August 27, 2014

Effort to Bring Private Investments to Low-Income Areas Is in Danger

Amid new activity in the impact-investing movement, including $1.5-billion in new commitments from foundations and banks across the country, we sometimes forget the existing tools that government has used for decades to attract private investments to the social sector. One of these quiet forces that is very worth remembering, especially now that it is in jeopardy, is the New Markets Tax Credit program, administered by the Community Development Financial Institutions Fund of the U.S. Treasury.

The program was created by Congress to attract private investments to low-income areas. Often, these investments help finance the construction of new community facilities like health centers or schools, providing critical services to neighborhoods in need.

The tax-credit program expired in 2013 and is up for reauthorization by Congress—but a couple of recent reports have publicly criticized it, making its future in this climate of tax reform even more uncertain.

That's a shame. New Markets Tax Credits work. The federal government is willing to offer them as an incentive to encourage the private sector to help the government achieve a public-policy goal: the creation of economic opportunities in disadvantaged communities. And because of this incentive, investors, such as large banks, are able to provide capital to projects that they otherwise would not, and typically on flexible and below-market terms.

Rather than being characterized as a tax break for large banks, the tax dollars that the U.S. forgoes by offering these tax credits should be seen as an investment by the government—an investment in communities that are underserved by traditional markets.

And these investments pay off.  The U.S. Treasury has awarded $40-billion in New Markets Tax Credit allocations since 2002 to hundreds of community development groups working to support the most underserved communities in the United States. This allocation has leveraged $60-billion in total capital investment. The program helps create jobs, increase real-estate values, and provide goods and services to neighborhoods throughout the country--all things that result in increased tax revenues for governments at many levels and more than repay the dollars originally lost by offering the tax credit.

But perhaps the best defense of the program is the investments themselves—not the few unfortunate examples focused on in critical reports but the vast majority of past projects, like those supported by Nonprofit Finance Fund, that are new and improved anchors of their communities and ones that could not have existed without the program. As a result of the tax credits:

  • A health center in West Philadelphia was able to move from its cramped quarters in a strip mall to a new, state-of-the-art facility, allowing it to expand services to residents of the surrounding low-income community, as well as increase its capacity to serve patients by over 59,000 visits annually.
  • A local revitalization organization in Flint, Mich., relocated the Flint Farmers Market to a new, central location near mass transit, allowing for expanded access to fresh food and local goods for the surrounding population, as well as classrooms, offices, and affordable housing for Michigan State University’s public-health program.
  • A youth-services organization in the Harlem neighborhood of New York City wanted to play a bigger role in the day-to-day lives of the kids they served. Through the tax credits, it is now constructing a permanent facility for its affiliated charter school, which will serve the low-income population of the neighborhood’s many public-housing developments.  The school is part of a larger complex that also includes affordable housing and program and office space for the nonprofit organization.
  • A community arts organization undertook a $30-million restoration of a historic theater in Worcester, Mass., only possible due to creative financing using the tax-credit program. The nonprofit was able to bring a state-of-the-art performance center to distressed downtown Worcester, giving it not only a fully restored historic landmark but also an estimated $40-million of annual economic benefit in the form of induced spending and jobs to the surrounding area.  The theater has become an anchor of continuing municipal revitalization efforts.

Unlike many of the impact-investing programs that have received attention in the last several years, the New Markets Tax Credit program is well established. With over 10 years in practice, it has already helped hundreds of community-development groups build, test, and refine an infrastructure for collaborative financing for nonprofits and community-development projects.

It has also demonstrated something even more powerful: proof of impact. In the decade of its existence, the program was responsible for creating over 562,000 jobs, with more than 72 percent of investments being made in communities exhibiting severe economic distress. (See the New Markets Tax Credit Coalition website for more information. You can also see how the program fits into impact investing as a whole in the U.S. National Advisory Board’s recently released report.)

We at Nonprofit Finance Fund, among many others in the field of impact investing, have voiced support for innovation in impact investment, recognizing the need for capital to help develop and test new tools, including Pay for Success, Social Impact Bonds, and more.

But impact investing isn’t just about innovation. It is also about sustaining and supporting what we know already works.

Will Lanier, NFF analyst, contributed to this article.