I think there is some credibility to the phrase “If you can manage to stay around long enough people mistakenly think you know what you’re talking about.” Last Thursday (April 2), at the invitation of the Hon. Armond Budish, Speaker of the Ohio House of Representatives, I testified at the Ohio House Finance and Appropriations Committee concerning the New Markets Tax Credit (NMTC) program (see April 2 post on this blog for full testimony).
House Bill 1 (the Governor’s proposed budget) contains language establishing an Ohio NMTC. The intent of the bill is to mirror the federal NMTC program thereby enhancing Ohio’s ability to attract new investors and additional investment capital. The bill is fairly well conceived and presented in HB 1 but has a few items that should be addressed before passage. This is a relatively small program at $25.6 million ($10 million in foregone public tax revenue) which makes it increasingly important to design it in a way that will be as effective as possible.
First, the bill creates a program that defines “applicable percentage” or the amount of tax credit that can be taken as 0% for the first two credit years (January 1, 2010 & 2011), 7% for the third and 8% for the last four. This means that the program wants to solicit investment and not give return for two years. Though I understand the desire to conserve capital in tight budget years, it is my opinion that investors will not invest for those first two years, which in the current capital market is an eternity. Investors invest to obtain yield or return on capital. No return = no investment. [HB 1, Section (2)]
Second, the bill seems to get prescriptive about the types of investors being solicited. It specifically discusses holders of “qualified equity investment” or investment that triggers tax credit as insurance companies, foreign insurance companies, and financial institutions. Though there is significant investment potential from these investor groups, if the purpose is to solicit “new investment” from taxpaying entities it seems counterproductive to frame a statute that limits who can play. The 2007 Government Accounting Office report on NMTC showed that the major federal NMTC investors were corporations and individuals. [HB 1, Sections 5725.33 (7), c, (B); 5729.16 (B); 5733.58 (B)]
Third, the definition of “qualified active low-income community business” or businesses eligible to get loans or other investments from tax credit proceeds as “any business that derives or projects to derive 15% or more of annual revenue from the rental or sale of real property.” It would seem the rationale here is to do business investment and not fund office buildings, condominiums, or lease-able commercial space. The result will be, depending on the specificity of the regulations and interpretation of reviewer, the exclusion of businesses that as a matter of course in low-income communities use real estate to stimulate economic revitalization. For example a local non-profit development corporation could not build a community facility such as a health center, child care center, or community service space. These dollars could not fund a business incubator or a share business space common in rural areas of the state. Restricting the program to non-real estate projects will severely affect its usefulness. [HB 1, Section 5725.33 (5)]
Tags: Armond Budish, Finance Fund, GAO, Government Accounting Office, Governor Strickland, House Bill 1, New Markets Tax Credit, Ohio General Assembly, Ohio House of Representatives, State of Ohio, Tax, tax credits