At its best, the federal New Markets Tax Credit program has subsidized projects like a community-owned grocery store in West Oakland.

Or a new permanent home for an immigrant rights organization in Queens, New York.

Or the re-purposing of a 180-acre former steel production site on the far South Side of Chicago into spaces for retail, green manufacturing and food production, and the largest indoor recreational space in the region.

At its worst, the same program has subsidized high-priced condominiums or even convention centers that spark or accelerate gentrification.

New research from the Urban Institute, a nonpartisan research group based in Washington D.C., dives deep into the 5,746 investments that included New Markets Tax Credit financing from the program’s first round of awards in 2001 to 2017. The work provides an overall long-term assessment of the New Markets Tax Credit program and its impact on communities. It finds the New Markets Tax Credit program does what it promises, most of the time, and doesn’t seem to cause displacement in the way that many fear the newer Opportunity Zones tax incentives may.

“It’s all government spending and we should want it to be spent in the best way to address the issues we want addressed,” says Brett Theodos, co-author of the new research, senior fellow and director of the Community Economic Development Hub at the Urban Institute.

The findings come out at an important crossroads for the country, especially when it comes to reckoning with the ongoing racial disparities in wealth, employment and access to credit and investment.

The new research starts with a look at cost — how much in federal spending are we really talking about?

A tax credit program isn’t as simple as a grant program, and this tax credit program is one of the more complex. It provides a tax credit worth up to 39 percent of the total investment into any eligible project. From 2001 to 2017, $12.2 billion in tax credits have gone out to investors — predominantly large banks. PNC Bank, U.S. Bank, Capital One, Bank of America, JPMorgan Chase and Citi are some of the main investors who participate in the program. (Citi also provides funding to Next City)

Those $12.2 billion in tax expenditures in turn have supported 5,746 transactions representing a total of $107 billion in total investment involved. So in other words, every $1 in federal spending on the New Markets Tax Credit program helps attract around $9 of investment from other sources.

“But the real question we want to answer here is, for every $1 million in investment, how much outcome on the ground do we achieve, and then compare that across programs,” says Theodos. The researchers attempted to answer that question in the remaining five research briefs.

What is it spending on exactly?

Outcomes for a tax credit program may also depend on the types of projects that receive investment through that program. By design, the New Markets Tax Credit program is very flexible, but does require projects to tell the federal government the primary purpose of the investment and to report on certain project outcomes like jobs created onsite.

Out of 5,746 New Markets Tax Credit investments from 2001-2017, retail projects were the most popular — about a thousand of them, or 17 percent of the total number of investments. Manufacturing and food processing projects came in next, at 828 investments, followed by 719 office or professional service projects, 619 health care facilities projects, and 600 school and child care projects. The rarest were investments into financial intermediaries that serve low-to-moderate income communities, like Hope Credit Union.

Considering the type of investment starts to reveal the potential impact in terms of jobs and income. Retail projects can create lots of jobs, but often at very low wages. Manufacturing projects can create fewer jobs, but at much higher wages. Hope Credit Union used New Markets Tax Credits to grow during the Great Recession, going from less than ten branches to nearly 30 across the Deep South — creating or preserving a good number of jobs internally, but also having an even larger indirect impact by preserving access to credit in many communities that lost all other banking providers.

Where is the spending going?

Urban studied all 38,063 census tracts that are eligible to receive New Markets Tax Credits investments — eligibility here meaning those that have a poverty rate of at least 20 percent or a median income below 80 percent of the region — finding that only a small percentage of eligible tracts have ever seen investment under the program. Through 2017, New Markets Tax Credits have supported projects in just 3,654 census tracts.

A big reason for the limited reach of the New Markets program is the annual cap in available tax credits. While the cap has gone up since inception, typically there have only been $5 billion in New Markets Tax Credits available per year. In some years Congress has allocated more to the program in response to disasters like Hurricane Katrina. In the COVID-19 response package enacted by Congress at the end of 2020, the program was re-authorized for $5 billion a year for the next five years. Unlike the Low-Income Housing Tax Credit program, the New Markets program has never been made a permanent part of the tax code.

Given that limitation, Congress also gave preference in the New Markets Tax Credit program to neighborhoods with severe levels of economic distress, neighborhoods outside of metropolitan areas, and projects that serve or employ low-income populations. The Urban Institute found that New Markets Tax Credit projects are indeed located in neighborhoods that, relative to eligible tracts that did not receive projects, tend to have higher poverty rates, lower median incomes, and larger shares of people of color.

About half of New Markets Tax Credit projects are in tracts that have only ever had one such project, meaning that the program is generally not flooding the same areas with new projects over and over again — something that could happen with other place-based investment programs, like the newer Opportunity Zone tax break.

These findings are of particular contrast to the early research coming out about the newer Opportunity Zones tax break, created in 2017. The two programs have many of the same eligible census tracts, however according to “the most comprehensive study of investment in [Opportunity Zones] to date,” conducted by researchers at University of California, Berkeley and the Joint Committee on Taxation, projects under Opportunity Zones tend to favor eligible tracts that on average have higher educational attainment, higher incomes, and higher home values than other eligible tracts.

In other words, Opportunity Zone projects tend to be in the less economically distressed of their possible locations, while New Markets Tax Credit projects tend to be in the more economically distressed.

“I think it’s clear that New Markets is much better targeted than the Opportunity Zones program, and has much more potential to benefit residents,” says Theodos.

Who really benefits?

Theodos says the most notable outcome they could attribute is that, New Markets Tax Credit projects on average result in 17.7 new firms and 100 new jobs in the census tract where that project is located following the investment. Not all of those firms and jobs are located within the project itself, but they are a result of the new economic activity related to that new project.

That said, not all of those jobs go to residents of that census tract. The researchers found only 27 of the 100 new jobs went to residents of the census tract where the project was located — and it is impossible to know whether those residents lived there before the project came into existence or if they moved in later. It’s also possible many of the other new jobs went to residents of adjacent census tracts with similar demographics.

Also, some of the increase in new firms in the census tract occurred before the project investment occurred — though that may indicate that intermediaries selected projects where they were aware of newer local businesses that could benefit from the additional investment.

The researchers also found there was a $562 increase in median incomes for some census tracts as a result of New Markets Tax Credit projects — specifically, projects that researchers expected to bring higher-than average salaries like manufacturing or some professional services. Once again, it is difficult to say whether that increase went directly to households that were there before the investment.

In terms of housing markets around each project, there’s a case to be made that some appreciation in census tracts is desirable. As a result of redlining and racist appraisal practices, homes in Black neighborhoods are still vastly undervalued compared to homes of similar quality with homeowners of similar income levels in white neighborhoods. Researcher Andre Perry at the Brookings Institution found that homes in Black neighborhoods would collectively be worth $156 billion more if not for the lower value that comes with the perceptions associated with being in a majority-Black neighborhood. (Perry is a Next City board member)

Some rise in appraised home values also helps to close the appraisal gap — the gap between what homes are valued at by appraisers and what it actually costs to build a new home or rehabilitate a vacant one in that area.

The Urban Institute researchers found that home prices rise and residential lending increases in surrounding neighborhoods after a New Markets Tax Credit project is complete. Home prices within one mile of each project on average increased 2.4 percent, while mortgage lending went up five percent — or about two more mortgages per year. Some of the effects, they say, were already in motion before the projects were complete, and therefore are not attributable solely to the projects.

Perhaps most crucially, the Urban Institute researchers found only a modest increase in the turnover rate for households within a census tract where a New Markets Tax Credit project was located. There have been small increases in population, and nearly equivalent increases in the number of residents in each census tract with at least a bachelor’s degree, but the percentage of residents who moved in the past year (within or into the census tract) barely changed from the pre-investment level, 23.7 percent.

Looking deeper, when the research breaks down impact by project type, only market-rate residential projects actually show a statistically significant increase in residential turnover in the area around the project. Theodos says it was not possible to disaggregate neighborhood turnover by specific projects, since the statistical model used needed a large enough sample size to be able to attribute statistical changes to New Market Tax Credit projects.

“If displacement is occurring [as a result of a New Markets Tax Credit project], the modest gain in number of residents with jobs, the modest decline in poverty rate, and the slight increase in turnover all imply that any displacement is affecting less than 1 percent of the population,” the researchers write.

Who decides where the dollars go?

One possible reason for the differing track records of where Opportunity Zones projects go versus where New Markets Tax Credit projects go, is the contrasting structures of the programs.

Unlike the New Markets Tax Credit Program, there is no annual cap on Opportunity Zone investments. There is also far less red tape — Opportunity Zone investors only need to file a bare minimum of paperwork with the Internal Revenue Service, and only to self-certify their investments are located in eligible census tracts and eligible projects or businesses. So it’s not that surprising that in 2019 alone, the Opportunity Zones program saw $19 billion in investment, according to the Berkeley study.

By contrast, the New Markets Tax Credit program is not only capped at $5 billion a year, it’s also a comparatively byzantine program. The Urban Institute recommends making the program simpler or at least easier for new entrants.

Since there is an annual cap on New Markets Tax Credits, there is an elaborate process for investors to compete for them. Federal agencies delegate the task of awarding credits to intermediaries who must first obtain certification to participate in the New Markets Tax Credit program.

Those intermediaries — mostly nonprofits, banks, local or state economic development agencies — have to compete themselves for an allocation of tax credits to award every year. They compete on the basis of their track record in completing successful community development projects as well as their financial management capacity and the strength of their ties to the communities receiving investment. Early on, this process tended to favor larger banks and larger CDFIs, but over time, smaller CDFIs and nonprofits including community banks and especially Black-owned banks have gotten more allocations of New Markets Tax Credits.

In every year since the program has existed, intermediaries have sought more in New Markets Tax Credit allocations than there are to go around. In most years, the Urban Institute researchers found, 200-300 intermediaries apply for an allocation, but only 70-90 actually receive one. In 2019 alone, 206 intermediaries applied for $14.7 billion in New Markets Tax Credit allocations, and the U.S. Treasury only awarded $3.5 billion to 76 intermediaries.

Since 2001, CDFIs have received 58 percent of New Markets Tax Credit allocations, followed by 17 percent to for-profit financial institutions that do not have CDFI certification, then 12 percent to government or quasi-government bodies. Theodos says making the program permanent might encourage more smaller organizations or government bodies to sign-up as intermediaries.

“I think the competitive nature is what drives performance. And it could be expanded, but I think the biggest thing is to make it permanent,” Theodos says. “I think the cap does serve community interest by making the private sector compete on the basis of impact to win access to the credits.”

Once an intermediary receives an allocation of New Markets Tax Credits, it has five years to award those credits to actual projects. Sometimes the intermediaries can’t find enough projects in their intended geographic target areas, which can cause some awkward transactions, like earlier this year when a D.C. intermediary ended up awarding $6 million of its allocated New Markets Tax Credits to a project in Los Angeles.

The process is convoluted, far from perfect, and typically very costly for project developers, who end up paying for squads of consultants and lawyers to compete for credits and remain in compliance after receiving investments. But Theodos says it’s the institutional structure and processes that account for New Markets Tax Credits going to support projects in communities that need them the most.

Based on their findings about the New Markets Tax Credit program, the Urban Institute researchers recommend other place-based investment programs like Opportunity Zones adopt a more rigorous process to certify eligible projects. The researchers also recommend sizing incentives based on potential impact, as opposed to tying incentives to potential rise in property values — as is the case with Opportunity Zones.

“We’re daring to introduce facts into a political process that probably more often than not has made up its mind as to what it thinks and is looking for the facts to justify it one way or another,” Theodos says. “But maybe over time special interests fade and we recognize them for what they are and at some point the hope is we really can craft policy that is both efficient and effective.”