New Markets Tax Credit: An Introduction

March 3, 2008 – October 26, 2022 RL34402

New Markets Tax Credit: An Introduction
Updated October 26, 2022
Congressional Research Service
https://crsreports.congress.gov
RL34402

New Markets Tax Credit: An Introduction

Summary
The New Markets Tax Credit (NMTC) is a nonrefundable tax credit intended to encourage private
capital investment in eligible, impoverished, low-income communities. NMTCs are al ocated by
the Community Development Financial Institutions Fund (CDFI), a bureau within the U.S.
Department of the Treasury, under a competitive application process. Investors who make
qualified equity investments reduce their federal income tax liability by claiming the credit. The
NMTC program, enacted in 2000, is currently authorized to al ocate $91 bil ion through the end
of 2025.
This report wil be updated as warranted by legislative changes.
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Overview
The New Markets Tax Credit (NMTC) was enacted by the Community Renewal Tax Relief Act of
2000 (P.L. 106-554) to provide an incentive to stimulate investment in low-income communities
(LICs). The original al ocation authority eligible for the NMTC program was $15 bil ion from
2001 to 2007.1 Congress, subsequently, has increased the total al ocation authority to $91 bil ion
and extended the program through 2025.2 Qualified investment groups apply to the U.S.
Department of the Treasury’s Community Development Financial Institutions Fund (CDFI) for an
al ocation of the New Markets Tax Credit.3 The investment group, known as a Community
Development Entity (CDE), seeks taxpayers to make qualifying equity investments in the CDE.
The CDE then makes equity investments in low-income communities and low-income
community businesses, al of which must be qualified. After the CDE is awarded a tax credit
al ocation, the CDE is authorized to offer the tax credits to private equity investors in the CDE.
The tax credit value is 39% of the cost of the qualified equity investment and is claimed over a
seven-year credit al owance period.4 In each of the first three years of the investment, the investor
receives a credit equal to 5% of the total amount paid for the stock or capital interest at the time
of purchase. For the final four years, the value of the credit is 6% annual y. Investors must retain
their interest in a qualified equity investment throughout the seven-year period.
Program Components
The process by which the NMTC affects eligible low-income communities involves multiple
agents and steps. Figure 1 il ustrates the key agents in the NMTC process.

1 Congress provided a schedule limiting the NMT C allocation authority for calendar years 2001 through 2007. T he
schedule allowed for $1.0 billion in allocation authority in 2001, $1.5 billion in 2002 and 2003, $2.0 billion in 2004 and
2005, and $3.5 billion in 2006 and 2007.
2 T he Gulf Opportunity Zone Act of 2005 (P.L. 109-135) authorized an additional $1 billion of NMT C equity for
qualified investments in areas affected by Hurricane Katrina. T he T ax Relief and Health Care Act of 2006 (P.L. 109-
432) extended the NMT C for an additional year (through 2008) with an additional $3.5 billion of NMT C allocation
authority, and the Emergency Economic Stabilization Act of 2008 ( P.L. 110-343) extended the NMT C for an additional
year (through 2009) with an additional $3.5 billion of NMT C allocation authority . In the 111th Congress, the American
Recovery and Reinvestment T ax Act of 2009, P.L. 111-5, Division B, increased the NMT C allocation for 2008 and
2009, to $5 billion from $3.5 billion, and the T ax Relief, Unemployment Insurance Reauthorization, and Job Creation
Act of 2010 (P.L. 111-312) extended the NMT C authorization through 2011 at $3.5 billion per year . In the 112th
Congress, the American T axpayer Relief Act of 2012 (P.L. 112-240) extended the NMT C authorization for 2012 and
2013 at $3.5 billion per year. In the 113 th Congress, the T ax Increase Prevention Act of 2014 (P.L. 113-295) extended
the NMT C authorization for 2014 at $3.5 billion. In the 114th Congress, the Protecting Americans from T ax Hikes
(PAT H) Act (Division Q of P.L. 114-113) extended the NMT C authorization through 2019 at $3.5 billion per year. In
the 116th Congress, the Further Consolidated Appropriations Act, 2020 ( P.L. 116-94) extended the NMT C
authorization through 2020 for $5 billion. T he Consolidated Appropriations Act, 2021 (P.L. 116-260) extended the
NMT C authorization through 2025 at $5 billion per year.
3 See CRS Report R47169, Community Development Financial Institutions (CDFI) Fund: Overview and Programs, by
Donald J. Marples and Darryl E. Getter, for additional information on the CDFI Fund.
4 In present value terms, the credit is equal to approximately 30% of the eligible investment at a 6.7% discount rate.
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New Markets Tax Credit: An Introduction

Figure 1. Key Components of the NMTC Process

Source: CRS analysis of NMTC program components.
The multiple steps and agents are designed to ensure that the tax credit achieves its primary goal:
encouraging investment in low-income communities. For example, the Department of the
Treasury’s CDFI reviews NMTC applications submitted by CDEs, issues tax credit authority to
those CDEs deemed most qualified, and plays a significant role in program compliance.
Community Development Entities (CDE)
A CDE is a domestic corporation or partnership that is an intermediary vehicle for the provision
of loans, investment funding, or financial counseling in low-income communities (LICs). To
become certified as a CDE, an organization must submit an application to the CDFI that
demonstrates that it meets three criteria: (1) it is a domestic corporation or partnership duly
organized under the laws of the jurisdiction in which it is incorporated, (2) it has a primary
mission of serving low-income communities, and (3) it maintains accountability to residents of
these low-income communities. A CDE may demonstrate meeting the third criterion by fil ing at
least 20% of either its advisory or its governing board positions with representatives of low -
income communities.5
Only CDEs may apply for the NMTC. Upon receipt of NMTC al ocation, CDEs attract investors
using the credits. While both for-profit and nonprofit CDEs may apply for the NMTC, only for-
profit CDEs may pass the NMTC on to investors. To ensure that projects are selected on
economic merit, nonprofit CDEs awarded NMTCs must transfer their al ocations to for-profit
subsidiaries prior to offering NMTCs to investors.
As Figure 1 il ustrates, CDEs play a critical role in a properly functioning NMTC process. CDEs
are the intermediaries between the potential low-income community investments and the CDFI

5 In addition, all Community Development Financial Institutions or Specialized Small Business Investment Companies
automatically qualify as CDEs. T o be recognized as CDEs, th ese entities are required to register through the CDFI
Fund website.
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during the application process. CDEs also present investors with investment opportunities and
provide the CDFI the majority of its compliance data.
Qualifying Low-Income Communities
Under the tax code’s NMTC provisions, only eligible investments in qualifying low -income
communities are eligible for the NMTC. Qualifying low-income communities include census
tracts that have at least one of the following criteria: (1) has a poverty rate of at least 20%; (2) is
located in a metropolitan area and has a median family income below 80% of the greater of the
statewide or metropolitan area median family income; or (3) is located outside a metropolitan
area and has a median family income below 80% of the median statewide family income. As
defined by the criterion above, about 39% of the nation’s census tracts covering nearly 36% of
the U.S. population are eligible for the NMTC. Additional y, designated targeted populations may
be treated as low-income communities.6 Further, the definition of a low-income community
includes census tracts with low populations and census tracts within high migration rural
counties. As a result of the definition of qualified low-income communities, virtual y al of the
country’s census tracts are potential y eligible for the NMTC.
Qualified Investors and Investments
Al taxable investors are eligible to receive the NMTC. As noted above, investors receiving the
credit can claim the NMTC over a seven-year period, starting on the date of the investment and
on each anniversary, at a rate of 5% for each of the first three years and a rate of 6% for each of
the next four years, for a total of 39%. Once the investor begins claiming the NMTC, the credit
can be recaptured if the CDE (1) ceases to be a CDE, (2) fails to use substantial y al of the
proceeds for eligible purposes, or (3) redeems the investment principal.7
Almost al qualified equity investments (QEI) in low-income communities or serving low-income
populations could be eligible to receive the NMTC. These eligible investments are referred to as
qualified low-income community investments (QLICIs). QLICIs are categorized in four ways: (1)
loans or investments to qualified active low-income community businesses (QALICBs), (2) the
provision of financial counseling, (3) loans or investments in other CDEs, and (4) the purchase of
loans from other CDEs; see Figure 1.8 Al QLICIs, including QALICBs, are explicitly prohibited
from investing in residential rental property and certain types of businesses, such as golf courses
and casinos.
NMTC Allocation Process and Compliance
To receive an al ocation, a CDE must submit an application to the CDFI, which asks a series of
standardized questions about the track record of the CDE, the amount of NMTC al ocation
authority being requested, and the CDE’s plans for any al ocation authority granted.

6 See Internal Revenue Bulletin 2006-29, Notice 2006-60, issued July 17, 2006, for a more complete description of the
definition of designated targeted populations.
7 According to IRS regulations, the “substantially all” requirement is met if at least 85% of investor proceeds are used
to make eligible investments in the first six years of the NMT C period and at least 75% in year seven of the investment.
8 For a business to be a QALICB, it must be located in a qualifying census tract, derive at least 50% of gross income
from activity conducted in a LIC, have at least 40% of both the use of tangible property and services provided located
or performed in the LIC, and have less than 5% of the aggregate unadjusted bases of the property attributable to
collectibles or nonqualified financial property.
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New Markets Tax Credit: An Introduction

The application covers four areas: (1) the CDE’s business strategy to invest in low-income
communities, (2) capitalization strategy to raise equity from investors, (3) management capacity,
and (4) expected impact on jobs and economic growth in low-income communities where
investments are to be made. In addition, priority points are available for addressing the statutory
priorities of investing in unrelated entities and having demonstrated a track record of serving
disadvantaged businesses or communities. The application is reviewed and scored to identify
those applicants most likely to have the greatest community development impact and ranked in
descending order of aggregate score.9
Tax credit al ocations are then awarded based upon the aggregate ranking, until al of the
al ocation authority is exhausted. In each of the completed NMTC rounds, significantly more
CDEs applied for al ocations than were able to receive al ocations. For example, in the most
recent completed al ocation round (2020), 48% of applicants received al ocations. Additional y,
al ocation authority of $15.1 bil ion was requested, compared with the $5 bil ion in al ocation
authority available.10
Prior to receiving the authority to offer tax credits to investors, every CDE al ocatee must sign an
al ocation agreement. The al ocation agreement clarifies the terms and conditions of the al ocation
authority, such as the total tax credit authority, service areas, authorized uses of the al ocation,
and CDE reporting requirements. Failing to meet the terms of the al ocation agreement subjects
the CDE to the potential revocation of al ocation authority.
Additional y, the Internal Revenue Service (IRS) monitors compliance with the tax consequences
of NMTC al ocations, focusing on the “substantial y al ” requirement.
As specified in the IRS regulations, CDE al ocatees must issue tax credits to investors within five
years of signing their al ocation agreements and invest the QEIs in QLICIs within 12 months of
signing their al ocation agreements. If these requirements are not satisfied, the CDE loses the
authority to al ocate the unused NMTC. In addition, CDEs that receive principal payments from
their QLICIs have 12 months to reinvest those funds in QLICIs to avoid recapture.
NMTC Investment Activity
Once an al ocatee signs its al ocation agreement and receives its NMTC al ocation authority, it
may begin soliciting capital from investors. Investors receive the right to claim NMTCs on a
portion of their investment, by acquiring stock or a capital interest in a CDE with an al ocation.
The CDE, in turn, must invest the proceeds in qualified low-income community investments.
Investors have, to date, invested roughly $63.4 bil ion in CDEs. Virtual y al of the NMTC
al ocations made prior to 2017 have been invested in NMTC investments. For the most recent
NMTC round (2020), nearly 60% of the al ocation was invested within one year.11

9 For past examples of what the CDFI has considered as “highly ranked applications” for the NMT C, see Community
Development Financial Institutions Fund, Combined CY2020 New Markets T ax Credit Program, Allocation
Application Review Process and General Characteristics of a Highly Ranked Application , 2021,
https://www.cdfifund.gov/sites/cdfi/files/2021-09/CY2020_NMT C_Application_Review_Process_26AUG2021.pdf .
10 CDFI Fund, NMTC Award Book CY2020, September 2021, https://www.cdfifund.gov/sites/cdfi/files/2021-08/
CY2020_NMT C_Program_Award_Book_FINAL.pdf .
11 CDFI Fund, NMTC Qualified Equity Investment Report, September 2, 2022, https://www.cdfifund.gov/sites/cdfi/
files/2022-09/NMT C_QEI_Issuance_Report_September_2022.pdf.
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New Markets Tax Credit: An Introduction

Legislative Developments
Modifications to the NMTC program have been made in each Congress since the NMTC was
created.
In the 108th Congress, the American Jobs Creation Act of 2004 (P.L. 108-357, 118 Stat. 1418)
included provisions expanding the authority of the Secretary of the Treasury to treat certain other
tracts and targeted populations as low-income communities.12
During the 109th Congress, the Gulf Opportunity Zone Act of 2005 (P.L. 109-135, 119 Stat. 2577)
was enacted to provide tax relief to businesses and individuals affected by Hurricanes Katrina,
Wilma, and Rita. The bil , which created the Gulf Opportunity Zone (or GO Zone), provided an
additional $1 bil ion in al ocation authority to CDEs with a significant mission in the recovery
and redevelopment of low-income communities in the Katrina GO Zone.13
Also during the 109th Congress, the Tax Relief and Health Care Act of 2006 (P.L. 109-432, 120
Stat. 2922) extended the NMTC for one year, through 2008, with an additional al ocation of $3.5
bil ion and mandated Treasury to promulgate regulations to ensure that nonmetropolitan counties
receive a proportional al ocation of investments under the NMTC.
In the 110th Congress, legislative attention focused primarily on extending the NMTC program
authorization. This attention came to fruition with the enactment of P.L. 110-343, which extended
the NMTC program authorization one year, through the end of 2009.
In the 111th Congress, the American Recovery and Reinvestment Tax Act of 2009 (P.L. 111-5,
Division B) increased the NMTC al ocation for 2008 and 2009, to $5 bil ion from $3.5 bil ion.
For the additional 2008 al ocation, the CDFI distributed the additional $1.5 bil ion in NMTCs to
applicants of the original 2008 al ocation round. Also in the 111th Congress, the Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) extended
the NMTC authorization through 2011 at $3.5 bil ion per year.
In the 112th Congress, the American Taxpayer Relief Act of 2012 (P.L. 112-240) extended the
NMTC authorization for 2012 and 2013 at $3.5 bil ion per year.
In the 113th Congress, the Tax Increase Prevention Act of 2014 (P.L. 113-295) extended the
NMTC authorization for 2014 at $3.5 bil ion.
In the 114th Congress, the Protecting Americans from Tax Hikes (PATH) Act (Division Q of P.L.
114-113) extended the NMTC authorization through 2019 at $3.5 bil ion per year.14
In the 115th Congress, P.L. 115-97 did not directly affect the NMTC,15 but did reduce its value to
selected investors through a base erosion provision in the law.16

12 T he term targeted population, as defined in 12 U.S.C. §4702(20), means individuals, or an identifiable group of
individuals, including an Indian tribe, who (1) are low-income persons (low-income targeted population) or (2)
otherwise lack adequate access to loans or equity investm ents.
13 T he Gulf Opportunity Zone (GO ZONE) is defined as those areas in Alabama, Mississippi, and Louisiana that were
designated by the federal government as warranting assistance due to Hurricane Katrina. Disaster areas associated with
hurricanes Rita and Wilma were not eligible for the additional allocation.
14 For more discussion of other community development tax incen tives that were temporarily extended in the PAT H
Act, see CRS Report R43541, Recently Expired Com m unity Assistance-Related Tax Provisions (“Tax Extenders”): In
Brief, by Sean Lowry.
15 T he original House-passed version of H.R. 1 would have repealed the NMT C beginning in 2018.
16 T o protect the tax base of foreign-owned corporations or U.S. corporations with significant foreign operations, the
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New Markets Tax Credit: An Introduction

In the 116th Congress, the Further Consolidated Appropriations Act, 2020 (P.L. 116-94) extended
the NMTC authorization through 2020 for $5 bil ion, and the Consolidated Appropriations Act,
2021 (P.L. 116-260) further extended the NMTC authorization through 2025 at $5 bil ion per
year.
In the 117th Congress, the New Markets Tax Credit Extension Act of 2021 (H.R. 1321) would
make the NMTC permanent, index the NMTC authorization for inflation beginning in 2021, and
al ow the NMTC against the alternative minimum tax. The Rural Jobs Act (H.R. 3357) would
al ocate $500 mil ion in additional NMTC al ocations for investments in Rural Jobs Zones for
2021 and 2022.
Policy Considerations
The New Markets Tax Credit Program is set to expire at the end of 2025. As Congress debates
reauthorization of the NMTC, the following policy considerations could be pertinent to any
consideration of these bil s.
The NMTC is primarily intended to encourage private capital investment in eligible low -income
communities. However, the source of the investment funds has implications for the effectiveness
of the program in achieving its objective. From an economic perspective, the impac t of the
NMTC would be greatest in the case where the investment represents new investment in the U.S.
economy that would not have occurred in the absence of the program. Conversely, the impact of
the NMTC is diminished to the extent the tax credit is applied to investment that would have
otherwise occurred or been funded by a shift in investment from more productive alternatives.17
To date, only one study has empirical y assessed the question of whether NMTC investment is
funded through shifted investment or whether it represents new investment.18 The findings of the
study suggest that corporate investment represented a shift in investment location. In contrast, the
authors concluded that a portion of individual NMTC investment, roughly $641 mil ion,
represented new investment.
Although important, understanding the source of NMTC investments alone is not sufficient to
determine the effectiveness of the NMTC. A comprehensive review of the program would require
an accounting of both the social and economic costs and benefits of the NMTC, an undertaking
that may pose considerable chal enges. For example, this would include examining the efficiency
and opportunity costs of the NMTC investments, while a comprehensive accounting of the
NMTC benefits would need to identify and value “spil overs” such as its effect on neighboring
businesses and communities.
The most comprehensive evaluation of the NMTC, to date, was conducted by the Urban Institute
under contract from the CDFI.19 While the evaluation’s final report found project level activity
consistent with the NMTC achieving program goals, it was unable to generalize its findings to the

2017 law imposes a Base Erosion and Anti-abuse T ax (BEAT ). T he NMT C is not allowed to offset the BEAT ,
potentially reducing its value to affected investors.
17 However, from a policy perspective, the desire to minimize the distortion of investment choice caused by the NMT C
is usually balanced against other objectives, such as equity.
18 T ami Gurley-Calvez et al., “Do T ax Incentives Affect Investment? An Analysis of the New Markets T ax Credit,”
Public Finance Review, vol. 34, no. 4, pp. 371-398.
19 Martin D. Abravanel et al., New Markets Tax Credit (NMTC) Program Evaluation: Final Report, prepared for U.S.
Department of the T reasury Community Development Financial Institutions (CDFI) Fund, Urban Institute, April 2013,
https://www.cdfifund.gov/Documents/NMT C%20Program%20Evaluation%20Final%20Report.pdf.
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New Markets Tax Credit: An Introduction

broader universe of NMTC activity or census tract level outcomes due to evaluation design
limitations. The report noted it was an initial effort to a more robust research plan that has not yet
been implemented.
Others, notably GAO, have recommended that the NMTC be simplified by converting the NMTC
into a grant program.20 This option may be able to deliver the same level of incentive with lower
cost to the government, as investors do not general y “buy” tax credits at face value—al owing a
smal er grant to provide a similar level of incentive. Specifical y, tax credit markets historical y
set a price of 70 to 80 cents per dollar of tax credit.
A grant option, however, likely provides a lesser incentive for investors to invest in NMTC
projects, as they may not be the beneficiary of the incentive.21 If this occurs, improving the access
to capital in low-income communities (an NMTC program goal) would be more difficult. Further,
a grant program may complicate existing mechanisms designed to ensure the NMTC is used for
intended purposes, as the primary provision to ensure compliance, the IRS authority to recapture
tax benefits, would likely not apply (as the NMTC would no longer be a tax program).
An additional issue is the geographic distribution of NMTC activity. Initial concerns focused on
distinctions between urban and rural NMTC activity and were addressed in the Tax Relief and
Health Care Act of 2006 (P.L. 109-432). The act required that the NMTC program direct a
proportional amount of investment to nonmetropolitan counties. Beginning with the CY 2008
al ocation round, the NMTC program used 20% as the appropriate benchmark for ensuring a
proportional al ocation of QLICIs in nonmetropolitan areas, which approximated the percentage
of the U.S. population that CDFI data indicated resided in nonmetropolitan counties. According to
the most recent NMTC public data release, 19.2% of NMTC investments have occurred in
nonmetropolitan counties during the life of the program.22
NMTC activity has occurred in al 50 states, the District of Columbia, and the territories.
However, the distribution of NMTC activity appears concentrated in a few states—with the 10
states with the highest activity accounting for nearly 49% of al NMTC projects and activity. In
contrast, the 25 states with the least NMTC activity account for less than 13% of al NMTC
activity. The current distribution of activity is not likely to reflect the distribution of low -income
populations and may raise questions concerning the equity of the NMTC.
Final y, the NMTC is one of several programs designed to improve conditions in low -income
communities. In a 2004 assessment of the NMTC, the Office of Management and Budget noted
that the goal of the NMTC overlaps that of several other tax credits and numerous programs
administered by the Departments of Housing and Urban Development and Commerce.23 Given
this overlap and the desire to target federal funds to their most productive uses, it follows that
information on the performance of the NMTC relative to other programs with a similar goal

20 U.S. Government Accountability Office, New Markets Tax Credit: The Credit Helps Fund a Variety of Projects on
Low-Incom e Com m unities, but Could be Sim plified , GAO-10-334, January 29, 2011, http://www.gao.gov/products/
GAO-10-334.
21 Allowing CDEs to assign the grants to specific investors is an option to mitigate this problem.
22 CRS analysis of Community Development Financial Institutions Fund, FY2021 New Markets Tax Credit Public Data
Release: 2003-2019 Data File, https://www.cdfifund.gov/sites/cdfi/files/2021-05/
FY_2020_NMT C_Public_Data_Release.xlsx .
23 See U.S. Office of Management and Budget, Detailed Information on the New Markets Tax Credit Assessment,
updated January 29, 2008, http://www.whitehouse.gov/omb/expectmore/detail/10002230.2004.html.
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New Markets Tax Credit: An Introduction

would be of use.24 To date, however, no comparative, empirical study of this nature has been
undertaken.

Author Information

Donald J. Marples

Specialist in Public Finance

Acknowledgments
A previous version of this report was coauthored with Sean Lowry, former CRS Analyst in Public Finance.

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should n ot be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
material from a third party, you may need to obtain the permission of the copyright holder if you wish to
copy or otherwise use copyrighted material.

24 In an NMT C program compliance report, Summit Consulting recommended further study to determine how the use
of non-NMT C public funding influences the depth and distribution of benefits in NMT C transactions. See Summit,
Com pliance Review of New Markets Tax Credit Program , August 2017, https://www.cdfifund.gov/Documents/
Summit%20-%20Compliance%20Review%20of%20New%20Markets%20T ax%20Credit%20Program%20 -
%20August%20Date%20-%20508%20Compliant.pdf.

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