Bill Analysis - AB 1572, Jobs, Economic Development, and the Economy (April 13, 2021)
Summary
Analysis of AB 1572, a committee bill, as introduced March 4, 2021, for the Date of Hearing April 13, 2021 before the Assembly Committee on Jobs, Economic Development, and the Economy. The subject is the California New Markets Tax Credit. The summary section states the bill establishes the C-NMTC Program and authorizes the awarding of $100 million in tax credits annually for five years, beginning in the 2023 tax year, to attract new private capital to very low-income neighborhoods in California. The program is administered by the Governor's Office of Business and Economic Development (GO-Biz). Opposition is listed as none on file.
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AB 1572
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Date of Hearing: April 13, 2021
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT, AND THE ECONOMY
Sabrina Cervantes, Chair
AB 1572 (Committee on Jobs, Economic Development, and the Economy) – As Introduced March 4,
2021
SUBJECT: California New Markets Tax Credit
POLICY FRAME: Responding to the coronavirus pandemic has required the state to take extreme and
rapid steps to protect the health and safety of Californians. Within one week in March 2020, the state
went from open-for-business to implementing a strict stay-at-home order for everyone not directly
engaged in what government considered an essential and critical business activity. Since March 12, 2020,
21.4 million unemployment insurance claims have been filed with the state’s Employment Development
Department, claims for initial and extended benefits included.
Even before the coronavirus emergency, however, when California enjoyed 120 straight months of
economic growth, there were significant economic forces driving income inequality. Between 1979
through 2017, earnings for the top 0.1% of households increased by 343.2%, as compared to the earnings
of the bottom 90% of households, which experienced an increase of only 22.2%. Given these divergent
income outcomes, it is not a surprise that California ranks within the top tier of states relative to
household poverty.
In the coming weeks, the Legislature and Governor will finalize its discussion on how to construct a
balanced budget while also providing economic stimulus to hard hit industry sectors and reemployment to
over 1.6 million unemployed workers. Focusing on re-investment strategies that have shown to also
address historic economic disparities should be a top priority. If the state does not, the economic
inequality of pre-pandemic California will spread and drag down the overall recovery.
AB 1572, a committee bill, establishes a California New Market Tax Credit (C-NMTC), which uses a
community development model proven to be successful in the lowest income areas of the nation.
Research shows that the federal New Market Tax Credit (F-NMTC) is able to leverage $8 dollars for
every $1 dollar of credit it provides. Further, the US Treasury reports that of the F-NMTC moneys
deployed, more than 75% were in severely distressed areas of which 55% had unemployment rates 150%
above the statewide average.
The policy committee analysis includes a discussion of how a C-NMTC may address the state’s
increasing income disparities and the challenges small businesses face in the post-coronavirus economy.
The analysis also provides information on the F-NMTC Program, reports and assessments of the federal
program, and examples of NMTC programs in other states. There is no known opposition to this bill.
Should this bill pass this Committee, the bill will be referred to the Assembly Committee on Revenue and
Taxation for further policy consideration.
SUMMARY: AB 1572 establishes the C-NMTC Program and authorizes the awarding of $100 million
in tax credits annually for five years, beginning in the 2023 tax year. The purpose of the C-NMTC
Program is to attract new private capital to very low-income neighborhoods in California. In general, the
new state credit parallels the F-NMTC Program. Specifically, this bill:
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1) Purpose of the Credit: Establishes the C-NMTC Program, administered by the Governor’s Office of
Business and Economic Development (GO-Biz), for the purpose of stimulating private sector
investment in lower-income communities, as specified.
2) Annual Credits Awards: Authorizes GO-Biz, beginning in 2023 and concluding in 2028, to award
authority to designate qualified equity investments up to $100 million per tax year to qualified
community development entities (CDEs) and other entities authorized to participate in the federal
program, including qualified community development financial institutions (CDFIs) and small
business investment corporations (SBICs). [In order to finalize the designation of the qualified equity
investment, the qualified CDE obtains cash from a taxpayer in the form of a qualified equity
investment. Once the investment moneys are raised, the CDE submits documentation to GO-Biz,
verifying that the investment funds have been obtained. This process is referred to as the “issuance of
the qualified equity investment” by the CDE. Following the issuance, the qualified equity investment
is available for deployment in qualified low-income communities to qualified active low-income
community businesses. Most commonly, funds are deployed in the form of low-cost debt instruments.]
3) Value of Individual Credits: Authorizes a 39% tax credit to a taxpayer who makes a qualifying
deposit with a CDE for a minimum of seven years and the CDE uses those funds in a manner
consistent with the C-NMTC requirements. The credit may be applied against the taxpayer’s personal
or corporate tax liability. A 9% credit may be applied in the first tax year of the investment, followed
by 5% in each of the following six tax years. [The federal credit allows taxpayers to apply the credit
in the first year, as follows: 5% in the first three years and 6% in the final four years.]
4) Program Guidelines: Requires GO-Biz to adopt guidelines as necessary and appropriate to meet its
responsibilities related to the allocation, monitoring, and management of the C-NMTC. Below is a
list of required elements of these guidelines.
a) Allocation Process: The tax credit allocation process is required, at a minimum, to include or
address the following:
i) The first applications are required to be accepted by GO-Biz on or before October 15, 2022, to
the extent the C-NMTC is authorized for that year, as specified.
ii) The application process results in low-income community populations across the state having
an opportunity to benefit from the program.
iii) Applicants are required to demonstrate they can meet key organizational capacity standards by
having an appropriate business strategy, a history of targeted community outcomes, an
effective capitalization strategy, and demonstrated management capacity. [These standards
are consistent with the F-NMTC allocation process.]
iv) Consideration is given in the awards process of an applicant’s prior experience in making
investments in low-income areas, as specified.
v) Priority is provided to applications that:
(1) Commit to addressing the hardest to serve and undercapitalized lower-income populations.
(2) Support neighborhood revitalization strategies driven by local grassroots stakeholders.
vi) Applicants are provided a five-day cure period for applications GO-Biz determined to have a
minor, non-substantive error or omission.
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vii) Members of the application review committee are prohibited from having any financial
conflicts of interest, as specified.
b) Operating Costs: GO-Biz is required to set a fee to cover the costs of reviewing applications and
may set a separate fee to cover other program implementation and monitoring costs, which
successful applicants are required to pay, as specified. All fees are required to be deposited in the
California New Markets Tax Credit Account, which is established by this bill.
c) Raising Investment Capital: After certification from GO-Biz of an award, the qualified CDE has
200 calendar days to obtain equity investments from taxpayers up to the value of the certified
award and to notify GO-Biz that the CDE has successfully issued the qualified equity investment.
d) Reversion of Unused Investment Authority: Any portion of the certified award that is not
covered by a qualified equity investment at the end of 200 days lapses and the value of the unused
portion of the award reverts to GO-Biz.
e) Recording Taxpayer IDs: A qualified CDE that issues a qualified equity investment is required to
notify GO-Biz of the names of taxpayers that are eligible to utilize tax credits pursuant to this
program.
f) Deploying Capital: A qualified CDE that issues a qualified equity investment is required to
submit a report to GO-Biz that documents the deployment of at least 85% of the qualified low-
income community investments in a qualified active low-income community business within one
year of issuance.
g) Ongoing Reporting on Deployed Capital: In years two through seven after the issuance of the
qualified equity investment, the qualified CDE is required to annually document to GO-Biz the
investment of the funds being deployed within the reporting period in qualified low-income
community investments, as specified.
h) Process for Recapturing Credits: GO-Biz is required to work with the Franchise Tax Board
(FTB) on the establishment of a process for recapturing tax credits when the conditions of the C-
NMTC are not met during the mandatory seven years of compliance. Enforcement of the
recapture provisions are subject to a six-month cure period.
i) Reallocation of Undesignated or Recaptured Credits: The value of any undesignated qualified
equity investments and recaptured credits may be re-awarded by GO-Biz without the $100 million
per year allocation limit being affected, as specified.
5) Franchise Tax Board Authority: Requires the Franchise Tax Board (FTB) to adopt any rules or
regulations that may be necessary or appropriate to implement the C-NMTC. The FTB is granted
access to any documentation held by GO-Biz relative to the application and reporting of the qualified
community development entity.
6) Annual Reporting Details: Requires annual reporting on all of the following in the second through
seventh years following the issuance of the qualified equity investment:
a) The social, environmental, and economic impact of tax credit on qualified low-income
communities during the report period and cumulatively.
b) The amount of money invested in qualified active low-income community businesses.
c) The number of employment positions created and retained, and the average annual salary of such
positions.
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d) The number of operating businesses assisted by industry and number of employees.
e) The number of owner-occupied real estate projects.
f) The geographic locations of the assisted businesses.
g) Documentation that demonstrates the actual investment of the funds, as specified.
h) Any other information requested by GO-Biz, as specified.
7) Public Disclosure of Reporting: Requires GO-Biz to annually report on its internet website the
information provided by CDEs, with the geographic distribution of the qualified active low-income
community businesses included.
8) Use of Tax Credits by Taxpayers: Specifies the following provisions relative to the application of
tax credits to a taxpayer’s tax liability:
a) Limits the allocation of a tax credit to only those calendar years in which the Legislature
appropriates funds in the California New Markets Tax Credit Fund to pay for the cost of
administering the C-NMTC program, as specified.
b) Prohibits a taxpayer from taking another state tax credit for the same investment.
c) Allows the C-NMTC to be taken in addition to the F-NMTC.
d) Authorizes a taxpayer to carry forward excess credits up to seven years.
9) Transfer of Investment Authority: Authorizes a qualified CDE to transfer all or a portion of its
certified qualified equity investment authority to its controlling entity or any subsidiary qualified
community development entity of the controlling entity, as specified. GO-Biz is required to be
notified within 30 days of the transfer, and the transferee is subject to the same rules, requirements,
and limitations applicable to the transferor.
10) Definition of Qualifying Business: Defines a qualified active low-income community business as an
entity meeting the requirements of federal law, including having the entity organized under a
nonprofit or for-profit tax structure, with several modifications.
a) The qualified active low-income community business shall:
i) Have less than 250 employees, with one exception. This requirement does not apply to a
business located in a tribal trust land held communally by a federally recognized tribe and
managed by the tribal government, as defined. [There are no size limitations in F-NMTC.]
ii) Derive less than 15% of its annual revenue from rental or sale of real estate, as specified.
[There are no similar limitations in F-NMTC. However, reports by the Congressional Budget
Office suggest that land development and property management companies may not be the
highest and best use of the credits.]
iii) Be physically located in a census tract that meets one of the following criteria: a poverty rate
30% or higher, a median income that does not exceed 60%, as defined, or an unemployment
rate 1.5 times the national average. [This is the federal definition for severely distressed
census tracts and is more stringent than the general eligibility of the F-NMTC, which is 20%
poverty or 80% median income.]
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b) Excluded from the definition of a qualified active low-income community business is any business
that:
i) Operates or derives revenue from the operation of a charter school. [There are no similar
exclusions in the F-NMTC. Removal of this activity from the California credit focuses the use
of the credit on economic development-based investments.]
ii) Operates or derives revenue from the operation of a country club or golf course.
iii) Operates or derives revenue from the operation of gaming establishment, massage parlor,
liquor store, or sexually oriented businesses, as defined. [There are no similar exclusions in
the F-NMTC. There are, however, other state tax credits which have similar limitations,
including the California Competes Tax Credit.]
11) Measuring Success of the C-NMTC: Provides the following metrics for evaluating the success of
the C-NMTC program:
a) Sets the goal, purpose, and objective of the C-NMTC as attracting private sector investment in
lower-income communities in California.
b) Sets the performance indicators as the:
i) Amount of qualified low-income community investments issued.
ii) Amount of dollars deployed in qualified low-income community investments.
iii) Number of operating businesses assisted as a result of qualified low-income community
investments. This data shall be compared to business development, including startups, tax
revenues, and new investments within the most immediate geographic area for which data is
reasonably available for the 12 and 24 months prior to the use of the C-NMTC in that area.
iv) Number of employment positions created and retained as a result of qualified low-income
community investments and the average annual salary of those positions. These numbers shall
be compared to the area median income and unemployment and poverty rates for the most
immediate geographic areas for which data is reasonably available for the 12 and 24 months
prior to the use of the C-NMTC in that area.
c) Sets the following baseline measurements and data collection requirements:
i) The baseline measurements include:
(1) The amount of tax credits issued in the year.
(2) The unemployment rate of the area.
(3) The poverty rate of the area.
ii) Data to collect includes:
(1) The amount of tax credits issued in the year.
(2) The number of operating businesses located in a low-income community that are assisted.
(3) The number of jobs created and retained as a result of qualified low-income community
investments.
12) Sunset: Contains a sunset of December 1, 2028.
13) Severability: Contains a severability clause.
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14) Tax Levy: Takes immediate effect as a tax levy.
EXISTING FEDERAL LAW
1) F-NMTC: Authorizes a taxpayer to claim a federal tax credit for qualified investments made to
qualified CDEs, as specified. The value of the federal NMTC is 39% of the qualified equity
investment. The credit is applied by the taxpayer over a seven-year period.
2) F-NMTC Applicants: Limits applications under the F-NMTC program to only federally certified
CDEs, CDFIs, and small business investment companies.
a) Community Development Entity: The F-NMTC program defines a qualified CDE as any
domestic corporation or partnership in which the following three requirements:
i) The entity has as its primary mission the serving or providing of investment capital for low-
income communities or low-income persons.
ii) The entity maintains accountability to residents of low-income communities through
representation on its governing board or an advisory board sponsored by the entity.
iii) The entity has been certified by the CDFI Fund at the US Treasury as meeting the
requirements of (i) and (ii).
b) Community Development Financial Institutions: The F-NMTC program has a special rule that
allows certified CDFIs to apply for an award. A certified CDFI:
i) Is a legal entity at the time of certification application;
ii) Has a primary mission of promoting community development;
iii) Is a financing entity;
iv) Primarily serves one or more target markets;
v) Provides development services in conjunction with its financing activities;
vi) Maintains accountability to its defined target market;
vii) Is a non-government entity and not under the control of any government entity (Tribal
governments excluded); and
viii) Is certified by the CDFI Fund at the US Treasury as meeting the requirements of (i) through
(vii).
c) Small Business Investment Company: A SBIC is a type of privately-owned and -managed
investment fund that is licensed and regulated by the Small Business Administration. An SBIC
has its own capital, plus funds borrowed with an SBA guarantee, to make equity and debt
investments in qualifying small businesses.
3) Definition of Qualified Investment: Defines a qualified low-income community investment to
mean:
a) Any capital or equity investment in, or loan to, a qualified low-income business, as defined;
b) Any capital or equity investment in, or loan to, a real estate project in a low-income community;
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c) The purchase of a loan from another CDE that meets the other requirements for a low-income
community investment;
d) Financial counseling and other services in support of business activities to businesses and
residents of a low-income community; or
e) Any equity investment in, or a loan to, a CDE. [An equity investment includes any stock, other
than nonqualified preferred stock, in a corporation or any capital interest in any partnership.]
EXISTING LAW:
1) Establishes GO-Biz within the Governor’s Office for the purpose of serving as the lead state entity for
economic strategy and marketing of California on issues relating to business development, private
sector investment, and economic growth.
2) Establishes the California Competes Tax Credit for the purpose of competitively awarding
individually negotiated tax credits to businesses that operate in California. The amount of the award
is based on a number of conditions, including, but not limited to, the number of jobs being created, the
compensation-level of employees, the amount of investments made, and the location of the project or
business. Priority is provided to projects and businesses located in high unemployment and high
poverty areas.
FISCAL EFFECT: Unknown
COMMENTS & CONTEXT:
1) Economic Justice and Building an Equitable Economy: Those individuals and communities most
impacted by the coronavirus emergency are California’s most vulnerable and historically
underinvested neighborhoods and groups of individuals.
This is not a new trend. Research clearly shows that the inequality between the residents in low-
income communities and those that reside in California’s most affluent communities has dramatically
increased in the past several decades. For example, the pretax income among the highest 1% of
California taxpayers increased from 9.82% in 1980 to 25.1% of total income in 2013. During the last
seven years, the pace of these disparities has only increased. This rise in economic disparity has
significant social and economic ramifications for everyone in the state.
As the coronavirus pandemic unfolded, the federal Centers for Disease Control and Prevention
(CDPC) began reporting that “current data suggest a disproportionate burden of illness and death
among racial and ethnic minority groups.” In identifying factors that may be related to these findings,
the CDCP noted that “[h]ealth differences between racial and ethnic groups are often due to economic
and social conditions that are more common among some racial and ethnic minorities than whites.”
PolicyLink, in its COVID-19 economic recovery strategy, calls for “sustained and race-conscious
policies and investments to stabilize people during the crisis and bridge to a more equitable future.”
In taking actions to respond and economically recover from the pandemic, PolicyLink recommended
that policymakers be guided by three principles:
Ensure economic security during the crisis.
Use stimulus funds to build the next economy.
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Forge a new social contract that enables shared prosperity.
PolicyLink is not an outlier in calling for targeted investment is communities of color and focusing on
building a more equitable economy. Addressing the systemic and complex challenges faced by
California’s low-income neighborhoods of color will require deep economic and community
development work over a sustained period of time.
Programs like the C-NMTC program proposed in AB 1572 are based on the economic principle that
target significant incentives to lower-income communities will allow these communities to more
effectively compete for new businesses and retain existing businesses that have remained open, which
will result in an increase in tax revenues, less reliance on social services, and lower public safety
costs. Residents and businesses also directly benefit from these more sustainable economic conditions
through improved neighborhoods, business expansion, and job creation.
2) Challenges to Accessing Capital: Access to debt and equity financing is critical for promoting the
efficient operation and expansion of small businesses. Small businesses rely on adequate short-term
debt (working capital) and long-term debt as well as equity financing to purchase new equipment,
replenish inventories, fund ongoing operations, and market their services long before those activities
generate revenue. While financial institutions routinely extend working capital and long-term debt
products to established, larger businesses, smaller businesses are often bypassed because they lack the
collateral or establishment history, or need too small of a loan.
The same dynamic occurs when small businesses attempt to access equity financing, with investment
funds often bypassing smaller businesses because they lack the operating history and revenue
generating track record of larger businesses. The situation often results in a “chicken or the egg”
scenario whereby businesses are told they need to grow in order to access financing, while
simultaneously being denied access to the financing they need to grow.
AB 1572 supports the development of new capital resources for businesses in low-income
neighborhoods. According to the US Treasury report on the F-NMTC program, from inception
through 2016, over 90% of investments were made at below market interest rates, 50.9% had more
flexible borrower credit standards, 47.3% had lower than standard debt service coverage ratios, and
30.0% had subordinated debt.
3) Federal New Markets Tax Credit Program: Congress enacted the NMTC as part of the
Community Renewal Tax Relief Act of 2000 to assist in stimulation of equity investments in low-
income communities. Under the program, CDEs apply to the US Treasury’s CDFI Fund for an
allocation of federal tax credits which the CDE can then offer to individual and corporate investors in
exchange for making an equity investment in the CDE or its subsidiary.
In this way, the CDE serves as a community and financial intermediary between sources of private
capital and low-income communities. The value of the federal credit to the investor is 39% of the
original investment amount, claimed over a period of seven years (5% for each of the first three years,
and 6% for each of the remaining four years). The investment in the CDE cannot be redeemed before
the end of the seven-year period.
Through 16 competitive application rounds (2003 to 2019, inclusive), the CDFI Fund has made over
1,254 F-NMTC awards for a total of $61 billion in tax credits. This $61 billion includes $3 billion in
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Recovery Act Awards and $1 billion of special allocation authority to be used for the recovery and
redevelopment of the Gulf Opportunity Zone.
New Markets Tax Credits are uniquely designed to attract private capital to very low-income
neighborhoods, including by drawing money from national investment pools. Since its inception, the
federal CDFI Fund has allocated tax credit authority to 427 CDEs headquartered in 45 states, the
District of Columbia, Puerto Rico, and Guam. Of the qualified equity investments deployed, more
than 75% were in severely distressed areas and 55% with unemployment rates 150% above the
statewide average. The federal General Accounting Office (GAO) reports that the presence of the
federal credit attracts capital for projects that may otherwise be overlooked.
Since the inception of the program, allocations recipients have reported making nearly $55.9 billion in
cumulative qualified low-income community investments, which have created or retained 830,000
jobs. Based on program activities reported through federal fiscal year (FFY) 2017, the largest amount
of investments by industry sectors went to single and mixed-use real estate (25.0%), followed by
health care and social services (30.4%), manufacturing (15.4%), and educational services (9.8%).
These investments supported the construction of 56.7 million square feet of manufacturing space, 94.5
million square feet of office space, and 67.2 million square feet of retail space. The U.S. Department
of the Treasury reports that a secondary benefit of the program is that as these communities develop
through F-NMTC investments, they become more attractive to other investors, catalyzing a ripple
effect that spurs further investments and revitalization.
According to the US Treasury, for every $1 invested by the federal government, the NMTC Program
generates over $8 of private investment. Over 75% of NMTC investments have been made in highly
distressed areas, meaning the household income was less than 60% of statewide median income and
the poverty rate was higher than 30%.
In FFY 2019, the US Treasury allocated $3.5 billion in New Markets Tax Credits. As of March 2021,
there is $2.5 billion in outstanding F-NMTC moneys still available from allocation rounds in 2015
through 2018. Allocation recipients in FFY 2019 reported that they made more than $3.8 billion in
loans and investments, created an estimated 9,172 jobs, and funded 26,710 construction-related jobs.
Of these FFY 2019 investments, 64% were in operating businesses and 36% of the dollars were
invested in businesses that develop or lease real property for use by others.
4) California New Markets Competiveness: Community and economic developers have expressed
concern that California communities have not received a greater benefit for the F-NMTC program.
The New Markets Tax Credit Coalition, a nonprofit organization of CDEs, reports that states that
regularly receive the largest shares of the federal credits are often the same states that offer parallel
state tax credit programs or other resources that encourage community development within lower-
income communities.
Since inception to 2020, California-based CDEs, CDFIs, and SBICs received 129 F-NMTC awards,
and 216 awards went to a CDE, CDFI, or SBIC that serve California. Total qualified equity
investments expended in California were $4.8 billion of the $55.9 billion available through 2020. In
addition, over 50,400 California entities received $6 billion in CDFI loans.
While that may seem like a considerable amount of money, it represents less than 10% (8.6%) of
funds. California represents over 11.9% of the US population (most recent data from 2019). The
state has 11.8% of individuals living under the federal poverty line, and 17.2% of individuals living
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below the supplemental poverty rate that includes, among other things, the cost of shelter (most recent
data from 2019).
In 2019, 76 F-NMTC awards were made for a total of $3.5 billion. California’s share is as follows:
Nine F-NMTC applicants serving California received $470 million; and
2 F-NMTC applicants identifying as having a multi-state service area, including California,
received $95 million.
Compounding the impact of less than equitable F-NMTC allocations is that not every California-based
CDE, CDFI, or SBIC uses the money raised through the federal credit in the state. In fact, there are
over 100 CDEs that have national service areas. In the 2019 funding rounds, $1.7 billion in tax credit
authority was awarded to 34 CDEs and CDFIs with a national service area. Of these 34 national
awards, only 26% stated in their application that California would be a preference area.
5) Other State New Markets Tax Credits Program: Since the inception of the federal NMTC, more
than one dozen other states have enacted matching programs to help leverage more federal dollars in
NMTC investments, moreover, Ohio, Florida, Missouri, Louisiana, Mississippi, Kentucky, Illinois,
Oklahoma, and Connecticut are included. According to information provided by the offices of authors
of similar bills previously introduced, several of these states have experienced a return on investment
of 13 to 1. More details on state programs are provided below:
a) In Missouri, the state New Markets Tax Credit paid for itself during its first two years of
operation, which brought in more in additional investment dollars than was allocated in state funds
for the entire seven-year period.
b) In Illinois, federal allocations of NMTC funds more than doubled after the Legislature
implemented a matching state program in 2008. In the first year of implementation, allocations
jumped to $875 million. Prior to the 2008 law, federal allocations never exceeded $400 million.
c) The Ohio NMTC program awards $10 million annually to CDEs with federal allocations or who
anticipate federal allocations. The award cycles are synced so that a CDE could co-apply for
awards at the time they apply for the federal credit.
6) Federal Tax Cut and Jobs Act of 2017: The federal Tax Cuts and Jobs Act of 2017 (Federal Act)
made a number of enhancements to federal community development tools. Among other actions, the
Federal Act extended the NMTC and created Opportunity Zones (OZs), a new incentive for investors
to deploy capital in lower-income neighborhoods.
Under the new Federal Act, Governors were authorized to nominate up to 25% of their respective
states’ eligible low-income census tracts for designation. Up to 5% of the 25% of the nominated
census tracts could be from census tracts adjacent to the eligible low-income census tracts. Once
approved by the US Treasury, census tracts remain designated for a term of 10 years.
Eligible Census Tracts: An Opportunity Zone is defined as any census tract that has either: (1) a
poverty rate of at least 20%, or (2) a median family income that does not exceed 80% of statewide
median income.
California Eligible Areas: Based on guidance from the U.S. Treasury, California had 3,516
eligible low-income census tracts, meaning California was able to nominate up to 879 census
tracts. As census tracts are designed to capture geographic areas of approximately 4,000 people,
more than 3 million Californians are potentially living within an Opportunity Zone. Link to online
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resources related to designated census tracts:
http://www.dof.ca.gov/Forecasting/Demographics/opportunity_zones/index.html
Most significantly, the geographic specifications of the Opportunity Zone align with those in the
NMTC program. The target areas also align with another federal tax credit program, the Workforce
Opportunity Tax Credit, which provides credits to businesses who hire and retain workers who have
historically faced barriers to employment.
Federal law authorizes a broad range of Opportunity Zone business investments, including
investments in stock, partnership interest, and business property. A qualified Opportunity Zone;
business property investment may include new and substantially improved tangible property,
moreover, commercial buildings, equipment, and multifamily housing complexes are included as
tangible property. The essential eligibility requirement of the tax incentive is that the investment must
be made through a qualified Opportunity Fund. For investors who properly place moneys in a
qualified Opportunity Fund, they will receive:
A temporary deferral of inclusion in taxable income for capital gains reinvested in an Opportunity
Fund. The deferred gain must be recognized on December 31, 2026, or earlier if the Opportunity
Zone investment is disposed;
A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by
10% if the investment in the Opportunity Fund is held by the taxpayer for at least five years and is
increased by an additional 5% if held for at least seven years, thereby excluding up to 15% of the
original gain from taxation may be excluded; and
A permanent exclusion from taxable income of capital gains from the sale or exchange of an
investment in an Opportunity Fund if the investment is held for at least 10 years. This exclusion
only applies to gains accrued after an investment in an Opportunity Fund.
It is difficult to accurately identify the scope of new investment dollars Opportunity Funds represent.
The Economic Innovation Group, one of the early sponsors of the Opportunity Zone Program,
estimated that there are up to $6.1 trillion in unrealized capital gains; moreover, investments headed
by US households and corporations are included.
AB 1572 builds on these efforts by providing another financial resource to help lower the risk of
development and to help California communities attract Opportunity Zone investors.
7) NMTC Research Findings: Over the years the F-NMTC Program has been reviewed and evaluated
by a number of sources, including the GAO, Pacific Community Ventures, and the Urban Institute.
In 2010, the GAO released one of several statutorily mandated reports on the New Markets Tax Credit
program that found:
a) Since 2003, NMTC investments totaling $26 billion have been made in all 50 states, the District of
Columbia, and Puerto Rico;
b) NMTCs are often used as “gap financing,” which account for a portion of total project costs; and
c) NMTC investments in low-income community businesses generally use leveraged structures,
where equity is left in the businesses, or subsidized loan structures, where below market interest
rate loans are offered.
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According to a January 2011 case study prepared by Pacific Community Ventures on the NMTC
program, Impact Investing: A Framework for Policy Design and Analysis:
“Through 2009, CDEs made more than $16 billion in NMTC investments in low-income
communities. Approximately 95% of NMTC funds are invested in designated areas of distress. For
every dollar of forgone tax revenue, NMTC leverages $12-$14 of private investment.”
In 2013, the Urban Institute released a report on the first four years of the program (2002-2006). This
was the first independent evaluation of the F-NMTC program requested by the CDFI Fund. Findings
include:
a) The vast majority of qualified active low-income community businesses (93%) either could not
otherwise have obtained financing or, compared with other available financing, received better
rates and terms in conjunction with F-NMTCs.
b) 77% of projects increased payroll, property, sales, corporate, or other taxes to the benefit of the
local community.
c) 60% of projects saw an increase in their employment levels of more than 33% compared with pre-
NMTC levels.
8) July 2014 Report from the Government Accountability Office: In the summer of 2014, the GAO
issued a special report at the request of US Senator Tom Coburn (R-OK) regarding the F-NMTC
Program. The report was critical of the complexity of the projects and the lack of consistent reports.
More specifically, the report made the following findings:
a) Investments have become more complex and less transparent over time. One reason is the practice
of combining NMTCs with other government assistance. While the GAO agrees that this can help
finance projects that would not otherwise be economically viable, it raises questions about whether
some amount of these additional subsidies are necessary.
b) The increasingly complex financial structures may also be masking investors’ actual rates of
return. The GAO is concerned that the return on investment (ROI) may be above market and cite
a 24% ROI reported by one investor. The GAO reports that the IRS and US Treasury have the
authority to request information on other government resources but have not updated guidance to
reflect the inclusion of that information.
c) GAO also recommends that the CDFI Fund collect additional data on fees and other charges
collected by the CDEs. Finally, the GAO report expresses concern over the lack and quality of
data on equity remaining with the business in low-income areas and failure rates of NMTC
projects.
In conclusion, the GAO recommended the US Treasury issue further guidance to ensure:
a) Appropriate means for combining the F-NMTC with other government programs;
b) Adequate controls to limit the risks of unnecessary duplication and above-market rates of return;
c) That more complete and accurate data are collected on fees and costs, the equity which remained
in the business after 7 years, and loan performance; and
d) That the CDFI Fund issues instructions to clarify the reporting of loan performance and makes the
reporting of that data mandatory.
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The US Treasury agreed with GAO’s recommendations to improve data collection on loan
performance and equity which remained with the low-income business. The GAO also established a
working group in response to the report to consider the other recommendations. Many changes have
been made to the program since this 2014 report.
9) Impact of the Great Recession on F-NMTC Program: The 2014 GAO report covers F-NMTC
investments made between 2010 and 2012. While this represents the most recent program data
available at the time, it also represents the deployment of F-NMTCs at the height of the global
recession. With global capital markets frozen, public policy makers, including the US President and
the US Congress, were taking drastic actions to substitute public moneys where previously there
would have been private funds. Most notably, the federal government passed the Stimulus Package
(2009) and the Small Business Jobs Act (2011).
By not commenting on the nature of the financial crisis, the GAO failed to provide the context in
which to evaluate the true impact of the F-NMTC. At a time where there were limited private funding
sources, the F-NMTC leveraged other funding sources and served as the “glue” to larger community
development projects.
Program evaluation is a challenge, and the GAO has historically served as a trusted voice. In this
limited case, they missed a central driver of the complex financial structures, the significant levels of
public funding, and even the reason why there were large numbers of development projects being
funded with F-NMTCs. During the Great Recession, states and local communities where scrambling
to piece together financing packages for “shovel ready” projects as a means to re-energize the
construction industry.
10) Related Legislation: Below is a list of bills from the current and prior sessions.
a) AB 185 (E. Garcia and Medina) State New Markets Tax Credit: This bill would have authorized
the creation of a New Markets Tax Credit for qualified investments made in low-income
communities beginning in the 2016 tax year. The NMTC Program would have been administered
through the Governor’s Office of Business and Economic Development. The bill would have
authorized $40 million in tax credits over a five-year period for a total program of $200 million in
credits. Total private investment raised was estimated at $512 million. Tax credit authority would
have come from the reallocation of the unused portion of the State Sales and Use Tax Exclusion
Program. Status: Returned to the Desk without action by the Assembly Committee on
Appropriations, 2016.
b) AB 305 (V. Manuel Pérez) State New Markets Tax Credit: This bill would have authorized the
creation of a New Markets Tax Credit for qualified investments made in low-income communities
which would have begun in the 2013 tax year. The NMTC Program would have been
administered through the California Tax Credit Allocation Committee. The bill would have
authorized $30 million in tax credits over a seven-year period for a total program of $200 million.
Tax credit authority would have come through the elimination of the underutilized Small Business
New Hire Credit. Status: Held in the Assembly Committee on Appropriations, 2013.
a) AB 643 (Davis and V. Manuel Pérez) California New Markets Tax Credit: This bill would have
created a New Markets Tax Credit for qualified investments made in low-income communities
which would have begun in the 2012 tax year. The State Treasurer’s Office would have
administered the new credit program and allocated credits of up to $50 million per year for a total
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amount equal to $300 million over six years. Status: Held in the Assembly Committee on
Appropriations, 2012.
b) AB 1259 (L. Rivas, Cervantes, and E. Garcia) New Market Tax Credit: This bill would have
authorized the creation of a New Markets Tax Credit for qualified investments made in low-
income communities which would have begun in the 2020 tax year. The NMTC Program would
have authorized $100 million in tax credits per year for five years. Status: Held in the Assembly
Committee on Appropriations, 2019.
c) AB 1399 (Medina and V. Manuel Pérez) State New Markets Tax Credit: This bill would have
authorized the creation of a New Markets Tax Credit for qualified investments made in low-
income communities which would have begun in the 2015 tax year. The NMTC Program would
have been administered through the Governor’s Office of Business and Economic Development.
The bill would have authorized $40 million in tax credits over a five-year period for a total
program of $200 million in credits. Total private investment raised was estimated at $512 million.
Tax credit authority would have come from the reallocation of the unused portion of the State
Sales and Use Tax Exclusion Program. Status: Vetoed by the Governor, 2013. The veto message
states, “This bill creates a New Markets tax credit that will cost – over time - $200 million. I
certainly endorse programs that result in private investments to help low-income areas, but a bill
to spend this much should be considered with other priorities during the annual budget.”
d) AB 1715 (JEDE Committee) California New Markets Tax Credit: This bill would have
authorized the creation of a New Markets Tax Credit for qualified investments made in low-
income communities which would have begun in the 2018 tax year. Funding for the credit would
have come from the renegotiation of the Governor’s Economic Development Initiative (GEDI), an
underperforming initiative which was created to replace the California Enterprise Zone Program.
Status: Following discussions with Assembly Budget Subcommittee Four regarding the
reworking of GEDI tax incentives, the bill was used for another purpose, 2017.
e) AB 2037 (Davis and V. Manuel Pérez) California New Markets Tax Credit: This bill would
have authorized the creation of a New Markets Tax Credit for qualified investments made in low-
income communities which would have begun in the 2011 tax year. The NMTC Program would
have been administered through the California Tax Credit Allocation Committee. Tax credit
authority would have come through the elimination of the underutilized Small Business New Hire
Credit. Status: Held in the Assembly Committee on Appropriations, 2011.
f) AB 2647 (E. Garcia and Medina) California New Markets Tax Credit: This bill would have
established a $40 million tax credit program for five years for the purpose of attracting new private
capital to very low-income neighborhoods in California. In general, the new state credit would
have paralleled the federal New Markets Tax Credit (F-NMTC) Program. Status: Held in the
Assembly Committee on Appropriations, 2016.
g) AB 3101 (Blanca Rubio and Cervantes) New Markets Tax Credit: This bill would have
established the C-NMTC Program and authorizes the awarding of $50 million in tax credits
annually for five years, which would have begun in the 2021 tax year. The purpose of the C-
NMTC Program is to attract new private capital to very low-income neighborhoods in California.
In general, the new state credit would have paralled the F-NMTC Program. Status: Held in the
Assembly Committee on Appropriations, 2020.
h) SB 1316 (Romero) California New Markets Tax Credit: This bill would have authorized the
creation of a New Markets Tax Credit for qualified investments made in low-income communities
which would have begun in the 2011 calendar year. The State Treasurer’s Office would have
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administered the new credit program and allocated credits in an amount equal to the estimated
revenue gains that resulted from the temporary elimination of specified like-kind property
exchanges. Status: Died on the Senate inactive file, 2010.
11) Double Referral: The Assembly Committee on Rules has referred this measure to the Assembly
Committee on Jobs, Economic Development, and the Economy and to the Assembly Committee on
Revenue and Taxation (R&T). Should this measure pass this committee, it will be referred to R&T
for further policy consideration.
REGISTERED SUPPORT / OPPOSITION:
Support
California Asian Pacific Chamber of Commerce (CAPCC)
Coalition for Small and Disabled Veteran Businesses
Flasher Barricade Association
Opposition
None on File
Analysis Prepared by: Toni Symonds / J., E.D., & E. / (916) 319-2090
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