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In 2017, two University of Tennessee economists were hired by Alabama’s Department of Revenue to evaluate a tax credit program underway in Alabama that was meant to support economic growth in low-income areas. Five years after Alabama’s “New Markets Development Program” was approved and after $234 million in state tax credits were awarded, the economists determined that the program was “prohibitively costly” and “woefully inefficient.” They gave the program a “D” and recommended its termination.
The Tennessee legislature is now considering its own version of the program, calling it the “New Markets Development Act.” Variations of the program have been implemented in several states and they are modeled after a similarly-named federal program. Their creation in state legislatures is led by lobbyists backed by a group of investment firms that stand to gain from the state-funded programs.
For years, the state-funded New Markets programs have attracted controversy. Proponents tout the programs as a tool to help low-income economies and rural areas. Critics, including economists, state officials and policy institutes, say the mechanism rewards investors with minimal gains for the communities they are intended to support and with high costs for taxpayers.
“Tennessee would be on the hook for $100 million and it would get pretty much nothing in return,” said Julia Sass Rubin, an associate professor at Rutgers University who has studied New Markets and similar investment programs for two decades. “It’s not a good deal for the state.
The program described in Senate Bill 900 and House Bill 1218, filed by Republicans Sen. John Stevens, Huntington, and Rep. Ryan Williams, Cookeville, is funded through insurance premium tax credits and would allow investment groups to take advantage of $20 million in tax credits for five years. The bill’s fiscal note said the impact on jobs in Tennessee is “not significant.”
Through the program, investors working with insurers receive the tax breaks if they make a loan or an investment in a Tennessee business or development that qualifies, based on census data, as a “low-income community business.” Investment groups can receive a tax break worth 50% of their investment over five years, on top of the nearly 40% tax break earned through the federal New Markets program.
The bill was heard in the Senate’s Commerce & Labor committee April 7 and more discussion was scheduled for the committee’s final meeting after a few lawmakers expressed reservations. It is unclear if the bill will move forward in 2021, and sponsors have said they will consider pursuing it next year if it stalls this spring.
Stevens, speaking in the Senate Commerce & Labor committee meeting, said Tennessee is among the bottom 10 states when it comes to federal New Markets investments. Adding a state program that brought additional benefits to New Markets investors would help attract more capital to Tennessee small businesses in need.
Tennessee would be on the hook for $100 million and it would get pretty much nothing in return. It's not a good deal for the state.
– Julia Sass Rubin, Rutgers University
“It provides needed, private growth capital to small businesses in underserved parts of the state,” Stevens said. “We have pro-growth economic policies. This access to capital for small and medium-sized businesses is still a challenge.”
State program reviews show mixed results
In Alabama, there were about 1,000 projected jobs from relevant New Markets Development Program investments, based on the University of Tennessee 2017 report. The Tennessee economists, Matthew Murray and Don Bruce, estimated the state spent between $174,000 and $336,000 per new job. If the state factors in the loss of tax income and how that revenue might have been spent, results are further diminished.
While the New Markets program provided “an important boost” to low-income communities, “it falls short in terms of economic impact, efficiency, and accountability,” Murray and Bruce wrote. “The program entails relatively high costs and, based on the available evidence, provides little market or fiscal return to the state other than the reallocation of investment into low-income communities.”
Arkansas approved a New Markets program in 2013. Grant Tennille led the Arkansas Economic Development Commission at the time and opposed the bill, citing efficiency concerns. Tennille said some of the projects proposed through the program were mostly construction, which are more temporary, or low-wage jobs, which are not the jobs state economic officials are prioritizing.
“There was this whole area in the middle of it that was completely opaque, where a large percentage of the money seemed to disappear,” Tennille said. “In some cases, up to 75 percent was getting pulled out of the deals and into the pockets of lawyers, accountants and investment bankers. If this is what we want to do, why not just give these credits to the agency and let them market them and take the proceeds and inject it? We all get paid a salary to do what we do. None of that money has to disappear. One hundred percent of it could flow down to the projects.”
Tennille, now in an economic development role for Little Rock, said he can see some instances where funding from investors in smaller municipalities through the program could be useful, but he still doesn’t see it as a “sound” mechanism.
A 2015 article by the Portland Press Herald in Maine outlined an investment made through its state New Markets program in which investors were set to receive $16 million in tax credits for a paper mill that went bankrupt and laid off at least 200 people. The firms brokering the deal earned $2 million in origination and brokerage fees for the deal, according to the Press Herald.
A 2017 review of Maine’s program by its office of accountability, spurred by the media report, estimated a $16 million fiscal gain from the program over a 10-year period and that each business receiving an investment directly benefited. Some businesses were able to draw additional investment because of those made through the program. It concluded that the program’s design did not directly support “preserving jobs” and “promoting economic development,” but it did help the state become more competitive in attracting investment capital and in encouraging investment.
Florida passed a state-funded New Markets program in 2009 that eventually became a $216 million program. Investments were made in multiple Florida museums, hotels, a minor league baseball stadium, the Florida Aquarium, and a restaurant, among other entities, according to a 2017 report by Florida’s research and accountability offices. While the report noted that the program’s social benefit to low-income communities could not be calculated, it found the program’s return on investment, in terms of tax revenue, was 18 cents for every dollar invested.
“While capital investment, job retention and creation are program goals, they are not conditions for receipt of program funding,” the report said, noting that most of the investments reviewed were spent on working capital, paying off debt and real estate deals.
Eighteen investment groups utilized Florida’s New Markets tax credits. Advantage Capital and Enhanced Capital were among the five who received the largest allotments, according to the state’s report. Based in St. Louis and New Orleans, Advantage has hired three Tennessee lobbyists, and an Advantage principal spoke to Tennessee lawmakers Wednesday about the program.
A history with Advantage Capital, other investment groups
Advantage and Enhanced Capital, based in New York and New Orleans, were among investment firms, also called CAPCOs ( for certified capital companies), that lobbied Tennessee in 2009 for what eventually became the $200 million investment program called TNInvestco. While the TNInvestco program was less lucrative to investors than the CAPCO program initially proposed, Enhanced partnered with Nashville firm Council Capital to participate in the program, along with nine other Tennessee firms.
TNInvestco, which invests state dollars in Tennessee companies chosen by 10 investment firms, has added more than 1,880 jobs as of 2019, according to annual reports. Of the $200 million spent in tax credits, the state has recouped nearly $27 million and the 10 investment groups have collectively profited by $27 million. Based on the total cost to the state to date, it has spent about $92,000 per new job. That cost-per-job number is likely to shrink further as companies expand.
TNInvestco participants often point to the additional money Tennessee companies have attracted, thanks in part to their TNInvestco funds, the potential for greater future earnings and greater jobs as companies grow and the less measurable boost to the state’s entrepreneurial ecosystem. But the program has also drawn criticism for lacking adequate oversight and for rewarding investors, regardless of outcome, at a high cost to taxpayers.
At the April 7 Senate committee meeting, TNInvestco was mentioned several times as a cautionary tale, with one lawmaker saying TNInvestco “had a bad smell from the very beginning.” The program has left some lawmakers’ wary of approving a second, complicated investment program backed by the same groups that spurred TNInvestco.
“This is not TNInvestco,” Stevens said. “This is a different model. Where TNInvestco lacks some of the processes and controls, this federal program has those in place.”
By 2015, Advantage and Enhanced had begun pushing a new form of legislation with a similar structure as the New Markets programs that were called “Rural Jobs” programs. A lobbyist for Enhanced approached the Tennessee Economic & Community Development office on the rural jobs concept that year, but then Commissioner Randy Boyd was opposed to it.
The Pew Charitable Trusts reported in 2017 that “rural jobs” legislation pushed by these same groups were proposed in at least 11 states that year. At least 20 states had already passed a similar economic development package, either New Markets or CAPCO.
“They are the same beast but in different clothing and they adjust the clothing to fit the state,” Rubin said. “If it’s a state concerned about rural economic development, they will propose a rural jobs act. If they can’t do that, they will propose new markets tax legislation.”
With complicated descriptions that obfuscate the structure of the program and its outcome, lawmakers may be willing to throw their weight behind a bill that seems to help areas in needs, she said.
“The bill is intentionally confusing and for something that has broad support, like, for some states, it’s rural jobs. So you are going to come out against rural jobs?” Rubin said. “Who would do that?”
Advantage did not respond to a request for an interview, but emailed a statement, saying that studies from Maine to Oregon have shown the program is an effective economic development tool that expands businesses and creates jobs.
“As we focus on investing in small businesses that can grow good quality jobs in distressed communities that often lack access to capital, we are supportive of SB900,” Advantage officials wrote in the email. “State New Market Tax Credit Programs ensure private investment is delivered where it can have the greatest impact, and also attract federal funding, bringing additional investment into a state’s most distressed communities.”
Advantage Capital principal Ryan Dressler, speaking at the Senate committee hearing, said that the New Markets program allows the state to recapture tax credits if an investment group is noncompliant. That would include failing to invest for a full seven years, investing in a non-qualified business or investing in a business in another state. He said recapture does not apply if a business loses money and the bill does not mention recapture for a lack of jobs created.
Dressler emphasized that the firms eligible to participate have been vetted rigorously by the federal New Markets program. Just as any investor wants to see returns and avoid losses, they are choosing businesses that they foresee being successful, he said. “The alignment of interests is very strong here,” Dressler said.
Republican Sen. Bo Watson raised questions at the committee meeting about investment groups benefiting from both federal and state tax credits on the same projects, what he called “double-dipping.” He also asked about the possibility that any census tract could qualify, a point that Dressler refuted. Watson said he was concerned that he was first approached about the bill the day before a committee meeting on it. He said he preferred to take a more “analytical” look at the bill before approving it.
“I am always nervous about legislation that comes to me that is spending state money or using state resources and we are in either the next-to or last committee meeting,” Watson said. “I’m a little bit concerned that we are looking at somewhere between $20 to $100 million commitment on the state’s part, putting that money at risk so to speak, and the first word we have heard about this, or at least for me, was yesterday afternoon.”
Dressler said the combined state and federal tax credits allow the investment groups to take on more risk in identifying small businesses that may be overlooked by banks. By expanding their presence in Tennessee with the state tax credit incentives, the groups may remain as active investors through the federal program even if the seven-year state program is not reauthorized, he said.
“We are now looking at a state where we have an active portfolio,” Dressler said. “It is getting it started.”
Stevens said he was open to having the fiscal aspect reviewed further by the commerce committee and to spending more time on the bill next year.
Williams, a co-sponsor of the bill, said in a telephone interview Wednesday afternoon he does not see the bill going forward this year and that he is likely to take the bill off notice after presenting it to other lawmakers. It is “too soon to tell” if the bill will be attempted again next year. “We want to find ways to incentivize businesses to come to Tennessee,” he said. “This may be a solution, but there are multiple solutions.
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