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. Read more