Teaching new markets old tricks: The effects of subsidized investment on low-income neighborhoods

a r t i c l e i n f o Keywords: Place-based programs Business incentives Tax credits Low-income neighborhoods Regression discontinuity This paper examines the effects of investment subsidized by the federal government's New Markets Tax Credit (NMTC) program, which provides tax incentives to encourage private investment in low-income neighborhoods. I identify the impacts of the program by taking advantage of a discontinuity in the rule determining the eligibility of census tracts for NMTC-subsidized investment. Using this discontinuity as a source of quasi-experimental variation in commercial development across tracts, I find that subsidized investment has modest positive effects on neighborhood conditions in low-income communities. Though spillovers appear to be small and crowd out incomplete, the results suggest that some of the observed impacts on neighborhoods are attributable to changes in the composition of residents as opposed to improvements in the welfare of existing residents. Over the past several decades, the federal government in the U.S. has revisited its approach to tackling the problem of persistent poverty in low-income communities. Greater emphasis has been placed on market-based incentive schemes that rely on the private sector to provide resources perceived as necessary to alleviate poverty and blight in distressed cities and neighborhoods. As interest in business-oriented mechanisms to address stagnation in disadvantaged communities grew, a number of new programs emerged that attempt to encourage private investments in low-income areas, often using tax incentives. This paper evaluates the effectiveness of the New Markets Tax Credit (NMTC) program in reducing poverty and improving other neighborhood conditions over the course of the 2000s. The NMTC, which was signed into law in 2000 as part of the Community Renewal Tax Relief Act, arose out a desire to encourage private capital investment in neighborhoods thought to be overlooked during the economic boom of the 1990s. The program provides tax credits to investors who make equity investments in Community Development Entities. These entities are charged with investing the proceeds from the equity investments in businesses and real estate projects in certain designated low-income census tracts. In order to identify the effects of NMTC-subsidized investment on neighborhood conditions, I take advantage of a discontinuity in the formula used to designate tracts as low-income. The discontinuity generates pseudo-random assignment of investment in tracts around a certain income threshold. Tracts below the threshold are eligible to receive NMTC-subsidized investment, whereas those above it are generally not eligible. However, on all …