Tax-Credit Stalemate Leaves Nonprofit Projects in Limbo

A Congressional stalemate on tax policy has put a crimp in Jed Dietz’s plans to open a renovated movie theater in Baltimore.

Next summer, Mr. Dietz, director of the nonprofit Maryland Film Festival, plans to begin rehab work on the Parkway, a shuttered theater that screened its last feature in 1977. But a significant chunk of his planned financing was going to come through the New Markets Tax Credit, a federal tax break for investors in low-income areas that expired at the beginning of the year.

Attempts to revive the credit, one of about 55 expired tax provisions, known as “extenders,” have run aground on Capitol Hill. And the credit’s expiration probably will curtail expansion plans by a variety of nonprofit groups, like the Maryland Film Festival.

Lawmakers have usually bundled the extenders, which also include research and development and renewable-energy tax credits, as well as a tax break for the construction of Nascar racetracks, into one package and voted to prolong them for one or two years at a time.

This year, however, the House is considering each provision one at a time and has yet to taken up the New Markets credit.

Last week the Senate failed to come to a final vote on the provisions as lawmakers clashed over procedural matters.

On June 10, members of the New Markets Tax Credit Coalition, a group of more than 150 groups that use the credit, plan to visit Washington to push lawmakers for an extension.

Project Delays

For Mr. Dietz’s organization, inaction in Congress will mean delays in the Parkway project, which is being built in the low-income Station North neighborhood. The State of Maryland designated Station North as an arts and entertainment district, enabling artists and arts organizations there to receive favorable tax treatment.

Through the tax credit, the film festival planned to lure more than $3-million in private investment to help meet its $17-million goal. If lawmakers don’t extend the tax credit, Mr. Dietz says, the project will still eventually get completed, but it will take a lot longer.

“I hope they get back on track,” he says.

The New Markets Tax Credit allows investors to receive a 39-percent tax credit on money invested in approved projects in low-income areas, which are defined by a number of measures, including a poverty rate that exceeds 20 percent. The recipients of the investment can be either businesses or nonprofit organizations.

Past attempts to extend the credit as a stand-alone piece of legislation haven’t reached a final vote in Congress, but they have enjoyed wide support from members of both parties.

However, one lawmaker, Sen. Tom Coburn, Republican of Oklahoma, has long targeted the credit, calling it a “giveaway” to big banks. In a 2011 budget proposal that included the elimination of the credit, Mr. Coburn wrote that bank subsidiaries, including Chase Bank, Merrill Lynch Community Development Corporation, and Wachovia Community Development Enterprises had received nearly $900-million in tax write-offs by investing in New Markets projects.

Mr. Coburn plans to retire after this session of Congress.

Banks Unwilling to Lend

Some critics also say that the New Markets credit is unnecessary to spur investment. About 20 percent of New Markets projects did not show convincing evidence that the credit was needed to complete those projects, according to a 2013 study by the Urban Institute. The same study concluded that at least 30 percent of all New Markets projects would not have proceeded without the credit.

For the Lyric Opera of Kansas City, the credit was essential, says Deborah Sandler, the general director. The organization was spread out across the city in several dilapidated buildings, she says. Its leaders wanted to build a new headquarters, performance space, and set-design shop, but getting the money was a problem.

“There weren’t a lot of banks underwriting loans to nonprofits in low-income communities,” she says.

With more than $10-million in investments provided through the credit, the group completed a $13-million opera center in 2012.

Similarly, the Ed Roberts Campus, a center in Berkeley, Calif., which houses 14 organizations that support people with disabilities, secured $25-million in construction financing through the program. Because the group is tax-exempt, it couldn’t use the New Markets program to reduce its tax liability, but the credits can help attract private money.

“We can sell those tax credits and turn them into a cash benefit for us,” says Dmitri Belser, president of the center.

Big Impact

Since its inception, the U.S. Treasury has allocated more than $36.5-billion for the New Markets program to groups called Community Development Entities, which then pick projects and market them to donors and financial institutions that want to receive a tax credit in exchange for an investment.

There is a huge demand for the credits, according to Charlie Spies, chief executive of CEI Capital Management, a for-profit subsidiary of CEI, a nonprofit that supports economic-development projects in Maine.

In the last round of allocations by the treasury department, CEI Capital Management received $80-million. Competition for the funds, which will be placed as soon as next month, is fierce: Groups planning $3-billion in projects have expressed interest.

Mr. Spies says that about one-third of the projects his group has financed are run by nonprofit groups. He credits the program with creating or preserving nearly 5,000 jobs and luring more than $2.1-billion in private capital to low-income areas.

“It’s not a huge program by Washington standards,” he says, “but it does have an impact.”

Prospects of Passage

Although the New Markets Tax Credit Coalition is gearing up to push lawmakers next month to renew the credit, other organizations that advocate for nonprofits on Capitol Hill, including the Council on Foundations, Independent Sector, and the Jewish Federations of North America, have focused on other tax items in the extenders package. Among their concerns: the tax treatment of IRA funds donated to charity, donations of food, and land-conservation easements.

Policy experts at those groups say partisan jockeying leading up to the November midterm elections will make passage of the extenders difficult.

Congress could go either way on the extenders, says Geoffrey Plague, vice president for public policy at Independent Sector. Because the various tax credits in the extender package have faithful supporters, leaving them untouched will give lawmakers a big incentive to pass an elusive major tax overhaul.

Says Mr. Plague: “The extenders are the sugar that will help the medicine go down.”