The New Markets Tax Credit

Over the past two decades the federal government played a major role in encouraging private investment in lower-income communities through housing programs like the low-income housing tax credit, but this new capital has been limited almost exclusively to housing. A new program called the New Markets Tax Credit is intended to change this.  The credit:

• was authorized in 2000 and will be awarded for the first time in 2002;
• is intended to generate $15 billionover the next seven years in private investment in small businesses or commercial facilities located in low-income neighborhoods;
• will give private investors that make equity investments in qualified businesses an annual credit of 5-6 percent of the amount of their investment per year for a total of seven years; and
• will also allow investments through funds set up for the purpose of qualifying for these credits.

The result should be that qualified businesses are able to access loans or equity investments at lower interest rates.  Unlike the housing tax credit, which provides a much higher level of federal subsidy per dollar invested, the businesses that receive New Markets funds will have to prove that they can repay the capital.  The New Markets credits will probably not make whole new types of businesses feasible but they should help struggling businesses to thrive.  They may even help to convince private investors that these neighborhoods can be profitable places to invest without tax credits.

There are many ways, however, in which the New Markets Tax Credit is not ideal for commercial stabilization. The rules for the new tax credit do not adequately distinguish between investments that serve low-income families and those that are located in the target neighborhoods but have no benefit or, like check cashing outlets, have a negative impact on the lives of local residents. The administrators of the program at the Department of the Treasury say that they will address this concern in the way that they score applications for award of the credits, but the success of the program as a tool for equitable development will likely depend entirely on the specific details of how they implement this scoring process.

Ensure Local Government Considers Full Costs of Gentrification

When local government invests in "commercial revitalization" there is a danger that they will focus too tightly on the tax benefits. Certainly stronger businesses should expect to pay more taxes but equitable development of a commercial district may not result in the level of short term sales and property tax revenue that that gentrification of the same district could generate. However, the full economic cost of gentrification has to be considered. Large scale displacement of low-income and working families leads to higher demand for subsidized housing and social services and can make it difficult for local businesses to retain a stable workforce.  In addition, gentrification is part of a cycle of investment and abandonment that is probably more expensive in the long run then sustained investment in incremental change. Cities should make conscious decisions to invest in stabilization with an understanding that increased tax revenue will be only one of several benefits.

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