Loss of Development Tax Break Would Hit Rural Areas

The House reform bill would end a credit that has been used for projects in blighted urban areas—and Trump country.

Rep. Richard Neal, the House Ways and Means Committee ranking member, confers with Rep. Sander Levin during debate on the GOP tax bill on Nov. 9.
AP Photo/J. Scott Applewhite
Casey Wooten
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Casey Wooten
Nov. 15, 2017, 8 p.m.

A big chunk of the House’s tax-overhaul bill is paid for by wiping away a slew of smaller tax breaks for businesses and individuals. But some of those breaks have unexpected constituencies.

One is the New Markets Tax Credit, a popular provision that’s meant to incentivize business or real-estate investment in low-income communities. It helps facilitate renovating that factory or hospital, or building that new apartment complex in an area where private capital rarely finds its way in.

The credit is caught up in the sweep of tax breaks as part of the House bill, set for a vote on the floor Thursday. The Senate version, which is still in the Finance Committee, preserves the break.

The New Markets Tax Credit is widely viewed as a means to help reverse urban blight, by offering a big, 39 percent credit for certain money invested into low-income communities. But as the fortunes of America’s cities turn upward, many rural areas—one-industry towns where the closure of a factory or plant can devastate the local economy—have seen their fortunes fade.

While the tax credit is nearly 20 years old, more and more of its benefits have been flowing to rural America, places that voted overwhelmingly for Donald Trump in the 2016 election.

“While you typically think of a big-city area, in the last survey we did over $700 million went to small communities,” said Bob Rapoza, a top lobbyist for the credit in Washington and a spokesman for the New Markets Tax Credit Coalition. “So it’s had a big impact on big-city areas, but also small towns and the farming communities as well.”

The New Markets Tax Credit typically incentivizes investment in areas with 1.5 times the national unemployment average and poverty rates of more than 30 percent, Rapoza said.

The measure was last extended in the 2015 Path Act, a year-end bill that made permanent or renewed a slew of temporary tax provisions called extenders. The current NMTC provision expires in 2019. It was created in 2000 out of a bipartisan effort to stimulate private development in low-income, urban areas.

The New Markets Tax Credit Coalition says that the Treasury Department now targets 20 percent of the credit’s allocation to non-metropolitan areas. Between 2003 and 2014, the program financed 817 business or revitalization projects in rural areas, and $6.5 billion in NMTC allocation generated $11.6 billion in total project investment and about 50,000 jobs.

The credit has bipartisan support, but that wasn’t enough to save it in the House tax plan.

Two Republicans on the Ways and Means Committee who back the tax bill have in the past proposed legislation that would make the New Markets Tax Credit permanent. Rep. Pat Tiberi of Ohio introduced legislation in February that had 91 bipartisan cosponsors, including his Republican Ways and Means colleague Tom Reed of New York.

Republican Sen. Roy Blunt of Missouri and Democratic Sen. Ben Cardin of Maryland introduced similar bipartisan legislation.

When Ways and Means considered its tax bill last week, the panel voted down a broader Democratic amendment on housing that would have in part preserved the tax credit.

The House bill also would also eliminate tax breaks for private activity bonds and the refunding program for bonds, both used to encourage investment in local development.

In the hearing last Wednesday, committee ranking member Richard Neal and Democratic member Bill Pascrell defended housing tax breaks under threat from the bill, including the NMTC.

Tiberi, despite his previous support for the credit, was pragmatic in his response.

“I can’t, quite frankly, disagree with anything either of them said,” he acknowledged.

Certain development programs are needed, he added, and many of the programs on the chopping block are supported by Republicans. Committee Chairman Kevin Brady’s plan to sharply cut tax rates meant that something had to give.

“But at the end of the day, the chairman has a really tough job—a balancing act that is the equivalent to someone on a circus wire,” Tiberi said.

In the grand scheme of a trillions-of-dollars tax bill, the credit’s revenue effects may not be all that eye-popping. Eliminated, it saves about $1.7 billion over a decade. That doesn’t tell the whole story, though, because the current credit is set to expire in less than two years and would likely again be renewed by Congress.

Rapoza said the credit’s economic impact has been significant. Between 2003 and 2015, a total of about $42 billion in tax credits have resulted in roughly $80 billion total project value for qualifying projects. That’s financed about 5,000 businesses and created 750,000 jobs, he said.

Rapoza said his group has been meeting with House, Senate, and administration officials about preserving the credit in the final version of the tax bill.

“There is little dispute that without this credit we wouldn’t have gotten that level of activity and private-sector investment in these communities,” he said.

One of those projects is at a factory operated by St. Croix Tissue Inc. in Baileyville, Maine. St. Croix Tissue is headquartered on the state’s rural eastern border with Canada, in Washington County, which went for Trump by 16 points in the 2016 election.

Over the last few years, about six paper mills have closed in Maine, hitting small communities hard, said Charlie Spies, chief executive of CEI Capital Management LLC, which helped finance the project using the tax credit. St. Croix was looking to improve production and stay profitable.

“They looked at how they could increase the value of their output, and tissue machines were an obvious answer for them,” Spies said. “So we helped finance two new tissue machines that went in at the end of the pulp production line, and now they are producing tissue that is being sold throughout the eastern United States.”

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