New tax credits aim to boost rural business investment while helping communities

Grassland Dairy Products, headquartered in the small town of Greenwood, Wisconsin, is the largest family-owned butter creamery in the world. But when management decided recently to increase raw milk production by 30%, it had trouble securing the necessary capital. Barriers to traditional funding included the volatility of the dairy business and the high cost of construction.

Grassland needed an alternative. Through a partnership with CEI Capital Management, LLC, the dairy has now secured $10 million in New Markets Tax Credit capacity to fully fund the expansion. This federal tax credit incentivizes investment in low-income communities, bolstering businesses rooted in place to increase production and create new employment opportunities. The dairy's expansion will help add 34 new full-time jobs and increase stability for its existing 376 employees.

CEI Capital Management, which facilitated the financing and the use of the tax credit, is one of one hundred community development entities that serve as intermediaries in the New Markets program. Each intermediary is annually allocated a portion of the $5 billion in credits. Businesses like the dairy don't receive the tax credit. Instead, the credit goes to the investors, like U.S. Bancorp Impact Finance, which provided the equity for Grassland's expansion. The tax credit is an incentive for investors like U.S. Bancorp to finance a project that has a positive community impact. Intermediaries like CEI Capital Management that allocate the tax credits can then make loans to the businesses with better-than-market terms, like flexible features and lower rates. For every dollar invested by the federal government, New Markets Tax Credits generate $8 of private investment in these communities, according to the U.S. Treasury Community Development Financial Institutions Fund website.

The Daily Yonder takes a closer look at how federal tax credits are encouraging investment in rural businesses and the effect it is having on rural communities.

Investing in building businesses—and communities

The term "tax credit" may evoke images of tax breaks given to outside manufacturers to set up shop in a community. These types of arrangements have a poor track record of achieving social gain. But the New Markets Tax Credits are fundamentally different, according to Brett Theodos, a senior fellow with the Urban Institute. He has completed three different research projects on the program in the last decade with the nonprofit research institution. Allocatees are required to have a social mission, and a competitive process to receive credits drives positive benefits. Strict federal eligibility and reporting requirements ensure accountability. His research has found that the tax credits generate substantial economic activity, create lasting new jobs, and decrease poverty, though there is a question about whether existing or new residents benefit the most.

Theodos shared that the program has a 20% rural project requirement. Citing smaller projects and fewer building professionals, he said, "It is harder to make investments into rural places. That is why it is good there are groups, like [CEI Capital Management], that really know the rural space and focus on them."

CEI Capital Management is a wholly owned subsidiary of Coastal Enterprises, Inc., a Maine-based Community Development Financial Institution. Coastal Enterprises founded CEI Capital Management at the start of the New Markets program as a way to increase the potential size of their investments and expand their geographic reach beyond New England. According to their 2022 Impact Report, the organization has created and preserved 12,097 rural jobs in 96 projects across the United States since 2004. 

In an interview with the Daily Yonder, CEO Traci Vaine explained how CEI Capital Management uses the program. She said the New Markets credits are flexible and able to fund almost any type of business in any size community.  The company has found a niche in the program by focusing on rural manufacturing businesses. It benefits from the decades-long expertise of its parent organization in food processing and forest products to make a significant impact in communities, Vaine said. 

"Rural communities often have underutilized or non-existent manufacturing facilities that require significant expense," said Vaine. "Investors need an incentive, and the New Market Tax Credit can be the catalyst to bring the capital to these communities."

Ensuring corporate responsibility with accountability and a lot of patience

Manufacturing's unique characteristics make it ideal for creating economic mobility, something that can be hard to come by in rural places, Vaine said. Manufacturing businesses have positions that don't require higher levels of formal education. When companies offer employees with entry-level positions training and chances for promotion, they facilitate moving up the economic ladder.

That kind of advancement is one of the tenets of CEI Capital Management's Good Jobs Framework, which is foundational to its investment approach. Vaine explained that to decrease poverty in low-income areas, businesses need to create more than just jobs. Employment must provide those opportunities for advancement, a living wage, and benefits like health insurance and paid time off. 

Ensuring this kind of corporate responsibility begins before CEI Capital Management partners with a business. The staff meet with town leaders to ensure the company goals align with community needs. In selecting partner companies, CCML seeks out ones that already have a corporate culture with a good-jobs mentality. Theodos said, "These are the right design elements that could make [the tax credit] truly benefit communities."

A Community Benefits Agreement is one way businesses are held accountable. CEI Capital Management staff also monitors the businesses through quarterly updates, covering progress in construction, training, and compensation. They check in with local leaders and implement site visits if necessary.

"Giving communities false hope about a great company, then not following through, causes more harm than good," said Vaine. "We become very friendly with the projects, and most of the time the businesses have far exceeded their goals."

The New Markets Tax Credit is, in Vaine's words, "patient capital." The Treasury regulations require a seven-year credit term, providing ample time for projects to get off the ground and bring benefits to fruition. 

"Economic development takes time to mature," she explained. "With the tax credits, the federal government is taking some of the risk out of these investments."

This story was produced by The Daily Yonder and reviewed and distributed by Stacker Media.