New Report Confirms Symbiotic Relationship of State and Federal Historic Tax Credits

Posted on: April 17th, 2013 by Special Contributor

by Renee Kuhlman

By now, many of you have breathed a sigh of relief and put your 2012 taxes behind you. But how many of you filled in the line item for a state historic tax credit?

Apparently many people did because these historic tax credits caught the eye of two economists in the Washington, D.C., budget office. Jeffrey Oakman and Marvin Ward, both fiscal analysts, wondered if state historic tax credits for commercial buildings spurred the use of the federal credit, and if so, why?

So they decided to undertake the first comprehensive examination of the 31 state tax incentives as a unit. Their research appears in the report, Leveraging Federal Economic Development with State Historic Rehab Tax Credits, which was released in January.

Wash_Mills_North_elevation_BEFORE

According to an independent 2012 report, states with active historic tax credit programs leverage on average between $3 to 7 million in federal historic tax credits. The pictured project, Washington Mills in Lawrence, Mass., benefitted from both the federal and the Massachusetts state tax credit programs. | Credit: Durkee, Brown, Viveiros & Werenfels, Architects

I was curious to know why Oakman and Ward would be interested in this topic since the District doesn’t offer a rehabilitation tax credit of its own. Turns out Oakman had worked for developers in Boston and New York on rehabilitation projects, before landing in the Office of the Chief Financial Officer of the District of Columbia.

This report is significant for several reasons. While studies have been conducted for individual states, this is the first time all of the state historic tax credit programs have been examined as a whole. In addition, this report was carried out by an independent entity (as opposed to being funded by a preservation organization) which means it should have a great deal of credibility with revenue analysts in other states.

Since funding for preservation is one of the biggest challenges preservationists face, it’s important that they understand the results and how the researchers arrived at their conclusions.

Wash_Mills_North_at_night_AFTER

Washington Mills, Lawrence, Mass., after renovation. | Credit: Durkee, Brown, Viveiros & Werenfels, Architects

Oakman and Ward initially contacted the state historic preservation offices for a description of each program’s design. They found a wide range of differences between the state programs: the percentage amount of qualified rehabilitation expenses ranged anywhere from 5 to 50 percent, the credits differed in how they were transferred (or not) to those with tax liability, and program caps ranged from $400,000 to $145 million, while per-project caps range from $50,000 to $5 million.

The researchers then used a series of algorithms to analyze how much the federal tax credits had been used in those states and what may have influenced their use.

The report is quite technical and economics majors will feel right at home. But as I waded through the specialized terms and mathematical computations, I found some important findings that will help preservationists make the case for continuing or creating state historic tax credit programs. Their findings will also be a useful resource for state legislators when they are putting state tax policies in place or improving them.

1) Specifically, elected officials will be interested in knowing that the presence of an active state tax credit program boosts the use of the federal credit—on average between $15 and $35 million in certified expenditures. That means the states with active tax credit programs are bringing between $3 to $7 million federal dollars, which would not otherwise be available, to the state.

2) A program’s design influences how well it leverages federal credits. According to Oakman and Ward’s research, the most important element is the level of subsidy being offered. Their analysis showed that an increase of 10 percent in the state credit boosted the use of the federal credit by as much as $34 to $78 million in additional certified expenditures.

3) The paper also finds that individual project caps can depress a program’s success with leveraging, but the effect is relatively small. Overall state budget caps obviously can limit a program’s success as well if they are low, but the variation in state programs makes it difficult to discern the true impact of budget caps.

Oakman was quick to point out that their office does not take an advocacy position on policy, but said that he is glad the report will be useful to decision-makers. Oakman also said, “This is just an initial look. There are a lot of opportunities for additional research here, including the intersection with affordable housing.”

Renee Kuhlman works in the Government Affairs and Public Policy Department at the National Trust for Historic Preservation where she encourages the establishment, improvement, and protection of state tax credits for historic preservation.

Economics, Real Estate