Novogradac Journal of Tax Credits
June 2017 | Volume VIII - Issue VI
By: Albert Rex, MacRostie Historic Advisors, LLC
With the national discussion about tax reform heating up and state budget debates in full swing, how do state historic tax credits (HTCs) fare in 2017?
There are 34 states with HTC programs. Providing a supplement to the federal HTC and acting as a development tool to encourage local investment, these incentive programs could be more important than ever if the federal program is eliminated.
State HTC programs in the Northeast are popular because of the historical building stock found there. They are also popular because of the high acquisition and construction costs in the region. When programs have an annual cap, as is the case with the Connecticut HTC, competition for funds can stunt opportunity for historic development. As reported in the April 2017 issue of the Novogradac Journal of Tax Credits, Connecticut’s $31.7 annual program funds were fully reserved in the first three months of the recent fiscal year. Senate Bill (S.B.) 819, An Act Raising the Annual Cap on Tax Credits for the Rehabilitation of Certified Historic Structures, was filed earlier this year to increase the cap to $60 million. Connecticut Preservation Action and the Connecticut Trust for Historic Preservation are working to advocate on behalf of the increase.
New York established its first state HTC program in 2007. The program was a 6 percent credit capped at $100,000 per project and was rarely used. In 2009 the program was expanded to a 20 percent credit with a $5 million per project cap. This was a positive step, but unlike many other states, the state and federal credits could not be bifurcated to accommodate separate investors, depressing the value of the state credit when syndicated. Gov. Andrew Cuomo signed a budget bill in March 2013 to ensure that the 20 per- cent HTC (for income-producing properties) was ex- tended through 2019 and improved the program by allowing the credit to extend to investors who do not have state tax liability and take the credit as a refund beginning in January 2015. In April, Gov. Cuomo boasted that his state led the nation in the number of completed historic rehabilitations using tax cred- its and made $748 million in overall investments in 2016 alone. Look for advocates to begin ramping up a campaign for legislation to extend the program beyond its 2019 sunset date.
The Southeast is a hotbed of HTC news. Top among the headlines is the new version of a HTC moving through the Alabama Legislature. With the former program being allowed to expire in 2016, questions about the real economic benefits of such a credit were addressed by a study released in January 2017 that was commissioned by the Alabama Department of Revenue and conducted by the University of Tennessee (“Evaluation of Alabama’s CAPCO Credit and Historic Rehabilitation Tax Credit”). The HTC received an overall “B” rating, receiving the lowest marks for “efficiency” and “evaluation.” Recommendations from the study were incorporated into new bills in both the Alabama Senate and House.
The initial House version passed with a vote of 95-7 in April, and May 9 the Senate voted unanimously to send the bill back to the House for a third reading. Final changes include increasing the age of a certified historic structure from 50 years to 60 years, requiring 40 percent of credits to be allocated to rural counties for the first two quarters of the fiscal year (they will be available to any project in the state thereafter), allowing a refund for the credit, and limiting the value of a credit to 85 cents on the dollar. Rules are expected to be posted by October 2017 with new applications to begin in January 2018.
Other news out of the Southeast includes a per-taxpayer cap of $5 million for Virginia’s HTC program and an increase in the per-project cap in the Arkansas Historic Rehabilitation Income Tax Credit. The Virginia change comes from scrutiny by state legislators of the highly popular program that makes the state one of the most active for HTC projects in the country. (See the August 2016 issue of the Novogradac Journal of Tax Credits for an overview of the issues being addressed.) This change is temporary, expiring in 2019, and hopefully in that time legislators will come to see the importance of an uncapped program in keeping pace with the economic development that the program has spurred. The increase in Arkansas allows for a 25 percent credit to be taken on up to $1.6 million (up to $400,000 in credit) after July 1, up from $500,000 (or a $125,000 credit).
In Georgia, the state HTC that was passed in 2015 is beginning to reap rewards as 2017 is the first year that credits can be taken under the new bill. Early indications are that there is an increase in interest throughout the state in using this credit for historic building development in some of the Southeast’s most historic cities like Atlanta and Savannah. (See the June 2016 issue of the Novogradac Journal of Tax Credits for an assessment of the Georgia HTC.)
Wisconsin HTC advocates are using newly released data from a University of Wisconsin-Milwaukee Historic Preservation Institute and Baker Tilly Virchow Krause LLP report to oppose a proposal by Gov. Scott Walker to radically cut the state’s HTC program and its economic benefits. Gov. Walker’s plan would cap total state HTC allocations at $10 million and would require Wisconsin developers to compete for the incentive. According to the new report, since 2014 the state HTC has granted $171 million in tax credits to 118 projects statewide and the credit created an estimated 15,680 construction and permanent jobs. The report also notes how state HTCs benefit projects not just in major cities but also in dozens of smaller communities across Wisconsin. (See the February 2016 issue of the Novogradac Journal of Tax Credits for more about the economic impact of the Wisconsin Historic Preservation Tax Credit.)
The River Edge Redevelopment Zone (RERZ) tax credit in Illinois, a program that focuses on the redevelop- ment of historic properties along the Mississippi River in Aurora, East St. Louis, Elgin, Peoria and Rockford, is extended through the end of 2017. New legislation has also been introduced in the Illinois House (H.B. 3096) to create a similar stimulus program called the Lincoln- Douglas Tax Credit that will impact historic buildings in the seven cities where the Lincoln-Douglas debates occurred.
During the 85th Texas Legislature Regular Session, the Senate passed S.B. 550, allowing the Texas HTC to be applied toward premium insurance tax in lieu of the state franchise tax. This would broaden the pool of investors in the program and would provide an alternative that keeps the tax credit viable should the franchise tax be altered or eliminated. The Texas program, introduced in 2015, has been responsible for a dramatic increase in federal HTC applications and has impacted not only the larger cities in the state but also small communities like Elgin. (See the April 2016 issue of the Novogradac Journal of Tax Credits for our full assessment of the program’s impact.) Currently, the Texas House of Representatives is considering the premium insurance tax legislation.
Oklahoma faced a proposed $7 million annual cap to its currently uncapped HTC. H.B. 2352 was created to address a $900 million shortfall in the state budget, but this restriction would have dramatically decreased the amount of economic activity throughout the state. The bill was withdrawn, but expect that this threat may return in future sessions.
The Importance of State HTCs
The loss of the federal HTC would certainly have an impact on many state programs, especially ones that are directly tied to National Park Service (NPS) approvals. But even if the federal HTC survives, changes in tax policy could have an impact at the state level. As the federal government cuts more funds to the states, states must make up for these shortfalls, and as legislatures across the country engage in the budget process, they will take a much closer look at all of their tax expenditures. Advocates for state HTC programs understand this and continue to commission studies that focus on the positive economic impacts states experience from the redevelopment of their historic assets.
Bill MacRostie is the senior partner of MacRostie Historic Advisors LLC and is located in Washington, D.C. In private practice for more than 30 years, Bill has advised clients nationwide on historic rehabilitation projects of many sizes and types. He can be reached at firstname.lastname@example.org or 202.567.6055. Visit www.macrostiehistoric.com for more information about MHA and our expert team.
This article first appeared in the June 2017 issue of the Novogradac Journal of Tax Credits.
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