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State New Markets Tax Credit Programs
Fourteen states have adopted New Markets Tax Credit Programs, with 80% of the program established since 2010. In general, all the state programs follow the general structure of the federal NMTC Program and all of the programs limit applicants for state credits to community development entities with current allocation agreements with the Community Development Fund (CDFI Fund), located within the U.S. Treasury.
The purpose of these state programs is to help attract private capital to lower income communities. There are over 100 community development entities with nationwide service areas, meaning they can deploy their capital in any income qualifying census tract. According to the August 2014 report by the CDFI Fund, there is over $2.4 billion available through these national players. Research shows that states with their own NMTC Programs are more attractive to the community development entities with national service areas.
The chart below displays key information on each of the state NMTC Programs including when the programs were established, subsequent program extensions, tax credit rates, terms, and the current authorized level of investments. [more information on the impact of these credits on the states' ability to attract federal NMTCs.]
State New Market Tax Credit Programs
|Credit Rate||Term in Years||Current Annual Qualified Equity Investments|
|Florida||2009, 2012, 2013, & 2014||39%||7||
|Illinois||2008, 2010, 2012, 2013, & 2014||39%||7||
|Kentucky||2010 & 2014||39%||7||
|Louisiana||2007, 2008, & 2013||45%||4||
|Mississippi||2008, 2013, & 2014||34%||3||
|Missouri||2007 & 2009||39%||7||
|California||2015 - proposed||39%||7||
While most states offer a 39% credit similar to the federal NMTC, there is variance of credit rates among the states. Mississippi, as an example, offers a 24% credit over three years and Utah offers a 58% credit over seven years.
Beyond the similar program designs, most states have additional elements representing the unique community development practices and values of their state. As an example, Florida requires each credit application to include information on how the community development entity plans to development relationships with community based organizations. Further, most states, but not all, require reporting of outcomes from the deployment of capital.
Reports on State New Markets Tax Credit Programs
Several state have undertaken thier own studies on the impact that a state New Markets Tax Credit Program would have on thier communities.
Ball University Research on State NMTCs (excerpt from report summary)
New Market Tax Credits are a relatively recent policy innovation designed to increase investment in distress communities around the nation. To date, the best analysis of these programs suggests this goal is occurring through both the redirection of investment from non-distressed to distressed areas and through new investment resulting from decreased consumption by individual investors. Extrapolating from earlier studies, we find that the ratio of new to redirected investment is roughly one to nine in the United States.
Several states have chosen to use a similar format to the federal NMTC to further increase investment in distressed regions. In doing so, they have chosen a program with low state-level administrative costs—a growing trend among states engaged in parallel tax and expenditure programs (e.g. the state-level Earned Income Tax Credit). Our analysis of these state plans from 2005 to 2010 finds that the programs significantly boost total NMTC in a state. This is addition to an expected effect of some $54 million per year in states adopting the 50 percent credit plan phased in over the course of seven years.
Using earlier studies and our own analysis, we offer a simulation of the effects of a tax credit, had Indiana implemented a 39 percent state New Market Tax Credit in 2010. We find that over a seven year period, the NMTC in Indiana would have resulted in roughly $433 million in investment in distressed regions, with 4,665 total jobs. Of this, $46 million would have been discrete new investment and a total of 499 discrete new jobs in Indiana’s distressed communities.
Analysis prepared for Alabama on whether to implement NMTC Program (expert from Executive Summary)
Alabama currently has approximately 250 census tracts that qualify for the NMTC. NMTC works through specialized Community Development Entities (CDEs) that offer federal tax credits in exchange for investments in projects ranging from commercial, industrial, retail, manufacturing, or mixed-use ventures to community facilities. New Markets Tax Credits help accomplish three objectives: (1) bring additional funding into low-income communities; (2) bridge funding gaps in projects; and, (3) provide strong returns on investment to those willing to risk their capital. The federal government benefits through jobs creation at a lower cost while states benefit by having more taxpayers in the state pool, a higher property tax base due to property improvements, more efficient use of existing infrastructure, and removal of urban blight. An additional benefit is the reduction of urban sprawl and the improvement of living/working conditions in previously distressed communities…
As of January 1, 2011, four states (Florida, Mississippi, Illinois, and Ohio) offer New Markets Tax Credits as a means of attracting new and/or additional investment into their state. Past users include Louisiana and Missouri. These states have been able to attract as much as 4 to 5 times as many federal New Markets Tax Credit dollars as Alabama. Surrounding states allocate as much as $10 million to $15 million to New Markets Tax Credit programs each year…
New Markets Tax Credit programs can attract millions of dollars into Low Income Communities, with up to 98% at better rates and terms than those offered in the prevailing capital and lending markets. Hundreds, if not thousands of new construction jobs and permanent full-time jobs can be created. Further, hundreds of thousands of square feet of commercial real estate space can be rehabilitated. Based on an analysis prepared by the “New Markets Tax Credit Coalition” dated December, 2010, they reported on 4,000 transactions and 3,000 business enterprises that leveraged $8 in private investment for every $1 of cost to the government, and the Coalition estimates that NMTC financed projects have created or retained up to 500,000 jobs, at a cost to the Federal government of less than $12,000 per job...
RECOMMENDATION: Alabama should implement a state-level New Markets Tax Credit program during the 2011 legislative session if Alabama is to compete with surrounding states for new capital and job creation. [Contact the JEDE COmmittee for a copy of the report]