20151015 tax credits and the size of federal spending for linkedin vs

Tax Credits and the Size of Federal Spending

October 15, 2015

Professional Education and Knowledge Seminar

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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


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Agenda

I. Spending Through the Tax Code

II. Introduction to Tax Credits

III. New Markets Tax Credit Program

IV. Relevance to Summit


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I. Spending Through the Tax Code


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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


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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


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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


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Calculating Taxes Owed to Government

Adjusted Gross IncomeAGI – (Exemptions + Deductions) =

Taxable IncomeTaxable Income * Tax Schedule =

Tax Liability Tax Liability – Tax Credits =

Taxes Owed to Government


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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?


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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


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II. Introduction to Tax Credits


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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 ProjectTax Credits and the Size of Federal Spending

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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


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III. New Markets Tax Credit Program


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Department of Treasury - Community Development Financial Institutions (CDFI) Fund


• 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 CDFIs2. CDFI Bond Guarantee Program3. New Markets Tax Credit Program4. Bank Enterprise Award Program5. Native Initiatives

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New Markets Tax Credit (NMTC) Program


• 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

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NMTC Program Process


New Markets Tax Credit Program Process:1. The CDFI Fund enables CDEs to raise QEIs from investors2. Investors can reduce federal taxes by 39% of the investment3. 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)

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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


NMTC Investor CDE QALICB

Equity (QEI) Loan (QLICIs)

Repayment of loanTax Credits and cash return

1 Information from Reno and Cavanaugh PLLC

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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


Round Year(s) Total Allocation1 2001–2002 $2.5 billion2 2003–2004 $3.5 billion3 2005 $2.0 billion4 2006 $4.1 billion5 2007 $3.9 billion6 2008 $5.0 billion7 2009 $5.0 billion8 2010 $3.5 billion9 2011 $3.6 billion

10 2012 $3.5 billion11 2013 $3.5 billion12 2014 $3.5 billion

Total 2001-2014 $43.5 billion

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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


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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


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IV. Relevance to Summit


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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


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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


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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


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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


20151015 tax credits and the size of federal spending for linkedin vs

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