Member Article

The presidential and congressional campaigns brought considerable disagreement on a number of platform issues that were constantly in the daily news cycle. Each brings their potential political polarization, yet we heard less about economic development incentives that often bring bipartisan support.

Many of these vehicles lead to accomplishing the common goals of stimulating economic development and community revitalization. This article will focus on the status of a couple of those incentives and what we might expect in 2025 and beyond.

2025 will mark the 25th anniversary of the establishment of New Markets Tax Credits (NMTC), as Congress enacted this incentive in December of 2000. The program provides investors with a 39% tax credit on a “qualified equity investment.” or QEI, spread over seven years made in projects in qualifying census tracts (QCTs) in low-income communities.

This program, administered by the Community Development Financial Institutions Fund (CDFI), provides the QEI investor with a tax credit that results in a return of, and on, its QEI, which provides monies to the project. A substantial portion will not have to be repaid, instead, facilitate the development of meaningful projects benefiting communities in low-income QCTs.

Since the enactment of NMTC, the CDFI has awarded $76 billion throughout the country to over 100 Certified Development Entities (CDE). A number of those projects are here in Cincinnati and have allowed new businesses to start, including restaurants and “eatertaineries,” as well as permitted certain nonprofit organizations to enhance and expand their missions.

Despite how successful NMTC’s have been in growing economic development, they have yet to enjoy a permanent place in the U.S. tax code. The program has been extended incrementally over the years and is currently set to expire at the end of 2025, following the last extension in 2020. Upon the enactment of each extension, Congress has considered making them permanent, with support coming from both sides of the aisle.

Republican U.S. Rep. Pat Tiberi of Ohio sponsored the New Markets Tax Credit Extension Act of 2017, and Democratic U.S. Sen. Sherrod Brown of Ohio has openly welcomed the New Markets Tax Credit as giving a boost needed for communities to receive increased private investment. Will this be the year that NMTC’s will become permanent? If passed, the New Markets Tax Credit Extension Act of 2023 would make new markets tax credits permanent. As of Sept. 29, 2023, Ohio has completed 115 projects using New Markets Tax Credits, with total investments exceeding $120 million.

Another, more recent, tax vehicle created under the 2017 Tax Cut and Jobs Act involves Opportunity Zones, which were designed to incentivize long-term investments in economically distressed communities. This program allowed for a deferral of capital gains tax for those who would reinvest those proceeds through a Qualified Opportunity Fund (QOF) in areas specifically identified by the governors of each state. Additionally, investors would have effectively had a portion of those deferred capital gains eliminated by the receipt of a step-up in basis of 10% for their reinvested capital gains if the investors held their gains inside of the Opportunity Zones for five years and an additional 5% if the gain was held for seven years.

Since the deadline for the funds to be invested to achieve that step-up was the end of 2019, the opportunity to achieve those basis step-ups has now passed. Yet, if the capital gains are held in the Opportunity Zone for more than 10 years and sold off, post-investment future appreciation in the QOF investment is excluded from taxation.

Some of the areas are urban and others are rural, but the list is fixed and the methods are set, unlike NMTCs where there are annual awards given to competing CDE projects. Will this new Congress and administration renew and extend Opportunity Zones? With the incoming administration’s win, Opportunity Zone backers expect a boost in the odds of an extension.

There is an Opportunity Zone Enhancement Act of 2023 bill that is being considered in the House right now that would allow banks to exclude loans to qualified Opportunity Zone businesses from their gross income tax. Along with federal Opportunity Zones, Ohio has its own state Opportunity Zone tax credit program that recently had a January 2025 application round for $25 million of tax credit allocations.

These examples of tax incentives benefit both the investor and the community where the investment project is established. Time will tell if these tax incentives for low-income communities will persist and/or become permanent.

 

Link to article