A federal tax credit intended to help revitalize struggling, impoverished communities is, in some instances, being used by big banks to open new luxury businesses and exhibits that don’t benefit the low-income people it was meant to help.
The New Markets Tax Credit was created nearly 15 years ago to offer banks an incentive to invest in small businesses in low-income areas with the hope that more jobs could be created in those communities. But little oversight over the credit, which equals 39 percent of the investment, has auditors and lawmakers questioning whether it’s a good use of taxpayer dollars.
Two new reports released today from the Government Accountability Office and Sen. Tom Coburn’s (R-OK) office raise issues with the program, which costs at least $1 billion every year.
“This tax credit intended to benefit the poor is instead lining the pockets of the well-off--such as big banks and other private investors,” Coburn, a long-time government reform hawk, said in the report.
Since the program began in 2000, banks and hedge funds have worked with Community Development Entities and projects to exploit the tax credits. Sometimes they set up their own CDE’s to receive the credits directly from the Treasury Department. Since 2007, almost 40 percent of all New Markets Tax Credit beneficiaries were banks or other financial institutions, the report noted.
The report also highlights a handful of examples where big banks like Goldman Sachs used the tax credit to finance projects or services that in some cases were not even located in impoverished areas.
For instance, Suntrust and Wells Fargo received two New Markets Tax Credits totaling $40 million to update the AT&T dolphin exhibit at the Atlanta Aquarium, the largest aquarium in the world. The banks said it was a job creator that would also provide educational value. The aquarium charges $65 per person to see the exhibit’s 15-minute dolphin show-- an activity not likely to be utilized by many low-income children.
Jess Lawhorn, a senior vice president with Wells Fargo told Atlanta Business Chronicle, “This is a huge job generator for that area of downtown…. What’s important to us is the direct and indirect job creation in that downtown market. We think that’s the key to that market being self-sustaining.”
However, Coburn’s office argues that the aquarium hardly benefits poor communities since its located in a neighborhood chock full of million dollar condos, and the jobs that the project brought in required a high skillset like a dolphin veterinarian that gets paid upwards of $300,000 annually.
In another example, U.S. Bank got $13 million from the New Markets Tax Credit to finance a classic car museum in Takoma, Washington. The report points out that the bank used this tax credit while also receiving $15 in private donations and receiving millions more from federal and state taxpayers including -- $3.6 million from the Department of Housing and Urban Development and another $22 million from the city and state—all to develop a museum full of Ferraris.
Other projects detailed in the report include a $65,000 sculpture outside of a health center in Desert Springs, California, and two laser-lighted fountains for a new $26.5 million park in Washington, D.C. The tax credit has also been used to build hundreds of upscale hotels including Hilton’s and Marriot’s.
To be sure, the New Markets Tax Credit has also been used as intended--to help low-income communities. Just this summer, the credit helped finance a supermarket in a troubled area of Baltimore, Maryland, that hasn’t had a grocery store for over a decade. Advocates of the credit argue that overall it’s succeeding in its mission. The New Markets Tax Credit Coalition says it has generated over $7 billion in investments and 67,000 jobs in rural America.
Still, critics like Coburn raise concerns regarding oversight over the program, which the Joint Committee on Taxation says will cost $5.1 billion in the next five years. Coburn also cites the lack of metrics in place to evaluate the program’s effectiveness.
“There is little evidence it has succeeded in its intended purpose of creating new markets in distressed areas to foster economic opportunities,” the report said. If the tax credit is extended, Congress should consider requiring performance metrics in order to measure its impact. Coburn, however, advocates for eliminating the tax credit entirely, pointing to the GAO report issued today, which indicates that 62 percent of the projects receiving the new market tax credit are also receiving similar tax credits from the government.
GAO auditors said the program mainly benefitted banks that had already been double dipping into other tax credits. The federal government offers at least 23 community development tax expenditures that cost taxpayers about $10 billion a year. Separately, there are more than 80 similar programs financed by the Departments of Commerce, Housing and Urban Development, and Agriculture as well as Small Business Administration—all of which target “economic development,” the report said.
“Because of this redundancy, many projects and corporations are double dipping on taxpayers-receiving multiple federal subsidies through other grant programs and tax giveaways,” Coburn said.
This is a problem, GAO auditors said, because when developers combine the new market tax credit with other federal and state tax credits, it becomes more complex and less transparent.
Auditors said that data on equity remaining in businesses that are using the tax credits are unreliable because “instructions on what to report” are unclear. And data on projects that failed were unavailable. “It is not possible to determine, at this time the project failure rate with certainty,” auditors said.
GAO also said that some investors are using a process called “twinning” to claim the New Markets Tax Credit on the equity raised through other federal funding sources. In these cases, corporations are claiming these tax credits based on a higher value than the amount of their own money invested in a project.
“With so many programs that are making billions of dollars available, [New Market Tax Credit] is not serving a unique role and has instead become just another form of corporate welfare,” Coburn said.
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