A tax credit that is supposed to help poverty-stricken communities is instead being used to finance at least two luxury hotels, an antique car museum, a small theater in an upscale neighborhood, and other dubious projects, while lining the pockets of wealthy banks and investors.
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The New Markets Tax Credit, introduced during the Clinton administration, was intended to spur the development of projects that would create jobs in low-income communities. However, recent reports by Bloomberg Markets Magazine and CBS News have cast a harsh light on how banks and investors have managed to manipulate the qualifications for the tax credit to allow projects to be built in areas that would seem to hardly fit the definition of a low-income community.
Among the projects is the luxurious Blackstone Hotel in downtown Chicago, which was the beneficiary of $15.6 million in tax credits, much of which went to Prudential Financial and its partner in the project, JPMorgan Chase. Prudential also profited by building another luxury hotel, the Nines, in Portland, Ore., which was built with $27.3 million in New Markets Tax Credits.
The tax credits are only supposed to go to census tracts with a poverty rate of at least 20 percent, or whose population earns 20 percent less than the median family income of the surrounding metropolitan area. Projects like these qualified for the tax credits in some cases because the surrounding communities fit the definition of low-income based on 2000 census figures, before they became more upscale, and the fact that many students from nearby universities live in the area, upping the individual poverty rate.
While the program has indeed benefited many low-income communities, banks have also managed to cherry-pick communities where the family poverty rates are close to zero while targeting areas that are already beginning to gentrify. Banks stand to collect hefty fees of 39 cents on the dollar over a seven-year period for the loans or money they contribute to a project. Prudential invested $40 million in the Blackstone Hotel and in turn received $15.6 million in tax credits.
Goldman Sachs and U.S. Bancorp partnered on converting an old armory into the nonprofit Gerding Theater, a 599-seat venue in Portland, Ore., with the help of the New Markets Tax Credits in the up-and-coming Pearl District of the city.
Taxpayers also footed the bill for a museum in Tacoma, Wash., built to house the antique car collection of a deceased garbage-hauling magnate. U.S. Bancorp helped put together that project with the benefit of $34 million worth of New Markets Tax Credits. They had to set up a company to buy the assets of the museum and then lease back the property in order to get around restrictions.
Ironically, back in 1999 when President Clinton was promoting the brand-new tax credits, he visited a cabinet factory in the impoverished Mississippi Delta town of Clarksdale. Clarksdale has yet to receive any tax credits under the program.