Crescent Growth Capital

Gambit, February 9, 2009

Of all the government programs helping south Louisiana recover from Hurricane Katrina, one of the most effective has to be New Markets Tax Credits (NMTCs).  Originally designed to spur private investment in economically distressed areas, the NMTC program was expanded under GO Zone legislation to include hurricane-damaged areas.

Since then, dozens of private projects representing more than $1 billion in investments have gone forward in the New Orleans area — thanks to state and federal NMTCs and participation by area banks and qualified nonprofits.  In fact, NMTCs represent one of the few areas in which Louisiana outpaced Mississippi in post-K recovery programs.

The only thing “wrong” with NMTCs is that more state and federal dollars aren’t dedicated to them.  Hopefully, that will change.

Even in these difficult economic times, NMTCs continue to generate private equity investments — more than $1 billion nationally in the past six months alone.  Since the program’s inception, NMTCs have spurred more than $12 billion in equity investments nationally.

The list of local projects made possible by NMTCs is impressive — and this is just a partial list:

– Expansion of the National World War II Museum to include a theater, a $60 million total project.

– Permanent funding for the Convention Center Marriott Hotel, which kept the hotel open after Katrina and saved more than 140 jobs.

– Ochsner/Baptist Medical Center, which reopened after Katrina and brought back more than 1,350 permanent jobs.

NMTCs work and are popular among conservatives because they are not a government giveaway.  Typically, NMTCs represent the “last dollar” in a private deal, not the first.  The tax credits thus help “close” a lot of quality projects that otherwise might not go forward.  In fact, every $1 of federal tax revenue foregone via NMTCs induces, on average, more than $14 in private investment in low-income or storm-damaged communities.

Not all projects qualify, and less than 25 percent of all community development entity (CDE) applicants receive allocations of tax credits. Allocation of NMTCs by CDEs is competitive, and CDEs look for projects with the highest likelihood of success.

Here’s how the program works:

When a for-profit or nonprofit CDE makes an equity investment in a qualified private business endeavor, that equity investment gets favorable tax treatment in the form of tax credits granted over a multi-year “compliance” period.  The credits are then sold to provide “up front” equity in the chosen project.  During the compliance period, the federal and state governments make sure the program’s standards are met, including the mission of serving an economically distressed area.  CDEs that participate in the tax credit program can go back for more credits each year — but only if they can show their past investments are working.  Thus, the program rewards the private sector for doing what it knows best how to do, and it gets government out of the business of trying to do something it knows nothing about (i.e., deciding which businesses are good investments).

When he first came into office last year, Gov. Bobby Jindal recognized the value of state NMTCs and got lawmakers to put $25 million into the program for 2008.  Unfortunately, only $12.5 million was dedicated to state NMTCs in 2009 and again in 2010.  The program is so successful that all $12.5 million of this year’s credits were allocated in less than a week.  Clearly, this program needs more funding — and soon.

On a national level, the post-Katrina template needs to be expanded so that all federal disaster areas qualify for NMTCs for at least six years after disasters are declared.  It often takes that long for good projects to get going after a disaster.

Hopefully, it won’t take that long for the governor and the new president to recognize a government program that works — and to pump more resources into it.