In 2020, the New Markets Tax Credit (NMTC) program turned 20 years old. A bipartisan congressional coalition created the NMTC program to promote investment and economic growth in low-income urban and rural communities. The program’s purpose is to give these depressed areas the capital to support and grow businesses, develop and sustain jobs, and maintain a healthy economy. In 2022, the NMTC program will celebrate the 20th anniversary of the first NMTC application round resulting from the newly created NMTC program.
The Community Development Corporations Tax Credit Pilot Program
According to the New Markets Tax Credit Coalition, the predecessor of the NMTC program was the Community Development Corporations Tax Credit (CDCTC), a pilot program authorized by Congress in 1993. Under the CDCTC, individuals and corporations could get a federal income tax credit for cash grants and loans made to 20 community development corporations (CDCs) chosen by the U.S. Department of Housing and Urban Development. Investors received a five percent federal tax credit over ten years based on the amount of their investment and could claim it as a charitable deduction.
New Markets Tax Credit Introduced in Congress
Based on the success of this pilot program and the Historic Rehabilitation Tax Credit and Low-Income Housing Tax Credit programs, the Clinton administration first proposed the “New Markets Tax Credit” in the White House’s FY 1999 budget. In 1999, Democrats introduced the New Markets Tax Credit Act of 1999 in both chambers of Congress. Republicans also introduced a similar “New Markets Initiative” bill that created a “New Markets Tax Credit.”
The Clinton administration and Congress eventually agreed on a $25 billion package of community development incentives embodied in the Community Renewal Tax Relief Act of 2000. In addition, the Act devoted $15 billion to create the New Markets Tax Credit from 2001 to 2007.
The NMTC program is not a permanent part of the federal tax code. Nonetheless, Congress has authorized its extension seven times.
Implementation of the NMTC Program
After the passage of the Act, the Department of Treasury’s Community Development Financial Institutions (CDFI) Fund had the task of implementing the NMTC program. The IRS released temporary regulations and the first Community Development Entity (CDE) certification application in December 2001. The first application round opened in September 2002, by which time the CDFI Fund had certified 1,021 CDEs. The IRS released final regulations for the NMTC program in December 2004.
Awards from the First Round of the NMTC Program
The CDFI Fund awarded $2.5 billion in March 2003 to 67 CDEs from 40 states and the District of Columbia. Twenty-two CDEs targeted national or multi-state service areas, whereas the other 45 CDEs targeted specific states or localities. Individual award amounts ranged from $500,000 to $170 million.
The first round of allocation moved much more slowly than today. The CDFI Fund did not finalize most allocation agreements until the fall of 2003. As a result, by the end of 2004, CDEs had utilized only about $1.1 billion of the $2.5 billion in first-round allocation. In contrast, in 2018, CDEs with NMTC allocation awards utilized $5 billion in under 12 months.
Allow Savage & Associates to Help You Develop Your Vision
We are an economic development law firm dedicated to offering complex and innovative legal and transactional advice to developers, investors, nonprofit organizations, entrepreneurs, and changemakers in society. We are not a traditional law firm. Instead, we are a small boutique law firm that focuses on what you need to develop the strategies necessary to impact communities.
We have worked with clients to obtain all types of tax credits and other government programs to finance the revitalization of communities. Savage & Associates has handled over a billion dollars in New Markets Tax Credit financing transactions and more than 300 commercial real estate closings. As a result, we know how to leverage the available tax credit tools to transform your communities. You can contact our offices by calling 215.880.9441 in Philadelphia or 202.817.3941 in Washington D.C. to discuss your ideas. You also can find out more about our services online. We look forward to working with you to build your communities through traditional and alternative investment mechanisms based on your individual needs.