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IMPLAN Blog

A Look at Procuring New Markets Tax Credit Funding, Pt. 2

May 4, 2018 by Sarah K. M. Gross

Two weeks ago, I published a post about the New Markets Tax Credits (NMTC) Program in the spirit of this year’s tax season coming to a close. Continuing on the topic, I sat down with our Marketing Design Director, and author of our newest Case Study “Of Curds & Whey”, Tim French, to pick his brain a little on the company he chose to interview and highlight as an exemplar of NMTC allocations done right.  

Sarah Gross: How did you choose Muscoda as your study for Tax Credits, specifically NMTC?

Tim French: Initially I was talking to the sales team about clients of ours who have done impact analyses in the past, and one client of ours, Baker Tilly, had done this study that featured Muscoda Protein Products (of Muscoda, WI) as their client. So, we dug into what MPP did and how that fit into the program, what projects they were looking to fund through the program, and looked more broadly at who they are as a company.

To be perfectly honest, I really fell in love with them. Their current owner/director, Mr. Meister, is also in charge of Meister Cheese which incidentally is right next door. The two factories are sister companies and they are situated right next to each other. [Mr. Meister] had been operating for a number of years under this philosophy of “logical environmentalism.” What that basically entails is doing what makes sense business-wise but also doing what makes sense for the environment.

For example, they had been importing natural gas from some distance away and having to pay for that to be transported to the factories to operate the burners/furnaces which heat the milk in order to produce the cheese, and to reduce the whey in order to extract the protein. So what they did was get in contact with a local lumber mill and collect all of the sawdust and offcuts which the lumber mill had been paying to send away to a paper mill a great distance away. So they took the offcuts and the sawdust and engineered a furnace which would give them all these controls over how much oxygen would go into the burning process, how much heat would come out, and how much fuel etc... and engineered a hyper-efficient way of burning this local fuel in order to get maximum output of energy. What little waste was leftover from that burning process (some ash and carbon waste) could be used then to be sown into the earth as a fertilizer. Which they actually did. There is a nearby field where they use the waste from the burner to fertilize the field and grow switchgrass, which is a material that is flammable/well-suited to be included as a fuel for the burner. So they are approaching almost 100 percent efficiency with the way they are handling it. It’s local, its’ efficient, it’s more environmentally friendly than natural gas, and almost smokeless.

So that mentality of logical environmentalism carried through from not just that example, but also sourcing milk locally, instituting processes and procedures for their dairy farms from whom they collected milk to treat their cows very well (their cows needed to have 24/7 hour access to pastures if they wanted it) and all of this sort of aggregated into a company that has fantastic products and is doing wonderful, wonderful things for the community.

So, where that was connected to Baker Tilly is that they needed to get funding in order to update the equipment and they also needed more people on staff to operate that equipment. Ultimately the funding they secured went to refurbishing or replacing the old equipment and supporting actual new jobs. They actually created jobs, not just importing them or having temporary jobs, but real onsite, full-time employment to boost their local economy.

SG: So that’s why they were looking for the New Markets Tax Credits. How much of all that prior to the application was so environmentally conscious? Or was that as a result of being awarded the allocation?

 TF: Oh that’s a great question. To a certain extent, it went hand in hand. So the fuel furnace which I mentioned earlier, they were able to get that made and maintained by way of a grant which they secured through a different program. So they had already been familiar with various program types. And when Baker Tilly was consulting with them to find an appropriate program for funding the new factory equipment and hiring those individuals, they found that the New Markets Tax Credits program was kind of the right fit. Given how much they needed to borrow and the scope of the project, the fact that they were in a qualifying census tract, it ticked a few other boxes down the line for what technically qualifies a project for New Markets Tax Credits. So it’s kind of that logical environmentalism thing all over again. I can’t say definitively whether or not the environmental angle directly contributed to the approval of that project, but it certainly is a fabulous byproduct of funding a company that already thinks that way all the time.

SG: As far as I know, there is no environmental consciousness requirement for NMTC application, but do you think that in the future that could put some projects as a priority over others given the way some legislation and renovation is going?

TF: I think so, because I think people are realizing that the Good Lord has stopped creating more American soil. So there is certainly more of an interest in environmental programs. Consider the way people talk about the National Park Service. Back when it was first founded, people just wanted to create a nice space to play croquet on a weekend. But today, tons of attention goes into the valuation of national parks and how they economically contribute to society at large. I think the total valuation was something like 92 billion dollars—that’s just how much it is worth to the American people to have the park service. So there is a kind of consciousness now, not only legislatively, but also generally and publicly about caring for the environmental aspect of any kind of human endeavor. So not only can we model the economic impact of hiring people with jobs, there’s technology, science, and research tools now supporting calculations that account for the dollar value in carbon emissions of a particular activity. So its possible now, in the way that the NMTC cares about measuring the return on investment of supporting a project in terms of jobs and median household income, to have the ability to do basically the same thing for the environmental impact. So if we are talking about funding a project that is trying to ostensibly reduce carbon emissions, we can go and see based on the activities of a plant over the course of a year, what fuels they use and spot checks along the way, ‘did it work?’ So it’s not only jobs and taxes and income that we can measure and translate to an economic value, it’s also those environmental impacts that are becoming more measurable and contributive toward the legislative process.

SG: So, not only is Muscoda Protein Products a good example of using a firm like Baker Tilly to conduct an impact analysis to project the impact of what those NMTC dollars would be used for, they are also somewhat on the forefront of the environmentally conscious movement which is kind of what drew you to them?

TF: Totally. I think they would be a great candidate for re-evaluation whenever researchers, economists, and scientists have pulled together and determined the best way to model the environmental impact of something. I’d love to revisit Muscoda Protein Products or Meister Cheese and see what happens under their purview because they would be a fantastic go-to to see a before and after. I would be very surprised if we don’t discover that all the good things they’ve been doing the whole time actually had a positive effect.

SG: So how do you think that using Baker Tilly to conduct the impact analysis contributed directly to the awarding of those dollars to Muscoda Protein Products?

TF: I think in a significant way, especially when you consider the process for being awarded funding through NMTC program—that you have to get connected to a CDE, and that CDE has to be willing enough to find means to produce the loan that relies on those tax credits as awarded to that CDE by the CDFI. So, getting Baker Tilly involved was a smart move because Baker Tilly is a consultant that knows the game. They knew which CDEs to try and talk to to get that funding. The one they ended up working with, the Rural Development Partners, they had funded projects similar to Muscoda in terms of the profile of the region. Baker Tilly knew to pitch that to CDEs to get their attention in that specific way. If you’re a business owner and have never applied for a New Markets Tax Credit before, and are just kind of dipping your toe into the water, I think doing what Muscoda did and getting in touch with a consultant who has a history of successfully funding projects and executing those impact analyses is the best way to go.

The other advantage to doing that is it’s great to have an economist look at your business and carefully translate that into economic inputs as far as an impact analysis is concerned. Because there are so many economic factors at play in determining what the economic contribution of what an individual business might be, or translating various different activities that your business may be doing in addition to producing its primary product or service that an economist knows to look for and translate into an accurate-as-possible impact analysis.

 

SG: What if you want to conduct an impact analysis yourself for something like this?

TF: There are lots of tools out there that you can use to conduct an impact analysis. I think the one that makes it easiest and is very affordable is IMPLAN. What IMPLAN does is give you access to all the economic data for the entire country, or state, or counties that you want to look at. And you can set up an analysis that finds impacts for business decisions if, for example ‘I want to see what happens if I add 5 jobs and I know I’m going to pay these 5 individuals this much to do these jobs and I’m going to employ them for an entire year at least’. IMPLAN will show you what the impacts are of making that specific business decision. You’re going to see where those dollars flow throughout the economy, what kind of taxes they generate, that those jobs support other jobs and other industries in the local economy, and so on. Because we all know that when you take your paycheck home, you’re going to go to the grocery store and spend some money, and that money you spend at the grocery store goes to supporting the jobs of those who work at the grocery store, same for the gas station, same for your local gym. So all of these cumulative effects (what are called indirect and induced effects) support so much economic activity. IMPLAN gives you a window into how that all happens in any given economy. And it’s really the foundation of determining the potential economic impact that a government program would be looking for specifically in awarding funding or awarding tax credits.

SG: So would you say conducting an analysis like this really gives you an edge in your application for tax credits, as is evidenced by Muscoda Protein Products?

TF: Yes totally, and I think that edge gets even sharper when you go back after you’ve finished those business activities and you see what changed in your local economy. You can’t say that there is an exact 1-to-1 contribution because economies are complex, but you can at least see in what direction the economy moved and know that whatever business activity you were involved in contributed to that in some way. That sharper edge also comes in terms of determining the return on investment for the government in terms of whether or not what you did had the desired effect. Most tax programs, I would dare say all of them, have some stipulation that says the design of this tax program is intended to create jobs, or intended to raise census tracts out of poverty. So showing that ROI involves doing that impact analysis upfront and then also doing a follow-up impact analysis after the fact or several years later to see the ways in which the economy changed as a result of your business activity and as a result of seeing those funds come through all those incentive programs.

SG: Essentially a before and after?

TF: Totally.

SG: What are your thoughts on MPP/Meister cheese?

TF: So Good! In the interest of full disclosure, we ordered a bunch of cheeses from their online web store. All of which were really good. The one spicy one was really really good. I thought it would be great on nachos. They make great cheese as is evidenced by all the awards they win. You can go to their website and see year over year how many state fair awards they have won… it’s just really good stuff.

SG (who was fortunate enough to share in some of this cheese): Not only is MPP doing well with their allocated dollars, they are thriving and winning awards.

TF: Oh Definitely, I would definitely say so.

 

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Topics: New Market Tax Credit, Funding

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