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F I S C A L I M P A C T R E P O R T

SPONSOR Lundstrom

ORIGINAL DATE

LAST UPDATED

1/31/06

HB 277

SHORT TITLE NMFA New Markets Tax Credit Program

SB

ANALYST Lewis

APPROPRIATION (dollars in thousands)

Appropriation

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

NFI*

(Parenthesis ( ) Indicate Expenditure Decreases)

*See narrative.

SOURCES OF INFORMATION

LFC Files

Responses Received From

New Mexico Finance Authority (NMFA)

Economic Development Department (EDD)

SUMMARY

Synopsis of Bill

House Bill 277 amends the Statewide Economic Development Finance Act to authorize the New

Mexico Finance Authority to form, operate, own or co-own one or more nonprofit or for-profit

qualified community development entities for the purpose of participation in the federal New

Markets Tax Credit Program, and to:

A.

apply for and obtain one or more allocations of new markets tax credits;

B.

market and sell qualified equity investments;

C.

make qualified low-income community investments; and

D.

take all actions necessary or convenient to carry out the purposes of the qualified community

development entity or to participate in the federal New Markets Tax Credit Program.

FISCAL IMPLICATIONS

According to the Economic Development Department (EDD), there is currently no estimate of

the fiscal impact of this bill on the Severance Tax Bonding Fund. The cost to staff and operate

the community development entities (CDEs) should be minimal. However, the impact to the gen-

House Bill 277 – Page

2

general fund would be positive as new jobs are created. NMGRT, payroll taxes and other taxes

would be generated by the creation of new jobs and the investment of new dollars into the state’s

tax base.

According to the New Mexico Finance Authority (NMFA), House Bill 277 does not carry an ap-

propriation, nor does it require any state funding. On the other hand, a successful application to

the New Markets Tax Credit program will generate a flow of private investment capital into New

Mexico.

The NMFA has developed a list of potential eligible projects for the program totaling more than

$350 million. The program is ideally suited to private business financing for business facility de-

velopment, mezzanine finance structures, and commercial real-estate development, such as rede-

velopment of blighted commercial districts. An interesting application of New Markets Tax

Credits has been to finance construction of charter schools throughout the nation.

SIGNIFICANT ISSUES

According to the New Mexico Finance Authority (NMFA), the New Markets Tax Credit

(NMTC) Program permits taxpayers to receive a credit against Federal income taxes for making

qualified equity investments in designated Community Development Entities (CDEs). Substan-

tially all of the qualified equity investment must in turn be used by the CDE to provide invest-

ments in low-income communities. The credit provided to the investor totals 39% of the cost of

the investment and is claimed over a seven-year credit allowance period. Investors may not re-

deem their investments in CDEs prior to the conclusion of the seven-year period.

The NMFA notes that NMTCs are allocated annually by the U.S. Department of Treasury to

CDEs under a competitive application process. These CDEs then offer the credits to taxable in-

vestors in exchange for stock or a capital interest in the CDEs. To qualify as a CDE, an entity

must be a domestic corporation or partnership that:

1)

has a mission of serving, or providing investment capital for, low-income communities or

low-income persons;

2)

maintains accountability to residents of low-income communities through their representa-

tion on a governing board of or advisory board to the entity; and

3)

has been certified as a CDE by the U.S. Department of Treasury.

The NMFA has developed a list of potential eligible projects for the program totaling more than

$350 million. The program is ideally suited to private business financing for business facility de-

velopment, mezzanine finance structures, and commercial real-estate development, such as rede-

velopment of blighted commercial districts. An interesting application of New Markets Tax

Credits has been to finance construction of charter schools throughout the nation.

ADMINISTRATIVE IMPLICATIONS

According to the NMFA, HB 277 would require the NMFA to manage and administer this fed-

eral tax credit program. The Finance Authority has a team of finance analysts and accountants,

who have specific expertise in working with federal programs. As an example, the NMFA man-

ages, on behalf of the State of New Mexico, the federal drinking water state revolving loan pro-

gram. NMFA would not require any resource from the state, aside from partnership with appro-

priate state agencies (e.g., the Economic Development Department) and the Legislature.

House Bill 277 – Page

3

TECHNICAL ISSUES

NMFA notes that this legislation does not carry an emergency clause, and suggests that it could

be useful to include an emergency clause to allow the NMFA to begin participating as soon as

possible.

OTHER SUBSTANTIVE ISSUES

According to NMFA, no single entity within New Mexico has been successful in being awarded

tax credits pursuant to this federal program. This unfortunate circumstance has limited private

sector participation in New Mexico in this specific program. The impact of this is that New Mex-

ico is not on the radar screen for investment by those private-sector investors who have partici-

pated in the New Markets Tax Credit.

A flow diagram provides a simple illustration of the program operation.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL

According to EDD, failure to enact this bill would delay New Mexico’s participation in the fed-

eral New Markets Tax Credit program, and would thus hinder access to capital for small busi-

nesses in New Mexico’s low-income communities.

ML/nt

NMFA

Community Development

Entity

39% tax credit taken over

7 yr period: 5% in first 3

yrs, 6% in final 4 yrs

Private Investors

Business in Low-

income area

$$

$$

Uses cash investment to

startup or expand busi-

ness, create more jobs

Tax credits

CDE must deploy tax

credits, i.e., bring in in-

vestors, within 5 yrs of

allocation

CDE must deploy capital

to businesses within 1

year of investment

Ex. $1,000,000 equity investment = Tax Credit Value is $390,000

Year 1 Year

2

Year

3

Year 4 Year 5 Year 6 Year 7

Tax Credit Value $50,000 $50,000 $50,000 $60,000 $60,000 $60,000 $60,000

Dividends

Investment Repay

$ .. $ .. $ .. $ .. $ .. $ .. $ ..

$ 0 $ 0 $ 0 $ 0 $ 0

$ 0

$1,000,000