United States Government Accountability Office

GAO Report to Congressional Committees

TAX POLICY

New Markets Tax 

Credit Appears to 

Increase Investment 

by Investors in LowIncome Communities, 

but Opportunities 

Exist to Better 

Monitor Compliance 

January 2007 

 

GAO-07-296 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

January 2007

TAX POLICY

New Markets Tax Credit Appears to 

Increase Investment by Investors in LowIncome Communities, but Opportunities 

Exist to Better Monitor Compliance 

Highlights of GAO-07-296, a report to 

congressional committees 

The Community Renewal Tax

Relief Act of 2000 authorized up to

$15 billion of allocation authority

under the New Markets Tax Credit

(NMTC) to stimulate investment in 

low-income communities. The act 

mandated that GAO report on the 

program to Congress by January 

31, 2004, 2007, and 2010. Two 

subsequent laws authorized an

additional $1 billion in NMTC 

authority for certain qualified 

investments and extended the 

program for 1 year with an

additional $3.5 billion of authority. 

This report (1) describes the status 

of the NMTC program, (2) profiles

NMTC program participants, (3) 

assesses the credit’s effectiveness

in attracting investment by

participating investors, and (4) 

assesses IRS and the Community 

Development Financial Institutions

(CDFI) Fund compliance 

monitoring efforts. To conduct the 

analysis, GAO surveyed NMTC 

investors, conducted statistical 

analysis, and interviewed IRS and 

CDFI Fund officials. 

What GAO Recommends

To ensure that it is reviewing the 

full range of NMTC transactions, 

IRS should develop information for

selecting which CDEs to audit as 

part of its compliance study. In 

addition, IRS should work with the 

CDFI Fund to further explore

options for cost effectively 

monitoring investor compliance. 

IRS and the CDFI Fund agreed with 

our recommendations. 

As of January 2007, the CDFI Fund had awarded $12.1 billion of NMTC 

authority to 179 Community Development Entities (CDE). CDEs that 

received allocations began making NMTC investments in 2003, and the 

program has continued to grow since then. Investors use two main 

investment structures to make NMTC investments: direct investments to 

CDEs and tiered investments, which include equity investments and 

leveraged investments, where a portion of the investment amount originates 

from debt and a portion from equity. 

Banks and individuals constitute the largest proportion of NMTC investors, 

though banks and other corporations have made the largest share of NMTC 

investment. CDEs that received allocations applied for allocations in a 

competitive selection process and, through fiscal year 2005, most investment

from CDEs to low-income communities had been used for either commercial 

real estate rehabilitation or new commercial real estate construction. 

NMTC Loans and Investment by Type of Activity for Fiscal Years 2003 through 2005 

0

10

20

30

40

50

Percentage

Purpose

Source: GAO analysis of CDFI Fund data.

Other

Business,

fixed asset

Business,

working

capital

Commercial

real estate,

construction

Commercial

real estate,

rehabilitation

The results of GAO’s survey and statistical analysis indicate that the NMTC 

may be increasing investment in low-income communities by participating 

investors. Investors indicated that they have increased their investment 

budgets in low-income communities as a result of the credit, and GAO’s 

analysis indicates that businesses may be shifting investment funds from 

other types of assets to invest in the NMTC, while individual investors may 

be using at least some new funds to invest in the NMTC. 

The CDFI Fund and IRS developed processes to monitor CDEs’ compliance 

with their allocation agreements and the tax code. However, IRS’s study of 

CDE compliance does not cover the full range of NMTC transactions, 

focusing instead on transactions that were readily available, and may not 

support the best decisions about enforcement in the future. Moreover, IRS 

and the CDFI Fund are not collecting data that would allow IRS to identify 

credit claimants and amounts to be claimed. 

www.gao.gov/cgi-bin/getrpt?GAO-07-296.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Michael 

Brostek at (202) 512-9110 or 

brostekm@gao.gov. 
Contents 

Letter 1

Results in Brief 3

Background 6

CDEs Are Using NMTC Allocations to Invest in Low-Income 

Communities, and the CDFI Fund Is Tracking Program 

Implementation 15

Financial Institutions and Individuals Are the Primary NMTC 

Investors, and CDEs Most Often Use NMTC Investments to 

Make Loans to Qualified Businesses 24 

NMTC Investors Report That the NMTC Increases Investment in 

Low-Income Communities and Statistical Analysis Indicates 

That These Investments May Be Financed by Shifting Assets 

from Other Uses and Some New Investment 34 

IRS and the CDFI Fund Monitor NMTC Compliance, but Additional 

Opportunities Exist to Better Measure Noncompliance and 

Identify NMTC Investors 43 

Conclusions 52

Recommendations for Executive Action 53 

Agency Comments 54 

Appendix I Objectives, Scope, and Methodology 56 

Appendix II Description of Data and Methodology for Statistical 

Analysis of the Effect of NMTC Participation on 

Investment 61 

Appendix III NMTC Investment Data by State, Fiscal Years 2003 

through 2005 73 

Appendix IV Comments from the Community Development 

Financial Institutions Fund 75 

Appendix V Comments from the Internal Revenue Service 77 

Page i GAO-07-296 Tax Policy
Appendix VI GAO Contact and Staff Acknowledgments 79 

Tables 

Table 1: NMTC Allocation Rounds 14 

Table 2: NMTC Claimant Types 25 

Table 3: Reasons NMTC Investors Invested in the NMTC Program 

(in Percentages) 26 

Table 4: Investor Knowledge of CDE Operations (in Percentages) 28 

Table 5: NMTC Allocations Awarded by Round 29 

Table 6: CDEs That Applied for NMTC and Received Allocations by 

Round 29

Table 7: Top 10 States by NMTC Dollars through Fiscal Year 2005 34 

Table 8: Effects of NMTC Individual Investor Participation on 

Wealth 41

Table 9: Growth in Net Assets Using Fixed Effects Regression and 

Comparisons Based on Nearest Neighbor Propensity Score 

Matching 66

Table 10: Baseline Analysis: Instrumental Variables Fixed Effects 

Regressions on the Full Sample 69 

Table 11: Growth in Assets: Comparisons Based on Nearest 

Neighbor Propensity Score Matching 71 

Figures 

Figure 1: NMTC Process for Using Allocated Tax Credits to Make 

Qualified Low-Income Community Investments 9 

Figure 2: NMTC Eligible Areas 13 

Figure 3: Number of CDE Allocations by Round (Calendar Year) 16 

Figure 4: Qualified Equity Investment by Calendar Year 17 

Figure 5: Comparison of NMTC Investment Structures 20 

Figure 6: Interaction of CDFI Fund NMTC Data Collection Systems 22 

Figure 7: NMTC Loans and Investment by Type of Activity for 

Fiscal Years 2003 through 2005 31 

Figure 8: NMTC Dollars Used in Loans with Better Rates and

Terms 32

Figure 9: NMTC Investors Packaging the NMTC with Other 

Government Incentives 36 

Figure 10: Activities Investor Survey Respondents Undertake to 

Monitor CDE Compliance 52 

Page ii GAO-07-296 Tax Policy
Abbreviations 

AAS Allocation Agreement System 

ATS Allocation Tracking System 

BRTF Business Returns Transaction File 

CDE Community Development Entity 

CDFI Community Development Financial Institutions 

CIIS Community Investment Impact System 

CPI Consumer Price Index 

CRA Community Reinvestment Act 

FCOS Financial Counseling and Other Services 

FEMA Federal Emergency Management Agency 

GO Zone Gulf Opportunity Zone 

HUB Zone Historically Underutilized Business Zone 

ILR Institution Level Report

IRS Internal Revenue Service 

IRTF Individual Returns Transaction File 

MOU memorandum of understanding 

NCMS New Markets Compliance Monitoring System 

NMTC New Markets Tax Credit 

SBA Small Business Administration 

SCF Survey of Consumer Finances 

TIN Taxpayer Identification Number 

TLR Transaction Level Report 

QALICB qualified active low-income community business 

QEI qualified equity investment 

QLICI qualified low-income community investment 

This is a work of the U.S. government and is not subject to copyright protection in the 

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reproduce this material separately. 

Page iii GAO-07-296 Tax Policy
United States Government Accountability Office

Washington, DC 20548 

January 31, 2007 

Congressional Committees 

Congress established the New Markets Tax Credit (NMTC) program in the 

Community Renewal Tax Relief Act of 20001

 as part of an ongoing effort to

address one of our nation’s most persistent challenges—the revitalization

of impoverished, low-income communities. Conventional access to credit 

and investment capital for developing small businesses, retaining jobs, and 

revitalizing neighborhoods is often limited in economically distressed 

communities or in communities with large low-income populations. The 

NMTC provides investors (individuals, financial institutions, other 

corporations, etc.) with a tax credit for investing in communities that are 

economically distressed or consist of low-income populations. 

Currently, the Community Development Financial Institutions (CDFI) 

Fund in the Department of the Treasury is authorized to allocate up to 

$19.5 billion2

 in tax credit authority to Community Development Entities 

(CDE) that manage NMTC investments in low-income community 

development projects. CDEs are domestic corporations or partnerships 

with a primary mission of serving or providing investment capital for lowincome communities or low-income persons. Tax credit authority is the 

amount of investment for which investors can claim a tax credit at rates 

that total, over the 7 years they can claim the credit, 39 percent of their 

investment. In return for the tax credit, investors supply capital to the 

CDEs, which, in turn, make investments in qualified low-income 

communities. 

The Community Renewal Tax Relief Act of 2000 mandated that we report 

to Congress on the NMTC program by January 31, 2004, 2007, and 2010. In

 1

 Pub. L. No. 106-554 (2000). 

2

 The original legislation that authorized the program allowed for $15 billion of equity 

investment to qualify for the NMTC program. However, the Gulf Opportunity Zone Act of

2005, Pub L. No. 109-135 (Dec. 21, 2005) authorized an additional $1 billion of NMTC equity 

for qualified investments in areas affected by Hurricane Katrina, and Pub. L. No. 109-432 

(Dec. 20, 2006) extended the NMTC for an additional year (through 2008) with an

additional $3.5 billion of NMTC allocation authority. 

Page 1 GAO-07-296 Tax Policy
our report issued January 30, 2004,3

 we described the status of the NMTC 

program, profiled CDEs that received first round allocations (there have 

now been four rounds of NMTC allocations), and evaluated whether the 

systems were in place or planned in order to ensure NMTC compliance. 

We concluded progress was being made in implementing the NMTC 

program, but we also recommended that Internal Revenue Service (IRS) 

and the CDFI Fund work together to develop plans for designing and 

implementing compliance monitoring processes. IRS and the CDFI Fund 

agreed with our recommendation and have taken steps to design and 

implement compliance monitoring processes. 

Based on consultations with staff at cognizant congressional committees, 

this report (1) describes the status of the NMTC program; (2) profiles the 

characteristics of NMTC investors, the CDEs that receive NMTC 

allocations, and the businesses and communities that receive NMTC 

investments; (3) assesses how effective the NMTC has been in bringing 

new investment to low-income communities by the investors that have

participated in the program; and (4) assesses the steps that IRS and the 

CDFI Fund are taking to ensure CDEs and investors are complying with 

the NMTC and evaluates how effective these steps have been. 

To accomplish these reporting objectives, we met with officials from the 

CDFI Fund and IRS. We collected documents on the program’s status and 

efforts to monitor NMTC compliance. We also analyzed data from the 

CDFI Fund on the CDEs and their investment in low-income communities 

and tax return data from tax years 1997 through 2004 for investors in the 

NMTC program. We used these data to report summary statistics that 

profile the participants in the program and to conduct statistical analysis 

that measures the effect of the NMTC on investment by participating 

investors. In our statistical analysis, we compared a stratified random 

sample of taxpayers that did not make NMTC investments with investors 

that did make NMTC investments using fixed-effects regressions and 

comparisons based on other statistical methods to measure the effect of 

the NMTC on corporate investors’ growth in net assets and individual 

investors’ growth in wealth. We also surveyed investors in the NMTC 

program in order to provide additional information on the effect of the 

credit and characteristics of the investors. Our overall response rate was 

51 percent. We weighted our survey responses using information on 

 3

 GAO, New Markets Tax Credit Program: Progress Made in Implementation, but Further 

Actions Needed to Monitor Compliance, GAO-04-326 (Washington, D.C.: Jan. 30, 2004). 

Page 2 GAO-07-296 Tax Policy
investor type and investor size to reduce possible nonresponse bias that is

associated with investor type and size. Results from our statistical analysis 

and the survey are limited to the effects of NMTC investments on the 

investment choices of participating investors and do not assess the effect

of this investment on the investments by non-NMTC participants in lowincome communities. Our scope and methodology section (app. I) 

provides additional details on how we did our work. 

Our work was conducted from July 2006 through December 2006 in 

accordance with generally accepted government auditing standards. In 

December 2006, we requested written comments on a draft of this report 

from the Director of the Community Development Financial Institutions 

Fund and the Commissioner of the Internal Revenue Service; their 

comments are reprinted in appendices IV and V.

Since the CDFI Fund made its first allocations in 2003, the NMTC program 

has grown in terms of the amount of tax credit authority allocated to 

CDEs, the complexity of NMTC investments, and the amount of money 

invested in low-income communities. As of January 2007, the CDFI Fund 

had made 233 NMTC allocation awards totaling $12.1 billion in allocation 

authority to 179 CDEs—some CDEs have received multiple allocations—

which the CDEs have used to attract nearly $5.3 billion in NMTC 

investment. These CDEs with allocation awards are required to attract 

investment sufficient to use the remaining $6.8 billion of allocation 

authority in the coming years. The total amount per year invested by these 

CDEs in low-income communities grew from about $140 million in 2003 to 

$2.2 billion in 2005. As the NMTC program has grown, more investors have 

participated in more complicated NMTC investment structures, such as 

tiered investments, which include both equity investments and leveraged 

investments. The CDFI Fund has developed data systems that track 

allocation agreements (which set forth conditions such as approved uses 

of the allocations and approved service areas), allocated credits, and 

collected data about investors, the CDEs, and their investments in lowincome communities. The CDFI Fund combines data from these systems 

to monitor compliance with allocation agreements and to help IRS 

determine whether laws and regulations are being observed. All of these 

systems were operational in time to meet the CDFI Fund’s needs. 

Results in Brief 

Banks and individuals constitute the majority of NMTC claimants, 

accounting for 70 percent of NMTC claimants through 2006, though banks 

and other corporations account for the largest share of NMTC investment. 

Banks and other corporations that invested in the credit had relatively 

Page 3 GAO-07-296 Tax Policy
large net assets, and individuals who invested in the NMTC had, on 

average, higher incomes than other taxpayers. Most investors made only 

one investment in a CDE: 55 percent of investors made a single investment

while 12 percent made five or more investments. The CDEs applied for far 

more allocation dollars than were available. They received only about 11 

percent of $107 billion in allocation authority for which they applied. Data

reported through fiscal year 2005 indicate that businesses in low-income 

communities received investments from CDEs to fund over 580 NMTC 

projects, totaling over $3 billion of investment. The projects were funded 

primarily by loans from the CDEs and were used chiefly to finance 

commercial real estate construction and rehabilitation. The communities 

where the investment projects were located were dispersed across states 

and about 90 percent were located in areas designated as “areas of high 

distress” because of factors such as low median incomes or high 

unemployment rates. 

The results of our survey and statistical analysis are consistent with the 

NMTC program increasing investment in eligible low-income communities 

by the investors that participate in the program and with this investment 

coming primarily from funds shifted from other uses. Such a shift would 

be one indicator that the NMTC program is effective because the NMTC 

sought to increase investment in eligible low-income communities. An 

estimated 64 percent of the NMTC investors reported that they increased 

the share of their investment budget for low-income communities because

of the credit. One limitation of our survey is that the population of NMTC 

investors we surveyed benefit from claiming the credit and have an 

interest in ensuring that the NMTC program continues in the future. 

However, in many cases the survey also indicated that the credit alone 

may not have been sufficient to justify the investment and meeting other 

government regulations may be an important incentive for making NMTC 

investments. Any increased investment in low-income communities 

because of the credit can occur when NMTC investors make new 

investment by increasing their total funds available for investment or when

they shift funds from other uses in higher income communities. Our 

statistical analysis suggests that in general corporate NMTC investors are 

not increasing their overall level of investment to participate in the NMTC 

program. Taking this information together with information from our 

survey of investors, we infer that the most likely effect of the credit is that

corporate investors, which make the majority of investments in CDEs, are 

shifting investment into low-income communities from higher income 

communities. Our statistical analysis indicates that unlike corporate 

investors, participating individual investors as a group appear to be 

making at least some new investment to participate in the NMTC program. 

Page 4 GAO-07-296 Tax Policy
This finding that corporate and individual NMTC investors appear to be 

increasing investment in low-income communities is not, in and of itself,

sufficient to determine that the credit is effective. For example, it was 

beyond the scope of our analysis to determine whether investment by 

NMTC investors reduced such investments by non-NMTC investors. A 

complete evaluation of the program’s effectiveness also requires 

determining the costs of the program, including any behavioral changes by

taxpayers that may be introduced by shifted investment funds. In addition, 

such an evaluation requires an assessment of the program’s economic and 

social benefits. For example, to the extent a community experiences a 

reduction in poverty and increases in employment opportunities as a 

result of the program, possible “spillover” benefits to the community may 

include reductions in crime and improvements in the health status of 

community residents. The CDFI Fund is working with a contractor to 

develop plans for a comprehensive evaluation of the NMTC, which may 

include evaluating the program’s effectiveness. 

IRS and the CDFI Fund have taken steps to monitor compliance with the 

requirements of the NMTC program, but additional opportunities exist to 

better measure noncompliance and identify NMTC investors. IRS is 

conducting a compliance study focusing on whether CDEs comply with 

the “substantially all” test imposed by the Internal Revenue Code, which 

requires that CDEs invest at least 85 percent of a qualified equity 

investment (QEI) in a low-income community within 1 year of receiving

the investment. However, because CDEs did not file initial returns as soon 

as IRS expected, IRS was not able to select CDEs to audit in a way likely 

to produce findings that are representative of the full range of CDE 

activity. However, as the program expands and more CDEs make NMTC 

investments, IRS should have more CDEs to choose from when selecting 

CDEs to audit for its compliance study, and IRS could use CDFI Fund data

to aid in developing criteria for selecting which CDEs to audit. The CDFI 

Fund is focusing on ensuring that CDEs fulfill their allocation agreement 

requirements. The CDFI Fund monitors CDE compliance primarily 

through its data systems and, to a lesser extent, by making site visits. The 

data systems are designed to enable the CDFI Fund to identify when a 

CDE falls out of compliance with its allocation agreement. However, 

neither IRS nor the CDFI Fund currently have sufficient information to 

enable the IRS to identify NMTC investors and the amount of credit that 

the investors are entitled to claim, particularly when the original 

investments are sold to others. CDEs may be a useful source of 

information because they need to know who their investors are, even

when investments are sold, in order to submit appropriate reports to those 

investors. If IRS or the CDFI Fund developed ways to identify investors 

Page 5 GAO-07-296 Tax Policy
and the amounts they invested, even when NMTC investors sell their 

equity share in a CDE after the original investment is made, the IRS would 

be better able to ensure that credits are claimed correctly. 

To ensure that IRS is reviewing the full range of NMTC transactions and 

that the conclusions of its compliance study are more representative of all 

CDEs with NMTC allocations, we recommend that IRS use CDFI Fund 

data and the results of its current NMTC compliance study to develop

criteria for selecting which CDEs to audit as part of its future compliance 

monitoring efforts. Additionally, to ensure that eligible taxpayers claim the 

correct amount of NMTC on their tax returns and IRS is able to identify all 

tax credit claimants in the event of a CDE falling out of compliance with 

NMTC regulations, we recommend that IRS work with the CDFI Fund to 

further explore options for cost effectively monitoring investor 

compliance and developing a way to identify NMTC claimants, even in 

instances where the original investor sells its equity share in a CDE, and 

the amount of NMTC investment that investors made. In commenting on 

this report, both the Acting Director of the CDFI Fund and the 

Commissioner of Internal Revenue agreed with our recommendations 

(their responses are reprinted in appendices IV and V). 

As we noted in a past report, the NMTC was created in an effort to 

increase the amount of capital available to low-income communities,4

facilitate economic development in these communities, and encourage 

investment in high-risk areas.5

 In order to achieve these goals, the program 

allows investors that provide eligible capital to low-income communities 

and businesses to reduce their tax liability by 39 percent of the amount of 

the investment over a 7-year period. 

Background 

 4

 A low-income community is defined as a census tract (1) in which the poverty rate is at 

least 20 percent or (2) outside a metropolitan area in which the median family income does 

not exceed 80 percent of median statewide family income or within a metropolitan area in

which the median family income does not exceed 80 percent of the greater statewide or the 

metropolitan area median family income. After October 22, 2004, the Secretary of the

Treasury was authorized to issue regulations designating targeted populations that may be

treated as low-income communities and procedures for determining which entities are 

qualified active low-income community businesses with respect to such populations. In 

addition, the definition of a low-income community included certain areas not within

census tracts, tracts with low population, and census tracts with high migration rural 

counties.

5 GAO-04-326. 

Page 6 GAO-07-296 Tax Policy
The process of making an NMTC investment involves several steps and a

number of stakeholders. Before applying for an NMTC allocation, the 

applicant must apply for and be certified as a CDE, which is an entity that

manages investments for community development.6

 Once an organization 

has been certified as a CDE by the CDFI Fund, it is then eligible to apply 

for an NMTC allocation.

The NMTC Investment 

Process 

Both for-profit and nonprofit CDEs may apply for and receive NMTC 

allocations (once a CDE is awarded with an allocation, it is often referred 

to as an allocatee). However, only a for-profit CDE can offer NMTCs to 

investors. Therefore, when a nonprofit CDE receives an NMTC allocation,

it must transfer the allocation to one or more for-profit subsidiary CDEs 

(referred to as suballocatees). NMTC applicants submit standardized 

application packages in which they respond to a series of questions about 

their track records, the amounts of NMTC allocation authority being 

requested, and their plans for using the tax credit authority. 

The CDFI Fund staff and a group of external reviewers who have 

experience in business, real estate, and community development finance 

then review the applications and score them based on the following four 

areas: (1) community impact, (2) business strategy, (3) capitalization 

strategy, and (4) management capacity. The applicants can receive a score 

of up to 25 points in each of the areas, and CDEs can obtain up to 10 

additional “priority points” for demonstrating that they have track records 

of successfully investing in low-income communities and/or that they 

intend to invest in unrelated entities. After being reviewed and scored by 

three different reviewers (and, in some cases, a fourth reviewer if a 

scoring anomaly exists), the applicants are ranked and NMTC allocation 

awards are made in descending order of the highest aggregate scores to 

applicants that met minimum thresholds in each of the four areas.7

 The 

CDFI Fund makes award determinations in this order until the allocation

authority is exhausted. The CDFI Fund also provides a written debriefing

to each CDE that does not receive an allocation in order to provide them 

with reasons their application did not receive an NMTC award and to 

 6

 Community development financial institutions and specialized small business investment 

companies automatically qualify as CDEs and only need to register as CDEs rather than 

apply for certification. 

7

 For more information on how NMTC awards are determined and the criteria that the 

CDFI Fund uses to select which CDEs will receive allocations, refer to GAO-04-326, pp. 5-9.

Page 7 GAO-07-296 Tax Policy
provide the CDE with suggestions on how to be more competitive for 

NMTC awards when applying in future rounds. 

As figure 1 shows, after the allocations are made to the CDEs, investors 

make equity investments, by acquiring stock or a capital interest, in the 

CDEs to receive the right to claim tax credits on a portion of their 

investment.8

 In turn, the CDE must invest “substantially all”9 of the 

proceeds into qualified low-income community investments (QLICI). 

Eligible investments include, but are not limited to, loans to or 

investments in businesses to be used for developing residential, 

commercial, industrial, and retail real estate projects; and purchasing 

loans from other CDEs. 

 8

 Beginning in the year the investment is made, investors are entitled to claim the credit for 

a 7-year period with 5 percent of the investment claimed in each of the first 3 years and 6

percent in each of the last 4 years. Investors are allowed to carry the credit back 1 year and

carry the credits forward for a 20-year period. 

9

 “Substantially all” means that CDEs must use (within 12 months) at least 85 percent of

investor proceeds in years 1 through 6 and 75 percent in year 7 of the investment. CDEs

can satisfy this requirement by two methods: (1) direct tracing of investments to specific 

qualified low-income community investments or (2) showing that at least 85 percent of 

their aggregate gross assets are invested in qualified low-income community investments. 

Page 8 GAO-07-296 Tax Policy
Figure 1: NMTC Process for Using Allocated Tax Credits to Make Qualified Low-Income Community Investments 

a

Only a for-profit CDE can receive qualified equity investment from NMTC investors. These CDEs can 

then make investments in other CDEs that could be for-profit CDEs or nonprofit CDEs or they can 

directly invest the NMTC funds in low-income communities. However, both for-profit and nonprofit 

CDEs can receive allocations from the CDFI Fund. If a nonprofit CDE receives a NMTC allocation 

from the CDFI Fund, it must transfer the allocation authority to a for-profit CDE before NMTC 

investments can be made. 

Once a qualifying investment has been made in a CDE and the CDE has 

invested the funds in an eligible low-income community, the investor can 

claim the tax credit over the course of 7 years. In addition, equity investors 

may receive returns on their investments in the form of dividends or other 

income that they receive from the CDE during the period in which they are 

Page 9 GAO-07-296 Tax Policy
eligible to claim the credit. The NMTC investor is still usually allowed to 

claim the NMTC for the full 7-year period even if the business that the CDE 

provides investment to defaults on its loans or files for bankruptcy. 

However, in the case of a business that receives NMTC funds going 

bankrupt, the ability of the investor to recover its initial equity investment

in a CDE would depend on the assets and financial condition of the CDE 

as well as the original agreement that the CDE entered into with the 

investor. 

The NMTC is a nonrefundable tax credit, meaning that taxpayers do not 

receive payments for tax credits that exceed their total tax liability. In 

addition, taxpayers that are eligible to claim the tax credit may sell their 

investment, along with the right to claim any remaining tax credits, to 

another investor after the initial NMTC investment. For example, an 

investor may make an equity investment in a CDE that would allow it to 

claim the credit and then sell its equity share in the CDE to another 

investor, thereby transferring the right to claim the remaining credits to 

this investor. The original investor may choose to sell its equity share in a 

CDE, and consequently its right to claim the credit, because it does not 

have a tax liability for that year or other reasons, such as the timing of the 

original investment.10

Once investors begin claiming the credit on their tax returns, three things 

can trigger a recapture event (meaning that the investor will no longer be 

able to claim the credit because the investment no longer qualifies for 

NMTCs). The NMTCs can be subject to a recapture if the CDE (1) ceases 

to be certified as a CDE, (2) does not satisfy the “substantially all” 

requirement, or (3) redeems the investment. In general, a recapture event

means that the investors that originally purchased the equity investment 

and subsequent holders of the investment are required to increase their 

income tax liability by the credits previously claimed plus interest for each 

resulting underpayment of tax. 

 10 For example, an investor may have an interest in beginning a particular NMTC project at

a time before all of the final investors have made their investments. In that case, the 

original investor could make the entire original equity investment with the intention of

selling its equity share in the CDE to other investors at a time when the financing could be

finalized. 

Page 10 GAO-07-296 Tax Policy
Two recent legislative changes have increased the number of areas where 

NMTC investments can be made. First, the American Jobs Creation Act of

200411 added “targeted populations” to the eligibility criteria for NMTC 

investments. Second, Congress also expanded the NMTC program in 

2005,

12 providing an additional $1 billion of allocation authority to be made 

available to CDEs with a significant mission of recovery and 

redevelopment of low-income communities in the Gulf Opportunity Zone 

(GO Zone), which are specified areas in Louisiana, Mississippi, and 

Alabama that were affected by Hurricane Katrina during 2005.

Legislative Changes 

Created Targeted 

Populations 

In general, targeted populations were introduced to give CDEs flexibility 

in making investments serving individuals and groups that reside or work

in communities that might not otherwise fall under the NMTC program’s 

geographically based definition of a low-income community. Currently, 

regulations defining targeted populations have not been finalized. 

However, the CDFI Fund and IRS have provided guidance for what 

qualifies as a targeted population.13 These guidelines specify that the 

targeted populations, which are individuals or an identifiable group of 

individuals, must meet tests to qualify as low-income communities and the 

businesses or entities receiving the investments must also meet certain 

criteria.14

In IRS’s recently provided guidance, the definition of GO Zone targeted 

populations is similar to the definition for low-income targeted 

populations with some differences. In cases where a business is located 

within the GO Zone, it does not mean that it automatically qualifies for 

NMTC investment dollars. First, the GO Zone targeted population need not 

qualify as low-income individuals as defined above, but rather the 

population must consist of individuals who lack access to loans or equity 

investments because they were displaced from their principal residence or

lost their principal source of employment because of Hurricane Katrina. 

 11 Pub. L. No. 108-357 (2004). 

12 Pub. L. No. 109-135 (2005). 

13 IRS Notice 2006-60, I.R.B. 2006-29. 

14 Under the new guidelines, a qualifying business for a targeted low-income population is 

any corporation (including nonprofit corporations) or partnership that meets one of the 

following three tests: (1) at least 50 percent of the entity’s gross income is derived from 

sales, rentals, service, or other transactions with individuals who are low-income persons;

(2) at least 40 percent of the entity’s employees are low-income individuals; or (3) at least 

50 percent of the entity is owned by low-income individuals. 

Page 11 GAO-07-296 Tax Policy
Second, the NMTC investment must serve targeted populations in census 

tracts within the GO Zone that meet certain requirements, including that 

they contain one or more areas designated by the Federal Emergency 

Management Agency (FEMA) as flooded or having sustained extensive or

catastrophic damage as a result of Hurricane Katrina. 

Figure 2 illustrates the effect that recent legislative changes have had on 

the census tracts that are eligible to receive NMTC investments. As the 

figure shows, geographically, a large portion of the country qualifies for 

NMTC investment, and there are eligible areas in every state. The figure 

also shows the area of the GO Zone where NMTC investments can be 

made in both eligible low-income communities and specified targeted 

populations as a result of additional allocation authority made available 

for areas affected by Hurricane Katrina. 

Page 12 GAO-07-296 Tax Policy
Figure 2: NMTC Eligible Areas 

Source: CDFI Fund.

Not NMTC eligible

NMTC eligible

Gulf Opportunity Zone targeted population

Gulf Opportunity Zone boundaries

Note: All unshaded areas identified as “Not NMTC eligible” could receive NMTC investment funds if 

CDEs serve targeted populations in those areas under the American Jobs Creation Act of 2004 (Pub. 

L. No. 108-357). In addition, targeted populations in areas shaded in black in the GO Zone may 

receive NMTC investment because they meet the definition of a GO Zone targeted population. 

Page 13 GAO-07-296 Tax Policy
Congress initially provided a schedule for allocating annual NMTC 

authority to CDEs for calendar years 2001 through 2007.15 However, as we 

also reported in 2004, the CDFI Fund did not make any NMTC allocations

to CDEs until 2003 because it needed to complete various start-up tasks 

for the new program, such as establishing the rules for using allocations. 

Because the initial allocations were not made until 2003, the CDFI Fund 

combined the allocation amounts available for 2001 and 2002 and awarded 

those NMTC allocations in 2003. The allocation amounts designated for 

2003 and 2004 were then combined and awarded in 2004. Table 1 shows 

the current schedule for allocation rounds. Since 2004, allocation awards 

have been made to CDEs annually. 

Table 1: NMTC Allocation Rounds

Authorized Allocation 

Rounds End in 2008 

Dollars in billions

Round Allocation year Original allocation years Amount allocated 

Round 1 2003 2001-2002 $2.5

Round 2 2004 2003-2004 3.5

Round 3 2005 2005 2.0 

Round 4 2006 2006 4.1a

Round 5 2007 2007 3.9a

Round 6 2008 2008 3.5b

Total $19.5

Source: CDFI Fund. 

a

The amounts available to be allocated in Round 4 and Round 5 were increased by $600 million and 

$400 million respectively because of increased NMTC allocation limits targeted toward the GO Zone. 

b

Congress initially only authorized NMTC allocation authority through 2007. However, the Tax Relief 

and Health Care Act of 2006 (Pub. L. No. 109-432) extended NMTC allocation authority for 1 year

(through 2008) with an additional $3.5 billion of NMTC allocation authority.

As of January 2007, there have been four completed rounds of NMTC 

allocations, and the CDFI Fund is receiving applications for the 2007 

round of NMTC allocation awards, which will be announced in September 

2007. The 2007 allocation awards were originally scheduled to be the last 

authorized round of NMTC allocation awards. However, in December 

2006, Congress passed and the President signed the Tax Relief and Health

 15 The original allocation schedule was $1 billion in 2001, $1.5 billion in 2002, $1.5 billion in

2003, $2 billion in 2004, $2 billion in 2005, $3.5 billion in 2006, and $3.5 billion in 2007.

Page 14 GAO-07-296 Tax Policy
Care Act of 2006,

16 which extends the NMTC for an additional year 

(through the end of 2008) with an additional $3.5 billion of NMTC 

allocation authority. Regulations are also required to be drafted to ensure

that nonmetropolitan areas receive a proportional allocation of qualified 

equity investments. 

The CDFI Fund has completed four rounds of NMTC allocations, which 

CDEs are using to attract investment. The investment structures used to 

complete these deals have taken a variety of forms, including combining

debt and equity in limited liability partnerships in order to invest in a 

CDE—called leveraging. In addition, the CDFI Fund has developed four 

main data collection systems to track efforts to implement and monitor 

the expanding NMTC program. 

Beginning in 2003, the CDFI Fund awarded NMTC allocations of varying

amounts to a number of CDEs. The CDFI Fund has awarded 233 NMTC 

allocations to 179 different CDEs totaling $12.1 billion over the course of 

the four completed NMTC allocation rounds. As figure 3 shows, the CDFI

Fund made awards to the largest number of CDEs in 2003, when the fund 

awarded NMTC allocations to 66 CDEs, and it made awards to the smallest 

number of CDEs in 2005 when 41 CDEs received allocations. In its most 

recent allocation round in 2006, the CDFI Fund made allocations to 63 

CDEs for a total of $4.1 billion of tax credit authority. The largest award to 

a single CDE in this allocation round was $143 million, while the median 

award was $60 million. 

CDEs Are Using 

NMTC Allocations to 

Invest in Low-Income 

Communities, and the 

CDFI Fund Is 

Tracking Program 

Implementation 

NMTC Allocations and 

Investments in CDEs and 

Low-Income Communities 

Have Increased in Number 

and Amount 

 16 Pub. L. No. 109-432 (2006). 

Page 15 GAO-07-296 Tax Policy
Figure 3: Number of CDE Allocations by Round (Calendar Year) 

The CDEs receiving allocations were able to attract an increasing number 

of QEIs. As of December 2006, investors had made nearly 1,400 QEIs in 

CDEs, and as more allocation rounds have taken place, the number of 

QEIs has grown. Relatively few QEIs were made in 2003 when the program 

was in its early stages, but the number of QEIs increased significantly in

both 2004 and 2005. This pattern of growth reflects increases in NMTC 

allocation authority and increased time for CDEs to establish business 

relationships with potential investors. In addition, more QEIs were made 

in CDEs that received allocations in 2003 and 2004 than in CDEs that 

received NMTC allocations in 2005. As of December 2006, 749 QEIs had 

been made in first round NMTC allocatees, 478 QEIs had been made in 

Page 16 GAO-07-296 Tax Policy
second round NMTC allocatees, and 154 QEIs had been made in third 

round allocatees.17

As figure 4 shows, the CDEs were generally able to attract increasing 

dollar amounts of qualified equity investment. QEI grew from about 

$140 million of investment in 2003 to over $2.2 billion of investment in 

2005, and as of mid-December 2006, CDEs had recorded nearly $1.5 billion

in NMTC investment for the year—totaling $5.3 billion over the period. 

CDEs are required to invest the remaining $6.8 billion of allocation 

authority awarded to this point during the coming years. At the same time, 

the size of the QEIs varied considerably across CDEs. According to CDFI 

Fund data, the largest QEI made through December 2006 was $113 million, 

while the median QEI during this period was about $1.8 million. 

Figure 4: Qualified Equity Investment by Calendar Year

Note: Amount of QEI in 2006 is through mid-December. 

 17 As of December 2006, only six QEIs had been made into fourth round allocatees. The 

2006 NMTC allocations were not announced until the summer of 2006, which may explain 

the relatively small amount of investment activity into fourth round allocatees at the time 

of this report. 

Page 17 GAO-07-296 Tax Policy
The CDEs used this QEI to make investments in 583 qualified NMTC 

projects totaling $3.1 billion through fiscal year 2005.18 Nearly all of these 

investments have been to qualified active low-income community 

businesses (QALICBs) in qualifying areas. However, according to CDFI 

Fund data, a small number (about 1 percent) of the investments were 

made to other CDEs, as permitted under NMTC regulations. As more 

NMTC allocation awards are made and more NMTC investment 

transactions are completed, additional information will be available about 

the size and type of NMTC investments. 

The Ability of Investors to 

Use Tiered Investment 

Structures May Have 

Contributed to the Growth 

of the NMTC Program 

Certain NMTC investment structures may have been a factor in the growth 

of the program by making NMTC investments more attractive. NMTC 

investors have used two primary investment structures when making QEIs 

in CDEs: (1) direct NMTC investment and (2) tiered NMTC investments.19

As of December 2006, about 54 percent of the $5.3 billion in NMTC 

investments were made using tiered investment structures. In a direct 

NMTC investment, an investor makes a QEI in a CDE that reinvests the 

money in a low-income community. (See fig. 5 for a description of these 

NMTC investment structures). In tiered investment structures, which 

include both equity investments and leveraged NMTC investments, 

investors provide equity or loans to a pass-through entity that combines 

funds from several sources, and the pass-through entity makes the QEI in 

a CDE.20 In both direct and tiered investment structures, equity investors in 

a CDE are able to claim the NMTC on their tax returns and, after leaving

the equity investment in the CDE for the 7 years during which they are 

eligible to claim the credit, they can redeem their original equity stake in 

the CDE. 

In a tiered equity investment structure, the dollars invested in the 

investment fund consist entirely of equity investments from multiple 

 18 This reflects data available in the CDFI Fund’s databases through fiscal year 2005 for 

awardees. Because of the timing of CDE reporting requirements—CDEs are not required to 

report data about low-income community investment to the CDFI Fund until 6 months after 

the end of their fiscal year—it is likely that more NMTC investment has taken place that 

has not yet been recorded in the CDFI Fund’s databases. 

19 Unlike tiered NMTC investments, there is no standard term for one investor making a

QEI into a CDE. For the purposes of this report, we refer to this type of transaction as a 

“direct” NMTC investment. 

20 Before making an investment in a CDE or in another pass-through entity, investors may 

set up a partnership as a pass-through entity.

Page 18 GAO-07-296 Tax Policy
investors. These investment structures accounted for about 13 percent of 

NMTC investment as of December 2006. In a tiered leveraged investment 

structure,21 a portion of the money being invested in the investment fund 

comes from equity investors and a portion of the money originates from a 

debt investment (loan). As of December 2006, about 41 percent of all 

NMTC investment was made using the leveraged approach. 

 21 In Rev. Rule 2003-20, 2003-1 C.B. 465, the IRS, based on the facts presented in the ruling, 

approved this method of structuring NMTC investments.

Page 19 GAO-07-296 Tax Policy
Figure 5: Comparison of NMTC Investment Structures 

a

Investors in a CDE cannot redeem any of the original QEI during the 7-year period while they are

allowed to claim the credit. However, equity investors can receive a return on their investment in a 

CDE, in the form of dividends or partnership income, for example. 

Page 20 GAO-07-296 Tax Policy
The leveraged investment structure may make NMTC investment more 

attractive to some investors because it allows investors to invest in the 

CDE who may not be able to claim tax credits but could still benefit from

the economic returns. The investment structure can be used to separate 

the tax benefits of the investment from the economic benefits of the 

investment. For example, an investment fund partnership makes a 

$1 million leveraged qualified equity investment in a CDE where $400,000 

of the money comes from the equity investors in the partnership and the

other $600,000 comes from a bank as an interest-only loan to the 

investment partnership with a balloon payment after 7 years. The CDE that 

receives the QEI reinvests the money by loaning “substantially all” of the 

$1 million to a QALICB. In this structure, the economic and tax benefits 

are separated: the bank receives interest payments on the loan to the CDE 

and, after 7 years, the bank will also be entitled to collect principle 

payments on the loan while the equity investors are entitled to claim the 

NMTC for 7 years, totaling 39 percent of the total $1 million QEI—not just 

the $400,000 that was originally invested as equity. NMTC equity investors 

may also receive a return on their investment, in the form of dividends or 

partnership income, for example, during the 7-year period while they can 

claim the credit. However, neither the investment fund partnership nor the 

underlying investors can redeem any portion of the QEI during this period

and still remain eligible to claim the credit. 

The leveraged investment structure may also offer a more attractive 

combination of risk and return than direct investment. From the bank’s 

perspective in the example above, this investment structure may be 

attractive because the loan-to-value ratio22 is more favorable than it would 

have been if the debt was not being combined with the investors’ equity. 

The more favorable ratio may compensate the bank for assuming a greater 

degree of risk, most notably if the business that receives the loan from the 

CDE defaults on its loan agreement. In that case, the bank’s investment is 

only secured by the equity in the original investment partnership ($400,000 

in the example above). From the equity investor’s perspective, if the 

business defaults on its loan, they are still allowed to claim the full amount 

of the credit—as long as the business that receives the funds is a qualifying

business in the year the loan is made.

 22 Loan-to-value ratio is the relationship, expressed as a percentage, between the amount of

a loan and the value of the asset that the loan is being used to finance. In the example 

above, if 100 percent of the proceeds were reinvested in a CDE as a QEI, the loan-to-value 

ratio would be 60 percent because a $600,000 loan is being issued to finance a project with 

a total cost of $1 million.

Page 21 GAO-07-296 Tax Policy
As the NMTC program has grown, investors have used more complicated

investment structures, such as tiered investments. According to CDFI 

Fund data, 81 percent of investors making NMTC investments through 

December 2006 used tiered (including both equity and leveraged) NMTC 

investment structures, with investors in more recent years being more 

likely to use tiered structures. For example, 69.1 percent of investors 

making QEIs in 2003 and 2004 used tiered structures, while 87.5 percent of 

investors making QEIs in 2005 and 2006 used tiered structures. 

The CDFI Fund’s Data 

Collection Systems Are 

Operational 

The CDFI Fund uses four data collection systems to administer and 

monitor the NMTC program. All of these data collection systems were 

operational before they were needed to collect data and to help the CDFI 

Fund monitor NMTC compliance. These data collection systems include 

(1) the Allocation Agreement System (AAS), (2) the Allocation Tracking 

System (ATS), (3) the Community Investment Impact System (CIIS), and 

(4) the New Markets Compliance Monitoring System (NCMS). Figure 6 

illustrates how the AAS, ATS, and CIIS, combine to populate the NCMS, 

which the CDFI Fund uses to monitor CDEs’ compliance with their 

allocation agreements. 

Figure 6: Interaction of CDFI Fund NMTC Data Collection Systems 

Page 22 GAO-07-296 Tax Policy
A brief description of these data collection systems follows. 

• The AAS contains information on the allocation agreements that CDEs 

enter into with the CDFI Fund. The AAS was operational as of August 2003 

and is primarily used by the CDFI Fund’s legal staff to ensure that NMTC 

contracts are properly executed. 

• The ATS is the primary system that the CDFI Fund uses to monitor QEIs 

that have been made and track CDEs (allocatees), suballocatees, and 

investors in the CDEs. The ATS contains information reported by the 

CDEs on the type of QEI that is made in the CDE, the amount of the 

investment, the CDE that received the investment, whether the CDE that 

initially received the allocation transferred the allocation to a 

suballocatee, and how much of the allocation was transferred. In addition, 

the ATS contains data reported by CDEs on the equity investors in the 

NMTC program. The ATS was operational as of November 2003. 

• The CIIS collects information about CDEs and the investments that they 

make in low-income communities. CIIS data is collected through two 

reports: the Institution Level Report (ILR) and the Transaction Level

Report (TLR). The ILR provides information on the CDEs, as well as their 

loan purchases and Financial Counseling and Other Services (FCOS) 

activities, and the TLR provides information the CDEs’ loans and 

investments in QALICBs and in other CDEs. The CIIS began receiving data

in May 2004.

• The NCMS combines data from the CIIS, ATS, AAS, and other CDFI Fund 

data collection systems and is used to monitor whether CDEs remain 

compliant with their allocation agreements. CDFI Fund officials said that 

the NCMS has been operational since April 2005 and that the system was 

in place in time to allow the CDFI Fund to monitor first round allocatees’

compliance with their respective allocation agreements. 

Page 23 GAO-07-296 Tax Policy
Banks and individuals constitute the majority of NMTC claimants when 

qualified equity investments are originally made.23 Taken together, banks 

and individuals accounted for 70 percent of NMTC claimants through 2006. 

Banks and other corporations that invested in the credit had relatively 

large net assets. Individuals who invested in the NMTC had, on average, 

higher incomes than other taxpayers. The CDEs applied for far more 

allocation dollars than were available, receiving only about 11 percent of 

$107 billion in allocation authority for which they applied. The CDEs made 

investments in low-income communities, most often in the form of term 

loans to businesses.24 The businesses that received these loans used them 

for a variety of purposes but chiefly to finance new commercial real estate

construction and rehabilitation. The communities where the investment 

projects were located were dispersed across states, and about 90 percent 

of projects were located in areas designated as “areas of high distress” 

because of factors such as low median incomes and high unemployment 

rates, including businesses in highly distressed areas, such as federally 

designated Empowerment Zones and Enterprise Communities. 

Although the NMTC program has attracted a variety of types of investors, 

as table 2 indicates, banks and individuals make up the majority of 

investors, accounting for 70 percent of NMTC investors. Other corporate 

investors, such as real estate development firms and insurance companies,

and still other types of investors, including estates and trusts, make up the 

remainder of investors in the CDEs. Banks and other regulated financial 

institutions also account for the majority of NMTC investment funds. 

Financial Institutions 

and Individuals Are 

the Primary NMTC 

Investors, and CDEs 

Most Often Use 

NMTC Investments to 

Make Loans to 

Qualified Businesses 

NMTC Investors Tend to 

Be Financial Institutions 

with Larger Net Assets and 

Individuals with Higher 

Incomes 

 23 NMTC claimants are a subset of the overall population of NMTC investors. Some

investors are pass-through entities designed to pool funds before making an investment in a

CDE, but they do not claim the tax credit on tax returns. Additionally, because the CDFI

Fund does not track when an investor sells its equity share in a CDE to another investor

(and thereby transfers the right to claim the tax credit), the data here are not reflective of

all NMTC claimants. The data presented here, unless otherwise noted, originate from the 

CDFI Fund’s databases. 

24 Term loans are loans that often only require interest payments until the last day of their 

term at which time the entire principle amount is due. 

Page 24 GAO-07-296 Tax Policy
Table 2: NMTC Claimant Types

Investor type

Number of 

claimants 

Percent of

claimants

Bank or other regulated financial institution 155 37.8

Individual investor 132 32.2

Other corporate investor 76 18.5

Other 47 11.5

Total 410 100.0

Source: GAO analysis of CDFI Fund data. 

Corporations and individuals that claim the tax credit differ from other 

taxpayers in several key ways. Corporations investing in the NMTC tend, 

on average, to have larger total assets. For example, the average total 

assets for corporations that made NMTC investments was $98.3 billion in

tax year 2003, while the average total assets25 for all corporations was $9.9 

million (the average total assets for banks, the most common type of 

corporate NMTC claimant, was close to $990 million in 2003).

26 Similarly, 

individual NMTC investors had larger adjusted gross incomes than other 

individuals who filed tax returns in tax year 2003.27 The average adjusted 

gross income for individual NMTC investors was about $1.2 million, while 

the average income for all individual taxpayers was about $47,600. 

 25 In most cases, median net assets for businesses and median adjusted gross incomes for 

individuals would have been more appropriate comparison measures. However, we were 

unable to use the available data to determine median values for each measure presented 

here. As a result, we present averages instead of medians.

26 The source of the comparison data for both businesses and individuals is IRS’s Statistics 

of Income division data file for taxpayers that filed tax returns in tax year 2003, the most 

recent year with available data. 

27 The measure of income used for individuals is adjusted gross income from their 

individual income tax form 1040. Adjusted gross income is a tax paying unit’s income after 

subtracting certain deductions from total income. As a result, when we refer to individual 

investors, we are referring to tax paying entities—adjusted gross income on the form 1040 

could include income from multiple individuals who are living in the same household or 

married taxpayers. 

Page 25 GAO-07-296 Tax Policy
In response to our survey, NMTC investors indicated that they decided to

participate in the NMTC program for a variety of reasons.28 As table 3 

shows, our investor survey revealed that the majority of NMTC investors 

indicated that the ability to claim the tax credit (over 75 percent of 

investors) and obtain a return on their investment (82 percent of 

investors) played at least a moderately important role in their decision to 

make an NMTC investment. Investors also indicated that improving 

conditions in low-income communities (90 percent) and creating and 

retaining jobs (78 percent) were at least moderately important 

motivations. About 40 percent of investors also noted that the credit 

played an important role in helping them remain compliant with other 

government regulations.

Table 3: Reasons NMTC Investors Invested in the NMTC Program (in Percentages)

Reason

Very great to

moderate

Little or no 

extent

Obtain the tax credit 76.7

(67.9, 84.1)

23.3

(15.9, 32.1)

Obtain return on investment 82.1

(73.8, 88.6)

17.9

(11.4, 26.2)

Improve conditions in low-income 

communities 

90.1

(82.7, 95.1)

9.9

(4.9, 17.3)

Comply with government regulations 41.2

(33.4, 48.9)

58.8

(51.1, 66.6)

Create or retain jobs 77.8

(69.1, 85.0)

22.2

(15.0, 30.9)

Expand lending relationships with special 

purpose borrowers 

52.0

(42.9, 61.0)

48.0

(39.0, 57.1)

Source: GAO survey of NMTC investors. 

Note: Numbers in parentheses indicate confidence intervals. 

 28Our survey had a 51 percent response rate. We have used type of entity and size of entity 

to adjust the data for nonresponse bias. If nonrespondents differ in their responses to 

survey questions beyond the variables used in our adjustment, our estimates will not reflect 

this difference. We have assumed that the respondents are a stratified random sample of 

the population. All percentage estimates from the survey are represented at the 95 percent 

confidence level. In most cases confidence intervals are only reported where at least one

estimate’s margin of error is greater than 8 percentage points, plus or minus. Where 

providing comparable statistics in charts and tables, we have provided all confidence

intervals. For additional information about our survey methodology, see app. I.

Page 26 GAO-07-296 Tax Policy
Over time the number of new investors in the CDEs that receive NMTC 

allocations has increased. For example, 19 percent of investors that made 

their first QEIs in 2003 were new investors. The CDFI Fund defines new 

investors as investors making their first investment in a particular CDE. 

The percentage of new investors increased with investment made in 2004 

through 2006 to a high of 69 percent in 2006 (through mid-December). 

Most investors that have participated in the NMTC program have only

made one qualified equity investment. However, CDFI Fund data indicate

that it is not uncommon for NMTC investors to participate in more than 

one QEI. For example, as of December 2006, about 55 percent of NMTC 

investors have only participated in one QEI, while 33 percent of NMTC 

investors participated in from two to five QEIs and 12 percent of investors 

participated in five or more QEIs. 

As NMTC investment structures have become increasingly complex in 

recent years, the expected rate of return for NMTC investments 

decreased.29 NMTC investments made in 2003 had an average expected 

rate of return, which includes any return on the equity investment and the 

tax credit, of 8.2 percent while investments in later years had an average

expected rate of return of only 6.8 percent. This decline could be a result 

of the greater perceived risk for investments made at the beginning of the 

program. According to CDFI Fund officials, as the program has developed 

and investors have gained a better understanding of the manner in which 

the credit can be used, investors’ perceived risk in making NMTC 

investments has likely declined. A factor contributing to the decline may 

be that as table 4 shows, NMTC investors reported that they have become 

more familiar with the operations and investment portfolios of the CDEs 

they invested in after making NMTC investments. 

The Average Expected 

Return on NMTC 

Investment Has Declined 

 29 The CDFI Fund collects self-reported data on the expected rate of return for NMTC 

investments from CDEs that make investments. 

Page 27 GAO-07-296 Tax Policy
Table 4: Investor Knowledge of CDE Operations (in Percentages) 

Level of knowledge Very high to moderate extent

Before investing in NMTC 48.9

(39.6, 58.2)

After investing in NMTC 93.4

(85.5, 97.7)

Source: GAO survey of NMTC investors. 

Note: Numbers in parentheses indicate confidence intervals. 

However, even though the reported expected rate of return on NMTC 

investments has fallen, investors indicate that they remain concerned 

about the market risk of NMTC investments and the possibility that 

businesses that receive NMTC investments could default on their loans. 

For example, our investor survey indicates that an estimated 86 percent 

(78.2, 92.0) of investors said that they were at least moderately concerned

that their investment would not achieve its expected rate of return, and 81 

percent (71.8, 87.9) of investors said that they were at least moderately 

concerned that the business that received their NMTC investment would 

default on its loan. 

For all allocation rounds combined, CDEs have applied for over 

$107 billion in NMTC allocation and received only about 11 percent of 

requested allocation dollars. As table 5 shows, the percentage of dollars 

awarded in relation to the dollars requested has remained fairly constant 

during the four allocation rounds, but in each round CDEs have applied for 

far more in NMTC allocations than the CDFI Fund has had the authority to 

award based on the NMTC’s authorizing legislation. The amount awarded 

as a percentage of the amount requested varied by at most 6 percentage 

points over the rounds. In general, CDEs applied for more in allocation 

authority in rounds where larger amounts were available for allocation. 

CDEs Apply for More 

NMTC Allocations Than 

Are Available and 

Relatively Few CDEs 

Receive Allocations

Page 28 GAO-07-296 Tax Policy
Table 5: NMTC Allocations Awarded by Round 

Source: GAO analysis of CDFI Fund data. 

For all allocation rounds combined, the CDFI Fund received 1,078 NMTC 

applications from CDEs and only 223, or about 22 percent, received 

allocations. As table 6 shows, between 19 percent and 25 percent of CDEs 

that applied for allocations received them in each round. 

Table 6: CDEs That Applied for NMTC and Received Allocations by Round 

Source: GAO analysis of CDFI Fund data. 

CDFI Fund officials indicated that NMTC applications will score 

particularly well to the extent that, among other things, the applicants 

commit to: (1) providing products with particularly flexible or 

nontraditional rates and terms; (2) serving severely economically 

distressed communities, including communities that have been targeted 

for redevelopment by other governmental programs; and (3) investing 

more than the minimally required 85 percent of NMTC proceeds into lowincome communities. We observed the application reviewer training 

session in 2005 and noted that the CDFI Fund encouraged application 

reviewers to pay particular attention to types of projects and financing 

terms being proposed in the applications. One example we noted was that 

CDFI Fund officials instructed NMTC application reviewers to base a 

Dollars in billions 

Round Amount requested Amount awarded Percentage awarded

Round 1 (2003) $26.0 $2.5 9.6

Round 2 (2004) 30.4 3.5 11.5

Round 3 (2005) 22.9 2.0 8.7

Round 4 (2006) 28.3 4.1 14.5

Total $107.6 $12.1 11.2

Round 

Number of 

applicants

Number receiving

allocations

Percentage receiving

allocations

Round 1 (2003) 345 66 19

Round 2 (2004) 271 63 23

Round 3 (2005) 208 41 23

Round 4 (2006) 254 63 25

Total 1,078 233 22

Page 29 GAO-07-296 Tax Policy
portion of each application’s overall score on the commitment of the 

applicant to serve highly economically distressed areas. 

CDEs that received NMTC allocations have used their allocations to make 

investments totaling $3.1 billion through fiscal year 2005, primarily in the 

form of loans to businesses in low-income communities. According to 

CDFI Fund data, these loans are used chiefly for constructing and 

rehabilitating commercial real estate and are also used to purchase fixed 

assets for businesses30 and to provide working capital for businesses.31 For 

example, these loans have been used to finance a range of activities, such

as the rehabilitation of historic buildings and the operation of mixed-use 

real estate development. Other uses include the construction or operation

of cultural arts centers, frozen pizza manufacturing, and the construction 

of charter schools. As figure 7 shows, about 75 percent of the dollar value

of these loans and investments was used for investment in commercial 

real estate. 

Businesses Primarily 

Receive Loans from CDEs 

That They Use Chiefly for 

Investment in Commercial 

Real Estate 

 30 The CDFI Fund defines fixed assets for businesses as a loan or investment that will be 

used to pay for any tangible property used in the operation of a business, but is not

expected to be consumed or converted into cash in the ordinary course of events. 

Commonly financed fixed assets include machinery and equipment, furniture and fixtures, 

and leasehold improvements.

31 The CDFI Fund defines working capital as a loan or investment that will be used to cover 

any ongoing operating expenses of a business, such as payroll, rent, or utility expenses. 

Page 30 GAO-07-296 Tax Policy
Figure 7: NMTC Loans and Investment by Type of Activity for Fiscal Years 2003 

through 2005 

According to data reported by CDEs to the CDFI Fund, most investment 

(88 percent) made by the CDEs in businesses comes in the form of term 

loans.32 According to CDFI Fund data, the most common types of loans 

being made to qualifying business with better rates and terms33 come in the 

form of loans with below market interest rates (80 percent of reported 

NMTC dollars) and lower-than-standard loan origination fees (56 percent 

of reported NMTC dollars). As figure 8 illustrates, other types of favorable 

0

10

20

30

40

50

Percentage

Purpose

Source: GAO analysis of CDFI Fund data.

Other

Business,

fixed asset

Business,

working

capital

Commercial

real estate,

construction

Commercial

real estate,

rehabilitation

 32 Most allocatees are using their qualified equity investments from investors to make loans 

to qualified businesses, but they can also make investments in other, non-related CDEs. 

Through fiscal year 2005, over 99 percent of NMTC investment dollars had been made to

businesses and less than 1 percent to other CDEs. 

33 The CDFI Fund includes a variety of categories under what is considered better rates and 

terms for financial notes that are issued by CDEs as qualified low-income community 

investments. In general, the CDFI Fund deems a financial note to have better rates and 

terms if the CDEs reporting the investment indicate that the rates or terms associated with 

the investment could not have been offered by the allocatee or otherwise been made

available in the marketplace. 

Page 31 GAO-07-296 Tax Policy
financial packages that qualifying business take advantage of include 

things like interest-only loans, loans with longer-than-standard

amortization periods, and higher loan-to-value ratios than are traditionally 

required. 

Figure 8: NMTC Dollars Used in Loans with Better Rates and Terms 

Page 32 GAO-07-296 Tax Policy
Through their allocation agreements with the CDFI Fund, all allocatees are 

required to use at least some portion of their allocation to serve designated

“areas of higher distress,”34 which may have a greater need for economic 

development funds than areas that meet the NMTC program’s minimal 

requirements. For example, 51 percent of projects serve areas with a 

median income of less than 60 percent of area median income, and 47

percent of projects serve areas with unemployment rates at least 1.5 times 

the national average. In addition, over one-fourth of NMTC projects are 

located in federally designated Empowerment Zones and 51 percent of all 

NMTC projects are in Small Business Administration-designated 

Historically Underutilized Business Zones. 

NMTC projects are distributed across states. Activities reported through 

fiscal year 2005 included 583 projects, located in 45 states, the District of 

Columbia, and Puerto Rico. Table 7 shows the top 10 states organized by 

the total dollar amount of NMTC investment and the total number of 

projects. Appendix III contains the full list of the number of NMTC 

projects by state. 

The Communities 

Receiving the Investment 

Tend to Be More Highly 

Distressed 

 34 For the purposes of the 2006 NMTC allocation round, the CDFI Fund defined “areas of

higher distress” as areas (1) with poverty rates greater than 30 percent; (2) with median 

incomes of less than 60 percent of area median income; (3) with unemployment rates at

least 1.5 times the national average; (4) that are designated Empowerment Zones,

Enterprise Communities, or Renewal Communities; (5) that are U.S. Small Business

Administration (SBA)-designated Historically Underutilized Business Zones (HUB Zone), to 

the extent the investment will support businesses that received HUB Zone certification 

from the SBA; (6) that are federally designated brownfields redevelopment areas; (7) that

are encompassed by a HOPE VI redevelopment plan; (8) that are federally designated as 

Native American or Alaskan Native areas, Hawaiian Homelands, or redevelopment areas by

the appropriate tribal or other authority; (9) that are designated as distressed by the

Appalachian Regional Commission or Delta Regional Authority; (10) that are Colonias

areas designated by the Department of Housing and Urban Development; (11) that are 

federally designated medically underserved areas, to the extent the investment will result 

in the support of health-related services; (12) that are CDFI Fund Hot Zones; (13) that are 

High Migration Rural counties; (14) that are state or local tax increment finance districts, 

enterprise zone programs, or other similar state/local programs targeted toward 

particularly economically distressed communities; or (15) that are counties for which

FEMA has (a) issued a major disaster declaration since July 15, 2005 and (b) made a 

determination that such county is eligible for both “individual and public assistance.” 

Page 33 GAO-07-296 Tax Policy
Table 7: Top 10 States by NMTC Dollars through Fiscal Year 2005 

Top 10 states by amount of

dollars invested

Total dollar amount of

loans and investment

Number of 

NMTC projects

California $303,081,270 58

New York 239,178,566 25

Ohio 201,857,969 69

Maine 153,527,250 13

Wisconsin 149,131,108 26

Missouri 146,165,868 22

Massachusetts 145,059,237 34

Kentucky 135,117,406 44

North Carolina 126,420,590 14

Washington 125,703,680 19

Source: GAO analysis of CDFI Fund data. 

The results of our investor survey and statistical analysis indicate that the

NMTC may be increasing investment in eligible low-income communities 

by participating investors, which is consistent with the program’s purpose. 

Increased investment in low-income communities can occur when NMTC 

investors increase their total funds available for investment or when they 

shift funds from other uses. One limitation with our survey is that NMTC 

investors responding to our survey, because they benefit from claiming the 

credit, have an interest in ensuring that the NMTC program continues to 

operate. Our survey indicated that most NMTC investors increased the 

share of their investment budget for low-income communities because of

the credit. However, in many cases the survey also indicated that the 

credit alone may not have been sufficient to justify the investment and 

meeting other government regulations may be an important incentive for 

making NMTC investments. In addition, about two-thirds of investors also 

indicate that NMTC investors have a track record of investing in lowincome communities, which may mean that some investment was shifted 

from other low-income community investments. Our statistical analysis 

suggests that corporations investing in the NMTC are shifting investment 

funds while individuals who make NMTC investments may be increasing 

their overall level of investment. Neither our statistical analysis nor the 

results of our survey allow us to determine definitively whether shifted 

investment funds came from higher income communities or from other 

low-income community investments. 

NMTC Investors 

Report That the 

NMTC Increases 

Investment in LowIncome Communities 

and Statistical 

Analysis Indicates 

That These 

Investments May Be 

Financed by Shifting 

Assets from Other 

Uses and Some New 

Investment 

Page 34 GAO-07-296 Tax Policy
A complete evaluation of the NMTC program’s effectiveness requires 

determining whether the program’s economic and social benefits to lowincome communities offset its costs, which include costs such as forgone

tax revenue and economic distortions evidenced by shifting investment 

funds. We did not conduct this complete evaluation for this report because 

sufficient data were not available. The CDFI Fund is currently working 

with a contractor to develop plans for a comprehensive program 

evaluation, which may include some aspects of program effectiveness. 

In response to our survey, most NMTC investors said that they would 

probably or definitely not have made the same investment with the same 

terms if they had not been eligible to claim the credit. An estimated 88 

percent of investors said that they would not have made the same 

investment without the NMTC. Of these investors who would not have 

made the same investment without the NMTC, 75 percent (66.6, 82.7) also 

indicated that in the absence of the NMTC they would not have made a 

similar investment in the same community. Moreover, 64 percent (54.9,

72.5) of investors said that they increased the share of their investment 

budget that is designated for low-income communities because of the 

NMTC. 

Most NMTC investors have experience in low-income community 

investment. Nearly two-thirds of investors have additional investment in 

low-income communities that does not qualify for the NMTC. Sixty-one 

percent (53.2, 69.4) of respondents currently had additional investments in 

low-income communities that were not eligible QEIs, and 29 percent of 

investors had made one or more investments in other CDEs or similar 

organizations that mainly serve low-income communities but cannot be

used to claim the NMTC. This interest in low-income community 

investment is also reflected in survey responses where 90 percent of 

investors said the goal of improving conditions in low-income 

communities influenced their decision to invest in the NMTC from a 

moderate to very great extent. Most investors also indicated that they plan

to make additional NMTC investments. 

The survey responses indicate that in many cases, the credit alone may not 

have been sufficient to justify the investment. The NMTC can also be 

packaged with a number of other government incentives to make the 

investment more attractive. About half of respondents combine the NMTC 

with at least one other government incentive that can provide additional 

tax benefits to the investor. As figure 9 shows, state and local tax 

abatements are the most popular type of government incentive used. Some 

NMTC Investors Reported 

That They Increased Their 

Investment in Low-Income 

Communities Because of 

the Credit, but Other 

Factors May Also Play a 

Role 

Page 35 GAO-07-296 Tax Policy
respondents that packaged the NMTC with other government incentives 

indicated that their ability to package the credit played an important role 

in their decision to make the investments, which may indicate that in some 

cases, the NMTC, in and of itself, is not a strong enough incentive to 

encourage investment in low-income communities. 

Figure 9: NMTC Investors Packaging the NMTC with Other Government Incentives 

Note: Confidence intervals for each of the categories in the figure are as follows: Historic 

Rehabilitation Tax Credits (19.6, 35.5), Historic Rehabilitation Easement Deduction (.1, 5.8), 

Brownfields tax incentive (7.2, 20.1), Empowerment Zone/Enterprise Community funding (15.7, 31.8), 

and State/local tax abatements (28.5, 46.1). 

Meeting other government regulations may also be an important incentive

for making NMTC investments. Over 40 percent of the investors reported 

that they use the NMTC to remain compliant with the Community 

Reinvestment Act (CRA), which rates depository institutions on their 

record of helping to meet the credit needs of their entire community. 

Seventy-one percent (58.3, 80.8) of investors that are required to comply 

with the CRA use their NMTC investment to help meet their CRA 

0

5

10

15

20

25

30

35

40

Percentage

Source: GAO.

State/local

tax abatements

Empowerment Zone/

Enterprise Community

funding

Brownfields

tax incentive

Historic Rehabilitation

Easement Deduction

Historic Rehabilitation

Tax Credits

Page 36 GAO-07-296 Tax Policy
obligations. For investors using the NMTC to meet CRA requirements, 94 

percent (83.4, 98.8) view it as very or somewhat important in their decision

to make the investment. 

Nearly half of NMTC investors also reported that they make investments 

eligible for the Low-Income Housing Tax Credit, a tax credit for 

investment in rental housing targeted to lower income households. 

However, less than one-half of the investors that also invest in the LowIncome Housing Tax Credit view it as an alternative to the NMTC. One 

explanation for this is that these investors may be making other lowincome community investments as a means for complying with 

government requirements such as the CRA. For example, of the survey 

respondents that participated in both the NMTC and the Low-Income 

Housing Tax Credit, nearly three quarters of these investors are also 

required to comply with the CRA. 

Our statistical analysis of corporations and individuals that claimed the 

NMTC indicates that some NMTC investment may be shifted from other 

uses and some investment could be new investment. Statistical analysis of 

corporations that claimed the NMTC indicates that, in general, NMTC 

investment funds are not new investment made from an increase in total 

funds available. When combined with information from the survey, this 

statistical result may indicate that corporations are shifting NMTC 

investment funds from other uses. Statistical analysis of individuals who 

invested in the NMTC indicates that in the aggregate, NMTC investment 

funds represent, at least in part, an overall increase in investment levels. 

Because corporate NMTC investment accounts for the majority of QEIs, 

the increased investment associated with participation in the program is 

likely to come primarily from funds shifted from other uses. 

Statistical analysis of corporations that claimed the NMTC indicates that 

NMTC investment funds are not likely to represent new overall 

investment. To assess whether NMTC investments represent new funds, 

we compared the growth rate in net assets of corporations that made 

NMTC investments to the growth in net assets of a similar group of 

corporations that did not make NMTC investments over time. We selected

our comparison group using a stratified random sample of taxpayers 

based on total assets at the end of the tax period. We drew the comparison 

groups based on 2000 tax year data because this was the year before the 

Statistical Analysis 

Suggests That Some NMTC 

Investment by 

Participating Investors 

May Be Investment Shifted 

from Other Assets and 

Some May Be New 

Investment 

Page 37 GAO-07-296 Tax Policy
credit could be claimed and in that year we would not expect any changes

in behavior because of the credit. If NMTC investments represent new 

investment funds35 then we would expect the net assets of NMTC 

participants to grow faster over time than the net assets of corporations 

that did not make NMTC investments. Using multiple specifications, our 

results suggest that corporate claimants’ net assets are not growing faster 

than similar corporations that did not make NMTC investments.36

Rather than new investment, NMTC investment could represent a shift of 

investment by participating corporations from high- or moderate-income 

communities to low-income communities. This conclusion follows from

combining evidence from the survey of investors with evidence from the 

statistical analysis.37 Because our analysis does not show a faster growth 

rate for NMTC investors, it is possible that the credit has no effect on 

investor behavior, but instead rewards investors for investment in lowincome communities that would have been made in the absence of the

credit. However, the effect of the credit may also be to shift investment 

from other low-income communities or from high- or moderate-income 

communities. Although it contains some contrary indicators about the 

effect of the credit, the survey of investors that benefit from claiming the

credit, indicated that most investments would not have occurred in the 

absence of the credit and that NMTC investors had increased their 

investments in low-income communities because of the credit. Therefore,

we infer that the most likely effect of the credit is that it shifts investment 

by participating investors into low-income communities from higher 

income communities. Further analysis of the components of net assets, 

total assets, and total liabilities, which are discussed in appendix II, 

produced inconclusive results regarding the source of the shifted funds. 

Shifted investment funds, in contrast to new investment funds, indicate 

that investors are decreasing investment in another asset or assets by 

 35 For instance, new investments might be funded by a decrease in dividend payouts for 

businesses.

36 See app. II for a more thorough description of the steps we took to verify the validity of 

these baseline statistical results. 

37 As described in app. I, the survey population and the statistical analysis population of 

NMTC investors are not identical. We surveyed NMTC investors that we identified using 

CDFI Fund data, and in a limited number of cases we surveyed a point of contact at a passthrough entity rather than all of the investors in the pass-through entity. Our statistical 

analysis population of NMTC investors includes NMTC participants that we identified as

credit claimants using both IRS and CDFI Fund data. 

Page 38 GAO-07-296 Tax Policy
some or all of the amount that they invest in the NMTC program. Investors 

might choose to shift funds for a variety of reasons, including a higher rate 

of return expected from the NMTC investment, a need to make an 

investment eligible for meeting CRA requirements, or the ability to 

establish new business relationships. Regardless of the reason, if funds are 

shifted as the result of a tax benefit, the shifting potentially creates other 

economic costs, including the opportunity cost of other uses of the funds,

and benefits.

38 These costs and any benefits that accrue to low-income 

communities should also be considered when evaluating the overall 

effectiveness of the tax credit in addition to the revenue costs of the 

program. 

When analyzing the effect of NMTC participation on the net assets of 

corporations, our results consistently showed no effect. Further, when we 

tested our results using different data specifications, we were still not able 

to detect an effect. However, our analysis of the NMTC’s effect on net 

assets for corporations had several limitations. For example, the amount 

of NMTC investment might be small enough relative to a corporation’s 

total size that our statistical models could fail to detect a positive effect of 

the NMTC investment on corporations’ asset levels. We attempted to 

mitigate this problem by basing our analysis on firm-level data, the 

smallest unit of analysis available, and growth in assets over time. In 

addition, we did not have data for total liabilities. We calculated a 

corporation’s total liabilities by subtracting stockholders’ equity and 

retained earnings from the “total liabilities and shareholders’ equity” lineitem on the tax return. Additionally, our data made it difficult to identify 

which industry NMTC corporate investors participated in, another variable 

that would have helped strengthen our analysis. 

Similar analysis of individuals who invested in the NMTC indicates that at 

least some portion of their investment may represent an overall increase in

investment (or “new” investment) rather than investment shifted from 

other uses. To assess whether NMTC investments represent new funds, we 

 38 Potential economic costs are often referred to by economists as efficiency costs or 

deadweight losses. Efficiency costs result when tax provisions cause individuals or

businesses to alter decisions like how much to work, how much to save, what to consume, 

and where to invest. An exception would be the case where the tax credit is offsetting a 

market failure, such as a shortage of capital funds available in low-income communities for

reasons other than economic returns. Potential benefits include the extent to which a 

community experiences reductions in poverty and increases in employment opportunities

as a result of the program; possible “spillover” benefits to the community may include

reductions in crime and improvements in the health status of community residents. 

Page 39 GAO-07-296 Tax Policy
compared the wealth of individuals who made NMTC investments to the 

wealth of a similar group of individuals who did not make NMTC 

investments over time. If NMTC investments represent new investment 

funds39 then we would expect the wealth of NMTC claimants to grow faster 

over time than the wealth of nonclaimants. As table 8 shows, the NMTC is 

associated with a positive effect on the growth in NMTC investors’ wealth. 

This means that NMTC investors’ wealth is growing at a faster rate than 

similar investors who did not make NMTC investments. 40 Thus, according 

to our analysis for individual NMTC claimants, the NMTC program 

investors appear to be increasing their investment in low-income 

communities because their QEIs represent investments that they would 

not have made otherwise and these investments are placed into lowincome communities according to program rules.41

The increase in wealth for individuals can be broken down into its 

components, such as interest-bearing assets and business assets. The 

NMTC can have indirect effects on these components of wealth through its 

effect on after tax income. In addition to potentially producing ordinary 

returns on investment (such as dividend payments), part of the return on

NMTC investments comes in the form of reduced tax liabilities. Because 

they are paying less in taxes, NMTC investors have more income available

for investing in other types of assets and for consumption. As table 8 

shows, our results are consistent with individuals placing at least a portion

of this income into interest-bearing assets, such as savings accounts or 

certificates of deposit. As table 8 shows, these new NMTC assets also 

appear to take the form of business assets, including partnerships. 

Increases in business assets may be consistent with typical NMTC 

investment structures where many individuals are investing through passthrough entities. 

 39 This conclusion follows from the statistical evidence alone and does not depend on 

combining evidence from the survey as was the case for shifted investment for businesses. 

New investment for individuals is funded through a decrease in consumption (e.g., the

amount spent on goods and services). 

40 See app. II for more information on the methods we used to develop these statistical 

models. 

41 Our analysis does not address the question of whether NMTC investment by individuals 

would have taken place by different investors if these particular investors did not make

NMTC investments. Our analysis is limited because it only allows us to say that the NMTC 

investment was new investment by these particular investors. 

Page 40 GAO-07-296 Tax Policy
Table 8: Effects of NMTC Individual Investor Participation on Wealth 

Source: GAO analysis of IRS and CDFI Fund data.

a

Results are based on comparisons of the 2000 to 2004 growth in each category, comparing growth 

for NMTC investors and an individual tax return representing the closest match among non-NMTC 

claimants from our comparison group. 

b

For categories where a positive effect is identified, our analysis was statistically significant at the 5 

percent level. 

In our analysis, NMTC participation by individuals was associated with 

greater growth in wealth, and most variables measuring this association 

were highly statistically significant. In addition, various checks that we 

performed were consistent with the results we present above. However, as 

was also the case with our analysis of corporate investors, several data

limitations exist for our analysis of individual investors. For instance, we

did not have direct data on asset holdings. Consequently, we estimated 

wealth based on income streams reported on tax returns. In addition, 

some assets are particularly difficult to measure. Business assets are 

especially susceptible to measurement errors as income streams from 

these assets may vary widely from year to year. This means that assets not 

generating reportable returns, such as stock holdings that do not generate 

dividends in a particular year, do not appear in our estimates for that year. 

We have attempted to mitigate this problem by conducting a series of 

tests, such as using a 3-year average of wealth and asset variables, to 

confirm the consistency of our results. These tests and data limitations are 

discussed in more detail in appendix II. 

A complete evaluation of the program’s effectiveness goes beyond 

identifying whether the credit increases investment in low-income 

communities by participating investors and also requires determining both 

whether non-NMTC investors would have made the same investments that 

the NMTC investors made if the NMTC investors had not made the 

investment and whether the program’s benefits to low-income 

communities offset its costs, which include costs such as forgone tax 

revenue and potential economic inefficiencies created by shifting 

Measure Effect on growth of:

a

Wealth Positiveb 

Interest-bearing assets Positive 

Dividends None

Real estate None 

Business Positive 

Further Analysis Is Needed 

to Determine Whether the 

Economic Costs of Shifting 

Investment Are Justified 

by Any Economic and 

Social Benefits to LowIncome Communities 

Page 41 GAO-07-296 Tax Policy
investment funds. Fully examining the effectiveness of the NMTC requires 

addressing at least two main issues: where do NMTC investment funds 

come from and do NMTC investments generate economic benefits in lowincome communities? Because of data limitations, the relative youth of the 

NMTC program, and the inherent difficulties of measuring program costs 

and benefits, a full evaluation is beyond the scope of this report. However, 

our finding that the NMTC program causes claimants to shift their 

investment portfolios suggests that the program might generate some 

additional economic costs, such as the opportunity cost of redirecting 

investment resources from other, potentially valuable uses.42 Whether 

these economic costs are justified depends on the economic benefits that 

are generated in the low-income communities and the extent to which 

these benefits accrue to the targeted population. This highlights the 

importance of assessing the benefits of the program in eligible

communities so that one can assess whether the costs are justified by the 

benefits of the program. 

The CDFI Fund has hired a contractor to design a comprehensive study to

evaluate the NMTC program. The study design will be completed by mid2007, and the study will begin after the design is complete. During the 

design phase, the contractor will complete five case studies of NMTC 

investments. The study could potentially evaluate the effect that the NMTC 

is having on factors such as job creation and economic growth in areas 

that receive the credit. These issues fell outside the scope of this report. 

 42 To assess whether the funds would have been used in a more beneficial way in the

absence of the program, one would need information on both the financial returns to the 

alternate use and any positive “spillover” benefits created by NMTC investments such as 

creating a more skilled workforce. 

Page 42 GAO-07-296 Tax Policy
IRS monitors CDEs’ compliance with NMTC laws and regulations, and IRS 

is conducting a compliance study but is not yet selecting CDEs to audit in 

a manner that represents all types of CDEs. The CDFI Fund monitors 

CDEs’ compliance with their allocation agreements through its data 

collection systems and, on a more limited basis, by making site visits. The 

CDFI Fund has tested its data systems and developed policies and 

procedures for site visits. IRS and the CDFI Fund developed a 

memorandum of understanding (MOU) in an attempt to clarify the roles 

and responsibilities of both agencies in ensuring NMTC compliance, and 

IRS has access to CDFI Fund data. However, additional efforts could help 

IRS receive information in a more useful format. In addition to IRS and the 

CDFI Fund, investors and CDEs play a role in ensuring that CDEs remain 

compliant and the credit is not recaptured. 

IRS is responsible for ensuring that CDEs and NMTC investors adhere to 

NMTC laws and regulations. As part of its effort to monitor CDEs’ 

compliance, IRS is conducting a study to monitor CDEs’ compliance with 

NMTC legislative requirements, focusing on CDEs’ compliance with the 

“substantially all” requirement to invest at least 85 percent of their QEIs 

within 1 year of receiving the investment. IRS officials said that they chose 

to focus on CDEs’ compliance with the “substantially all” requirement 

because they believed that this was the area where noncompliance with 

NMTC provisions was most likely to occur. The current compliance study

will provide IRS with some information about audited CDEs compliance 

with the “substantially all” requirement, including information about 

whether funds were invested in a timely manner and whether the 

investments were made to qualifying businesses. However, IRS did not 

select first round NMTC allocatees to audit in a manner that likely 

represents the full range of CDEs. 

IRS envisioned that its compliance study would focus on verifying that 

CDEs were in compliance with statutory requirements through examining 

CDEs’ tax returns and auditing CDEs. IRS has taken steps to develop and 

implement the compliance study, such as training auditors to conduct 

NMTC examinations and developing a training manual that provides 

examiners with background on the NMTC program, key issues to consider 

when reviewing whether CDEs meet the “substantially all” requirement, 

and information to familiarize auditors with the investment structures that 

NMTC investors use to make investments. IRS is currently auditing 20 of

the 66 first round allocatees. 

IRS and the CDFI 

Fund Monitor NMTC 

Compliance, but 

Additional 

Opportunities Exist to 

Better Measure 

Noncompliance and 

Identify NMTC 

Investors 

IRS’s Compliance Study 

Methodology Could Be 

Improved to Be More 

Representative of the 

Population of CDEs 

Page 43 GAO-07-296 Tax Policy
IRS officials said that they initially planned to conduct examinations of 

early round CDEs using a sample of CDE tax returns that would yield a 

valid 95 percent level of confidence for the study’s results. IRS expected 

that all CDEs that received early round allocations would file income tax 

returns within a year or two of the award date, and that shortly after all the 

CDEs’ tax returns were filed, IRS would have enough returns to select a

valid sample that would yield the desired confidence level. However, IRS 

changed its selection process because it took more time than expected for 

CDEs to file tax returns, and the volume of returns filed was not sufficient 

for IRS to draw a valid sample in a timely manner. IRS officials said that 

the delay for most CDEs occurred because of the lapse of time between 

the date that the CDE executed agreements with the CDFI Fund and when 

the CDE actually collected equity investments and began operations. 

As a result of the delay in acquiring tax returns for its study, IRS modified 

its overall compliance strategy in two ways. First, it decided to verify that

each allocatee filed a tax return as a way to monitor CDEs’ filing 

compliance. IRS intends to continue to monitor CDEs’ filing compliance 

until they are confident that the entities will file as required.43 Second, IRS 

discontinued the sample approach and decided to manually review every 

return that it could identify. IRS initially requested over 80 tax returns 

from tax years 2003 and 2004. Of the returns that IRS had received by June

2006, it chose to facilitate audits of CDEs that filed 2004 tax year returns 

that had some indication of NMTC activity. According to IRS, because of 

the delays in when CDEs were awarded NMTC allocations and the time in

which they began filing tax returns, IRS did not develop specific criteria 

for deciding which CDEs to audit. An IRS official said that IRS wanted to 

start its compliance study as soon as possible and the filing time lags 

created delays. IRS indicated that IRS will continue with this selection 

process until it reaches a point where there are sufficient returns placed in 

the examination stream to produce meaningful results.44

IRS plans to use the results of the compliance study, which will take 

several years to complete, to guide its future enforcement efforts. While 

 43 As of November 2006 IRS was able to verify that 61 of the 66 allocatees that received 

NMTC awards in 2003 had filed tax returns. For those instances where they were still 

unable to associate a filing, IRS is making an effort to contact the CDE to determine why 

they have not yet filed a tax return. 

44 IRS officials have not developed specific criteria for what “meaningful results” include, 

but they indicated that they intend to continue conducting NMTC audits until they are

comfortable that they have identified any key compliance issues that may arise. 

Page 44 GAO-07-296 Tax Policy
IRS’s current compliance study will provide the agency with information 

about CDEs’ compliance with NMTC laws and regulations, the compliance 

study will have limited value if the audit selection process does not 

represent the full range of transactions. We have previously reported that

taxpayer compliance studies should be representative of the population 

for which compliance is being measured and reasonably designed for 

developing compliance measures for the taxpayer population as a whole 

and for subgroups of taxpayers (such as suballocatees in the case of the 

NMTC program).45 IRS’s current plan for its compliance study could be 

improved to adhere to these standards more closely. Given IRS’s intent to 

rely on the study to guide enforcement efforts, the results of not having a

study representative of the population could be lost tax revenue and 

increased cost through inefficient use of resources. 

IRS could change its strategy to make its results more useful as its 

compliance work progresses. IRS plans to audit 15 to 25 CDEs from each 

allocation round until it feels that compliance levels warrant a reduced

number of audits. While it may be too resource intensive to conduct a 

statistically valid study with fully generalizable results, IRS could work 

with the CDFI Fund to develop criteria for determining which CDEs to 

audit. For example, IRS could use CDFI Fund data to categorize CDEs that 

invest in different types of projects or CDEs that use different types of 

investment structures for NMTC purposes. As the program expands and 

more tax return data are available for future rounds, IRS could use the 

audit results from its initial CDE audits, along with developing these 

criteria for identifying which CDEs it will audit, in order to produce 

compliance study results that will be more representative of the entire 

population of NMTC allocatees. 

The CDFI Fund is monitoring CDEs to ensure that they remain compliant 

with their allocation agreements through the New Markets Compliance 

Monitoring System (NCMS) and, on a more limited basis, site visits. The 

CDFI Fund took steps to ensure that its data collection and reporting 

systems are reliable and valid, such as testing its data collection systems 

and the interaction between these systems multiple times before using 

them to identify CDE noncompliance. These steps help to reasonably 

ensure that the CDFI Fund data are adequately maintained and properly 

The CDFI Fund Has 

Systems and Procedures in 

Place to Monitor CDEs’ 

Compliance with 

Allocation Agreements 

 45 GAO, Tax Administration: New Compliance Research Effort Is on Track, but 

Important Work Remains, GAO-02-769 (Washington, D.C.: June 27, 2002). 

Page 45 GAO-07-296 Tax Policy
disclosed in reports. CDFI Fund databases rely on data that CDEs selfreport to the CDFI Fund. However, the CDFI Fund has several 

mechanisms in place, such as providing written instructions to CDEs on 

how to report data and providing a help desk for CDEs to call when they 

have questions about reporting information to the CDFI Fund, that help

ensure that the data they collect are accurate and reliable. In addition, 

data used to populate the NCMS are subject to several validity checks to 

ensure accuracy. CDFI Fund officials have also conducted a limited 

number of site visits to CDEs, one goal of those site visits being to ensure 

that data are being accurately reported. 

Our review of the CDFI Fund’s NCMS system and site visits indicates that 

the CDFI Fund has instituted policies and procedures that should allow it 

to collect the information that it believes it needs to meet its compliance 

program’s objectives of identifying CDEs that are no longer compliant 

with their allocation agreements. According to our Government Auditing 

Standards, agencies should develop internal controls, including controls

that will ensure that programs operate effectively and efficiently and that

data collected are reliable and valid.46

The CDFI Fund uses the NCMS to detect allocatees’ noncompliance with 

their allocation agreements relating to authorized uses of NMTC 

allocations, restrictions on the use of NMTC allocations, and other special 

provisions that are included in an allocation agreement. If the NCMS 

identifies a CDE as being out of compliance with its allocation agreement,

the CDFI Fund contacts the allocatee to let it know that the NCMS has 

identified it as noncompliant. The CDFI Fund officials then attempt to 

determine why the CDE is noncompliant and take steps necessary to bring 

the CDE back into compliance with the terms of its allocation agreement.

As of January 2007, the CDFI Fund had identified nine CDEs that were not

compliant with their allocation agreements and one CDE that was not in 

compliance with the NMTC program’s “substantially all” requirement. For 

example, in one case the CDFI Fund determined through data reported in

the NCMS that the CDE was serving communities that were outside its 

approved service area. In this case, the areas that the CDE was investing in 

still qualified for NMTC investment. In response, the CDFI Fund amended 

the CDE’s allocation agreement by expanding the CDE’s service area. Six 

of the noncompliance CDEs were first round allocatees that had not, as 

 46 GAO, Government Auditing Standards, 2003 Revision, GAO-03-673G (June 2003). 

Page 46 GAO-07-296 Tax Policy
required in their allocation agreements, issued 60 percent of their QEIs by 

the end of September 2006. The CDFI Fund is working with most of these 

allocatees to correct the problem; however, one first round allocatee has 

had its NMTC allocation revoked and another CDE returned its allocation 

as a result of not meeting this requirement. In the case where the CDFI 

Fund used the NCMS to identify a CDE that was failing the “substantially 

all” test, the CDFI Fund referred the problem to the IRS. In this case, the 

CDE was able to correct the problem within 6 months, the amount of time 

CDEs are given to correct failing the “substantially all” test, and further 

action was not required.

The CDFI Fund developed policies and procedures for conducting site 

visits to CDEs where CDFI Fund officials check the validity of data 

reported by CDEs’ to the CDFI Fund and obtain additional information 

about CDEs’ efforts to remain compliant. These policies and procedures 

include criteria for prioritizing which allocatees warrant a site visit, the 

key information items to collect on a site visit, and a plan for using the 

information after the site visit is complete. As of November 2006, the CDFI 

Fund had conducted four site visits, two in 2005 and two in 2006, and

indicated that it intends to conduct more visits in the future. A CDFI Fund 

official indicated that the CDFI Fund has plans to conduct three site visits 

in fiscal year 2007. So far, the CDFI Fund has visited one multiyear 

allocatee, one CDE that the NCMS had identified as noncompliant, a CDE 

that participates in other CDFI Fund programs, and a bank that received 

an allocation award. 

The process of conducting a site visit goes through several steps. A site 

visit can be triggered when a CDE meets one or more of the seven criteria

established by the CDFI Fund, which include whether the NCMS identified 

the CDE as noncompliant and whether the allocatee received awards in 

multiple allocation rounds. Once the CDFI Fund contacts the allocatee it 

intends to visit, CDFI Fund officials review the data that the CDE reported 

to the CDFI Fund and identify any areas of concern that the CDFI Fund 

will investigate during the site visit. During the visit, CDFI Fund officials 

review other documents, such as board meeting minutes and financial

documents, and conduct interviews with key staff members. CDFI Fund 

officials also review documentation that the CDE maintains in order to 

ensure that the data the CDE reported to the CDFI Fund are accurate and 

reliable. After the site visit is complete, CDFI Fund officials prepare a site

visit report using information gathered before and during the site visit. If 

the CDFI Fund does not find the CDE to be in default with its allocation

agreement, no further enforcement action is taken. However, if the initial

CDFI Fund report finds that the CDE is not compliant with its allocation

Page 47 GAO-07-296 Tax Policy
agreement, the report is passed on to CDFI Fund senior management who 

then either approve or disapprove the report’s finding. 

While these site visits do not yield generalizable results, they do 

supplement the information that the CDFI Fund receives through the 

NCMS. Unlike IRS, which must audit CDEs to determine if they are 

compliant with the NMTC’s laws and regulations, the CDFI Fund is able to

use data reported by CDEs as its primary mechanism for reviewing CDEs’ 

compliance with their allocation agreements. As a result, the CDFI Fund is 

able to use data in the NCMS in conjunction with site visits that do not 

yield generalizable results in order to detect when a CDE is no longer 

compliant with its allocation agreement. 

If a CDE is determined to be noncompliant, the CDFI Fund can restrict the 

CDE’s access to the NMTC program. According to CDFI Fund officials, if

they find a “serious occurrence of noncompliance,” such as a CDE failing 

to perform any of the transactions that it agreed to perform, the CDE 

would be found in default. To the extent possible, the CDFI Fund would 

assist the CDE in correcting the areas in which it was determined to be 

noncompliant—this could include amending or modifying the CDE’s 

allocation agreement. If the CDE is not able to come back into

compliance, the CDFI Fund could potentially bar that CDE from future 

allocation rounds, or if the CDE has not yet issued all its QEIs, the CDFI 

Fund could revoke its ability to make additional investments using its 

current allocation. Thus far, the CDFI Fund has not had to take these 

actions against any CDE as a result of the outcome of site visits. 

IRS and the CDFI Fund have cooperated in their compliance efforts. As 

part of their response to our initial NMTC report,47 the CDFI Fund and IRS

developed an MOU in an effort to clarify the roles and responsibilities of 

both with respect to monitoring NMTC compliance. IRS and the CDFI 

Fund have had additional discussions to identify ways for the CDFI Fund 

to streamline the data that it provides to IRS. While IRS and the CDFI 

Fund have worked together to monitor NMTC compliance, the two 

agencies could collect additional information that would help the IRS 

monitor compliance by NMTC investors, an area where neither the CDFI 

Fund nor IRS has chosen to dedicate resources. 

IRS and the CDFI Fund 

Have an MOU for 

Compliance Monitoring, 

but Additional 

Opportunities Exist to 

Monitor Investor 

Compliance 

 47 GAO-04-326. 

Page 48 GAO-07-296 Tax Policy
According to the MOU completed in 2004, the CDFI Fund is responsible 

for carrying out the NMTC program’s application and allocation 

procedures. In addition, the MOU states that the CDFI Fund will permit 

designated IRS staff to have access to CDFI Fund databases, provide IRS

with the relevant findings and assessments of any site visits to NMTC 

allocatees conducted by CDFI Fund staff, and notify IRS of any potential

credit recaptures. Also, on behalf of IRS, the CDFI Fund also includes 

compliance questions that CDEs respond to in its database regarding 

recapture and investments that CDEs have made in low-income 

communities. If the CDFI Fund determines from the answers to these 

questions that the CDE may be in danger of having the NMTC recaptured, 

it is to forward the information to IRS. 

According to the terms of the MOU, IRS is responsible for the collection 

and determination of any tax as deemed appropriate. In addition, the MOU 

notes that IRS is responsible for establishing processes and procedures to 

ensure that taxpayers are in compliance with the NMTC’s tax provisions, 

and IRS will provide the CDFI Fund with quarterly information, to the 

extent permitted by law, regarding any CDEs that fail to meet the NMTC’s 

legal requirements. 

IRS and the CDFI Fund have identified data sharing as an area where their 

cooperation could be improved. While IRS has access to CDFI Fund data,

according to IRS officials, they have had difficulty selectively obtaining the

information that they are most interested in from the CDFI Fund’s data 

systems. According to IRS officials, a more streamlined format for sharing 

data between IRS and the CDFI Fund would allow IRS to better target 

noncompliance. CDFI Fund officials said that they are working with IRS to 

develop a streamlined compliance data report, and they indicated that IRS 

has been cooperative in working with them. An IRS official agreed that the 

two agencies are working together to develop a more user-friendly data

report specifically for IRS. 

IRS is also taking steps to increase the amount of information available 

about NMTC investors. IRS is in the process of finalizing a new form that 

will require CDEs to report to IRS the amount of QEI that NMTC investors 

made at the investment’s original issue. IRS currently does not have these 

data for all claimants because the CDFI Fund data that IRS currently uses 

to identify credit claimants does not track claimants in cases when the 

underlying QEI is sold to another investor. In addition, IRS is finalizing a 

second form that will require CDEs to notify the original equity investor in

an NMTC investment if the credit is being recaptured. With these forms 

Page 49 GAO-07-296 Tax Policy
and the CDFI Fund data, IRS will have a complete record of the initial 

NMTC investors in a CDE and how much they invested. 

However, further steps could be taken to identify NMTC investors and 

ensure that only eligible taxpayers claim the credit and that they claim the 

correct amounts. NMTC investors are allowed to sell their equity share in a 

CDE, which determines their NMTC eligibility, to other investors after the 

initial investment has taken place, and neither the IRS nor the CDFI Fund 

tracks NMTC investors after the original investment. IRS officials 

indicated that the forms they are finalizing cannot be used to track the 

selling of an investor’s equity share in a CDE because they will not be 

refiled if the investment is sold to another investor after the original 

investment. As a result, IRS and the CDFI Fund will not be able to identify

all NMTC investors and the amount of QEI that they made if an investor’s

equity share in a CDE is sold after the original investment. When 

evaluating other tax credits, we have noted that IRS is responsible for 

ensuring that taxpayers claim those tax credits for which they are 

entitled.48 If IRS and the CDFI Fund developed ways to identify investors 

and the amounts they invested, even when NMTC investors sell their 

equity shares in a CDE, they would be better able to ensure that credits are 

claimed correctly. 

Our analysis of IRS and CDFI Fund data indicates that many NMTC 

investments may be sold after the original QEI is made in the CDE, making 

it difficult for IRS to identify all eligible NMTC claimants and the amounts 

that they are eligible to claim. When we compared potential tax credit 

claimants in IRS’s databases to claimants in the CDFI Fund’s database, we

noted that more investors were identified as being eligible to claim the 

credit in IRS’s taxpayer data than in the CDFI Fund’s data on claimants 

when a QEI is originally issued. 

According to IRS, requiring individual investors to report sales of NMTC 

investments could place an undue burden on taxpayers. However, IRS told

us that this would be useful information for its compliance monitoring 

efforts—both for identifying investors eligible to claim the NMTC on their 

tax returns and for identifying tax credit investors if IRS is forced to 

recapture the credits from investors when a CDE is no longer compliant 

 48 GAO, Tax Credits: Opportunities to Improve Oversight of the Low-Income Housing

Program, GAO/GGD/RCED-97-55 (Washington, D.C.: Mar. 28, 1997).

Page 50 GAO-07-296 Tax Policy
with the “substantially all” requirement.49 The CDFI Fund already collects 

information from CDEs in its database identifying the initial investors and 

how much NMTC eligible investment has been made by investors that did 

not participate in tiered equity or leveraged NMTC transactions. Further, a 

NMTC investor with prior experience investing in CDEs and a 

representative of a CDE said that in their experience, CDEs are already

able to identify subsequent holders of NMTC qualified equity investments 

when one NMTC investor sells its equity share in a CDE to another 

investor, and CDEs could potentially be able to report that information to 

the CDFI Fund or IRS. In the case where investors in a partnership that 

has NMTC investments sell their share in the partnership, it may be more 

difficult for CDEs to identify who the correct tax credit claimants would 

be, although the CDE would still know which partnerships own QEI in the 

CDE. 

Currently, neither IRS nor CDFI Fund data make it possible to identify 

completely who is eligible to claim the tax credit and how much they are

entitled to claim. As more NMTC investments are being resold and 

complicated investment structures are becoming more common, limits on 

IRS’s ability to monitor investor compliance could make IRS vulnerable to

a loss of tax revenues caused by taxpayer noncompliance, fraud, and 

abuse, and it could become increasingly difficult for IRS to identify tax 

credit claimants if it is forced to recapture the credit. If CDEs reported 

more complete information about initial NMTC investors and subsequent 

sales of the equity shares in the CDE that are linked to NMTC eligibility to 

the IRS or the CDFI Fund, IRS would have better information to track 

investor compliance. 

Investors that responded to GAO’s NMTC survey indicated that they are 

concerned about the possibility of the credit being recaptured and that 

they play an active role in ensuring that CDEs remain compliant with the 

laws and regulations that apply to the NMTC program. An estimated 82 

percent (74.0, 89.0) of our survey respondents indicated that they are 

“moderately” to “very highly” concerned about the possibility that the 

credit could be recaptured. Nearly all investors, 97 percent, reported that 

they make some effort to ensure that CDEs remain compliant so that the 

Investors in CDEs Play a 

Role in Ensuring NMTC 

Compliance 

 49 If IRS finds a noncompliant CDE, it indicated that it will request an investor list from the 

CDE to take appropriate action. If the investment was sold after its original issuance, IRS 

plans to obtain information from the known investors regarding the purchaser of the

investments until the total recapture amount is accounted for. 

Page 51 GAO-07-296 Tax Policy
investors avoid recapture. About 72 percent of the survey respondents said 

that they have regular discussion with CDEs, and 84 percent said they 

receive regular reports from CDEs. Nearly one-quarter of NMTC investors 

said that they audit the CDEs in which they made NMTC investments. 

Figure 10 shows the activities that NMTC investor survey respondents 

undertake to monitor CDE compliance. 

Figure 10: Activities Investor Survey Respondents Undertake to Monitor CDE 

Compliance 

Note: Confidence intervals for the data presented in this graphic are as follows: receive regular 

reports from the CDE (75.8, 90.3), receive independent audit reports about the CDE (74.4, 89.9), 

have regular discussions with the CDE (62.8, 80.6), make regular site visits to the CDE (33.8, 52.5), 

created the CDE and staff it ourselves (25.3, 42.3), audit the CDE (16.1, 32.5). 

The purpose of the NMTC program is to encourage investment and 

development in low-income communities. Our analysis indicates that the 

program may be accomplishing part of that objective. In our investor 

survey, most participating investors said that they increased investment in 

low-income communities because of the credit. The statistical analysis 

Conclusions 

Page 52 GAO-07-296 Tax Policy
also showed an increase in investment, with individuals adding new 

investment and corporations shifting funds from other uses. However, 

some of the survey evidence may be less consistent with the credit 

increasing investment (e.g., the prior experience of most NMTC investors 

with low-income community investment) and, because of data limitations, 

our statistical evidence may only establish an association between the 

credit and increased investment, not that the program causes the increase.

In any case, the indication that the program increases investment is not 

sufficient to support conclusions about the program’s effectiveness, nor is 

the fact that the credit shifts investment an indicator of a lack of 

effectiveness. For example, more information is needed about the 

economic and social benefits that the low-income communities receive 

from the investment. This information is only now likely to be available

given that the program’s implementation was delayed. 

IRS and the CDFI Fund are implementing a compliance monitoring system 

in the context of a program that is growing and that is attracting investors

that use increasingly complex and sophisticated investment structures. As 

IRS moves forward with its NMTC compliance study, more rigorous 

development of criteria for selecting which CDEs to audit could help it 

better identify the most common compliance issues facing CDEs. 

Additionally, more complete information on who is eligible to claim the 

tax credit and the amounts that they are eligible to claim would be useful 

to IRS in helping ensure that only eligible taxpayers claim the NMTC, and 

a complete list of eligible NMTC claimants would assist IRS should the IRS 

need to recapture NMTCs. 

To ensure IRS is reviewing the full range of NMTC transactions and that

the conclusions of its compliance study are more representative of all

CDEs with NMTC allocations, we recommend that IRS use CDFI Fund 

data and the results of its current NMTC compliance study to develop

criteria for selecting which CDEs to audit as part of its future compliance 

monitoring efforts. 

Additionally, to ensure that eligible taxpayers claim the correct amount of 

NMTC on their tax returns and IRS is able to identify all tax credit 

claimants in the event of the credit being recaptured, we recommend that 

IRS work with the CDFI Fund to further explore options for cost 

effectively monitoring investor compliance and developing a way to 

identify NMTC claimants, even in instances where the original investor 

sells its equity share in a CDE, and the amount of QEI that each investor 

made. 

Recommendations for 

Executive Action 

Page 53 GAO-07-296 Tax Policy
We received written comments on a draft of this report from the Acting 

Director of the CDFI Fund and the Commissioner of Internal Revenue;

their comments are reprinted in appendices IV and V. Both the IRS and the 

CDFI Fund agreed with our recommendations. We also incorporated 

technical corrections to the draft report that we received from both IRS 

and the CDFI Fund where appropriate. 

In its response to the draft report, the CDFI Fund characterized GAO’s 

study as indicating that the NMTC has been a highly successful tool for 

increasing the flow of investments into low-income communities. While 

our findings do suggest that the NMTC appears to increase investment by 

participating investors in low-income communities, we also note that 

further information is needed to fully assess the effectiveness of the NMTC 

program. 

We are sending copies of this report to the interested congressional 

committees, the Commissioner of Internal Revenue, the Director of the 

Community Development Financial Institutions Fund, and other interested

parties. We will make copies available to others on request. In addition, 

the report will be available at no charge on the GAO web site at 

http://www.gao.gov. 

If you or your staff have any questions on matters discussed in this report 

or would like additional information, please contact me at (202) 512-9110

or at brostekm@gao.gov. Major contributors to this report are 

acknowledged in appendix VI. 

Michael Brostek 

Director, Tax Issues 

Agency Comments 

Page 54 GAO-07-296 Tax Policy
List of Committees 

The Honorable Max Baucus 

Chairman 

The Honorable Charles E. Grassley 

Ranking Minority Member 

Committee on Finance 

United States Senate 

The Honorable John F. Kerry 

Chairman 

The Honorable Olympia J. Snowe 

Ranking Minority Member 

Committee on Small Business and Entrepreneurship 

United States Senate 

The Honorable Christopher Dodd 

Chairman 

The Honorable Richard S. Shelby 

Ranking Minority Member 

Committee on Banking, Housing, and Urban Affairs 

United States Senate 

The Honorable Charles B. Rangel 

Chairman 

The Honorable Jim McCrery 

Ranking Minority Member 

Committee on Ways and Means 

House of Representatives 

The Honorable Nydia M. Velázquez 

Chair 

The Honorable Steve Chabot 

Ranking Minority Member 

Committee on Small Business 

House of Representatives 

The Honorable Barney Frank 

Chairman 

The Honorable Spencer Bachus 

Ranking Minority Member 

Committee on Financial Services 

House of Representatives 

Page 55 GAO-07-296 Tax Policy
Appendix I: Objectives, Scope, and Appendix I: Objectives, Scope, and Methodology 

Methodology 

Based on consultations with staff at cognizant congressional committees, 

the objectives of this report are to (1) describe the status of the New 

Markets Tax Credit (NMTC) program; (2) profile the characteristics of 

NMTC investors, the Community Development Entities (CDE) that receive

NMTC allocations, and the businesses and communities that receive

NMTC investments; (3) assess how effective the NMTC has been in 

bringing new investment to low-income communities by the investors that 

have participated in the program; and (4) assess the steps that the Internal

Revenue Service (IRS) and Community Development Financial Institutions 

(CDFI) Fund are taking to ensure CDEs and investors are complying with 

the NMTC and evaluate how effective these steps have been.

In order to accomplish these objectives, we used a number of methods of 

analysis. We met with officials from the CDFI Fund and IRS. We collected 

documents on the program status and efforts to monitor NMTC 

compliance. We also analyzed data from the CDFI Fund on the CDEs and 

their investment in low-income communities and tax return data from tax 

years 1997 through 2004 for investors in the NMTC program. We used 

these data to report summary statistics that profile the participants in the 

program and to conduct statistical analysis that measures the effect of the 

NMTC on investment. We also surveyed investors in the NMTC program in 

order to provide additional information on the effect of the credit and 

characteristics of the investors. 

To evaluate investment in the CDEs by NMTC investors, we used data 

from the CDFI Fund’s Allocation Tracking System (ATS) on investments 

reported through mid-December 2006. We used the ATS data to report on 

the type and size of qualified equity investment (QEI) made in the CDE 

and the CDE that received the investment. We also used the ATS to 

analyze the equity investors in the NMTC program. To report on qualified

low-income community investments (QLICI) from the CDE to the 

corresponding qualified active low-income community business (QALICB) 

we analyzed data from the Community Investment Impact System (CIIS). 

Specifically, we used data from the CIIS Transaction Level Report (TLR) 

for fiscal years 2003 through 2005, which provides information on each 

transaction made as part of a QLICI. To assess the reliability of the ATS 

and the TLR data sources, we reviewed the CDFI Fund’s data quality 

control procedures and subsequently determined that the data were 

sufficiently reliable for our purposes. 

We also reviewed tax data on NMTC investors from IRS’s Individual 

Returns Transaction File (IRTF) and Business Returns Transaction File 

(BRTF). We identified NMTC claimants using data on original claimants 

Page 56 GAO-07-296 Tax Policy
Appendix I: Objectives, Scope, and 

Methodology 

(at the time the QEI was made) from the CDFI Fund’s ATS and used their 

tax return information to determine how NMTC investors differ in size 

from all taxpayers. In cases where we could not locate a corporation’s tax

return because the NMTC investor was a subsidiary of a larger parent 

corporation, we used IRS’s National Account Profile to link the subsidiary 

to its parent corporation. In these cases, the parent corporation’s tax 

return was used in our analysis. In addition, because original claimants 

may sell their investment, and along with it their NMTC credit, we 

identified further claimants as those individuals or corporations that 

indicated they were eligible to claim the NMTC on their tax returns. This 

information came from IRS’s IRTF or BRTF on the New Markets Tax 

Credit Form (Form 8874) or as part of the General Business Credit (Form 

3800). To assess the reliability of the IRS data sources, we reviewed the 

IRS’s data quality control procedures and subsequently determined that 

the data were sufficiently reliable for our purposes. 

To obtain information from investors on the effectiveness of the NMTC, 

we designed and implemented a Web-based survey to gather information 

on the investors’ motivations and methods. We used CDFI Fund data and 

interviews with investors to determine the proper points of contact for 

NMTC investors. Our survey population consists of NMTC claimants and 

their proxies for cases in which the individual claimant was not principally 

responsible for deciding to make the NMTC investment. In some cases, 

one person was designated as the contact point for a group of investors 

responding to the survey. 

The survey asked a combination of questions that allowed for open-ended

and close-ended responses. Because some investors invested with more 

than one CDE and because not all investors participated in tiered or 

leveraged investment structures, the instrument was designed with skip 

patterns directing investors to comment only on the prepopulated CDE 

and type of investment structure that they utilized. Therefore, the number 

of survey respondents for each question varied depending on the number 

of CDEs in which the investor made a QEI and whether the investor had

used tiered or leveraged structures. 

We pretested the content and format of the questionnaire with 

knowledgeable investors. During the pretest, we asked the investors 

questions to determine whether (1) the survey questions were clear, 

(2) the terms used were precise, (3) the questionnaire placed an undue 

burden on the respondents, and (4) the questions were unbiased. We also 

assessed the usability of the Web-based format. We received input on the 

Page 57 GAO-07-296 Tax Policy
Appendix I: Objectives, Scope, and 

Methodology 

survey from a CDFI Fund official and made changes to the content and 

format of the final questionnaire based on pretest results. 

The survey was conducted using self-administered electronic 

questionnaires posted on the World Wide Web. We sent e-mail 

notifications to investors beginning on August 2, 2006.

1

 We then sent each

potential respondent a unique password and user name by e-mail to ensure 

that only members of the target population could participate in the 

appropriate survey. To encourage respondents to complete the 

questionnaire, we sent e-mail messages to prompt each nonrespondent 

approximately 2 weeks and 3 weeks after the initial e-mail message. We 

also arranged for contract callers to do phone follow-ups from September 

6 to September 8, 2006. We closed the survey on October 3, 2006. 

Because we attempted to collect data from every investor in the 

population, there was no sampling error. However, the practical 

difficulties of conducting any survey may introduce errors, commonly 

referred to as nonsampling errors. For example, differences in how a 

particular question is interpreted, the sources of information available to 

respondents, how the responses were processed and analyzed, or the 

types of people who do not respond can influence the accuracy of the 

survey results. We took steps in the development of the surveys, the data 

collection, and the data analysis to minimize these nonsampling errors and 

help ensure the accuracy of the answers that were obtained. A second, 

independent analyst checked all the computer programs that processed 

the data. 

The response rate for this survey was 51 percent. We conducted a 

nonresponse bias analysis by looking at the response rates for eight cells 

defined by the four types of investors surveyed (financial institutions, 

individuals, nonfinancial corporations, and other) and the size of the 

investor’s total assets (in the case of corporations) or adjusted gross 

income (for individuals). We collected this information primarily from the 

investor’s most recent tax return filed with IRS. In cases where we could 

not identify a tax return (primarily because the corporation had recently 

been acquired or merged with another corporation) we relied on public 

information on the corporation’s total assets from its most recent annual

 1

 Our survey only included tax credit claimants and, in a limited number of cases, a point of

contact at a pass-through entity as identified in CDFI Fund data. It did not include lenders 

participating in NMTC leveraged transactions, which accounts for just over one-quarter of

the total amount of QEI. Data are not available on lenders in leveraged transactions. 

Page 58 GAO-07-296 Tax Policy
Appendix I: Objectives, Scope, and 

Methodology 

report. Investors were placed in one of two size categories, either less than 

the median or greater than the median. 

Individuals with adjusted gross income less than the median for 

individuals using the NMTC had the highest response rate at 63 percent 

followed by financial institutions with a response rate of 56 percent for 

financial institutions with income above the median and 53 percent for 

financial institutions with income below the median. Individuals with 

incomes above the median had the lowest response rate at 32 percent. 

Differential response rates across analytic subgroups raise the possibility 

of nonresponse bias. If the respondents provided different responses than 

the nonrespondents, the survey estimates would be biased. We have 

weighted the respondents by type and income to reduce this source of 

nonresponse bias. Unfortunately, there may be other sources of 

nonresponse bias that we are unaware of and unable to adjust for. 

A statistician used the data on size and type of investor to create weights 

that allowed us to project the survey responses to the entire population by 

assuming that the nonrespondents would have answered the questions as 

the respondents did. We have treated the respondents as a stratified, 

random sample and calculated sampling errors as an estimate of the 

uncertainty around the survey estimates. Ninety-five percent confidence 

intervals are given in parentheses after the estimates. We are 95 percent 

confident that each of the confidence intervals in this report will include 

the true values in the study population. 

We also used IRS tax data to develop statistical analysis that measures the 

effect of the NMTC on investment and addresses the question of whether 

NMTC investments represent new or shifted funds. Using the tax returns 

of NMTC investors as determined from CDFI Fund and IRS data (see 

above) we used a multistage sampling methodology to draw a comparison 

group of tax returns. These methods are more fully described in appendix

II. To develop our statistical methodology, we relied on academic journal 

articles and interviewed experts in the research fields of individual savings 

and wealth and corporate taxation. 

To study the effectiveness of the steps that IRS and the CDFI Fund are 

taking to ensure CDEs and investors are complying with the NMTC and 

the effectiveness of these measures, we met with officials from the CDFI 

Fund and IRS. We also collected documents on the program status and 

efforts to monitor NMTC compliance. 

Page 59 GAO-07-296 Tax Policy
Appendix I: Objectives, Scope, and 

Methodology 

We performed our work at GAO Headquarters and the IRS office in New 

Carrollton, Maryland, from July 2006 through December 2006 in 

accordance with generally accepted government auditing standards. 

Page 60 GAO-07-296 Tax Policy
Appendix II: Description of Data and 

Methodology for Statistical Analysis of the Appendix II: Description of Data and Effect of NMTC Participation on Investment 

Methodology for Statistical Analysis of the 

Effect of NMTC Participation on Investment 

This appendix describes our data and methodology for assessing whether 

participation in the NMTC program affects investment by NMTC investors 

in low-income communities. The NMTC program may affect investment by 

increasing the overall level of investment (i.e., creating “new” investment) 

or by causing NMTC investors to shift investment from other uses to 

investment eligible for the credit. The methodology that we use to detect 

these changes in investment follows the methodology used in the 

retirement savings literature. This literature generally compares the wealth

or financial assets of participants in retirement savings plans to that of 

nonparticipants to detect any effect of participation on savings.1

 In our 

assessment of the NMTC program, we compare the wealth or assets of 

NMTC program participants to that of a group of similar nonparticipants 

to detect any effect on investment. 

Our statistical analysis of the effectiveness of the NMTC program in 

stimulating investment depends on the distinction between new and 

shifted investment. If our analysis detects new investment, this outcome is 

consistent with program goals because it may indicate increased 

investment in low-income communities that would not have occurred in 

the absence of the credit. If we do not detect new investment, it is possible 

that the credit has created no change in behavior and investors are just 

receiving a subsidy for investments that they would have made anyway, 

which is not consistent with the goals of the program. However, the 

investment could also be shifted from other communities. The 

implications for the effectiveness of the program in the case of shifted 

investment are more ambiguous. It could mean that (1) the credit has 

induced investors to shift investments from assets invested in other lowincome communities, which means that although the credit has generated

investments in projects that would not have occurred otherwise, it has not

increased investment in low-income communities, or (2) NMTC 

investments represent funds shifted from higher income communities. The 

first outcome is not consistent with the NMTC’s broader goal of increasing 

investment in low-income communities as a whole. The second outcome is

more consistent with program goals because, as with new investment, it 

may indicate increased investment funds available to low-income 

communities. Finally, in the case of both new and shifted investment, 

NMTC investment may reduce investment by non-NMTC investors (called 

crowding out) which is also inconsistent with the broader goal of the 

 1

 See the Literature Review and Credits section at the end of this appendix for a list of 

references. 

Page 61 GAO-07-296 Tax Policy
Appendix II: Description of Data and 

Methodology for Statistical Analysis of the 

Effect of NMTC Participation on Investment 

program. Our data and methodology do not allow us to detect crowding 

out, and for this reason, we confine our analysis to the effect of the credit

on the investment behavior of participants in the NMTC program. 

A limitation of our statistical analysis is that in the case of no detected 

change in the overall level of investment, we cannot distinguish between 

the possible types of shifting or between shifting and the possibility that 

there has been no change in investment behavior. However, if we combine 

evidence from our survey of investors with evidence from our statistical 

analysis, our analysis may provide some indication that the effect of the

program on investment in low-income communities by NMTC investors is 

shifted investment. The survey of investors that benefit from the tax credit

indicated that most investments would not have occurred in the absence 

of the credit (inconsistent with the notion that the credit has no effect on

investor behavior), and that NMTC investors had increased their 

investments in low-income communities because of the credit 

(inconsistent with the first shifting outcome above). Therefore, we use the 

second shifting outcome described above to interpret our statistical 

results in cases where we detect no overall increase in the level of 

investment by NMTC investors. 

We identified NMTC investors using both CDFI Fund data and IRS data. 

We collected data on original claimants (at the time the QEI was made) 

from the CDFI Fund. We also identified investors from IRS’s Returns 

Transaction File data as those claiming a positive amount for the credit on 

their tax returns in tax years 2001 through 2004. There were differences in

the number of claimants identified from the two different sources with the 

IRS data resulting in more investors. The source of these differences is 

unclear as they could indicate incomplete CDFI Fund data, missing 

taxpayer identification numbers (TIN) in the CDFI Fund data, or a large 

turnover in credits. In the latter case, investors may not be responding to 

the incentives of the credit themselves but to the terms constructed by the 

original investor. However, this is not necessarily the case as some 

investors we spoke with that had purchased the credit from the original 

investor indicated that they intended to participate but that the original 

investor was necessary due to timing issues. Because of the uncertainty 

over which set of investors is the most relevant for our analysis, we 

estimated results using both the full sample (IRS and CDFI Fund 

claimants) and CDFI Fund claimants only. Our conclusions were the same 

for both groups; however, we are only reporting results for the full sample 

of NMTC investors identified in IRS and CDFI Fund databases. 

Description of Data 

Page 62 GAO-07-296 Tax Policy
Appendix II: Description of Data and 

Methodology for Statistical Analysis of the 

Effect of NMTC Participation on Investment 

Our analysis of these data indicated that NMTC claimants were generally 

higher income (individuals) or had higher total assets (corporations) than 

the average taxpayer. This prompted us to identify our basic comparison 

group using a stratified random sample of taxpayers based on adjusted 

gross income for individuals and total assets at the end of the tax period 

for corporations. We oversampled high income and total asset taxpayers 

relative to an unstratified random sample from the same populations. We 

used quintiles to stratify our sample and drew a random sample of about 

4,000 returns per quintile.

2

 We chose our quintiles and drew the 

comparison groups based on 2000 tax year data because this was the year 

before the credit could be claimed and in that year we would not expect

any changes in behavior due to the credit. 

For individuals, we collected all available data from Form 1040 and 

information from Schedules C and F to form a panel of taxpayers for tax 

years 1997 through 2004. The data include more than 24,000 individual tax 

filers and about 80 percent of filers (including NMTC investors) are in the 

panel for all 8 years. For corporations, we used income data from Form 

1120 and balance sheet data from Schedule L to form a panel of corporate 

taxpayers for tax years 1997 through 2004. These data include more than 

14,000 corporate tax filers and about 56 percent of corporate filers were 

present in at least 7 years. (Forty-eight percent were present for all 8 years 

and 57 percent of NMTC investors were in all years.) Both individual and 

corporate NMTC investors were identified using TINs contained in CDFI 

Fund data and the New Markets Tax Credit Form (Form 8874) or as part of 

the General Business Credit (Form 3800) in the IRS data. The total number 

of NMTC claimants identified from these sources was 753. 

We also estimated asset values for individuals because, unlike IRS balance 

sheet data for corporations, the IRS data for individuals were limited to 

income streams and did not include asset levels. We followed the methods 

used in the Survey of Consumer Finances (SCF) to estimate asset holdings 

 2

 For corporate filers, the entire population of returns was drawn for the top two quintiles

because there were less than 4,000 total returns in these quintiles. For individual filers, the 

bottom two quintiles were divided into wage-only and other income groups. Most NMTC

claimants had some business income but a few had only wage income, making them harder

to distinguish from the “average taxpayer” for whom wage-only income is common.

Separating wage-only and other income groups allowed us to minimize the number of 

returns drawn from the wage-only subset of filers (who we determined to be, in general,

less “like” the NMTC claimants). 

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Appendix II: Description of Data and 

Methodology for Statistical Analysis of the 

Effect of NMTC Participation on Investment 

using income streams and rates of return.3 We also expanded on the SCF 

approach by using more sophisticated modeling to develop estimates of 

home equity. Rather than attribute to each household the median home 

value within its income group (as the SCF does), we estimated home 

equity using the November 1999 Wave (12) of the 1996 Survey of Income 

and Program Participation. Our controls included total income, age, 

marital status, and region.

4

 We then applied these estimated coefficients to 

tax return information on total income, age, filing status, and region of 

residence to generate estimates of home equity for each household using 

2000 tax data. Negative values were set to zero, and the consumer price 

index (CPI) (research series)5

 was used to adjust the year 2000 estimates 

for earlier and later years.6

We assessed the effects of NMTC participation by comparing the level of 

assets and growth in assets of NMTC participants with the level and 

growth in assets of corporations and individuals that did not participate in

the NMTC program.7

 We used regression techniques to compare the level 

Effects of NMTC Program 

Participation on 

Investment 

 3

 Note that we follow the SCF in excluding tax-preferred retirement accounts, which may

cause our wealth estimates to underestimate the wealth of NMTC investors relative to 

noninvestors as NMTC investors tend to have higher incomes than noninvestors. However, 

the exclusion’s effect, if any, on relative growth rates is not clear. This exclusion is 

primarily caused by data limitations, as our income tax data only include information for

taxable distributions from these accounts (not applicable for most filers) not contributions. 

For more information on SCF methods, see Arthur B. Kennickell “The Good Shepherd:

Sample Design and Control for Wealth Measurement in the Survey of Consumer Finances” 

(SCF Working Paper, Federal Reserve, Washington, D.C., 2005). 

4

 Regions were chosen in accordance with U.S. Census Bureau divisions. 

5

 See Kenneth J. Stewart and Stephen B. Reed, “CPI Research Series Using Current

Methods, 1978-98,” Monthy Labor Review, vol. 122, no. 6 (1999), for more information and 

access the data at: http://www.bls.gov/cpi/cpiurstx.htm.

6

 We are likely to be understating wealth for households in markets that grew at historically 

fast rates from 2001 through 2004. We predicted home equity values based on 2000 tax 

return data and used inflation adjustments to obtain values for 1997 through 1999 and 2001 

through 2004. The most likely affect is to bias our results downward because NMTC 

investors are more likely to have more expensive homes (they are higher income on

average than noninvestors, and this factor is associated with higher values of home equity)

and experience a greater increase in wealth from the increase in housing values. 

Consequently, wealth for investors would be underestimated to a larger degree than that of 

noninvestors and our analysis may underestimate the effect of the NMTC on the wealth of

NMTC investors. 

7

 All dollar amount variables were adjusted using the CPI (research series). The log 

transformation is used for all variables except for net assets, which are transformed using 

the inverse hyperbolic sine (to better address negative and zero values). 

Page 64 GAO-07-296 Tax Policy
Appendix II: Description of Data and 

Methodology for Statistical Analysis of the 

Effect of NMTC Participation on Investment 

of assets of NMTC investors and the relevant comparison group. The 

results of these models indicate whether the assets of NMTC claimants are 

higher than those of our comparison group controlling for other individual 

and corporate characteristics. However, it is possible that this approach is 

simply picking up the likelihood that NMTC claimants systematically have 

higher assets than their counterparts (despite our efforts to choose an 

appropriate comparison group using a stratified random sample). 

Therefore, we used several methods, including regression and propensity 

score techniques, to compare the growth of assets over time.8

 Differences 

in growth rates between NMTC investors and the comparison group do not 

depend on differences in the level of assets. 

Our baseline model for corporate investors is a fixed effects model of the 

following form9

: 

Yit = Xitβ + μit

For corporate investors, Yit represents the log of total assets, total 

liabilities, or net assets; Xit represents control variables which include the 

lag of net assets, the NMTC participation dummy, year dummies, and 

region dummies; and μit represents a random error term.10 Additional 

control variables are not used because they are included in the fixed 

effect. These variables include corporate-level characteristics, such as 

industry, that do not change over time. 

Statistical analysis of this baseline model indicates that corporate NMTC 

investment funds are more likely to represent investment funds shifted 

from other uses. Although there was some evidence that NMTC investors 

have higher levels of net assets than those in our comparison group, this 

result was not robust over different specifications of the model. On the 

other hand, our analysis of growth rates showed no statistically significant 

effect of NMTC investment status on the growth of net assets. This result 

means that NMTC investors are not investing at rates different from non-

 8

 The average treatment effect on the growth in assets for individuals was from 2000 to

2004. For corporations, the period was 2000 to 2003 (we choose 2003 for corporate filers 

because of the number of filers not in our records for 2004). 

9

 Initial Hausman tests indicated that fixed effects estimation was more appropriate than

random effects estimation. 

10 The Y, X and μ variables are time-demeaned data. The inverse hyperbolic sine 

transformation is used for net assets. 

Page 65 GAO-07-296 Tax Policy
Appendix II: Description of Data and 

Methodology for Statistical Analysis of the 

Effect of NMTC Participation on Investment 

NMTC investors. Unlike the case of asset levels, this result was robust 

across several specifications involving regression and propensity score 

methods, as indicated in table 9.11 In addition, the result was qualitatively 

the same for each quintile, when we used only years 2001 through 2004 in

the analysis, when we used median regression, and when our analysis 

included only banks. 

Table 9: Growth in Net Assets Using Fixed Effects Regression and Comparisons

Based on Nearest Neighbor Propensity Score Matching 

Specificationa

Average effect Coefficient

Standard

error

Nearest neighbor matching -2,883.972 6,740.992

Matching - CDFI Fund indentified investors -19,000.000 41,265.206

Baseline regression - full sample 0.009 0.091

Quintile one 0.002 0.012

Quintile two 0.020 0.090

Quintile three -0.065 0.614

Quintile four -0.065 0.306

Quintile five 0.662 1.134

Banks only 0.082 0.061

Tax years 2001 through 2004 -0.100 0.133

Median regression 0.000 0.003

Source: GAO analysis of IRS and CDFI Fund data.

Note: No coeffiecients were significant at the 10 percent or better level. 

a

Unless otherwise noted the dependent variable is the difference in the inverse hyperbolic sine of net 

assets. This transformation was used instead of the related log transformation to better address zero 

and negative values. 

Further analysis included using instrumental variables for predicting 

participation in the NMTC. However, we did not find important differences 

between participants and nonparticipants based on location and 

participation in other general business credits. We concluded that the 

 11 Our regression techniques included using the change in the inverse hyperbolic sine of net

assets as a dependent variable and median regressions of inverse hyperbolic sine and the

change in inverse hyperbolic sine. Our propensity scoring approach was to compare the

change in inverse hyperbolic sine of NMTC claimants to their nearest neighbor (closest

match) based upon their propensity score using differences in 2000 and 2003 data. 

Page 66 GAO-07-296 Tax Policy
Appendix II: Description of Data and 

Methodology for Statistical Analysis of the 

Effect of NMTC Participation on Investment 

problem of endogeneity12 may not be a significant issue for corporations 

because corporate participants are likely to be exposed to a similar set of 

investment options as nonparticipants and individual corporate 

characteristics that affect participation are captured in the fixed effect. We 

also attempted to identify the source of the shifted investment funds by 

dividing net assets into components, total assets and total liabilities. 

However, these results were inconclusive as they were not consistent 

enough to reach any strong conclusions. 

A limitation of our analysis of corporations is that the amount of NMTC 

investment might be small relative to a corporation’s total size. This means 

that our statistical models could fail to detect a positive effect of the 

NMTC investment on corporations’ asset levels even if such an effect 

exists. We attempted to mitigate this problem by analyzing firm-level data,

the smallest unit of analysis available, and growth in assets over time. 

We assessed the effect of NMTC participation on level and growth of 

assets for individuals in a manner similar to the analysis for corporations. 

Our baseline model for individual investors is a fixed effects model of the 

following form: 

yit = γNit + X1it

β + νit

where y is the dependent variable, wealth, for household i at time t; N is an 

indicator for NMTC investment (which is endogenous, i.e., correlated with 

the error term); X is a set of exogenous control variables; γ and β are 

coefficients; and νit is an error term.13

However, unlike the analysis of corporate investors, we analyzed the effect 

of NMTC on individuals by estimating an instrumental variables14 version 

of the baseline model to account for possible endogeneity of the NMTC 

participation variable. We concluded that this problem is likely to be

 12 A regression model suffers from endogeneity if one or more of the explanatory variables 

is correlated with the error term (the unexplained portion of the variance in the dependent 

variable). 

13 The household specific effect (μi

) is fixed over time and differenced out of the equation. 

14 An instrumental variables estimator is a method in which another variable that is not

correlated with the error term and is (partially) correlated with the endogenous 

explanatory variable (NMTC participation) is used to predict the endogenous variable in a

separate equation. 

Page 67 GAO-07-296 Tax Policy
Appendix II: Description of Data and 

Methodology for Statistical Analysis of the 

Effect of NMTC Participation on Investment 

worse for individuals than for corporations because individuals are less 

likely to have the same information about the various business tax 

incentives so that the decision to participate is not random and likely to be 

correlated with other explanatory variables. We chose as our instrumental 

variables the dollar amount of allocation in the state of residence and the 

presence of other general business credits.15 These variables are likely to 

be highly correlated with NMTC participation but not with levels of 

household wealth. 

To implement the instrumental variables model, we first estimated N as 

follows: 

Nit = X1it β+ X2itλ + νit

where X2 contains our instrumental variables and the other variables are 

defined as in the baseline model. This regression is used to predict NMTC 

participation using presence of a general business credit deduction and 

the cumulative NMTC allocation in state of residence as instrumental 

variables.16 We then estimated the baseline fixed effects model with Yit as 

the log of wealth and Xit as control variables, which include balance due, 

an NMTC participation dummy (instrumented), year dummies, and region

dummies.17 In order to test the effect of NMTC participation on the 

components of wealth, we also ran regressions with Yit as the log of 

business assets, real estate assets, dividend assets, and interest bearing 

assets. Like wealth, these asset levels were measured in thousands of 

dollars and adjusted into constant dollars using the CPI research series. 

The results of this analysis for asset levels of individuals are presented in 

table 10. The coefficient for NMTC investor in the wealth column indicates 

that the log of wealth (in thousands of dollars) is significantly higher than 

for noninvestors. 

 15 Our analysis of correlations indicated that the presence of the general business credit is

not strongly correlated with wealth, as one might expect. This is likely because claiming 

these credits is relatively rare for individual filers and presence of the credit might be more

indicative of a preference for certain types of tax planning or awareness of tax incentives. 

16 STATA’s panel IV regression models do not include a categorical variable option for the

first-stage regression so we are running a linear probability model for the first stage. 

17 Demographic information was not included as those variables are constant over the

panel. 

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Appendix II: Description of Data and 

Methodology for Statistical Analysis of the 

Effect of NMTC Participation on Investment 

Table 10: Baseline Analysis: Instrumental Variables Fixed Effects Regressions on the Full Sample 

 Wealth Interest assets Business assets 

Variable Coefficient Standard error Coefficient Standard error Coefficient Standard error

NMTC investor 2.346 0.331 2.719 0.665 17.287 0.950

Total income (log) 0.245 0.006 0.587 0.011 0.360 0.016

Balance due 0.038 0.002 -0.031 0.005 0.070 0.006

New England -0.071 0.084 0.269 0.169 0.324 0.242

East North Central -0.242 0.078 0.028 0.156 0.517 0.223

West North Central 0.003 0.097 -0.315 0.196 0.363 0.279

South Atlantic -0.134 0.063 -0.170 0.127 0.155 0.181

East South Central -0.232 0.101 -0.319 0.203 0.437 0.289

West South Central 0.135 0.086 0.301 0.172 0.630 0.246

Mountain -0.125 0.081 -0.062 0.162 0.236 0.232

Pacific -0.227 0.075 -0.008 0.150 0.103 0.214

Year 1998 0.097 0.016 0.061 0.032 0.068 0.046

Year 1999 0.158 0.016 -0.025 0.032 0.099 0.046

Year 2000 0.372 0.016 0.338 0.032 0.259 0.046

Year 2001 0.211 0.016 0.210 0.032 0.270 0.046

Year 2002 0.061 0.016 -0.267 0.033 0.405 0.046

Year 2003 0.069 0.017 -0.687 0.033 0.569 0.047

Year 2004 0.072 0.017 -0.920 0.035 0.506 0.050

Constant 3.383 0.055 -3.022 0.110 -8.314 0.156

Number of observations 186,241 186,241 186,241

Number of groups 24,933 24,933 24,933

Overall R-squared 0.157 0.190 0.038

Source: GAO analysis of CDFI Fund and IRS data.

Notes: The dependent variables are in log form and all bold type indicates significance at the 5 

percent level. Further, “NMTC investor” is instrumented using total income (log), balance due, 

allocations in state of residence (log), presence of another general business credit (log), region, and 

year. The Middle Atlantic is the omitted region and 1997 is the omitted year. 

The coefficients of these regressions should not be used to generate 

numeric estimates of the magnitude of the effect that the NMTC has on 

asset levels. In some cases, the fit of our models is poor and it is difficult 

to estimate the value of some types of assets, in particular business assets.

Our results for both the baseline analysis and propensity scoring are 

intended to illustrate the direction of the effect that the NMTC has on 

participating individuals’ investments. 

Page 69 GAO-07-296 Tax Policy
Appendix II: Description of Data and 

Methodology for Statistical Analysis of the 

Effect of NMTC Participation on Investment 

Nonetheless, these results show that NMTC participants have higher levels 

of wealth and business assets than those in the comparison group after 

controlling for individual fixed effects, year, region, and tax balance due—

a proxy for risk attitudes. These results are consistent across four of five 

quintiles, using data for years 2001 through 2004 only, and using 3-year 

averages for the dependent variable. However, it may be that these 

differences in asset levels are simply picking up the likelihood that NMTC 

claimants systematically have higher assets that their counterparts. (The 

summary statistics show that individual NMTC investors have higher asset 

levels on average than the comparison group despite our use of a stratified 

random sample where comparison households were chosen based on 

levels of adjusted gross income in tax year 2000.) Therefore, as an 

alternative measure of the effect of NMTC participation, we compare the 

growth in assets between the two groups using closest neighbor 

propensity score matching to further narrow the comparison group and 

estimate the effect of NMTC participation on asset growth.18 We used year 

2000 data to estimate propensity scores for future participation in the 

NMTC. The specification for our propensity scoring is as follows: 

Prob(N=1) = G(Xi β) 

Where N represents any NMTC participation from 2001 through 2004; X 

includes age, balance due, total income, presence of another general 

business credit, wage earnings, and dividend earnings; and G( · ) is the 

cumulative standard normal distribution. 

We then estimated the effect of NMTC participation on the change in the 

log of wealth asset levels from 2000 through 2004. Our results show that 

individuals who participate in the NMTC have higher growth in interest 

bearing assets, business assets, and wealth which is consistent with the 

results we obtained for our instrumental variables regressions. For 

example, the first column in table 11 indicates that the growth in wealth 

for NMTC investors was significantly higher than that of noninvestors. 

 18 We experimented with difference-in-log specifications to measure growth in our fixed 

effects models, but the fit of the models was not sufficient to interpret the results. 

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Appendix II: Description of Data and 

Methodology for Statistical Analysis of the 

Effect of NMTC Participation on Investment 

Table 11: Growth in Assets: Comparisons Based on Nearest Neighbor Propensity Score Matching 

Wealth Interest-bearing assets Business assets Real Estate assets Dividend assets 

Average 

NMTC 

effect 

Standard

error 

Average 

NMTC 

 effect 

Standard

error

Average 

NMTC 

effect

Standard

error

Average 

NMTC 

effect

Standard

error 

Average 

NMTC 

effect

Standard

error

0.881 0.152 1.554 0.351 3.112 0.527 0.385 0.441 0.650 0.431

Source: GAO analysis of IRS and CDFI Fund data.

Notes: Average effects are on the difference in the log of the asset from 2000 to 2004 and bold type 

denotes significance at the 1 percent level. 

Literature Review and 

Credits 

To develop our methodology, we relied heavily on savings literature, 

which generally compares the wealth or financial assets of participants in

retirement savings plans to those of nonparticipants to detect any effect of

participation on savings. The following list of publications provided us 

with important information in developing our methodological approach.

1. Engen, Eric M., and William G. Gale. “The Effects of 401(k) Plans on 

Household Wealth: Differences Across Earnings Groups.” NBER 

Working Paper No. 8032, 2000. 

2. Engen, Eric M., William G. Gale, and John Karl Scholz. “Do Saving 

Incentives Work?” Brookings Papers on Economic Activity, vol., no.1 

(1994). 

3. Engen, Eric M., William G. Gale, and John Karl Scholz. “The Illusory 

Effects of Saving Incentives on Saving.” Journal of Economic 

Perspectives, vol. 10, no. 4 (1996). 

4. Hubbard, R. Glenn, and Jonathan S. Skinner. “Assessing the 

Effectiveness of Saving Incentives.” Journal of Economic 

Perspectives, vol. 10, no. 4 (1996). 

5. Pence, Karen M. “401(k)s and Household Saving: New Evidence from 

the Survey of Consumer Finances.” Finance and Economics 

Discussion Series 2002-6. Washington, D.C.: Board of Governors of the 

Federal Reserve System, 2002. 

6. Poterba, James M., Steven F. Venti, and David A. Wise. “Do 401(k) 

Contributions Crowd Out Other Personal Saving?” Journal of Public 

Economics, vol. 58 (1995). 

Page 71 GAO-07-296 Tax Policy
Appendix II: Description of Data and 

Methodology for Statistical Analysis of the 

Effect of NMTC Participation on Investment 

7. Poterba, James M., Steven F. Venti, and David A. Wise. “How 

Retirement Saving Programs Increase Saving.” Journal of Economic 

Perspectives, vol. 10, no. 4 (1996). 

8. Poterba, James M., Steven F. Venti, and David A. Wise. “Personal 

Retirement Saving Programs and Asset Accumulation: Reconciling the 

Evidence.” NBER Working Paper No. 5599, 1996. 

We also consulted several experts in the course of our work, including 

Arthur Kennickel, Karen Pence, James Poterba, and Paul Smith, to discuss 

the methodology for our statistical analysis. They provided comments that 

we incorporated into our statistical models. 

Page 72 GAO-07-296 Tax Policy
Appendix III: NMTC Investment Data by

State, Fiscal Years 2003 through 2005 

State 

Total dollar amount of

loans and investment

Percentage of all loans

 and investment

Number of 

NMTC projects

Percentage of

NMTC projects

California $303,081,270 9.74 58 9.95

New York 239,178,566 7.68 25 4.29

Ohio 201,857,969 6.49 69 11.84

Maine 153,527,250 4.93 13 2.23

Wisconsin 149,131,108 4.79 26 4.46

Missouri 146,165,868 4.70 22 3.77

Massachusetts 145,059,237 4.66 34 5.83

Kentucky 135,117,406 4.34 44 7.55

North Carolina 126,420,590 4.06 14 2.40

Washington 125,703,680 4.04 19 3.26

Minnesota 122,587,357 3.94 13 2.23

Oklahoma 112,092,186 3.60 24 4.12

Oregon 111,464,317 3.58 14 2.40

Maryland 106,171,382 3.41 14 2.40

New Jersey 83,439,000 2.68 7 1.20

Pennsylvania 77,111,177 2.48 21 3.60

Arizona 68,476,055 2.20 8 1.37

District of Columbia 67,715,807 2.18 10 1.72

Texas 65,644,265 2.11 11 1.89

Michigan 57,541,869 1.85 10 1.72

Virginia 55,898,873 1.80 8 1.37

Rhode Island 55,235,675 1.77 3 0.51

Utah 53,884,716 1.73 14 2.40

Georgia 38,516,906 1.24 4 0.69

Florida 38,261,093 1.23 8 1.37

Louisiana 36,162,671 1.16 4 0.69

Connecticut 34,819,477 1.12 3 0.51

Indiana 26,098,460 0.84 3 0.51

Tennessee 22,249,867 0.71 21 3.60

Iowa 20,229,952 0.65 5 0.86

Nebraska 18,778,563 0.60 2 0.34

Delaware 17,000,000 0.55 1 0.17

Mississippi 16,310,758 0.52 2 0.34

Colorado 15,942,664 0.51 7 1.20

Idaho 12,890,000 0.41 10 1.72

Appendix III: NMTC Investment Data by 

State, Fiscal Years 2003 through 2005 

Page 73 GAO-07-296 Tax Policy
Appendix III: NMTC Investment Data by

State, Fiscal Years 2003 through 2005 

State 

Total dollar amount of

loans and investment

Percentage of all loans

 and investment

Number of 

NMTC projects

Percentage of

NMTC projects

Illinois 12,503,895 0.40 8 1.37

Arkansas 10,616,786 0.34 4 0.69

West Virginia 7,398,340 0.24 8 1.37

New Mexico 6,050,000 0.19 1 0.17

Alabama 5,000,000 0.16 1 0.17

South Carolina 3,607,755 0.12 2 0.34

Alaska 3,138,132 0.10 2 0.34

Puerto Rico 1,474,956 0.05 1 0.17

Wyoming 1,461,532 0.05 1 0.17

Nevada 588,750 0.02 1 0.17

Montana 457,200 0.01 1 0.17

Hawaii 250,000 0.01 2 0.34

Totals $3,112,313,380 100.00 583 100.00

Source: GAO analysis of CDFI Fund data. 

Page 74 GAO-07-296 Tax Policy
Appendix IV: Comments from the Community Appendix IV Development Financial Institutions Fund : Comments from the Community 

Development Financial Institutions Fund 

Page 75 GAO-07-296 Tax Policy
Appendix IV: Comments from the Community 

Development Financial Institutions Fund 

Page 76 GAO-07-296 Tax Policy
Appendix V: Comments from the Internal Appendix V Revenue Service : Comments from the Internal 

Revenue Service 

Page 77 GAO-07-296 Tax Policy
Appendix V: Comments from the Internal 

Revenue Service 

Page 78 GAO-07-296 Tax Policy
Appendix VI: 

A

GAO Contact and Staff 

cknowledgments 

Page 79 GAO-07-296 

Appendix VI: GAO Contact and Staff 

Acknowledgments 

Michael Brostek, (202) 512-9110 or brostekm@gao.gov

In addition to the contact named above, Kevin Daly, Assistant Director; 

Thomas Gilbert; Evan Gilman; Tami Gurley-Calvez; Katherine Harper; 

Stuart Kaufman; Summer Lingard; Don Marples; Donna Miller; Ed 

Nannenhorn; Karen O’Conor; and Cheryl Peterson made key contributions 

to this report. 

Tax Policy

GAO Contact 

Acknowledgments 

(450436) 
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