Legislation disguises tax giveaway to wealthy investors as aid for struggling communities

Money Exchange

Special interests often use the dog days of the legislative session to see if one of their old hounds can still hunt. As has become an almost yearly ritual, out of state companies appear once again to be trying to secure a huge tax give-away for their clients.

Under the guise of supposedly helping low-income communities, language inserted into HB 994 last week in the House Finance Committee would open a new tax loophole for wealthy investors and insurance companies. The provision would establish a state tax credit that would layer on top of the Federal New Markets Tax Credit. As drafted, there’s no guarantee that we would attract any projects that were not going to happen anyway while potentially costing the state millions of dollars over the next five years.

Created in 2000, the Federal New Markets Tax Credit incents investment in low-income communities by giving investors a tax discount based on how much they invest. Investment funds are channeled through banks or non-profit organizations certified as Community Development Entities (CDEs) that provide loans or equity investments in companies that operate within designated low-income communities. Tax credits generated under the federal program are then passed from CDEs to the companies or individuals who provided the investment capital.

The proposed North Carolina program would create an additional tax credit that investors can use to reduce their payment of state taxes. While the federal program has successfully spurred development in under-served communities and the goal of a state New Markets Tax Credit may be a worthy one, the current state proposal has some major flaws that make it more boondoggle than a boon.

Creates a special tax loophole for profitable insurance companies.

The current proposal creates a tax loophole that can only be used by profitable insurance companies. The bill would only allow credits to be taken against the state premium tax, a backdoor way of ensuring that most North Carolinians could not participate in the program and privileging certain business models. Only insurance companies pay the premium tax, so the bill effectively makes the provision unusable for the vast majority of potential investors in the state.

Pushed by out-of-state special interests.

There is no groundswell of support for this proposal from companies and investors that actually reside in North Carolina. Instead, the bill’s supporters are essentially out-of-state companies that specialize in NMTC investments. When the House Finance Committee discussed the proposal last week, the only company to speak in favor was Advantage Capital, a firm headquartered in St Louis which boasts of helping to distribute “$1.5 billion in state tax credits over its 20 year history.” You read that right, this proposal is avidly supported by a company whose business model relies on helping rich companies and individuals avoid paying state taxes. If this proposal was carefully designed to actually benefit struggling North Carolina communities, lots of instate companies and organizations would be lining up to support it.  But that’s not what’s happening.

Broad agreement on the dangers of this proposal.

Concern over state New Markets Tax Credit proposals knows no partisan or ideological boundary. Many of the problems identified here were also highlighted last week in a column by Becky Gray of the John Locke Foundation. In an era so often characterized by disagreement, it’s heartening to find area where accord exists. When skepticism about a legislative proposal is so widespread, it’s usually a good sign that something is amiss, which is certainly the case here.

False promise of fiscal benefit.

The “net benefit test” section of the bill is cleverly written to create the false impression that any authorized deal will add more than it takes from state and local coffers. As written however, the bill does no such thing.

The required analysis described in the bill does nothing to assess whether a given project would have taken place in North Carolina in the absence of the state credit. The bill’s language nearly guarantees that all of the deals that stand to benefit from the state credit will already be receiving the federal NMTC, so there is no reason to assume that the state credit is what’s making the difference. For any deals that would have happened based on the federal credit alone (which is almost certain to happen), state tax credits are nothing more than a state give-away that gets us nothing in return. Any credible analysis of a state NMTC would have to make this distinction, but the bill language requires nothing of the sort.

The bill comes remarkably close to admitting that the “net benefit test” is meant to be slipshod at best. The language gives the Department of Commerce only 15 days to review the economic assessment, and if the Department does not complete its review in that time than the analysis is assumed to be approved. This is a classic gambit on the part of special interests asking for state hand-outs. Even if there is no reason that a deal be approved ASAP, special interests often create the impression of overwhelming urgency specifically so the guardians of the public purse have less time to do their due diligence. What’s unusual is to see this strong-arm tactic written into law.

Tax giveaways and shifting the tax load.

As written, HB 994 would combine a big give away for wealthy interests with more taxes on working North Carolinians.  The New Markets Tax Credit proposal is actually embedded within a bill that expands the number of services that would be subject to the sales tax.  If the bill remains as is, it would grant many out of state companies a giveaway while increasing the sales tax load on North Carolina families.

Better ways to invest public funds to drive investment in struggling communities.

The goal of the New Markets Tax Credit, to incentivize private investment in struggling communities, is perfectly laudable. However, there are much more effective and efficient ways of using public dollars to stimulate revitalization of depressed local economies than poorly written state-level New Markets Tax Credits. For example, revolving loan funds can make capital available to companies that want to invest in low-income communities and, if properly constituted, can become self-sustaining instead of requiring a new raft of tax credits every year.   The same investment in foundational economic assets like schools, water and sewer, broadband, and direct support for entrepreneurs are all likely to do a better job building prosperity in low income communities.

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