House Bill to Expand Tax Credit Program Would Target Rural Areas

Two lawmakers in the U.S. House are proposing to expand the size of a tax credit program, in an effort to drive new investment in rural America.

Reps. Jason Smith, a Missouri Republican, and Terri Sewell, an Alabama Democrat, in late July introduced legislation dubbed the Rural Jobs Zones Act. They’re both members of the tax-writing Ways and Means Committee. Their bill would provide $500 million annually in 2018 and 2019 in additional New Markets Tax Credit authority, specifically aimed at rural areas.

The tax credit program was enacted in 2000 and is designed to draw investment capital to low-income communities. Through 2017, Treasury made awards totaling $54 billion in New Markets Tax Credit authority, according to a July report from the department.

All told, congressional lawmakers have afforded the program $61 billion in credit authority through the close of 2019.

Bob Rapoza, a spokesman for the New Markets Tax Credit Coalition, a group that advocates for the credit on Capitol Hill, stressed the need for investment in rural parts of the country.

“There are roughly 400 counties in the country that have had poverty rates of at least 20 percent for at least 30 years, and virtually all of them are in non-metro and rural areas,” he said.

“These are communities that are hard to serve and, in lots of cases, don’t have the private sector capital that’s important to spur revitalization,” Rapoza added.

House Speaker Paul Ryan said last month he expects that a bill to make technical corrections to last year’s sweeping tax code rewrite could be released during the “lame duck” session of Congress after this November’s midterm elections.

Rapoza said that broader tax legislation, if it does get any traction, could provide a vehicle the rural New Markets Tax Credit measure could be attached to.

Nobody has introduced a comparable bill in the Senate yet, he added.

The Treasury Department already has a goal of allocating 20 percent of New Markets Tax Credit allocation awards to non-metropolitan areas, according to the New Markets Tax Credit Coalition. Rapoza noted that in 2017 the figure was 23 percent.

Brett Theodos, a principal research associate in the Metropolitan Housing and Communities Policy Center at the Urban Institute, said he believes there is an appetite for the added $1 billion of tax credit authority proposed in the House bill.

“I do see it getting absorbed,” he said.

But he also raised questions about the rationale behind the bill. “It’s unclear to me why the rural areas would take priority,” he said, noting the floor already in place for the share of rural credits.

The investments that get made using capital that flows through the New Markets Tax Credits program are wide-ranging and can include projects such as commercial real estate, charter schools, health care facilities, parks and grocery stores.

Medivac helicopters and grain elevators were among the examples Theodos offered for possible rural investments. Rapoza highlighted broadband infrastructure as a possibility.

Efforts to reach Smith, Sewell, or staff in their offices, for comment on the legislation were unsuccessful on Monday.

How It Works

Under the New Markets Tax Credit program, the Treasury Department allocates tax credit authority to groups called “community development entities,” or CDEs. CDEs are supposed to have a primary mission of serving or providing investment capital for low-income communities.

Investors that contribute money to CDEs can gain access to New Markets Tax Credits in return, which lower their tax obligations. Organizations that might form a CDE include banks, nonprofits, or cities. Investors seeking the credits are commonly major banks.

In a basic example, a CDE might receives a $2 million credit allocation. Investors make a $2 million investment in the CDE and are then entitled to claim tax credits equal to 39 percent of the $2 million, or $780,000, in set increments, over the course of seven years.

Investors can also earn interest from capital they invest through the CDE that gets lent to a business or project.

By combining the stream of interest payments with the tax credits, interest rates can be lowered for borrowers, but investors have a way to still earn returns closer to market rates on their investments—after taking into account their reduced tax liability.

Demand for the credits regularly outstrips supply. For instance, a Congressional Research Service report from 2016 notes that in 2014 the federal government received $19.9 billion in requests for New Markets Tax Credit allocation authority, but awarded just $3.5 billion.

New Proposal

With the bill that Smith and Sewell introduced, the $1 billion in added New Markets Tax Credit authority would be allocated for CDEs making investments in rural areas, as defined by an existing law known as the Consolidated Farm and Rural Development Act.

These would be areas outside of cities and towns with over 50,000 residents, and “urbanized” areas that border these places.

The new bill also requires that at least 25 percent, or $250 million, of the $1 billion in credit authority be reserved for counties with persistent poverty or “high out-migration.” 

Persistent poverty is defined as a minimum 20 percent poverty rate for at least 30 years.

The text of the Smith-Sewell bill is not posted online, but New Markets Tax Credit Coalition provided a summary.

In the current New Markets Tax Credit law, high out-migration counties are those that saw their populations decline at least 10 percent in the 20-year period ending with the year that the most recent census count was conducted—which is currently 2010.

During last year’s Republican-led federal tax code rewrite, lawmakers in the House called for phasing out the credit. But that proposal did not make it into the legislation that became law.

“It is true that rural deals are tougher to do. They aren’t as large,” said Rapoza. “But there’s tremendous need.” Referring to the additional tax credit authority proposed in the House legislation, he added: “I would think that an incentive like this is going to get spent.”