Bipartisan Group of Senators Introduce Tax Credit for CDFIs
On June 16, Sens. Mark Warner (D-VA), Roger Wicker (R-MS), Chris Van Hollen (D-MD), and Cindy Hyde-Smith (R-MS) introduced the Community Development Investment Tax Credit Act of 2022. The purpose of the credit is to encourage long-term private sector investments in CDFI.
In general, the bill provides a tax credit for investments and equity-like investments in CDFIs as defined in the Community Development Banking and Financial Institutions Act of 1994 (12 U.S.C. 4702), as well as a partnership or investment vehicle managed or controlled by a CDFI or CDFIs.
The total credit available would be capped, starting at $1 billion for 2022, $1.5 billion for 2023, and $2 billion for 2024, and adjusted for inflation in subsequent years. The CDFI would administer the credit and presumably conduct an allocation competition along the lines of its other programs.
In return for an investment in a CDFI, a taxpayer would receive a 3 percent credit for each of the first ten years and 4 percent for the next ten years. Investments in a qualified CDFI investment which do not have a fixed term or duration receive an additional one percentage credit.
The bill defines a qualified CDFI investment as non-voting stock, interest in an entity or partnership, excluding investments made under the New Markets Tax Credit. An equity equivalent investment is generally defined as debt with equity features, and the legislation specifies in some detail the terms and conditions for such an investment.
The CDFI Coalition, along with a number of organizations, has endorsed the bill. Below please find a statement from Coalition Board Chair Ceyl Prinster. it is also included in Sen. Warner’s press release:
Statement of Ceyl Prinster, President and CEO, Colorado Enterprise Fund, Chair, CDFI Coalition
“The CDFI Coalition is pleased to add its voice in strong support for the legislation sponsored by Sens. Warner and Wicker to establish a tax credit for Community Development Financial Institutions (CDFIs). CDFIs provide financial products and services in urban neighborhoods and rural areas underserved by traditional financial institutions, particularly those communities with high rates of poverty and unemployment.
Throughout the last economic downturn, CDFIs served as economic shock absorbers, providing flexible and patient capital, rigorous risk management, and commitment to the projects in their communities and the sustainability of their borrowers. While traditional lenders fled economically distressed communities, CDFIs stepped in to fill the void. Since the advent of the economic crisis prompted by the pandemic, CDFIs have been on the frontlines of providing financial and technical assistance to small and minority-owned businesses. CDFIs fill a vital niche in the nation’s financial services delivery system by serving communities and market sectors that conventional lenders cannot – with the ultimate goal of bringing CDFI customers into the mainstream economy as bank customers, homeowners and/or entrepreneurs.
The proposed CDFI Tax Credit will provide a new avenue for CDFIs to raise capital that will be deployed to finance small businesses, construct affordable housing, and support community facilities in disadvantaged communities across the country. CDFIs leverage over $12 in private capital for every $1 in federal support, so the resources authorized by the tax credit will extend far beyond the amount authorized and help CDFIs to fill the widening credit gap encountered by economically disadvantaged communities across the country.”
