The Donovan Law Group

How to Fund and Efficiently Utilize a Natural Disaster Trust Fund

Posted in Interchange Fee, Natural Disaster Trust Fund by renergie on October 19, 2009

By Brian J. Donovan
October 19, 2009

The Highway Trust Fund is the principal mechanism for funding federal highway and transit programs through receipts from excise taxes charged to highway users, such as taxes on motor fuels. In a similar manner, a Natural Disaster Trust Fund (“NDTF”) could be the principal mechanism for funding specific recovery and redevelopment projects in areas damaged by natural disasters through receipts from a tax on interchange fees.

In 2008, credit card issuers extracted approximately $48 billion in interchange fees from U.S. merchants. Unlike other countries, the U.S. does not regulate interchange fees. The average interchange fee in the U.S. is approximately 2.10% of the value of the sale. The average interchange fee in countries throughout the rest of the world is approximately 0.3% of the value of the sale.

Using 2008 figures, if the interchange fee charged by credit card issuers was decreased (via comprehensive credit card reform legislation) from the current 2.10% to 0.60%, that would result in an annual savings of approximately $34.3 billion for U.S. merchants and consumers. Credit card issuers could retain 0.3% as a processing fee, the remaining 0.3% could be a “tax” used to fund a NDTF. In 2008, this would have generated $6.86 billion in funding for a NDTF.

Historically, Congress responds in a knee-jerk fashion to natural disasters by passing emergency aid or disaster relief bills in the wake of earthquakes, floods, hurricanes and other catastrophes.

Merely throwing money at a disaster is not the solution. Accordingly, the manner in which our government utilizes the funds from a NDTF is just as important as how the NDTF is funded. The moneys in a NDTF should be leveraged to ensure the proper and complete recovery and redevelopment of a natural disaster area.

One possible manner in which NDTF funds may be leveraged is by modeling the NDTF after the Community Development Financial Institutions Fund (“CDFI Fund”), specifically the CDFI Fund’s New Markets Tax Credit (“NMTC”) program. The NMTC program was created in December, 2000 to provide tax incentives to induce private-sector, market-driven investment in businesses and real estate development projects located in low-income urban and rural communities across the nation. The NMTC program is attracting critically needed private-sector capital to hard-to-finance but vital projects in the nation’s low-income communities. The NMTC program permits taxpayers to receive a credit against federal income taxes for making qualified equity investments in designated Community Development Entities (“CDEs”). Substantially all of the qualified equity investment must in turn be used by the CDE to provide investments in low-income communities.

In addition to the leveraging of taxpayer resources, accountability to the public is an important aspect of the NMTC program. Entities that are selected through the merit-based application review must not only demonstrate that they are accountable to the communities they serve, by including representatives from those communities on their governing or advisory boards, but they must also demonstrate their accountability to the American taxpayer. Entities awarded New Markets Tax Credits must regularly report to the CDFI Fund the projects they are investing in, and they must meet certain financial and other performance goals or risk losing their allocation of tax credits. The CDFI Fund makes information on NMTC activities available to the public through annual reports made available to the public via its website.

The CDFI Fund’s data shows that for every $1 in foregone tax revenue under the NMTC program, over $14 is being invested in important projects providing needed jobs and revitalizing these communities.

“Not only does the New Markets Tax Credit Program encourage the flow of low-cost and flexible private-sector investment into some of our country’s most economically distressed communities, but it also serves as a great example of how the public and private sectors can responsibly work together,” said Treasury Secretary Timothy Geithner. In a similar manner, a NDTF should encourage the flow of low-cost and flexible private-sector investment into our country’s economically distressed natural disaster areas.

A second possible manner in which NDTF funds may be leveraged is by offering refundable tax credits to investors and other stakeholders in areas affected by a natural disaster.

The interchange fee is a tax, just not a tax subject to political control or for which there is any discernible social benefit. It is a hidden tax paid by all Americans, regardless of whether they use credit, debit, checks or cash. Decreasing, and imposing a transparent tax on, the interchange fee would have the same stimulus effect of a tax break, but without an impact on the federal budget.

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