Wednesday, August 13, 2014

Senator Coburn Report Says New Market Tax Credit Wrongly Benefits Large Financial Firms and Hedge Funds

A report by Senator Tom Coburn (R-OK) revealed that global financial firms and hedge funds have taken advantage of a tax credit designed to spur new or increased investments into operating businesses and real estate projects located in low-income communities. The New Markets Tax Credit (NMTC) created by the Community Renewal Tax Relief Act of 2000 has become an opaque, poorly-designed, duplicative federal program that on one level has worked as a ``goodie bag’’ for large financial institutions at taxpayer expense. Senator Coburn’s report recommends that the New Market Tax Credit be repealed or reformed.  

The New Market Tax Credit program allows banks and other financial entities to claim a tax credit for investing in businesses in low-income areas. The Coburn report revealed that over the last decade, a niche group of investors, such as financial institutions and hedge funds, have worked with Community Development Entities and projects to maximize their return while maximizing the cost to taxpayers as well. As of 2007, nearly 40 percent of all NMTC claimants were banks or other regulated financial institutions. The New Market Tax Credit program has not only aided large financial firms, but the increasing complexity of NMTC investments benefits lawyers and accountants involved in the transactions.

The Senator’s prime recommendation is that Congress let the New Markets Tax Credit expire and focus its efforts on creating a fair and equitable tax code that will generate economic growth and opportunity for every American, not just the well connected. However, if Congress choosers to extend the tax credit, a number of reforms should be considered, including increased data collection and transparency requirements. He noted that a recent GAO report reveals that there is insufficient data collection by the Treasury Department, which administers the program, which means that taxpayers, lawmakers, and even program beneficiaries do not have access to important details about the program's effectiveness, including how much fees, transaction costs, and interest rates reduce the amount of the investment made into low-income communities.

The New Markets Tax Credit is not a permanent provision of the tax code, observed the report, yet Congress routinely reauthorizes the program. Congress should no longer provide these tax credits to some of the country’s biggest financial firms and corporations, but should allow the tax credit to expire.