One Man’s Tax Loophole Is Another’s Invaluable Public Policy Intervention

Somehow tax reform is once again on Washington’s lips this week. In a loosely related development, the Treasury Department was proud today to announce the release of new data (PDF) on the performance of the New Markets Tax Credit, a program established in 2000 with the enthusiastic support of Al Gore that provides a federal tax subsidy for equity investments in low-income communities. A bit below 60 percent of this money goes to boost real estate investments, and a bit below 40 percent goes for investments in operating businesses.

The idea is that to be eligible you need to be located in a census tract that meets one of several indicators for “severe distress” economically speaking, and the program seems to be a small-but-effective way of spurring investment in these communities.

And if you think about the urban revitalization process you can see why this is important. Private businesses are first and foremost run for private benefit. But the reality is that the first guy to renovate a vacant building on a block full of derelict storefronts and a liquor store creates some meaningful positive spillovers for the rest of the community. People would rather patronize businesses that are near other businesses, and patronize them in clusters of buildings that look attractive. That’s why they build shopping malls in the suburbs. So a round of applause for everyone.

But again note that this program would have to be considered one of those dastardly “tax loopholes” that everyone’s talking about closing. And perhaps it should be closed in the context of an overall reform package that raises revenues while lowering tax rates. But it’s easier said than done. These loopholes tend to get created for real reasons, and there are real people out there benefitting from them.