How Much Do New Markets Tax Credits Help Low-Income Communities? – Next City
The Equity Factor

How Much Do New Markets Tax Credits Help Low-Income Communities?

A new study finds that commuters, not nearby residents, are the primary beneficiaries from business investment owed to New Markets Tax Credits. (AP Photo/Steven Senne)

For urban neighborhoods with a large population of low-income residents, the existential challenge often becomes how to attract private investment that can stabilize and improve the community without pushing out the people who are already there. There are few tools cities can use to address this challenge but among them is a heavy-hitter: the U.S. Treasury’s New Markets Tax Credit program.

Established in 2000 by Congress to spur investment in low-income communities, the $43.5 billion program gives tax credits to businesses that create jobs in these marginalized areas. But while the program has gained bipartisan support and many friends in the urban development world, new research from Drexel University economist Matthew Freedman argues that perhaps the program isn’t quite as effective as those focused on equitable development would hope.

In his new paper, “Place-based programs and the geographic dispersion of employment,” Freedman points out that the NMTC program may not be creating the impact it aims to, because of a loophole that allows subsidized businesses to hire workers from outside of the low-income area the tax credits are intended to support.

Freedman’s data analysis indicated that people outside of low-income target neighborhoods are actually the primary beneficiaries of new jobs created in the areas receiving credits.

“What’s not surprising is that money goes into these projects with the hope that it’s going to help local residents,” says Freedman. These commercial investments are intended to provide jobs, in addition to services, amenities and other resources. “But what I find in this paper using administrative data not only on where people live, but where they work, identifies the fact that the money going into these communities does increase employment by a little bit, but it does not increase the number of residents in these communities who have jobs by any discernible amount.”

New hires, he finds, end up commuting in from relatively affluent neighborhoods.

Gentrification, unsurprisingly, plays another key role in whether or not the NMTC program benefits the residents of low-income communities.

“You tend to get more bang for your buck out of these programs in neighborhoods that are stable or declining than in those that are gentrifying,” says Freedman, “for the simple reason that the neighborhoods that are gentrifying are likely to be getting this investment even in the absence of the program. The money that we’re pouring into [gentrifying] neighborhoods ends up being a pure transfer from taxpayers to developers or businesses that are lucky enough to be getting these subsidies.”

He points out that the formula for determining which census tracts are eligible for the program (80 percent of statewide median family income) doesn’t weed out neighborhoods that might only look poor on paper — areas around college campuses, for example — where these investments aren’t going to have a major impact on alleviating unemployment and poverty.

There is evidence to suggest, however, that in stable or declining communities, these subsidies do make a difference in whether businesses or developments are feasible or at least feasibly competitive with affluent neighborhoods. He says regulations that tighten neighborhood eligibility and require businesses to hire locally could help the program fulfill its original mandate to create more economic opportunity in low-income areas.

“This points to potential areas where the design of the program might be improved,” says Freedman. “They won’t be able to change the eligibility requirements at whim, but I will say that there are certainly ways this program could be better targeted both to ensure that money is not going to projects that would have happened even in the absence of any subsidies, but also to ensure that the money is flowing into communities where it is needed.”

The Equity Factor is made possible with the support of the Surdna Foundation.

Alexis Stephens was Next City’s 2014-2015 equitable cities fellow. She’s written about housing, pop culture, global music subcultures, and more for publications like Shelterforce, Rolling Stone, SPIN, and MTV Iggy. She has a B.A. in urban studies from Barnard College and an M.S. in historic preservation from the University of Pennsylvania.

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Tags: jobsincome inequalitynew markets tax credit