Big banks are claiming hundreds of millions of dollars in tax credits the federal government intended to go to poor communities, according to two new reports released Monday that could make it tougher for Congress to renew the tax breaks later this year.
The New Markets Tax Credit, created by a Republican Congress and signed into law by then-President Clinton, was supposed to entice banks to help finance projects in low-income communities. But instead banks have claimed the credit for everything from drive-in movie theaters to luxury hotels, Sen. Tom Coburn, Oklahoma Republican and Congress’s top waste-watcher, said in one report.
Some investors also end up double dipping, combining the NMTC with other tax credits or subsidies and, in at least one case, an investor used the other public money to claim the size of the investment was bigger, thus earning an even bigger tax credit from the government — essentially getting paid a credit to invest taxpayers’ money rather than his own.
The government doesn’t even collect enough information to say how often the tax credit is a success in sustaining a project or revitalizing neighborhoods, GAO investigators said in their scathing report.
Meanwhile, in one California town, the wellness center built using the tax credit now threatens to “bankrupt an entire city” as officials struggle to keep the center afloat, slashing public workers’ salaries and even pondering cutting the police department, Mr. Coburn said.
“This tax credit, intended to benefit the poor, is instead lining the pockets of the well-off, such as big banks and other private investors that claim more than $1 billion in NMTC annually,” the senator wrote. “Because it is funded by taxing the labor of Americans, NMTC is essentially a reverse Robin Hood scheme paid for with the taxes collected from working Americans to provide payouts to big banks and corporations in the hope that those it took the money from might benefit.”
The credit ended at the end of last year, and now lawmakers are trying to decide whether to renew it as part of a massive package of special tax breaks Congress regularly approves. The package, known in Capitol-speak as the “tax extenders,” is particularly controversial this year.
Mr. Coburn says it’s time to ax the NMTC, saying it would save taxpayers $1 billion a year, leaving the money in the hands of Americans to invest as they want rather than catering to government incentives.
But the NMTC has its backers.
In a commentary piece published in Roll Call, a Capitol Hill newspaper, two lawmakers last week defended it as a critical source of funding for needy areas.
Reps. Michael R. Turner, Ohio Republican, and Chaka Fattah, Pennsylvania Democrat, said the credit has been responsible for more than a half-million jobs since it was established in 2000.
“We want to make certain this piece of outstanding congressional business does not fall victim to the end-of-the-year gridlock,” the lawmakers said, urging their colleagues to tour a project in their home states to see what the credit can do.
The credit is complex, which makes it difficult to track who ends up with taxpayers’ money. The government sets a dollar amount for the credit each year, and the money is then given to a development authority that decides which projects to finance, and then it seeks investors to buy into the development authority in exchange for the credit.
Mr. Coburn said nearly 40 percent of the investors are banks, and they get a tax credit equal to 39 percent of their investment for seven years.
“While Washington politicians tout the program’s goal is to put more money into the hands of businesses in struggling communities, the real beneficiaries are Wall Street banks, the CDEs and other large investment enterprises,” Mr. Coburn said.