Neighborhood Change Through Tax Credits
Can Tax Credits Be An Effective Mechanism for Neighborhood Revitalization?
New Market Tax Credits
New Market Tax Credits (NMTC) are mechanisms designed to catalyze economic development in distressed communities by attrating investments from private developers.
Watch case studies on the impact that New Market Tax Credits have achieved in three communities:
Low Income Housing Tax Credits
Low Income Housing Tax Credits (LIHTC) are one of the primary policy instruments used to incentivize the construction of new affordable housing units in the United States. Learn about LIHTC:
At some point in this project you might pause and wonder, of all of the possible mechanisms for catalyzing economic development, why are we using tax credits, and do they really work?
Even more weird, the money does not even go to the neighborhoods in need. The credits are claimed by intermediaries, whose job is then to convince others to invest in the neighborhoods.
One convincing argument is that if cities tried to directly invest in distressed neighborhoods they would likely run out of resources before achieving impact. Alternatively, if tax credits are structured correctly every one dollar the government spends can bring five or ten dollars of private investment to a community. That doesn’t guarantee the investments are going to the right projects or benefiting the people in need, but it is at least a provocative story proponents can tell.
The mystery is what makes this case study so interesting. Tax credits have potential to make a big impact, or the potential to waste a lot of money.
For your topic this week, reflect on the idea of using tax credits as a mechanisms to catalyze development. How might these policy tools go wrong? The biggest criticism against a lot of these programs is that you cannot determine which investors would have invested in the neighborhood without the tax credits, so even when we see a lot of private investment it is hard to tell how much was caused by the tax credit. This is the primary selection problem that makes research challenging in this space.
But it’s not the only issue. Consider the Frontline news story on some recent fraud tha was uncovered. It’s not surprising that when there are billions of dollars at stake the program invites corruption.
Frontline Episode: Poverty, Politics and Profit
Chap 3 on Low Income Housing Tax Credits - it start at 19:00.
Neighborhood Revitalization Background Reading:
Skim the following articles on how to best structure projects to help distressed neighborhoods:
- What Works Collaborative (2012): Building Successful Neighborhoods
- Lincoln Institute (2008): People or Place? Revisiting the Who Versus the Where of Urban Development
- Burnette (2017): Predicting Gentrification
After reading a little about the programs, what are your views on the mechanisms?
What is your instinctive response after learning some of the details of how they operate?
Before we explore the data, what is your apriori hypothesis? Do you think they will work as designed?
Make an argument for each of the following statements: (1) Low Income Housing Tax Credits promote neighborhood revitalization. (2) New Market Tax Credits promote revitalization.