive capital investments, which remain in place for years, into low-income and distressed communities. These investments include funds raised through the federal NMTC, as well as follow-on investments from other community development sources. Nationally, $12 to $14 dollars have been attracted into deals and projects for every $1 dollar directly invested.
Low Income Areas
The federal New Markets Tax Credit is designed to provide financing for economic development activities within low-income communities (at the census tract level) with median household incomes of no more than 80% or a poverty rate of over 20%. The federal tax credit also designates a severly distressed area.
A severly distressed area is a census tract with a median household income of no more than 60%, a poverty rate at or above 30%, or having an unemployment rate 1.5 times the national average. An interactive map of eligible areas is available through this link. The last several bills have limited New Market projects to only "severeley distressed areas."