Historic Tax Credits and the Gubernatorial Veto

Novogradac Journal of Tax Credits
October 2016 | Volume VII - Issue X

By: Albert Rex, MacRostie Historic Advisors, LLC

For the past 30 years, historic tax credits (HTCs) have been a powerful economic tool in states across the country. Currently, 33 states have programs that supplement the federal HTC and new programs are proving successful in states such as Texas, where there is no state income tax and the state HTC is used to reduce the state franchise tax. (See the April 2016 issue of the Novogradac Journal of Tax Credits to learn more about this program.) Conversely, programs are being disposed of in states such as Alabama, where the program that helped to stimulate development in Birmingham was allowed to sunset last year amid political posturing in the state Senate.

Advocates of state HTC programs can point to several key factors that make them desirable and successful. Among other things, HTC programs:

  • Encourage affordable housing. According to the annual fiscal report by the National Park Service (NPS), 23,569 units of housing were created  using the federal HTC in 2015 alone and more than 8,000 of those units were for low- and moderate-income residents.  Helping  to  move the needle are state programs such as the one in Connecticut that provides a bump in the available HTC credit amount for rehabilitation projects that create affordable units. And in Massachusetts, the HTC program requires at least 25 percent of all developments that receive credits include affordable housing, which is usually far exceeded.

  • Create jobs. The 2015 NPS report also noted the federal HTC program created more than 85,058 jobs nationwide. States with HTC programs undoubtedly provide the majority of these jobs.

  • Create a competitive advantage. In states where   a robust program exists, there is an economic advantage as investors and developers are  looking for opportunities to pair state credits  with the federal HTC. The list  of  states  that  have experienced economic growth and outside investment due to a state HTC is significant.

In addition to being strong economic drivers that have a catalytic affect, the other factor common to most state HTC programs is that they are always under attack. In recent years, there has rightly been a lot of focus on tax reform at the federal level. State HTCs are also under constant scrutiny. As budget shortfalls at the state level are more pronounced, a more constant vigilance is required to keep state programs in place.

But what about states that have never had HTC programs?

As of 2015, California and New Jersey ranked  in  the top 10 for gross domestic product in the United States. (California ranks first and New Jersey  comes  in  at  No. 8.) So with such robust economies  and  therefore an increased need for housing, why has neither state adopted a state HTC program?

Budget issues are often the biggest problem for the passage of state HTCs, but a less common–but just as powerful–factor can be a governor’s personal proclivity against these types of programs.

In January 2010, the New Jersey 214th Legislature introduced the Historic Property Reinvestment Act (A1851/S659). This legislation proposed a 25 percent HTC, with no individual project cap, for businesses and a program cap that would grow incrementally from $15 million in 2011 to $50 million 2014. Despite bipartisan support, Gov. Chris Christie vetoed the legislation, along with 13 other bills in a budget reduction exercise that his administration claimed would be a “return to the same irresponsible spending practices and lack of budgeting discipline that brought about the fiscal crisis the governor has been working to repair.”

Among the reasons  cited  for  this  sweeping  veto  was a lack of identified funding sources.  Gov.  Christie lauded the programs as tax cuts that New Jerseyites “deserved” saying, “Job-creating tax cuts and incentives must be paid for and made a priority as part of a long- term, fiscally responsible budget plan for the state.” He suggested that the programs were a “one-shot”  effort and encouraged a more comprehensive plan that demonstrated a “commitment to fiscal responsibility.”

Gov. Christie at the time seemed to acknowledge the value of tax credits. However, despite more recent efforts to pass a state HTC, New Jersey is still without one. In the meantime, some developments may have been abandoned because the funding source was not   in place. Developers of a large 1938 apartment complex in Newark, for instance, were unable to  redevelop  a 272 unit building after funding including low-income housing tax credits (LIHTCs), federal HTCs and Federal Emergency Management Agency (FEMA) incentives (after Superstorm Sandy) could not fund the project. Had there been a state HTC in place, Newark may have benefited from this needed rehabilitation.

Similarly, California Gov. Jerry Brown vetoed the Economic Development and State Historic Tax Credit Act (AB 1999) on Sept. 29, 2014, despite unanimous support in both legislative bodies of California. The legislation originally called for a 25 percent base tax credit for historic properties, but was revised to a 20 percent base with a 5 percent added credit for low- income housing developments. Efforts were underway again in 2015 to pass the legislation, but no legislation has passed.

With such overwhelming support for the 2014 California bill, questions arise about the intention of Gov. Brown to discount the incentive. At the Urban Land Institute Fall Meeting last year in San Francisco, Brown was asked about his decision to veto AB 1999. He responded with an account of the arcane budget rules in California where a tax incentive can be enacted by the Legislature with a simple majority, but rescinded only with a two- thirds majority, thus having the practical political effect of permanence in the tax code. Further, he felt the HTC bill was a one-off effort relating to a single issue, while his preference would have been for a larger bill that took a more holistic view of development incentives. However, candid remarks that followed suggested a personal frustration with the requirements of developing historic properties that he faced in Sacramento and Oakland.

 It is worth noting that the opportunity for historic development in these two states is tremendous. As of 2015, New Jersey had more than 1,686 listings on the National Register and California had 2,671. Many of those listings are historic districts,  meaning  there are thousands of buildings that  may  already  qualify for HTCs. In addition to having a large number of National Register listings, both states have several large metropolitan areas as well as a number of smaller cities, towns and boroughs that are ripe for redevelopment. And both states are active users of the federal LIHTC program that provides additional scoring in their qualified allocation plans (QAPs) for developments that use historic buildings, with California also having a state LIHTC program.

Whether an HTC program gets lost in a larger package of tax reform or has to overcome personal bias of key politicians, advocating for state HTC programs where there are none continues to be a worthwhile endeavor. In the same way as keeping a state historic tax credit program, getting one requires constant vigilance and leadership at the highest level. Next November, New Jersey will go to the polls to elect a new governor  and California will follow in 2018. With that in mind, now is the time to start thinking about reviving HTC legislation in these states with a focus on who may be the candidates to pass these largely bipartisan bills.

Albert Rex is a partner of MacRostie Historic Advisors LLC and Director of MHA Northeast in Boston. With more than 20 years of professional experience in historic preservation and economic development, Albert and his team provide services for a wide range of historic rehabilitation projects. Albert can be reached at arex@ mac-ha.com or (617) 531-7161. Visit www.macrostiehistoric.com for more information.


This article first appeared in the October 2016 issue of the Novogradac Journal of Tax Credits.

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