Treasury routed tax credits through competing community lenders

Low-income communities often lacked investable capital even when projects existed. Direct federal selection of thousands of local deals would have been slow and brittle, while ordinary investors had little reason to underwrite the hardest geographies.

The New Markets Tax Credit used a two-step market. Treasury's first competition notice said investors received credits for Qualified Equity Investments in Community Development Entities, and those CDEs then had to make qualified investments in low-income communities.

The credit was large enough to matter: 39% of the original investment, claimed over seven years. The first competitive round offered up to $2.5 billion of qualified-equity-investment allocation authority for 2001 and 2002 combined.

Subsidize the intermediary market

Competition rationed scarce tax-credit authority toward intermediaries with plans and capacity.

The seven-year credit made patient equity more attractive than a one-time grant.

CDE certification created a reusable distribution layer between federal tax policy and local projects.

When public money cannot know every local deal, allocate the subsidy to specialized intermediaries and make them compete for the right to deploy it.

The CDFI Fund says that by the end of FY2023 the program had generated $8 of private investment for every $1 of federal funding, supported over 268.2 million square feet of construction or rehabilitation, and created or retained more than 888,200 jobs.