AND MORE TAX EFFICIENCY IN URBAN REVITALIZATION:

Modeling Profitable Philanthropy and Investment Incentives

In hopes of revitalizing depressed urban areas, US tax policy has been to use tax credits as a major incentive to induce private equity re-investment. But those give away subsidies to private investors have failed to have transformative effects, and come at a price in the billions to the public treasury. This article seeks a shift in the tax policy paradigm to increase the private equity investment, while reducing tax subsidy dependence. For the philanthropic urban investor, the short term incentive of an annual tax benefit (credits from the annual tax returns) is singularly inadequate to cause a major shift in equity investments for the urban core. A preferred method of increasing that investor’s participation is to increase the return on investments through joint ventures with tax exempt entities.

As a catalyst for increasing that investment return, Congress should transform favorable, but non-precedential private letter rulings into statutory laws that strengthen the legal authority for joint ventures between private equity investors and tax exempt entities -a process this article terms “statutorization”.

This broadened base of private equity investors accelerates the timing and volume of projects that over the long term reduce both direct subsidies to the low income residents and the indirect subsidies to the investor-creators of those projects.

Rather than merely complain about federal government failures in its tax credit program, this article provides a self help model from the private sector - a carefully configured substrata of the African American middle class- to play a greater role in solving the urban crisis. I term that investor group “Ethnivestors”. The model rejects several types of African Americans, and identifies only one with requisite characteristics akin ethnic entrepreneurship of its prior generations and other immigrants. Those groups also faced hostility and exclusion, who nonetheless formed vertically and horizontally hyper-efficient ethnic economies, armed with rotating credit unions and most importantly a trusting nurturing role within their respective small businesses for its otherwise marginalized co-ethnics. It is past time for such a reconfigured African American middle class on its own collective volition to be part of the revitalization of the urban core cities through a revitalization of its own, fostering a reunion of sorts with low income residents of common ethnicity.

Part I of this article examines the historical development of ethnic enclaves in the United States, and how ethnic entrepreneurship gave rise to an ethnic enclave economy that can provide a valuable template for a modern day Ethnivestor. I maintain the NMTC target communities are also ethnic enclaves. Part II sets forth the conceptual precepts and then the Ethnivestor model, including various characteristics and investment motivations that make an Ethnivestor well suited for a NMTC transaction. Part III is the application of economic principles to further explore whether the Ethnivestor model may lead to increased utility for the target low-income residents and the Ethnivestor in a NMTC transaction beyond that of investor groups not similarly engaged in social entrepreneurship. Finally, Part IV is the application of the theoretical model to provide concrete illustrations of how the Ethnivestor more efficiently meets the congressional purpose of assisting low income residents without marginalizing them in the process. This discussion emphasizes the importance of small business modeling that incorporates the experiences of other ethnic enclave economies. The NMTC structure and transactional scheme is also explained, followed by a discussion of how the Ethnivestor can seamlessly operate within that structure.