Nothing New about the New Markets Job Act


“Public-private partnerships” with innocuous-sounding names have become extremely popular in South Carolina over the last decade.

The latest endeavor in the trend doesn’t look any more promising than the others. The South Carolina New Markets Jobs Act, or NMJA (S.892), would have expanded the role of government-backed economic development projects in South Carolina. The bill died in the Senate Finance Committee, but one suspects it’s far from dead. On the last day of the 2014 session, lawmakers expressed a serious interest in taking it up at the next opportunity. It will almost certainly get a hearing in 2015.

Modeled after the federal government’s New Markets Tax Credit Program, the NMJA would add another bureaucratic layer onto a program that openly promotes risky investment projects at the expense of taxpayers.

In theory, the state-level program would function just like its parent program: by providing tax credits to businesses that make “qualified equity investments” in “qualified community development entities” – this latter term signifying any independent organization that provides financial assistance to businesses looking to expand into low-income areas. The community development entity would then direct these funds to various low income businesses, and the businesses would use these funds to build things like grocery stores, health-care facilities, and other retail-oriented business ventures.

The bill’s supporters contend that such a program can create jobs that will help improve the economic wellbeing of low-income South Carolinians. We live in a state, these supporters might point out, that has a median household income level almost $10,000 below the national average. Moreover, the program will improve the appearance of low-income neighborhoods and downtown areas with newly constructed buildings.

Sounds like a good idea. But like many other government initiatives, it isn’t one.

What is important to understand is that targeted tax credit programs like the NMJA simply transfer wealth from the general populace to those with political connections. What politicians and pundits fail to consider when discussing programs like this is what Frederic Bastiat discussed in his essay “What Is Seen and What Is Not Seen.” It’s easy to see that these tax credits will encourage businesses to engage in investment projects. What’s a lot harder to see are the unintended consequences, chief among them an entrenched bureaucracy and political class newly emboldened in redistributing wealth in ways government planners see fit. It’s also hard to see an increased burden on taxpayers as a result of further government handouts.

Since the costs of the various tax credits issued by the program are spread out over the general populace, they often get ignored. But that’s no reason to ignore the costs – particular when the program in question doesn’t actually work.

A similar program in Missouri, for example, has only added 823 new jobs since its inception in 2007, while retaining 3,141 jobs, vastly fewer than the 9,679 anticipated jobs. When you couple weak employment numbers with the overall amount of certified investments, you begin to see an even bleaker picture: the program facilitated over $900 million dollars in loans over the same period (at a cost of over $225,000 per job attributable to the program).  Policymakers in other states, such as Georgia, have expressed opposition to similar programs, while many in Illinois have drawn the entirely justified conclusion that such projects are really just political handouts.

The New Market Jobs Act gives lenders a tax break – basically a bonus for making investments that fit the guidelines of the program. Why do lenders need this tax break? The answer is that it compensates lenders for the increased riskiness of investment projects. When governments sponsor risky investment ventures, bad things almost always follow. Consider what happened when government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, in conjunction with the Department of Housing and Urban Development, pushed for increased home ownership and lending to less credit-worthy borrowers.

Another design problem with the South Carolina New Markets Jobs Act is the incentive it creates for government officials to dole out political favors. In the marketplace, the interest rate that lenders charge borrowers for loans is a function of the riskiness of the investment project. Under the tax credit program established by the New Market Jobs Act, however, the returns realized by the lending company are far in excess of anything available on the open market. All that’s needed is approval from a bureaucrat, who likely has less technical knowledge than a loan officer and who certainly has less of an incentive to make an objective decision.

Without these tax breaks, many of these investments – if indeed not all of them – will ever be made. That is after all the overwhelming objective of the program. By definition, in other words, the program is designed to encourage risky and/or foolish investments.

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