It’s Time for the New Market Tax Credit Program to Be Permanent

The federal New Market Tax Credit program, which incentivizes private investment in economically distressed communities, is a crucial economic development tool and must be made a permanent fixture in the tax code. Doing so would allow participants of the program to make improvements and long-term plans, benefiting more communities across the country.

The NMTC program, enacted in 2000, has financed more than 10,800 businesses and created or retained nearly one million jobs since its inception. But as it does every few years, the program is facing an existential crisis.

Despite the diligent efforts of community development entities, lenders, borrowers, investors, accountants, attorneys, and consultants to be good stewards of taxpayer dollars, the program will be out of funds after the 2025 allocation round unless Congress acts.

Precedence exists for making the NMTC program permanent. The Low-Income Housing Tax Credit program, authorized in 1986, took less than seven years to achieve permanence. Not only did this encourage new investment in the program, but it also bolstered equity pricing. The real winners of LIHTC permanency were low-income households who benefited from new affordable housing units coming to market.

This shouldn’t be a difficult decision for Congress, as there is bipartisan support for making the NMTC program permanent. In 2023, the House (with H.R. 2539) and the Senate (with S. 234) advanced legislation to do just that. At a Senate Committee on Finance hearing, Chairman Ron Wyden (D-Ore.) said the NMTC program “should be at the top of list” of priorities ahead of future discussions about the tax code. Republican senators also echoed their support at the hearing.

Los Angeles is one of the many communities benefiting from job creation, community facilities, and affordable goods and services because of the NMTC program. Earlier this year, US Bancorp Impact Finance provided equity financing through NMTC and LIHTC structures, along with construction debt, to develop the Go for Broke Plaza and First Street North Residences.

The project includes 248 affordable housing units—one of the biggest 100% affordable housing developments in the city—plus approximately 40,000 square feet of commercial space for local minority-owned businesses. In total, over $83 million in debt and over $85 million in equity finance were committed through four different transactions.

The program works as follows: Community development entities apply to the Treasury Department’s Community Development Financial Institutions Fund for NMTC funds. Following an allocation award, the entities solicit investors and deploy those funds to businesses operating in low-income communities.

These loans and investments are made with better rates and terms—and with more flexible features than would otherwise be available to them. In turn, investors claim a federal tax credit worth 39% of their applicable investment over a seven-year period. To date, the CDFI Fund has awarded $76 billion in tax allocation authority to over 1,500 entities.

But as word has spread about what the NMTC program has made possible, demand has exceeded capacity. In the 2022 calendar year, the most recent round to be awarded as of this writing, 197 entities applied for allocation totaling nearly $15 billion, three times the allocation available, with $5 billion ultimately going to 102 entities.

Because the program isn’t permanent, new investors may be reluctant to devote resources to an incentive program with an impeding expiration date. As a result, most financing for NMTC projects comes from investors with a track record of success and specialized knowledge of program rules.

More investors in this space would mean more competitive pricing that would benefit underserved communities. There is a tendency now to focus on projects that can be completed quickly and efficiently. With program permanency, hard-to-finance projects with multiple phases would have a better shot at getting funding. Stimulating private investment in these neighborhoods would increase economic opportunity and improve lives.

While competition is likely the most tangible and direct benefit to permanency, it also would create a long-range planning pipeline and draw in new investors and community development entities, especially those who have been reluctant to commit without the promise of future funding.

Investors and entities could commit additional resources to organizational infrastructure, developing consistent policies, procedures and standardized documents to be used across a portfolio of projects. This would streamline intake, closing, and asset management.

One of the key challenges at the moment is that business leaders must weigh hiring decisions knowing there is no specific allocation for the NMTC program authorized past 2025. Permanency would allow project managers to hire individuals and organize teams in a way that develops deeper expertise rather than make haphazard assignments based on capacity. Likewise, early-career professionals such as attorneys and accountants who serve the industry could feel more comfortable developing a niche practice involving NMTCs.

With over 20 years of successful history, the NMTC program has proven itself worthy of a permanent place in the tax code. If proponents can convince Congress to take this next step, then more time can be spent developing projects with real community impact.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Karen M. Rippelmeyer is partner at Stinson, focusing on real estate and tax credit financing.

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