Minorities Fared Worse with New Markets Tax Credits

Minority-owned businesses were less successful in obtaining awards from the Treasury Department’s New Markets Tax Credits program than non-minority entities in recent years, according to a new government report.

The report, from the Government Accountability Office, found that from 2005 to 2008, minority-owned community development entities were successful with about 9 percent of the NMTC applications that they submitted to the Treasury’s Community Development Financial Institutions Fund. They received about $354 million of the $8.7 billion for which they applied, or about 4 percent.

In contrast, non-minority CDEs were successful with about 27 percent of their applications and received about $13.2 billion of the $89.7 billion for which they applied, or about 15 percent.

The Treasury’s CDFI Fund has awarded $19.5 billion of the $26 billion in New Markets Tax Credits it is authorized to award through 2009 to encourage investment in low-income communities. The NMTC allows investors to claim a tax credit in exchange for investing in community development entities that reinvest the funds in qualified communities. Recent congressional interest has focused on participation by minority CDEs.

Treasury Secretary Timothy Geithner announced $1.5 billion in NMTC awards last week to 32 organizations around the country, using money from the American Recovery and Reinvestment Act that Congress passed earlier this year to stimulate the economy. The NMTC Program was established by Congress in December 2000 to permit individual and corporate taxpayers to receive a credit against federal income taxes for making qualified equity investments in CDE investment vehicles. The credit provided to the investor totals 39 percent of the cost of the investment and is claimed over a seven-year period. A majority of the taxpayers' investment must in turn be used by the CDE to make qualified investments in low-income communities.

The CDFI Fund relies primarily on application scores to determine which CDEs receive awards. The GAO found that minority CDEs received lower scores than non-minority CDEs in each of the four application sections: business strategy, community impact, management capacity and capitalization strategy.

Although a CDE’s resources and experience in applying are important factors in a CDE’s success rate with the NMTC program, when controlling for factors that the GAO could measure, minority status appears to be associated with a lower probability of receiving an allocation, the GAO found.

“It is not clear from our analysis why this relationship exists or whether any actions taken or not taken by the Department of the Treasury contributed to minority CDEs’ lower probability of success,” said the report. “Characteristics associated with minority status of some CDEs for which data are unavailable may affect this relationship. If Congress views increased participation by minority CDEs as a goal for the NMTC program, policy options, such as providing certain preferences in the application process that may benefit minority CDEs, could be considered.”

The GAO noted that the CDFI Fund provides assistance that is available to all CDEs applying for awards, including a written debriefing to CDEs that do not receive awards detailing some of the weaknesses in their applications. Industry associations and consultants also hold conferences and offer services to help CDEs submit competitive applications, the GAO noted. It added that if Congress views additional assistance to minority CDEs as important to increasing minority CDEs’ participation in the NMTC program, it could consider requiring the CDFI Fund to provide targeted assistance to minority CDEs.