Incentives Watch: Weighing Federal New Markets Tax Credit’s Impact at State Level

As the end of the year looms (or the world, if you follow the Mayan calendar), certain tax credits are in danger of expiring if Congress does not act soon to extend them. One of the expired credits is the New Markets Tax Credit.

Congress established The New Markets Tax Credit in 2000. Individual and corporate taxpayers making investments in certain low-income areas may claim the credit, which is equal to 39% of their investment, according to the U.S. Treasury’s Community Development Financial Institutions Fund.

The federal New Markets Tax Credit expired at the end of 2011, but some are hoping to revive it before 2012 draws to a close. As part of its efforts, the New Markets Tax Credit Coalition released an Economic Impact Report last week that “is the first to measure the aggregate economic impact of NMTC investments over the course of the program.”

In particular, the report looks at how many jobs were created, as well as how much tax revenue was generated, as a result of the tax credit program, according to the Coalition’s press release.

The report indicates that credit investments created over 500,000 jobs in low-income communities, while expanding the state and local tax base and generating over $3 billion in state and local taxes.

Numerous communities across the country have been helped by the credit, according to another recently released report entitled The New Markets Tax Credit: At Work In Communities Across America. According to Robert Davenport, President of the National Development Council, the credit is “the most important economic development tool that this country has created in the last half century.” He noted in a recent teleconference that the beauty of the credit program is its flexibility. The credit helps big and small businesses, arts facilities, health care facilities, and more, says Davenport.

However, others believe there have been times when the credit was not being used for its intended purpose, according to a Bloomberg Markets Magazinearticle. Investors have used the credit to build luxury hotels, for example, in areas that qualify based on skewed poverty rates, notes the article.

State Programs

One question is whether states should adopt their own New Markets Tax Credit programs; however, with so much money being spent on other state tax incentives already, perhaps the federal tax credit is the more appropriate alternative right now. For more information about the state tax incentives available to various businesses, check out this recent article from The New York Times.

Nonetheless, Alabama recently enacted a new markets tax credit. In addition to the new markets tax credit, there are other tax credits designed to encourage investment in distressed areas. For example, many states, such as Colorado, offer enterprise zone credits to businesses that relocate to a designated enterprise zone and hire new employees there.

The basic difference between enterprise zone credits and the new markets tax credit is that the new markets credit is claimed by third-party investors, whereas the businesses actually located in the enterprise zone claim the enterprise zone credits.

In addition to Alabama, Florida, Illinois, Kentucky, Louisiana, Maine, and Mississippi offer a state new markets tax credit, according to the Bloomberg BNA’s State Tax Portfolios.

In other developments . . .

A long-operating construction company that reincorporated in another state and substantially changed its business model qualified for the empire zone tax credit, the New York Division of Tax Appeals ruled, because the changes made it a new business, according to a Bloomberg BNA Weekly State Tax Reportarticle.

By: Kathleen Caggiano

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