GAO-03-223R Implementation Status and Issues Related to Mandated Reports

United States General Accounting Office

Washington, DC 20548

December 6, 2002

Congressional Committees

Subject: New Markets Tax Credit: Status of Implementation and Issues Related to

 GAO’s Mandated Reports

The New Markets Tax Credit (NMTC) Program provides a credit against federal taxes for up

to $15 billion of investments made in low-income communities. The NMTC Program is part of

a federal initiative that includes such programs as the Renewal Communities Program that

are designed to provide tax and regulatory relief to economically distressed communities.

The Community Renewal Tax Relief Act of 2000 that authorized the tax credit also mandated

that we audit and report on the NMTC Program in January 2004, 2007, and 2010.1

 This report

describes the status of our work toward developing a methodology for evaluating the NMTC

Program. Our objectives are to provide information about (1) the NMTC Program, including

its goals, its design, and progress in implementing the program, and (2) our mandated review

of the program, including the potential scope of the review and how the program may be

evaluated for effectiveness and compliance.

To meet these objectives, we reviewed congressional and relevant executive branch

documents to determine the goals and design of the NMTC Program and interviewed

congressional staff to determine the scope of our legislatively mandated review. We also cosponsored with the Treasury Department’s Community Development Financial Institutions

(CDFI) Fund a conference of experts to review methods for evaluating the program’s

effectiveness and compliance on the part of program participants. We conducted our work

from January 2001 through July 2002 in accordance with generally accepted government

auditing standards.

From August 29 through November 4, 2002 we briefed your offices on the results of our work.

This report transmits the material from those briefings.2

Results

The goals of the NMTC Program are not stated explicitly in the legislation that authorizes the

program. However, according to congressional supporters of the legislation, the program’s

goals are to direct new business capital to low-income communities, facilitate economic

development in these communities, and encourage investment in high-risk areas. Although

the legislation authorizing the NMTC Program requires that the investments be made in

businesses and communities that meet certain eligibility standards, it does not specify that

the investment be new capital, that performance measures be established to show that

 1

P. L. 106-554

2

See the enclosure for details.
Page 2 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

investment leads to economic development, or that the investment be in high-risk areas

within eligible communities. Although not required by the legislation, the CDFI Fund

includes some criteria, among those that it uses in its application process for allocating

credits, which reflect these program goals.3

The NMTC Program is structured as follows. The CDFI Fund, which administers the

application and allocation procedures of the NMTC Program under authority delegated by the

Secretary of the Treasury, allocates shares of the total available tax credit to “community

development entities” (CDEs) through a competitive application process.4

 In return for the

tax credit, investors supply capital to the CDEs, which, in turn, invest the capital in qualified

businesses operating in low-income communities. The tax credit, which may be claimed over

7 years, equals about 30 percent in present value terms of the amount invested.

The NMTC Program is in the initial stages of its implementation. The CDFI Fund has not yet

made its first credit allocations, but it has provided guidance for CDEs applying for the credit

allocations and set up a process for reviewing the applications. The $15 billion of investment

qualifying for the credit will be made available over 7 years, in annual increments that range

from $1.5 billion to $3.5 billion. Towards the end of 2002 or the beginning of 2003, the CDFI

Fund plans to announce its decisions for the 2002 allocation round concerning which CDEs

receive allocations and how much they receive. The CDFI Fund is also working on plans to

monitor the CDEs’ compliance with agreements that the CDEs reach with the CDFI Fund

concerning how the allocations of qualified investment will be used and to evaluate the

program’s effectiveness in promoting investment and economic development.5

The legislation mandating that we audit and report on the NMTC program did not specify the

scope of our review. After consulting with congressional staff, we concluded that potential

topics for our review could include an evaluation of the program’s effectiveness in promoting

investment and economic development in low-income communities and an evaluation of

compliance with the program’s requirements in terms of its vulnerability to waste, fraud, and

abuse.

 3

 The applicants, who receive scores based on information that they supply in a competitive

application process, can score up to 25 points in a category called “community impact” where the

reviewer considers, among other things, the extent to which the applicant (1) targets particularly

economically distressed communities; (2) has the active participation of community representatives in

designing and implementing its business plan; and (3) can show a demonstrable community

development and economic impact. They can also score up to 25 points in the following categories:

“business strategy” where the reviewer considers factors like prior performance providing similar

kinds of products and services; “capitalization strategy” where the reviewer considers factors like

whether the applicant has secured investor commitments; and “management capacity” where the

reviewer considers factors like management’s prior experience investing in low-income communities.

Under the business strategy category, applicants may score an additional 5 points by demonstrating a

record of successful investment in disadvantaged communities or businesses and an additional 5

points by intending to invest in businesses unrelated to the applicant.

4

The CDEs, which must be certified by the CDFI Fund, are domestic corporations or partnerships with

a primary mission of serving or providing capital to low-income communities or individuals. Eligible

CDEs could include, for example, community development banks or venture funds, community

development corporations, and New Markets Venture Capital companies among others.

5

 The NMTC allocation agreements, which contain the terms and conditions of the NMTC allocation,

may specify the amount of the allocation, the approved uses of the allocation, the approved areas in

which the proceeds of the investment may be used, the CDE’s schedule for obtaining capital from

investors, and the CDE’s reporting requirements.
Page 3 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

An evaluation of the program’s effectiveness presents some significant difficulties. A criterion

for judging the program’s effectiveness is the extent to which NMTC investment and

economic development in the communities receiving the investment would not have

occurred if the tax credit program did not exist. The impact, if any, of the credit on

investment and development is difficult to determine because it is difficult to know what

program participants and others who invest in low-income communities would have done if

the program did not exist. A further difficulty for an effectiveness evaluation is that the

NMTC Program is very small relative to economic activity within the total geographic area

eligible for the credit. The $15 billion of potential new investment – over 7 years – may be too

small to have a measurable impact in a target area that the CDFI Fund estimates could

include 35 percent of the U.S. population and 40 percent of the land area.

Several methods have been developed that address some of the difficulties present in

effectiveness evaluations. For example, statistical methods use control or comparison groups

in an effort to determine what program participants would have done if the program did not

exist. However, all of these methods have significant limitations. Because of these

limitations, definitive conclusions about the effectiveness of the NMTC Program may not be

possible. Nevertheless, it may be possible to provide evidence that is consistent or

inconsistent with the program’s effectiveness, such as data on whether or not investors

receiving the credit had made similar investments in low-income communities in the past. In

our future reports on the NMTC program, we will provide detailed descriptions of the

methodology, or combinations of methodologies, that we determine are most appropriate for

our audit objectives.

The evaluation of program compliance requires determining the extent to which (1) the

investors are claiming only the credits that they are entitled to, (2) the CDEs are conforming

to statutory requirements relating to the timing of their investments, (3) the businesses

receiving investment are qualified to participate in the program, and (4) the CDEs are

conforming to the terms of the agreements reached with the CDFI Fund concerning how the

allocations of qualified investment will be used. The evaluation of compliance will be

complicated by the fact that different types of participants (investors, CDEs, and businesses)

are involved at different levels of the program, and two agencies within Treasury (the

Internal Revenue Service and the CDFI Fund) will have responsibility for administering,

monitoring and enforcing compliance. Namely, the Internal Revenue Service is responsible

for monitoring compliance with provisions of the tax code concerning the timing of

investment and the businesses qualified to receive investment. The CDFI Fund is responsible

for administering the application and allocation procedures of the NMTC Program (including

both CDE certification and competitive NMTC allocations), and monitoring compliance with

the terms of the NMTC allocation agreements.

Factors that affect the difficulty of evaluating compliance will include whether coordination

between the Internal Revenue Service and the CDFI Fund is sufficient to detect ineligible

credit claimants and whether sufficient data will be developed for the CDFI Fund to properly

monitor the CDEs and for the CDEs to monitor the businesses that receive the investment. A

further complication is that the requirement for compliance data from participants will need

to be balanced with the possible disincentives for participation that might arise from

increased record keeping. The CDFI Fund is currently working on plans to monitor

compliance with allocation agreements and to evaluate the effectiveness of the program in

promoting investment and economic development.
Page 4 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

At this time, we expect our report in January 2004 likely will cover the status of the NMTC

Program, but will not evaluate overall program effectiveness and compliance. At the time of

this first mandated report, the NMTC Program will be only partially implemented and will not

have been in operation long enough to permit such an evaluation. The report will likely

provide descriptive information on the program’s implementation, such as how much has

been invested, where it has been invested, and the types of businesses that received the

investment. The report will also likely identify any significant issues that have arisen

concerning compliance, administration, or the design of the credit.

Agency Comments and Our Evaluation

In a memorandum dated December 2, 2002, the Director of the CDFI Fund provided

comments on our draft correspondence. The Director suggested that we add certain

additional details regarding how the NMTC program should be evaluated and regarding

difficulties that may arise when applying the methodologies that we discussed in the

correspondence. He also made suggestions for clarifying the respective roles and

responsibilities of the CDFI Fund and the Internal Revenue Service in administering the

program, and monitoring and enforcing compliance. We modified the correspondence as

appropriate.

The Director also suggested that the NMTC Program should be evaluated in comparison with

other federal programs with similar goals, such as the Empowerment Zone and Renewal

Communities Programs. We expect that our future reports will deal chiefly with the NMTC

Program because it is sufficiently different in structure and scope from these other programs

to make comparison difficult. However, we are also mandated by the Community Renewal

Tax Relief Act of 2000 to audit and report on the Empowerment Zone and Renewal

Communities Programs in the same timeframes as our NMTC reports.

We are sending copies of this report to the Secretary of the Treasury; the Director,

Community Development Financial Institutions Fund; and other interested parties. We will

also make copies available to others on request. The report is also available on GAO’s

homepage at http//www.gao.gov.

This report was prepared under the direction of Jim Wozny. Other major contributors were

Kevin Daly and Larry Korb. If you have any questions about this report, please contact Jim

Wozny or me on (202) 512-9110.

Michael Brostek

Director, Tax Issues

Enclosure
Page 5 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Congressional Committees

The Honorable Max Baucus

Chairman

The Honorable Charles E. Grassley

Ranking Minority Member

Senate Committee on Finance

The Honorable John F. Kerry

Chairman

The Honorable Christopher S. Bond

Ranking Minority Member

Senate Committee on Small Business and Entrepreneurship

The Honorable Paul S. Sarbanes

Chairman

The Honorable Phil Gramm

Ranking Minority Member

Senate Committee on Banking, Housing, and Urban Affairs

The Honorable William M. Thomas

Chairman

The Honorable Charles B. Rangel

Ranking Minority Member

House Committee on Ways and Means

The Honorable Donald A. Manzullo

Chairman

The Honorable Nydia M. Velázquez

Ranking Minority Member

House Committee on Small Business

The Honorable Michael G. Oxley

Chairman

The Honorable John J. LaFalce

Ranking Minority Member

House Committee on Financial Services

The Honorable Richard H. Baker

Chairman

The Honorable Paul E. Kanjorski

Ranking Minority Member

Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises

House Committee on Financial Services
Page 6 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

New Markets Tax Credit

Status of Implementation and Issues Related 

to GAO’s Mandated Reports

Briefing to the Staff of the Committees 

of Jurisdiction 

August 29 through November 21, 2002
Page 7 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Objectives, Scope, and Methodology

Objectives

• To provide information on the New Markets Tax Credit (NMTC)

Program, including

• the goals and design of the program and

• the progress in implementing the program.

• To provide information on our legislatively mandated review of the

program, including

• the potential scope of the review,

• how the NMTC Program may be evaluated for effectiveness,

• how the program may be evaluated for compliance,

• the likely objectives of our report in 2004.
Page 8 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Objectives, Scope, and Methodology

Scope and Methodology

• We reviewed congressional and relevant executive branch

documents to determine the goals and design of the NMTC

Program.

• We interviewed congressional staff members to determine

the scope of our legislatively mandated review of the

program.

• We co-sponsored with the Treasury Department’s

Community Development Financial Institutions (CDFI) Fund a

conference of experts to review methods for evaluating the

program’s effectiveness and for ensuring compliance on the

part of program participants.
Page 9 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

NMTC Program Goals

• According to congressional supporters of the NMTC, the program

goals are to

• direct new business capital to low-income communities,

• encourage investment in high-risk areas, and

• facilitate economic development in low-income communities.

• The NMTC requires that qualifying investments be stock or similar

equity interest in, or loans to, businesses in low-income

communities, or financial services provided to businesses and

residents in low-income communities.

• The NMTC does not specifically require that the investment be new

capital, that the investment be in high-risk areas within eligible

communities, or that performance measures be established to show

that the investment leads to economic development.
Page 10 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Design of the Credit

• The NMTC Program provides a credit against federal taxes

for investments in low-income communities.

• The credit is taken over 7 years at the rate of 5 percent of the

investment in each of the first 3 years and 6 percent of the

investment in each of the final 4 years.

• The maximum amount of investment that qualifies for the

credit is $15 billion, distributed over 7 years with annual caps

that range from $1.5 billion to $3.5 billion.

• According to administration projections made in 2000, the

$15 billion in private investment will have a tax revenue

cost of $4.5 billion over 10 years.
Page 11 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Design of the Credit

• Community development entities (CDEs) that have been certified by the

Treasury Department’s CDFI Fund compete to receive shares of the total

amount of credit that the CDFI Fund has to distribute.

• The CDEs that succeed in gaining allocations of tax credits can offer them

to the taxpayers who provide the CDEs with capital.

• The CDEs use the capital to make investments in businesses in lowincome communities.

• The credit can be recaptured from the taxpayer by the Internal Revenue

Service if

• the CDE ceases to be certified,

• the taxpayer’s equity interest in the CDE is redeemed, or

• substantially all of the funds received by the CDE for tax credits are

not used to make qualified investments during the 7 year period.
Page 12 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Design of the Credit

CDE NMTC investor Qualifying

businesses

Tax credits

Investment

capital

Loans,

investment

capital,

services

Internal Revenue

 Service

CDFI Fund

(Dept. of Treasury) Noncompliance

reporting

Tax return

(with

Form 8874)

Certification

of CDE

Allocation of

NMTC credits
Page 13 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Credit Program Implementation

• The CDFI Fund has provided guidance for CDEs applying for credit 

allocations and has set up a process for reviewing these 

applications.

• The Internal Revenue Service has also issued temporary 

regulations that include guidance on what investments qualify for 

the credit and what events will trigger a recapture of the credit.

• The $15 billion in investment that qualifies for the credit will be 

made available in the following increments:

Year Amount

2001 – 02 $2.5 billion

2003 $1.5 billion

2004 – 05 $2.0 billion per year

2006 – 07 $3.5 billion per year
Page 14 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Credit Program Implementation

• The CDFI Fund plans to announce 2001-2002 allocation 

decisions towards the end of 2002 or the beginning of 2003. 

• The CDFI Fund is working on plans to monitor compliance 

with agreements that the CDEs reach with the CDFI Fund 

concerning how the allocations will be used and to evaluate 

the effectiveness of the program in promoting investment and 

economic development.

• The Internal Revenue Service has responsibility for 

monitoring compliance with provisions of the tax code 

concerning the timing of investment and whether businesses 

that receive the investment are qualified.
Page 15 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Scope of the Mandated Study

• The legislative mandate for our periodic reviews of the NMTC

Program did not specify the scope of the review.

• The mandate requires that we audit and report on the

NMTC program by January 2004, 2007, and 2010.

• According to the congressional staff that we consulted,

potential topics for the review include an evaluation of

• the effectiveness of the program in promoting new

investment and economic development in low-income

communities and

• compliance with the program’s requirements, that is, the

extent to which the program may be subject to waste,

fraud, and abuse.
Page 16 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Effectiveness Evaluation

Criteria for Determining Effectiveness

We found no guidance in the legislation for establishing

criteria for evaluating the effectiveness of the credit.

According to a conference of experts that we cosponsored with the CDFI Fund, potential criteria could

include:

• The extent to which investment in NMTC assets is new

investment.

• New investment means investment that would not

have occurred in low-income communities without

the tax credit and investment that is not simply

shifted from other low-income communities.
Page 17 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Effectiveness Evaluation

Criteria for Determining Effectiveness (continued)

• The extent to which the investment produced economic

development in the low-income communities.

• Economic development includes the direct effect of

growth in businesses receiving investment and

indirect “multiplier” effects on economic growth in the

low-income communities.
Page 18 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Effectiveness Evaluation

Factors Affecting the Evaluation

• The effectiveness of economic development programs is usually difficult to

determine because it is difficult to know what program participants and

others who invest in low-income communities would have done if the

program did not exist.

• In the case of the NMTC, it is difficult to determine:

• What investors would have done with their capital if the program

did not exist.

• Whether NMTC investment recipients would have been able to

obtain capital from other sources.

• Whether the recipients’ businesses would have grown more slowly

if they had not been able to obtain capital from other sources.

• Whether the communities would have had less economic

development due to slower business growth.
Page 19 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Effectiveness Evaluation

Factors Affecting the Evaluation (continued)

• The effectiveness of economic development programs may

also be difficult to measure when the program is small

relative to total economic activity within the geographic area

of interest.

• The CDFI Fund estimates that eligible communities

include 32 percent of the U.S. population and nearly 40

percent of the land area.

• The $15 billion in potential new investment is likely to be

too small relative to this target area to have an effect on

economic development that is large enough to be

measured accurately.
Page 20 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Effectiveness Evaluation

Factors Affecting the Evaluation (continued)

• Even if the evaluation is limited to low-income

communities receiving NMTC investment, the amount of

investment is likely to vary across these communities and

may be too small to have a measurable effect.

• The program’s effect on economic development may

have to be evaluated through its effect on such factors as

sales or employment growth in businesses receiving

investment.
Page 21 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Effectiveness Evaluation

Methods for Determining Effectiveness

Methods for determining the effect of the tax credit on

investment and economic growth include:

• Statistical methods that compare investors, businesses, and

low-income communities that participate in the program with

a comparison or “control” group of nonparticipants.

• Survey methods that directly question a sample of investors

and businesses that participate in the program about the

effect of the credit on their investment and business

decisions.

• Case study methods that examine in detail information about

a few investors and businesses that participate in the

program.
Page 22 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Effectiveness Evaluation

Statistical Methods

• The advantages of statistical methods are that

• they can provide precise, quantifiable estimates of the credit’s effect

on the amount of new investment and the rate of economic growth of

businesses and communities receiving the investment and

• the estimates can be generalized to all program participants.

• The disadvantage of the statistical methods is that they may be difficult to

apply because

• randomly selecting control groups would require excluding investors,

businesses,or communities from the credit program, and

• identifying appropriate comparison groups would require a great deal

of information about individual investors, businesses, and

communities.
Page 23 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Effectiveness Evaluation

Statistical Methods (continued)

Statistical methods may be difficult to apply because:

• There is likely to be little or no data available from standard

research databases on

• the investments and other characteristics of NMTC and

non-NMTC investors;

• employment, sales, and other economic characteristics of

businesses that receive NMTC investment and those that

do not;

• total investment in low-income communities that receive

the NMTC investment and those that do not.
Page 24 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Effectiveness Evaluation

Statistical Methods (continued)

Statistical methods may also be difficult to apply because:

• non-NMTC investors and businesses have little incentive

to provide the information in response to surveys and

reporting requirements, and

• record keeping requirements would reduce the incentive

to participate in the program.
Page 25 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Effectiveness Evaluation

Survey Methods

• The advantages of survey methods are that

• the survey responses can be generalized to the population of all program participants and

• surveys require information from only a sample of program participants.

• The disadvantages of survey methods are that

• the information from the survey may not be reliable because

• survey respondents may have an incentive not to respond

truthfully and

• survey respondents may not be able to give accurate answers to all questions.

• the method does not provide precise, quantifiable estimates of the credit’s effect.
Page 26 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Effectiveness Evaluation

Case Study Methods

• The advantages of the case study methods are that

• information is required from only a few program participants,

• the information can be checked for its reliability, and

• a considerable amount of detailed information could be

collected.

• The disadvantages of the case study methods are that

• findings cannot be generalized to the population of all program participants and

• the method does not provide precise, quantifiable estimates of the credit’s effect.
Page 27 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Effectiveness Evaluation

Limitations of an Effectiveness Evaluation

• Because each method for assessing effectiveness has significant

disadvantages, definitive conclusions about the effectiveness of the

NMTC program may not be possible.

• The methods may not establish that the NMTC causes new investment or economic development.

• However, the methods may provide evidence that is consistent or

inconsistent with the program being effective in attracting new

capital or promoting economic growth. For example,

• evidence consistent with attracting new capital would be finding that investors receiving tax credits had not made similar

investments in low-income communities in the past, while

• evidence inconsistent with attracting new capital would be finding that they had made such investments.
Page 28 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Compliance Evaluation

Criteria for Determining Compliance

According to the experts that we consulted, potential compliance criteria could 

include

• the extent to which the investors are claiming only the credits that they are 

entitled to;

• the extent to which the CDEs are conforming to the statutory requirements 

concerning the amount and timing of their investments in low-income 

communities;

• the CDEs must invest substantially all of the funds in qualifying low- income community investments within 1 year.

• The extent to which businesses receiving investment from the CDEs qualify 

for the credit.

• Qualifying businesses must have at least 50 percent of gross income, 40 percent of tangible property, and 40 percent of services in lowincome communities.

• The extent to which the CDEs are conforming to allocation agreements reached with the CDFI Fund.
Page 29 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Compliance Evaluation

Factors Affecting the Evaluation

Factors that affect the difficulty of evaluating compliance include:

• Multiple responsible agencies:

• Whether coordination between IRS and the CDFI Fund will be

sufficient to detect ineligible claimants.

• Record keeping costs:

• The need for compliance data will have to be balanced with the disincentives from increased record keeping burden.

• Multiple levels of monitoring:

• Whether sufficient data will be collected, maintained, and reported by

• the CDEs to the CDFI Fund to properly monitor the CDEs’ compliance with investment requirements and

• the businesses’ to the CDEs for the CDEs to monitor businesses’

compliance with eligibility standards.
Page 30 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

Compliance Evaluation

Plans for Monitoring Compliance

The CDFI Fund’s planned approach to monitoring compliance

may include

• using electronic reporting tools,

• relying on self-certifications from CDEs with appropriate

level of background documentation,

• providing CDEs guidance on monitoring compliance and

developing standards for data collection and retention,

and

• using some on-site auditing.
Page 31 GAO-03-223R Implementation Status and Issues Related to Mandated Reports

(440023)

Likely Objectives of our 2004 Report

Because the NMTC Program will be only partially implemented

in 2004, our report will not evaluate overall program

effectiveness and compliance. The report likely will cover the

status of the NMTC Program, including

• any significant issues that have arisen concerning compliance, administration, or the design of the credit

and

• information on

• who is investing in NMTC assets,

• how much is invested,

• where the investment occurs, and

• what types of businesses receive the investment.