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

SPONSOR Papen

ORIGINAL DATE

LAST UPDATED

2/1/06

HB

SHORT TITLE NMFA New Markets Tax Credit Program

SB 357

ANALYST Kehoe

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

(See Narrative)

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

New Mexico Finance Authority (NMFA)

SUMMARY

Synopsis of Bill

Senate Bill 357 amends the Statewide Economic Development Finance Act to authorize the New

Mexico Finance Authority (NMFA) to form, operate or own a community development entity for

the purpose of participating in the New Markets Credit Program—a federal program operated by

the U. S. Department of Treasury.

FISCAL IMPLICATIONS

There are no fiscal implications if this legislation is enacted. However, NMFA indicates an ap-

proved application to the New Markets Tax Credit Program could generate private investment

capital into New Mexico. A list of potential eligible projects developed by NMFA totals ap-

proximately $350 million. NMFA indicates the program would be ideal to finance business fa-

cility development, mezzanine finance structures, and commercial real-estate development.

SIGNIFICANT ISSUES

The following excerpts taken from the U. S. Department of Treasury website describes program

proposed by Senate Bill 357: “The New Markets Tax Credit (NMTC) Program permits taxpay-

ers to receive a credit against Federal income taxes for making qualified equity investments in

designated Community Development Entities (CDEs). Substantially all of the qualified equity

Senate Bill 357 – Page

2

investment must in turn be used by the CDE to provide investments 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. In each of the first three years, the investor receives a credit

equal to five percent of the total amount paid for the stock or capital interest at the time of pur-

chase. For the final four years, the value of the credit is six percent annually. Investors may not

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

NMTCs are allocated annually by the Fund to CDEs under a competitive application process.

These CDEs then offer the credits to taxable investors 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 representation on a governing board of or advisory board to the entity; and 3) has

been certified as a CDE by the CDFI Fund. The Fund is currently accepting applications from

entities seeking CDE certification.

Throughout the life of the NMTC Program, the Fund is authorized to allocate to CDEs the au-

thority to issue to their investors up to the aggregate amount of $15 billion in equity as to which

NMTCs can be claimed. To date, the Fund has made 170 awards totaling $8 billion in allocation

authority. The Fund released its fourth annual NMTC Program Notice of Allocation Availability

(NOAA) on July 15, 2005. This NOAA invites CDEs to compete for tax credit allocations in

support of an aggregate amount of $3.5 billion in qualified equity investments in CDEs. Applica-

tions are due on September 21, 2005.”

According to NMFA, the funding will only be available for two more years of future tax credit

allocations, unless extended and authorized by the U. S. Congress.

ADMINISTRATIVE IMPLICATIONS

NMFA already has a team of financial experts and would not require additional sources to ad-

minister the program proposed within this bill.

OTHER SUBSTANTIVE ISSUES

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

Senate Bill 357 – Page

3

LMK/mt

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