1. Tax Credits and the Size of
Federal Spending
October 15, 2015
Professional Education and Knowledge Seminar

2. Purpose
• The purpose of this presentation is to:
– Identify primary avenues of spending for the Federal Government
– Introduce spending through the tax code
– Highlight the role of tax credits and how they relate to Summit
• The majority of data in this presentation is taken from the
Fiscal Year (FY) 2015 President’s Budget
– See sources slide for link to the U.S. Government Printing Office website
2Tax Credits and the Size of Federal Spending

3. Agenda
I. Spending Through the Tax Code
II. Introduction to Tax Credits
III. New Markets Tax Credit Program
IV. Relevance to Summit
3Tax Credits and the Size of Federal Spending

4. I. Spending Through the Tax Code
4Tax Credits and the Size of Federal Spending

5. Spending Alternatives for the Federal Government
• Salaries and Expenses
• Contract Spending
• Loan Programs
– Direct Farm Ownership Loans
– Small Business Loan Guarantees
• Grants
– Resident Opportunities and Self Sufficiency (ROSS) Grant Program
– Self-help Homeownership Opportunity Program (SHOP)
• Tax Expenditures
– Deductions and Credits
5Tax Credits and the Size of Federal Spending

6. Blurry Line Between Spending and Taxes
• What are the purposes of taxes?
• Consider the following two proposals:
– $250 payment to an individual worker who has a low income
– $250 from earned income tax credit to qualified low income workers
• Under current budget definitions, one is labeled a spending policy
the other a tax policy
• Is there a difference between the two policies? Not Really.
– The following slides will illustrate this concept
6Tax Credits and the Size of Federal Spending

7. Introduction to Tax Expenditures
• Exemptions, Exclusions, Deferrals
– Personal Exemption
• Deductions
– Standard
– Itemized
• State and local taxes
• Home mortgage interest
• Charitable contributions
• Tax Credits
– Earned Income Tax Credit
– Child Tax Credit
7Tax Credits and the Size of Federal Spending

8. Calculating Taxes Owed to Government
Adjusted Gross Income
AGI – (Exemptions + Deductions) =
Taxable Income
Taxable Income * Tax Schedule =
Tax Liability
Tax Liability – Tax Credits =
Taxes Owed to Government
8Tax Credits and the Size of Federal Spending

9. Examples of Initiatives with Unclear Budgetary
Definitions
• Direct subsidy for each gallon of gasoline blended with ethanol
– Spending increase?
• Tax credit for each gallon of gasoline blended with ethanol
– Tax decrease or spending increase?
• Reduce mortgage interest deduction
– Tax increase or spending decrease?
9Tax Credits and the Size of Federal Spending

10. Tax Expenditures are Equivalent to 30% of Federal
Spending in the FY 2015 President’s Budget
• Estimated Spending: $3.80 trillion
• Estimated Revenue: $3.18 trillion
– Individual Income Taxes: $1.48 trillion
– Payroll Taxes: $1.07 trillion
– Corporate Income Taxes: $0.3 trillion
• Estimated Tax Expenditures: $1.23 trillion
– Without tax expenditures, the government could have a surplus
10Tax Credits and the Size of Federal Spending

11. II. Introduction to Tax Credits
11Tax Credits and the Size of Federal Spending

12. Size of Forgone Revenue from Tax Credits
• Tax Credits accounted for an estimated $70 billion in
spending/forgone revenue in the FY 2015 President’s Budget
– Approximately 6% of all tax expenditures
• In contrast, the Federal Government spends:1
– $70 billion on Education
– $41 billion on International Affairs
– $39 billion on Energy and the Environment
• Examples of US Tax Credits in FY 2015 President’s Budget:
– Child Credit ($23.5 billion)
– American Opportunity Tax Credit ($15.2 billion)
– Earned Income Tax Credit ($8.28 billion)
1: Data provided and categories defined by National Priorities Project 12Tax Credits and the Size of Federal Spending

13. Types of Tax Credits
• Over 30 Federal tax credit programs are provided across all areas
of spending except national defense
• Nonrefundable: Can only be used to the point at which no more
taxes are owed
– Most tax credits are nonrefundable
• Refundable: If the credit exceeds the amount of taxes owed, the
excess is given to the taxpayer in a refund
• Transferrable: If the value of a company's credits is higher than its
tax liability, it can sell the excess credits to another taxpayer
– Most transferable credits are offered by states
– Exchanges exist for businesses to purchase and sell the tax credits
13Tax Credits and the Size of Federal Spending

14. III. New Markets Tax Credit Program
14Tax Credits and the Size of Federal Spending

15. Department of Treasury - Community
Development Financial Institutions (CDFI) Fund
15Tax Credits and the Size of Federal Spending
• Mission: Increase economic opportunity and promote community
development investments for underserved populations and in
distressed communities
• The CDFI Fund promotes access to capital and local economic
growth though:
1. Directly investing in, supporting and training CDFIs
2. CDFI Bond Guarantee Program
3. New Markets Tax Credit Program
4. Bank Enterprise Award Program
5. Native Initiatives

16. New Markets Tax Credit (NMTC) Program
16Tax Credits and the Size of Federal Spending
• Late 1990s: Community Capitalism
• The NMTC program provides: an allocation of tax credits to
Community Development Entities (CDEs) to attract investment
from the private-sector in low-income communities
• Application Process: Community Development Entities apply to
the CDFI Fund each year for an award of "allocation authority”
• Allocation Authority: The authority to raise a certain amount of
capital, or Qualified Equity Investments (QEIs) from investors

17. NMTC Program Process
17Tax Credits and the Size of Federal Spending
New Markets Tax Credit Program Process:
1. The CDFI Fund enables CDEs to raise QEIs from investors
2. Investors can reduce federal taxes by 39% of the investment
3. For investors to obtain tax credits, CDEs must use the QEIs to
make Qualified Low Income Community Investments (QLICIs)
in Qualified Active Low Income Community Businesses (QALICBs)

18. Direct Investment NMTC Structure1
Transaction Summary:
• NMTC investor provides equity to the CDE
• CDE provides 7-year debt financing to the QALICB
• QALICB makes interest-only payments during the term of the loans
• Loans are repaid or refinanced at the end of the 7-year compliance
period
18Tax Credits and the Size of Federal Spending
NMTC
Investor CDE QALICB
Equity (QEI) Loan (QLICIs)
Repayment of loanTax Credits
and cash return
1 Information from Reno and Cavanaugh PLLC

19. NMTC Allocations 2001 - 2014
• In 2010, $3.5 billion of
allocation authority was
awarded to 99 CDEs out for
250 applicants
• This generated $1.4 billion in
tax credits for investors
$3.5 billion x 39% = $1.4 billion
19Tax Credits and the Size of Federal Spending
Round Year(s) Total Allocation
1 2001–2002 $2.5 billion
2 2003–2004 $3.5 billion
3 2005 $2.0 billion
4 2006 $4.1 billion
5 2007 $3.9 billion
6 2008 $5.0 billion
7 2009 $5.0 billion
8 2010 $3.5 billion
9 2011 $3.6 billion
10 2012 $3.5 billion
11 2013 $3.5 billion
12 2014 $3.5 billion
Total 2001-2014 $43.5 billion

20. Private Industry Innovated the NMTC Transaction
Structure
• The current NMTC structure is complicated, yet the previous
figure is a condensed summary of the arrangement process
– This was not how the program was initially designed
• The industry took a series of complex incentives provided by the
government, innovated, and created the system in place today
• Agencies implementing tax credit programs may need assistance
to setup and maintain these programs
20Tax Credits and the Size of Federal Spending

21. Government Accountability Office (GAO) Reviews
• GAO released three reports (2004, 2012, 2014) investigating the
effectiveness of the NMTC program
• Over the ten year span, GAO cited the complexity of the program,
the need for greater transparency, and the challenge of
developing collaboration between public and private partners
• GAO found NMTC experienced delays due to start-up tasks such
as developing selection processes and program rules
• Identifying performance measurements and determining the
program’s effectiveness have also been constant themes
21Tax Credits and the Size of Federal Spending

22. IV. Relevance to Summit
22Tax Credits and the Size of Federal Spending

23. Relevance to Summit
• Summit assists with cost estimations and implementation of loan
and grant programs for numerous agencies
• Tax credits are simply a different spending mechanism
• These initiatives have a wide scope ranging from impact
evaluations to program implementation to cost estimation
23Tax Credits and the Size of Federal Spending

24. CFDI NMTC Contract
• Summit was awarded a contract with the CDFI Fund to assist with
the following tasks for the NMTC program:
– Sample CDEs for evaluation and perform compliance reviews
– Analyze data to identify the impact of NMTC projects
– Estimate the subsidy required to attract private capital to eligible
low-income communities
– Determine if there are conditions in which the tax credit may substitute
comparable available private financing
24Tax Credits and the Size of Federal Spending

25. Sources
• FY 2015 President’s Budget, U.S. Government Printing Office
– http://www.gpo.gov/fdsys/browse/collectionGPO.action?collectionCode=BUDGET
• National Priorities Project
– https://www.nationalpriorities.org/budget-basics/federal-budget-101/spending/
– https://www.nationalpriorities.org/analysis/2014/big-money-tax-breaks/complete-
data-on-tax-breaks/
– https://github.com/npp/tax-break
• Government Accountability Office Reports
– GAO-04-326
– GAO-12-547R
– GAO-14-500
25Tax Credits and the Size of Federal Spending

26. Sources
• Internal Revenue Service
– http://www.irs.gov/Credits-&-Deductions
• Donald Marron - Spending in Disguise
– http://www.nationalaffairs.com/publications/detail/spending-in-disguise
• Donald Marron and Eric Toder - How Big Is The Federal
Government?
– http://www.taxpolicycenter.org/UploadedPDF/412528-How-Big-Is-The-Federal-
Government.pdf
• Reno and Cavanaugh PLLC – New Market Tax Credits
26Tax Credits and the Size of Federal Spending