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SUBJECT: Tax Tools for Local Economic Development
DATE: July 30, 2024
OVERVIEW: The Senate Finance Committee held a hearing to examine the effectiveness of tax tools and incentives in promoting local economic development. The discussion focused on how existing tax policies can be leveraged to stimulate growth, attract investment, and create jobs in local communities.
HEARING RECORDING LINK: https://www.finance.senate.gov/hearings/tax-tools-for-local-economic-development
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Witnesses
- C. LaShea Lofton, Deputy City Manager, City of Dayton
- Julia Nelmark, President & CEO, Midwest Minnesota Community Development Corporation
- Micheal J. Novogradac, Managing Partner, Novogradac
- Shay Hawkins, President, Opportunity Funds Association
Key Themes & Highlights
- Republican Concerns:
- Sustainable Economic Growth: Republicans emphasized ensuring that tax incentives lead to long-term and meaningful economic benefits rather than short-term gains. They stressed that investments should have lasting impacts on local economies.
- Prevention of Misuse: Concerns were raised about the potential misuse of tax incentives. Republicans called for stronger oversight and accountability measures to prevent exploitation and ensure the incentives achieve their objectives.
- Accountability in Tax Benefits: A strong focus was placed on enhancing accountability in using federal tax benefits. Republicans advocated for measures to monitor the effectiveness of tax tools and ensure they contribute to sustainable economic development.
- Democratic Concerns:
- Financing Tools and Infrastructure: Democrats expressed worries about efforts to cut financing tools that pay for tax cuts, which could undermine U.S. infrastructure advancements. They highlighted the importance of maintaining funding mechanisms that support public projects.
- Equitable Development: There was strong support for tax tools that promote equitable development and economic inclusion. Democrats aimed to ensure that the benefits of tax policies are widely distributed, particularly to underserved and marginalized communities.
- Expansion of Tax Credit Programs: Democrats advocated for increased funding and the expansion of successful tax credit programs like the New Markets Tax Credit (NMTC) and Historic Tax Credit (HTC) to further support community development.
- Effective Reach: Emphasis was placed on ensuring that the benefits of tax incentives effectively reach underserved areas to promote broader economic equality and reduce disparities.
- Witness Testimonies:
- C. LaShea Lofton (City of Dayton): Urged Congress to protect and enhance tax-exempt municipal bonds, which have fueled economic growth in Dayton, Ohio. Advocated for restoring funding for tax-exempt bonds to free up billions for community projects. Emphasized the need to increase access to capital for smaller borrowers by raising the bank-qualified borrowing limit, providing access to low-cost capital. Requested the restoration and expansion of direct-pay bonds while protecting subsidies from sequestration.
- Julia Nelmark (Midwest Minnesota Community Development Corporation): Called for passing the New Markets Tax Credit Extension Act to make NMTC a permanent part of the tax code. Argued that permanence would boost efficiency by providing certainty and improving pricing, leading to more investment in distressed communities. Suggested indexing future allocation levels to inflation and providing NMTC investors with relief from the Alternative Minimum Tax (AMT). Highlighted NMTC's focus on native projects and the need to include tribal communities explicitly.
- Michael J. Novogradac (Novogradac): Urged the expansion and improvement of tax incentives and the consideration of additional community development tax tools. Noted a recent decline in the value of certain incentives due to regulatory changes and market conditions. Advocated for extending Opportunity Zones (OZ) to continue attracting private investment to distressed areas.
- Shay Hawkins (Opportunity Funds Association): Highlighted that Opportunity Zones are effectively targeting private investment in de-industrialized areas. Expressed concerns about tax increases on businesses and workers, arguing that such increases would undermine progress made before the pandemic. Noted that OZs have expanded housing stock, increasing property values without raising rents. Called for abandoning plans for tax increases and advocated for greater transparency to allow new classes of investors to participate.
- Contentious Points:
- Republicans: Focused on potential misuse of tax incentives and the need for stronger oversight. They expressed concern that without proper accountability, tax tools might not yield sustainable economic growth.
- Democrats: Emphasized the importance of maintaining financing mechanisms that support infrastructure and public projects. They opposed cuts to these tools, arguing that such actions could hinder economic development and exacerbate inequalities.
- Key Discussions:
- Enhancing Tax-Exempt Municipal Bonds: Discussions centered on protecting and enhancing tax-exempt municipal bonds to support local projects, including affordable housing, schools, and infrastructure development.
- Making New Markets Tax Credit Permanent: There was strong advocacy for making NMTC a permanent part of the tax code to provide stability and attract more investors to distressed communities.
- Extending Opportunity Zones: Witnesses and senators discussed the importance of extending OZs to continue encouraging private investment in economically challenged areas while also improving transparency and accountability.
- Combining Tax Tools for Local Projects: The potential to combine tax-exempt debt with NMTC and HTC was highlighted as a strategy to facilitate complex local development projects that require long-term planning.
In-Depth Notes
- Senator Wyden: The New Markets Tax Credit Program has been a great way to get private investment money into low-income communities. This program has benefitted all 50 states and has helped get many projects off the ground (healthcare, childcare, education, housing, manufacturing, etc.). It expires at the end of 2025, so we need to make sure it doesn’t get lost. Senator Cardin has worked to make sure this doesn’t happen. Additionally, Opportunity Zones, which were created to help boost struggling communities, has now instead allowed wealthier individuals to opt out of paying taxes. Private equity bonds have helped governments get affordable housing and also have allowed for schools and highways to be built.
- Senator Crapo: Improving and extending the Opportunity Zones programs will ensure that private investment will continue to flow to distressed communities. Necessary to improve the program by requiring reports so Congress can monitor how investments in Opportunity Zones are working.
- Senator Cardin: Emphasized the importance of tax incentives in fostering local economic development. He advocated for the protection and expansion of key tax tools such as the New Markets Tax Credit and Historic Tax Credit. Highlighted the positive impacts these programs have on economically distressed areas, urging for their permanent extension and improvement. He also stressed the need for policies that ensure these tax incentives are used efficiently and effectively to maximize their benefits for communities across the country.
- Ms. Nelmark: Tribes often use tribal organizations not under state law, therefore, uncertainty remains regarding whether tribal communities are considered low-income communities. This causes additional steps to be made, such as creating state law entities to navigate the issue. Due to this, it takes longer to work on projects regarding reservations and tribal communities. Asking for Congress to amend the definition to include tribal communities.
- Senator Bennet Expressed that it is essential to ensure that individuals working in the community can afford to live there and don’t have to commute long distances to work. Home price-to-income ratios have reached all-time highs.
- Ms. Lofton: There is an opportunity to combine tax-exempt debt for the public with NMTC and HTC to make local projects happen. Takes many years of planning, so it would help if these tools were permanent. Believes it is important for municipalities to participate in some developments otherwise, some gaps cannot be filled in by the private sector.
- Senator Blackburn: Focused on the importance of Opportunity Zones in revitalizing economically distressed areas. Highlighted how these zones attract private investment, increase property values without raising rents, and support overall community growth. Emphasized the need to maintain current tax policies to sustain progress and opposed any tax increases on businesses and workers. She also called for greater transparency and the inclusion of new investors to ensure broader benefits from these incentives.