The Spread of State NMTC Programs

7 min read

South Carolina’s effort to join its neighbors

“New Markets Tax Credit legislation for South Carolina has been filed the past two years sponsored by a broadly bi-partisan group of legislators,” says Burnie Maybank, a former director of the state’s Department of Revenue and now in the Columbia, S.C. office of the Nexsen/Pruitt law firm. “South Carolina would follow the lead of fourteen other states, including its neighbors Florida, Louisiana, Mississippi, Alabama, Kentucky and Arkansas. North Carolina is currently considering similar legislation.”

Maybank, who has been promoting the NMTC idea among state legislators, is optimistic. “Job creation and business expansion are the two main policy objectives for a state NMTC,” he says. “South Carolina does very little to increase access to capital for small businesses. The state offers lucrative incentives to large manufacturers looking to move here, which certainly is an important facet of economic development. Small businesses, which continue to create the most new jobs in our country, get overlooked. New Markets offers a proven tool to expand those enterprises’ access to growth and expansion capital not readily available elsewhere.”

The next steps in South Carolina are continued movement through the legislative process. But whatever happens there, the state has already joined a large and growing crowd; more than a dozen states now have their own NMTC, and at least another dozen have tried and dropped, or seriously considered this tax credit—which totals more than half of all states.

Maybank correctly emphasizes that most states clustered around South Carolina now have their own New Markets Tax Credits. “This makes sense,” he says. “Ohio and Illinois are large, industrial states with an NMTC, but small business lending and equity investing face extra challenges in lower population and relatively poorer states. In fact, the reason you see such interest in southeastern states is there is such a shortage of operating capital for small businesses. The number of banks and the amount of bank loans actually declined from 2011-14 in South Carolina—the number one lament of small business here is difficulty in getting operating capital.”

The popularity of the NMTC, which Congress initiated on a national level in 2000, is somewhat ironic because the federal program faces the continual threat of termination and has been kept alive via a year-by-year maneuvering in Congress.

“Several main reasons explain NMTC’s appeal as a state law,” says a scholar who studies tax policy. “First, there is need. Need for tax revenues, desire for investment capital, and demand for affordable housing are growing. Every state worries about such things. Second. NMTC have a good reputation and track record. It is a proven program with strong bipartisan support. And third, such ‘policy diffusion—in this case from the federal government to the states—is increasingly common because it enables one level of government to benefit from the experiences—and often, the investment —of another level.”

Highlighting the importance of this last point, The Effect of State-Level Add-On Legislation to the Federal New Market Tax Credit Program, a study published in 2012 by Ball State University’s Center for Business and Economic Research notes “the justification … is straightforward. The application and administrative costs of this program are high and the due diligence process is costly. As a consequence, using established federal programs for state-level NMTC programs offer state tax credits at substantially reduced public costs.”

The Ball State study cited above reports that had Indiana implemented a 39 percent state New Market Tax Credit in 2010, “over a seven year period, the NMTC in Indiana would have resulted in roughly $433 million in investment in distressed regions, with 4,665 total jobs. Of this, $46 million would have been discrete new investment and a total of 499 discrete new jobs in Indiana’s distressed communities.”

Despite the certainty and precision that may be conveyed by these numbers, the need for more data and better data is clear. Ball State researchers, for example, juxtapose the words “An Estimate” in big, bright red letters right above the title of their report.

Indeed, supporters and opponents of NMTCs at the state level all believe they have facts on their side. Missouri, for example, adopted a NMTC in 2007, and then allowed it to lapse in 2013 amid dueling claims about jobs created.

“Data is hard to come by,” says Maybank. “South Carolina, like many smaller states, does not have many people to track things like jobs created by a particular tax credit. It would be quite a bit of work. Naturally, it would be wonderful to determine the effectiveness of it.”

Causality can be particularly difficult—and expensive —to prove in NMTC projects because they usually have a large number of federal, state and even local tax benefits.

An “implementation study” of Alabama, funded in 2011 by the Downtown Mobile Alliance 2011, for example, reported that “most of the states do not have any mechanism in place to track the effectiveness of the state-level programs. Two of the states included in this report were contacted by the authors and the directors said they did not keep that kind of data because it was not required by the state law that authorized the state NMTC. This makes it difficult, if not impossible to determine how many jobs were created or how much money was attracted for investment due to the state-level credits.”

Still, scholars have been able to find evidence of some important relationships. The Alabama study reports, among other things, that “States such as Mississippi, Louisiana, Florida, Illinois, Missouri, and Ohio that have leveraged state New Markets Tax Credits with federal credits have seen much larger investments in their states than they would likely have had with only the federal New Markets Tax Credit.” Several other studies have documented that states with their own NMTCs tend to have “a high per capita New Markets investment” at the Federal level.

Maybank’s, at least partial, solution to the data problem: Include a sunset provision in the legislation that “forces promoters of the NMTC to prove it is effective.” The South Carolina bill, like most state New Markets laws, requires annual reporting of jobs and investments.

It would seem that every state would have a NMTC local program by now. But lack of sufficient reporting and data on results has influenced some states to drop or not consider this funding option. An investigation conducted last May by the Portland Press Herald newspaper, for example, found that: The law that created Maine’s New Markets tax credit program includes [contrary to what the federal law requires] no requirement for how the recipient should use the money and – contrary to what some advocates claim – includes no mechanism to ensure the funds are invested in the business and therefore benefit its low-income community, as the law intended.

Maybank emphasizes that such issues can be easily prevented, and points out that “the South Carolina bill specifically requires that 100 percent of New Markets capital be invested in businesses with the state’s low-income communities as defined by federal law. Failure to do so triggers recapture.”

As state-level expansion of NMTC programs continues, a bipartisan coalition in Congress, led by U.S. Senator Roy Blunt (R- Mo) and backed by an industry-wide coalition, has introduced legislation to make the federal NMTC permanent.