Imagine if state government gave out millions of dollars a year to fat-cat financiers, big banks, and speculative ventures without monitoring how the money is spent — basically, giving it to whoever walks in the door as long as they flash a few credentials.
Sound weird? Such is the state’s little-known New Markets Tax Credits program administered by the Finance Authority of Maine (FAME), the state agency with the odd dual role of giving financial aid to both corporations and students.
Adding to the weirdness, the Legislature set up the New Markets program with unanimous votes, without debate, and with the House chairman of the Taxation Committee now admitting he didn’t fully understand it. This carefree approach, for a program soon to draw $10 million a year from taxpayers, according to Maine Revenue Services.
It gets worse. New Markets is supposed to create jobs in poor communities, but the first venture it financed (the reopening of an East Millinocket paper mill) has shut down. New Markets appears more likely to create wealth for the lobbyists and bankers who quietly convinced the Legislature in 2011 to create it and in 2013 to loosen its rules.
What is more, the program is deceptive in the language used to describe it. The “tax credits” are, in practice, not tax credits; they’re not subtractions from taxes owed the state. Instead, they’re documents requiring Maine Revenue Services to pay 39 percent of the loans that banks and sometimes other investors make to businesses under the New Markets program. Big national banks generally hold the so-called credits and don’t necessarily owe Maine taxes. (For details, see Part 1 of “Anatomy of a taxpayer rip-off,” by Lance Tapley, February 21, 2014. )
Chris Roney, FAME’s chief lawyer, said the agency doesn’t decide on or supervise the business deals the credits help — the law doesn’t give FAME that role: “We don’t make credit decisions or value judgments of any kind.” In an email, he added: “What deals get funded by investors” is not FAME’s business.
Go-betweens — mostly for-profit companies — come in the FAME door and, generally speaking, if they have been designated Community Development Entities under federal law, they have a right to a share of the credits. The state program is modeled after the federal New Markets program, which has been in operation for a dozen years, although its federal credits are true tax credits.
The typical process goes like this: FAME allocates to a Community Development Entity (CDE) “tax credit authority” for, say, $40 million. Translated, that means the state will pay an investor — over seven years — 39 percent of $40 million, or $15.6 million. The CDE then finds the investor to buy that $15.6 million of tax credits. Most often, the investor is a bank making a loan to a project, though it could provide a cash “equity” infusion.
The bank, however, actually buys the $15.6 million worth of credits at a 35 percent discount or 65 cents on a dollar. So, in this example, the bank only pays $10.1 million in cash for them.