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Thursday, February 10, 2011

New Markets Tax Credit Program Intended for Poor Neighborhoods Instead Funds Upscale Development

The landmark Blackstone Hotel in downtown Chicago, which has hosted 12 U.S. presidents, opened in 2008 after a two-year, $116 million renovation. Inside the Beaux Arts structure, built in 1910, buffed marble staircases greet guests spending up to $699 a night for rooms with views of Lake Michigan. What’s surprising isn’t the opulent makeover: It’s how the project was financed. The work was subsidized by a federal development program intended to help poor communities. ...

Since 2003, some of the world’s biggest financial companies, including Goldman Sachs Group Inc., U.S. Bancorp, JPMorgan Chase and Prudential, have taken advantage of a federal subsidy that will cost taxpayers $10.1 billion -- and most of the public has never heard of it.

Investors have used the program, called New Markets Tax Credits, to help build more than 300 upscale projects, including hotels, condominiums, office buildings and a car museum, on streets far from poverty, according to Treasury Department records released through a federal Freedom of Information Act request. ... Building high-end commercial projects goes against the intent of the New Markets program, says Cliff Kellogg, a former senior policy adviser at the Treasury Department ....

Under New Markets rules, firms get a credit of 39 cents on the dollar, paid over seven years, for cash or loans they put in. ... The Treasury controls who gets tax credits money and how the subsidies can be used. The agency bases decisions on census tracts, which are supposed to have common economic standards. Only tracts with at least a 20% poverty rate or with a population earning 20% less than the median family income of the surrounding metropolitan area qualify for subsidized projects.

The 15-block tract that’s home to the renovated Blackstone -- census No. 3206 -- qualifies because it had an individual poverty rate of 26% in 2000. A closer look at the demographics tells a different story and shows how investors can game the system, says Janet Smith, who lives in the Blackstone tract and teaches urban planning at the University of Illinois at Chicago. ...

The program’s standards open up some of the nation’s wealthiest areas to development, according to Treasury records. Taxpayers have subsidized projects in tracts with median family incomes as high as $200,000, records show. A total of $7.4 billion of the $16 billion already spent under New Markets, or 46%, has gone to tracts with family poverty levels ranging from zero to 19%, Treasury and census data show. Those communities include areas of California’s technology-rich Silicon Valley. ...

“The way the rules are written, it’s allowing a kind of cherry-picking by financial institutions to find favorable census tracts,” says Virginia Parks, a social services professor at the University of Chicago. “It’s so easy to qualify that all you need to do is hire a good demographer. It’s not rocket science.” ...

Kellogg, the former Treasury official who helped structure the subsidy plan, says New Markets needs changes. It should divert money away from projects such as high-end hotels and exhibit halls, he says. New Markets should target small-business development in regions that truly need a lift, Kellogg says. After all, he says, that was the point from the start.

(Hat Tip: Calvin Johnson.)

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