In his zeal to convince lawmakers to create a tax credit program that would dramatically benefit his client, a lobbyist for Advantage Capital Partners misled Nevada lawmakers about the success the “New Markets Tax Credit” program has had in other states.
Nevada’s newly established state program is based on the federal New Markets Tax Credit program that Congress and President Clinton created in 2000, ostensibly to steer new, private business investment into low-income communities.
The federal program was originally conceived and lauded as “a market-based solution … to alleviate poverty within the nation’s distressed areas” by “direct[ing] some business capital away from areas already experiencing rapid growth and to low-income communities.”
Investors are offered sizable tax credits for putting money into a qualified
‘Community Development Entity.” That entity then provides this money as financial capital for firms that do business in designated low-income neighborhoods.
Staking their cash up front, investors then receive their credits gradually, on a delayed basis. In total, they could be awarded 39 percent of their total investment as tax credits, but would receive these credits over a seven-year period — getting credits equal to 5 percent of their up-front investment for the first three years and then 6 percent of it for the next four years. As of 2012, federal authorities had awarded $29 billion in tax credits through the program.
The up-front investment is supposed to spur economic growth and new job creation that — at least theoretically — result in new tax revenues to offset the cost of the credit. The program was designed to appeal to supporters of Art Laffer and the other Reagan-era supply-side economists.
However, studies have shown that, for the most part, the program simply redirects investments from higher-growth areas to low-income neighborhoods so that investors can get the tax credit. By the best estimate, which appeared in the academic journal Public Finance Review, only about 10.7 percent of investments made through the New Market Tax Credit program were actually new investments. Instead, nearly 90 percent were simply funds diverted from higher-growth areas into low-income communities. Thus, with the federal government footing 39 percent of all investments made through the program, this small fraction of new investment comes at large cost to taxpayers.
An obvious concern about the program, then, is that it attracts investors seeking to capitalize on the tax credit itself — rather than on an actual return on investment earned through the firms receiving the funds.
Nonetheless, states began mimicking the federal program; Missouri soon implemented a parallel state tax credit, also worth 39 percent of investments and awarded on a delayed basis. Missouri has awarded more than $120 million worth of state tax credits through the program with more than $80 million going to a single firm — St. Louis-based Advantage Capital Partners. Advantage Capital has also been a leading beneficiary of the federal program.
Advantage Capital has become a self-interested cheerleader for the program in Missouri and in other states, where it has routinely lobbied lawmakers to create similar programs. Reports commissioned by Advantage Capital claim that Missouri’s state-level tax credit has led to the creation of 5,985 new jobs. However, official reports from Missouri’s Department of Economic Development say that the $120 million investment led only to the creation of 823 actual new jobs. That’s nearly $150,000 in tax credits per job.
Here in Nevada, this contradiction is extremely relevant because Advantage Capital successfully fielded 12 lobbyists during the 2013 legislative session to secure a similar tax credit. Testifying for Senate Bill 357, Advantage Capital lobbyist Ryan Brennan told Senate commerce committee members that other states were reaping huge fiscal benefits after enacting a state version of the federal legislation.
“New revenue garnered by the state will exceed the cost of the credits,” Brennan assured lawmakers.
Sen. Joe Hardy followed up: “So actually, you won’t have lost any revenue at all by starting with less revenue in the budget?”
Responded lobbyist Brennan: “Senator, that is how it has happened in the two states that have used it the longest — Missouri and Florida. Both confirm through state audits that revenue is exceeding the cost of the credits.”
When shown film of Brennan’s testimony, however, state audit departments in Missouri and Florida confirmed that no audit by either of those states has ever shown that “revenue is exceeding the cost of the credits,” as Brennan testified.
In fact, when a substantially similar tax-credit program called CAPCO was reviewed by Missouri’s state auditor, that office concluded the program “will not produce enough state revenue to offset [the] costs of credits.” A $140 million award of tax credits, said the audit, would result in only $23.6 million in new state revenues — creating a $116 million hole in the state budget.
Nevertheless, on the basis of the lobbyist’s assurances, Nevada lawmakers voted almost unanimously to enact the Nevada New Markets Jobs Act into law. The legislation commits up to $116 million in credits against insurance-premium taxes that can be awarded to firms like Advantage Capital when they partner with insurance companies to channel investment dollars away from high-growth areas and into Community Development Entities.
If Nevada experiences a return as meager as those in other states and at the federal level, lawmakers will soon regret their decision.
It’s true that money multiplies when left in the private sector to be invested in new capital equipment or technology, thereby improving labor productivity. This is why lower tax rates are highly beneficial to economic growth and can even lead to faster revenue growth for federal, state and local governments — despite the lower rates.
When investments are the result of complex tax-credit schemes and government intervention, however, the result is nearly always suboptimal.
The lesson is clear: If policymakers want to spur economic growth, the answer is to reduce tax rates, not to unnecessarily complicate the tax code with credits and deductions.
They only distort economic behavior and create money streams for rent-seeking special interests.
Geoffrey Lawrence is deputy policy director at the Nevada Policy Research Institute. For more visit http://npri.org.