Novogradac Journal of Tax Credits
December 2016 | Volume VII - Issue XII
By: Bill MacRostie, MacRostie Historic Advisors, LLC
In a year of unprecedented political drama, state historic tax credit (HTC) programs have also felt the weight of political pressure and public debate. Some programs have won, others lost. Some programs have been threatened while others are awaiting their fate. As 2016 comes to a close, we review some of the headlines that have shaped the historic tax credit landscape from sea to sea.
Programs that Won
Overall, 2016 was a good year for state HTC programs. One of the most publicized victories was the reemergence of a state program in North Carolina that included a statewide tour by Republican Gov. Pat McCrory and Susan Kluttz, secretary of the Department of Cultural Resources, to tout its merits in small towns across the Tar Heel state in 2015. This came after a well-used set of North Carolina HTC programs was allowed to sunset at the end of 2014. The revamped program went into effect Jan. 1, with a base credit of 15 percent and 5 percent add-ons for historic mills and economically distressed counties. The new program introduced a hard cap of $20 million per project.
Georgia also benefited from 2015 reform that saw significant changes in the program for projects to be placed in service after Jan. 1, 2017. An increase in the project cap from $300,000 to $5 million helped make Georgia more attractive for development in the Southeast and at a larger scale. The new law, however, includes a $25 million annual cap for the program for those that qualify for more than $300,000 in credits. Projects with credits less than $300,000 remain uncapped.
In Mississippi, the state HTC program took a stutter- step in 2015 as the state ran out of HTC funds to distribute, after the lifetime cap was set at $60 million in 2006. The program was reauthorized in mid-2016 but with an annual program cap of $12 million annually and a five-year sunset. The renewed program is more focused on income-producing properties by excluding owner-occupied residential properties from this round of funds. Advocates for the program credit the renewal of the fund with continued development in places such as Gulfport, Jackson and Natchez.
In early February, developers of historic buildings in Oklahoma held their breath as the state Legislature considered cutting the state’s HTC program as part of a statewide Fiscal Responsibility Moratorium Act, a bill aimed at tackling the state’s $900 million budget shortfall going into the 2017 fiscal year. Advocates and the business community in Oklahoma convinced the bill’s sponsor, state Sen. Mike Mazzei, that the economic benefits of the program far outweighed its costs. As a result, it was removed from the proposed list of eliminated incentives. Oklahoma’s economy has been heavily impacted by the depressed oil market and will continue to benefit from the rehabilitation projects and construction jobs the federal and state HTCs help facilitate.
Despite the faltering oil market, the Texas economy continues to grow and its new HTC program is proving to be a healthy stimulator of economic development. The program completed its first full year at the beginning of 2016 and the number of annual federal HTC applications more than tripled in the state since the program started, up from just nine in 2014. The amount of annual federal HTC claimed in 2015 more than quadrupled from 2014 to more than $70 million. The successful Texas program can serve as a model for other states–such as Tennessee and Florida–that would allow developers to benefit from a credit taken against state franchise tax in the absence of a state income tax.
Programs that Lost
One of the most dramatic storylines of the year was the loss of the Alabama Historic Rehabilitation Tax Credit. This successful state program was introduced in 2013 and capped at $60 million. Legislation to extend and refill the coffers looked to move quickly through both state legislative houses before making its way to the governor’s desk. Surprisingly, the bill hit a snag in the Alabama Senate when Senate President Pro Tem Del Marsh decided to table the bill despite overwhelming bipartisan co-sponsorship and outspoken community support. State Sen. Marsh cited concerns about the budgetary impact of the program, since most of the $60 million in credits applied for were claimed. Marsh called for more analysis, even though Novogradac & Company released a report in January that concluded the program would return $3.90 to the Alabama tax base for every $1 in state historic credit allocated over a 20-year period.
Many believe the bill to extend the Alabama HTC program will be up for review again in 2017 (a non- election year) and will likely get the necessary votes to pass.
Programs that Came up Short
The state HTC program in Connecticut met its $31.7 million cap in April, the fourth quarter of the state’s July-to-June fiscal year. For 2016-17, however, the cap was met in September, leaving rehabilitation project owners hoping to apply for the credit unable to do so. Individual projects are capped at $4 million of credit with an extra incentive for those projects twinned with low-income housing tax credits (LIHTCs).
Expect advocacy groups to urge Connecticut legislators in 2017 to raise the cap for the program to address the issue currently at hand and to ensure that preservation efforts will continue to be encouraged.
Programs to Watch in 2017
Another program that came under scrutiny in 2016 was the Virginia Historic Rehabilitation Tax Credit. The state’s Joint Subcommittee to Evaluate Tax Preferences recently turned a critical eye toward the program that allows for a 25 percent credit against income, insurance premiums and bank franchise taxes. Concerns raised in the June subcommittee meeting were addressed at length by supporters of the program in an August hearing. Information presented at the hearing included a review of the economic impact on the state based on a Virginia Commonwealth University Center for Urban and Regional Analysis conducted in 2014, and a report on state programs around the country that are capped in some way. The joint subcommittee is considering an option to defer recommendation to next year, when they can better understand the return on the state’s investment. At that time, they will debate whether the credit should remain at 25 percent, the impact of a potential cap on the credits and whether there should be any prioritization in the program.
The truth is that state programs are always at risk, as state economies can change quickly for many reasons. One such risk is that project caps can be placed on previously uncapped programs. In 2014, Wisconsin Gov. Scott Walker placed a moratorium on the then- new 20 percent state program due to concerns over the impact of the credit based on the initial use of the program. Fast-forward to 2016, where the lift of the moratorium led to a significant investment in historic properties across the state and a positive impact on the Wisconsin economy. Studies that grew out of the advocacy for an uncapped program, specifically those of a joint University of Wisconsin-Milwaukee and Baker Tilly impact analysis, are having continued impacts around the country as a way to quantify the benefits of such HTCs.
Renee Kuhlman, director of public outreach at the National Trust for Historic Preservation, advises that now is the ideal time to get engage in advocacy, since most legislative sessions start up again in January. Ongoing efforts to strengthen or initiate programs in Arizona, California, Illinois, Kentucky, Massachusetts and West Virginia need support. “Because these credits make business sense,” Kuhlman says, “the numbers practically speak for themselves.”
It is important for HTC advocates at both the state and federal levels to keep a watchful eye on legislation that could impact programs and to be ready to demonstrate the benefits of programs should they be threatened. For instance, big elections almost always have a way of creating a dustup around budgets and taxes, but when that dust settles we are confident that in most cases the positive impacts of HTCs on economic growth will win out–if there is a concerted effort to help officials understand the positive impacts of these programs. Looking forward to 2017, we all need to be doing our part to ensure that there will be more wins for state HTC programs.
This article first appeared in the December 2016 issue of the Novogradac Journal of Tax Credits.
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