Banks Claim Millions in Tax Credits Intended for Poor Communities
Big banks and wealthy investors are accused of benefiting from a tax credit program that is supposed to help poor communities, according to a new Senate report.
The report, from Sen. Tom Coburn, R-Okla., describes how millions of dollars in New Markets Tax Credits are being diverted to benefit billionaires, major banks, Hollywood producers and fast food chains.
The program is supposed to spur new markets in struggling communities, but Coburn said it is instead subsidizing companies and corporations that have little need of taxpayer assistance, providing financing for projects such as a sculpture in the desert, a vintage car museum, and pet care centers. In at least one case, a project supported with a New Markets Tax Credit is threatening to bankrupt an entire town and eliminate jobs, including the entire police department.
“The New Market Tax Credit is a reverse Robin Hood scheme paid for with the taxes collected from working Americans to provide payouts to big banks and corporations in the hope that those it took the money from might benefit,” Coburn said in a statement Monday. “When government picks winners and losers, the losers usually end up being taxpayers. Washington should reduce federal taxes on working Americans and all business owners who create jobs by eliminating tax earmarks, loopholes and giveaways like the New Markets Tax Credit.”
The New Markets Tax Credit program was expected to steer private financing into low-income communities to help create jobs. Yet, virtually every neighborhood, from Beverly Hills to the Hamptons, could qualify for the program, Coburn noted.
“As a result of the definition of qualified low-income communities, virtually all of the country’s census tracts [neighborhoods and communities] are potentially eligible for the NMTC,” according to a report from the nonpartisan Congressional Research Service.
While some of the projects are well intended, such as health clinics, Coburn acknowledged, it is difficult to measure if the tax credits are helping those who are seeking a hand up or simply subsidizing banks, corporations and others companies that are already succeeding.
The tax credit is intended to benefit the poor but is instead benefiting big banks and other private investors that claim more than $1 billion in NMTC annually. These include JP Morgan Chase, Bank of America, Goldman Sachs and Wells Fargo, among others.
The program duplicates over 100 other federal economic development efforts. There are at least 23 community development tax expenditures costing taxpayers over $10 billion annually and 80 overlapping discretionary programs costing $6.5 billion annually, 28 of which are specifically designed to spur growth in new markets. Because of this redundancy, many projects and corporations are double-dipping on taxpayers—receiving multiple federal subsidies through other grant programs and tax giveaways. In addition, it is unclear which of these best meets the overlapping goals, or if any of them spur more economic growth than policies encouraging private investments that do not spend taxpayer money.
A separate Government Accountability Office report that was issued Monday was also critical of the New Markets Tax Credit program, revealing that fees charged by Community Development Entities reduced the amount of assistance provided to low-income community projects by $619 million (7.1 percent) from 2011 to 2012. A majority of NMTC-financed projects used more than one source of public funding, even though the purpose of the tax credit is to leverage private investment.
The GAO found that 62 percent of NMTC projects received other public funding from 2010 to 2010. One-third of NMTC projects received other federal funding, while 21 percent of NMTC projects received funding from multiple other government programs. In many cases, investors were able to claim the tax credit on the equity provided by the other public sources.
The NMTC has subsidized wealthy investors in nearly 4,000 projects, including car washes, bowling allies, parking lots and breweries, according to Coburn’s report. Many of these are not a federal priority—such as an ice skating rink and a car museum—while others help corporations with little need of taxpayer handouts, including food and beverage chains such as Subway, IHOP and Starbucks.
One of the program’s projects is threatening to bankrupt the city of Desert Hot Springs, Calif., where the cost to maintain the wellness center established with NMTC support has prompted across-the-board salary cuts and city officials are even considering elimination of the police department. Tens of thousands of dollars intended for the financially challenged clinic were spent to create a sculpture in the desert.
In another project in an area of Atlanta where condominiums sell for millions of dollars, NMTCs are being used to expand the world’s largest aquarium, according to Coburn’s report. “With ticket prices costing nearly $65 for a 15 minute show, the real beneficiaries are SunTrust Bank, Wells Fargo and the Emmy-award winning producers and Hollywood ensemble hired to develop the show, and of course the dolphins who live in the larger aquarium.”
Defending the NMTC
The spokesman for a business group that lobbies for the credit, the New Markets Tax Credit Coalition, disputed the findings of both Coburn’s report and the GAO report.
“Washington doesn’t pick the winners and losers when it comes to the NMTC,” said Bob Rapoza, spokesperson for the NMTC Coalition. “It is a market driven program based in a philosophy that communities know best, they just need access to capital. Through public-private partnerships, the credit brings community revitalization projects to fruition that likely would not have gone forward if not for NMTC financing.”
He pointed to an earlier report in which the GAO found that 88 percent of investors would not have made their investments, but for the incentive of the credit, along with data from the Treasury Department indicating that the NMTC has delivered more than $60 billion in capital to businesses and revitalization projects nationwide in some of the poorest communities. These investments, Rapoza noted, have generated over 550,000 jobs and of the 74,134 census tracts in America, only 30,099 (41 percent) qualify. In addition, according to the NMTC Coalition’s survey of 2013 NMTC projects, 80 percent of investments went to severely distressed census tracts that far exceed the statutory requirements for investment.
Rapoza noted that Coburn’s report profiled 19 projects to which it objected, but analysis of the profiles of those communities indicate they are among the poorest in the country, with an average poverty rate of over 32 percent and an unemployment rate of 11.7 percent at the time the project was financed. In these communities, the NMTC delivered $770 million in financing and created over 7,700 jobs.
“The hallmark of the credit is its flexibility, which allows for diversity in projects based on needs and opportunities identified by citizens and local leaders—the vast majority of which include child and health care facilities, grocery stores, and manufacturing facilities,” said Rapoza.
The coalition also took issue with the GAO report, saying it ignores the challenges of investing in low-income communities and the success that the NMTC has in spurring revitalization in urban neighborhoods, small towns and farming communities. The group claimed the GAO did not provide an accurate analysis of the operations of the NMTC. In one such case, the GAO overestimated an investor return by 400 percent through faulty analysis. In this case, according to the NMTC Coalition, the authors of the GAO report used incomplete information based on one example in a second-party report that they could not independently verify. Thus, the GAO report implied that the financial structures used in NMTC transactions allow investors to receive an unduly large return on their investments, claiming a 24 percent annual return to the investor, when actual NMTC investor returns align with market rates of 6 to 7 percent annually, according to the coalition’s figures.
“Unfortunately, some conclusions are based on misinterpreted data and flawed calculations,” said Rapoza. “The Coburn report builds on those errors to cast a sensationalized and inaccurate portrayal of the NMTC.”