The United States Government Accountability Office (GAO) has recommended a check on duplication of subsidies under the framework of New Markets Tax Credit (NMTC) investments.

GAO has advised Treasury Secretary to issue guidance on how funding or assistance from other government programs can be combined with the NMTC including the extent to which other government funds can be used to leverage the NMTC by being included in the qualified equity investment.

In a recent report captioned ‘New Markets Tax Credit-Better Controls and Data Are Needed to Ensure Effectiveness', GAO has also called for controls “to limit the risk of unnecessary duplication at the project level in funding or assistance from government programs and to limit above market rates of return, i.e., returns that are not commensurate with the NMTC investor's risk.”

The report says that the financial structures of NMTC investments have become more complex and less transparent over time. The increased complexity is due, in part, to combining the NMTC with other federal, state, and local government funds.

Based on GAO's survey of Community Development Entities (CDEs) an estimated 62 percent of NMTC projects received other federal, state, or local government assistance from 2010 to 2012. While combining public financing from multiple sources can fund projects that otherwise would not be viable, it also raises questions about whether the subsidies are unnecessarily duplicative because they are receiving funds from multiple federal sources.

In addition, in some cases the complexity of the structures may be masking rates of return for NMTC investors that are above market rates. For example, a study done for the Department of the Treasury (Treasury) found an investor apparently earning a 24 percent rate of return, which is significantly above market rates of return. In that case, the investor leveraged the NMTCs by using other public funds to increase the base for claiming the NMTC.

Treasury and the Internal Revenue Service issued guidance about allowable financial structures in the early years of the NMTC program, but the guidance has not been updated to reflect the subsequent growth in complexity, such as the use of other public money to leverage the NMTC. Treasury also does not have controls to limit the risk of unnecessary duplication in government subsidies or above market rates of returns. Without such guidance and controls the impact of the NMTC program on low-income communities could be diluted.

The potential impact of the NMTC in promoting economic development in designated low-income communities is diluted if the NMTC provides an above-market rate of return. Similarly, the impact of a combination of assistance from government programs is diluted if in the same cases the combination of assistance is unnecessarily duplicative. Treasury guidance and controls that are designed to limit these risks can help ensure the NMTC program realizes the greatest possible impact on low-income communities.