The success of the federal New Markets Tax Credit (NMTC) program in directing investment capital toward economically distressed communities has inspired numerous states to develop their own complementary state-level NMTC programs. While state programs draw inspiration from the federal model and often work in conjunction with federal NMTCs, they differ in significant ways, including credit rates, qualification criteria, administrative structures, and strategic objectives. Understanding these key differences helps investors, Community Development Entities (CDEs), and businesses navigate both programs effectively and identify opportunities to layer federal and state credits for maximum project benefit.
Authorization and Funding Mechanisms
The federal NMTC program operates under permanent authorization established by the Community Renewal Tax Relief Act of 2000, with Congress periodically appropriating allocation authority that the Community Development Financial Institutions Fund (CDFI Fund) distributes through competitive allocation rounds. The program has enjoyed bipartisan support and has received consistent appropriations, though allocation amounts have varied based on Congressional budget priorities.
Federal NMTC allocation authority comes from the national treasury, and the CDFI Fund administers the program at the federal level with consistent regulations and requirements applying nationwide. This centralized structure ensures uniform program standards regardless of where projects are located, creating predictability for CDEs operating across multiple states.
State NMTC programs operate under state-specific legislation with funding mechanisms that vary significantly across states. Some states allocate annual funds through their budgets, while others establish revolving funds or cap total program costs at specific levels. State programs may face greater funding volatility than the federal program, as state budget pressures and competing priorities can affect allocation availability from year to year. Federal allocations provide capital for deployment nationwide within low-income communities, while state allocations serve only projects within the authorizing state’s boundaries.
Credit Rates and Value Structures
The federal NMTC program provides a 39% tax credit claimed over seven years according to a fixed schedule: 5% for each of the first three years and 6% for each of the subsequent four years. This credit rate applies uniformly to all federal NMTC transactions regardless of project location, industry, or other characteristics.
State NMTC programs feature varying credit rates reflecting state policy priorities and fiscal considerations. Some states mirror the federal 39% credit structure to facilitate layering with federal credits and leverage familiar transaction models. Other states offer different credit rates—some higher, some lower—based on state budget constraints or desires to provide enhanced incentives for priority projects.
For example, some state programs offer credits ranging from 25% to 39% of qualified investments, with specific rates depending on project characteristics, location within the state, or industry sector. A few states have experimented with enhanced credit rates exceeding 39% for projects that meet special criteria, such as serving particularly distressed areas or creating jobs in targeted industries.
Tax Credit Type and Claiming Mechanisms
Federal NMTCs represent credits against federal income tax liability. Investors claim federal NMTC benefits on their federal tax returns, reducing federal income tax obligations. For corporate investors, credits offset corporate income tax. For individual investors participating through pass-through entities, credits flow through to reduce individual federal income tax liability.
State NMTC programs provide credits against state income taxes or, in some cases, other state tax obligations. The specific taxes against which credits can be claimed vary by state. Most state programs offer credits against state corporate or personal income taxes. Still, some states also allow credits against franchise taxes, insurance premium taxes, or other state tax obligations, depending on the state’s tax structure and the type of investor.
This distinction creates different investor markets for federal versus state credits. Federal credits attract investors with substantial federal income tax liability, including national corporations, financial institutions, and high-net-worth individuals. State credits appeal to investors with significant tax liability to the specific state offering credits, potentially creating smaller investor pool,s particularly in states with smaller economies or lower tax rates.
Geographic Eligibility and Targeting
The federal NMTC program defines qualified low-income communities using census tract data and national standards. Census tracts qualify if they have a poverty rate of at least 20% or a median family income at or below 80% of the greater of the metropolitan area’s or statewide median family income. This standardized approach ensures consistent geographic targeting across all states and territories.
State NMTC programs may adopt federal eligibility definitions for consistency; however, many states customize geographic targeting to reflect their state priorities or address specific community needs. Some states narrow eligibility to specific regions within the state, designate particular counties or municipalities for enhanced credits, or layer additional geographic criteria onto the federal definitions.
States might prioritize rural communities, former industrial areas experiencing transition, communities affected by specific economic disruptions, or neighborhoods within targeted revitalization zones. These customized geographic priorities allow states to direct capital toward state-specific challenges that federal targeting might not fully address. Working with CDFI consultants familiar with both federal and state programs helps identify which communities qualify under each set of rules.
Qualified Business Requirements
Federal NMTC regulations define qualified active low-income community businesses (QALICBs) in accordance with specific statutory and regulatory requirements. Businesses must derive at least 50% of gross income from active conduct of business within low-income communities, have at least 40% of employees’ services performed in low-income communities, have at least 40% of tangible property located in low-income communities, or meet alternative tests for specific business types.
State programs often adopt federal QALICB definitions to maintain consistency and facilitate layering federal and state credits. However, some states modify QALICB requirements to advance state priorities or accommodate state-specific circumstances. States may impose stricter requirements, such as higher income thresholds, more stringent employment tests, or additional qualification criteria related to job quality, wage levels, or specific industry sectors.
Qualification under federal rules doesn’t automatically ensure qualification for state credits if the state has adopted modified or enhanced requirements. Businesses seeking to layer both credit types must satisfy both federal and applicable state QALICB tests.
Administrative Structures and Compliance
The CDFI Fund administers the federal NMTC program, conducting competitive allocation rounds, awarding allocations to CDEs, monitoring compliance, and enforcing program regulations. State NMTC programs utilize varied administrative structures. Some states designate economic development agencies, commerce departments, or finance authorities to administer programs. Others create specialized offices or partner with existing state CDFIs for program administration.
Federal NMTCs include a seven-year compliance period during which businesses must maintain QALICB status, satisfy the substantially all test requiring 85% of proceeds to remain deployed in qualified activities, and avoid triggering recapture events. State programs generally adopt comparable compliance periods, though specific requirements vary. Layered transactions must satisfy both federal and state compliance requirements throughout overlapping compliance periods. Reviewing successful NMTC projects demonstrates how businesses effectively manage dual compliance.
Allocation Availability and Program Scale
The federal NMTC program operates at a substantial scale with annual allocations typically ranging from $3.5 billion to $5 billion or more in recent years. This allocation volume supports hundreds of CDE awards and thousands of individual business financing transactions annually.
State NMTC programs operate on much smaller scales, reflecting the state’s fiscal capacity. State allocation volumes range from as little as $5 million annually in smaller state programs to $100 million or more in larger, more established state programs. These minor scales limit the number of transactions supported and may concentrate state allocations among fewer CDEs.
Strategic Advantages of Layering Federal and State Credits
Despite their differences, federal and state NMTC programs work synergistically when layered in the same transactions. Projects in states with active state programs can potentially access both federal and state allocations, resulting in combined credit rates that may exceed 50% or even approach 60% in specific structures.
This credit layering substantially improves project economics, enabling below-market financing terms that make marginal projects feasible or transform good projects into desirable investments. The combined federal and state credit value enables CDEs to structure financing with minimal or zero interest rates, extended payment terms, or quasi-equity features, which dramatically reduce business capital costs.
However, successfully layering credits requires navigating both federal and state requirements, coordinating compliance across both programs, and structuring transactions that satisfy multiple stakeholder groups. Working with experienced NMTC advisory services helps evaluate whether pursuing state credits alongside federal allocations is justified, considering the additional complexity, and ensures optimal transaction structuring for maximum benefit.