Connecting state and local government leaders

Another Affront to Local Governments in the Republican Tax Proposals

City Hall in Maupin, Oregon

City Hall in Maupin, Oregon Michael Grass / Route Fifty

 

Connecting state and local government leaders

Tax credits for historic buildings and low-income communities have served as important economic development tools in some places. But will they survive a tax overhaul?

WASHINGTON — Republican tax proposals advancing in Congress would eliminate or scale back two types of tax credits that economic development experts say have helped cities and towns struggling with difficulties like high poverty rates and industrial declines.

The House bill would end a tax credit program that offsets part of the cost of renovating and restoring historic buildings. It would also phase out the New Markets Tax Credit program, which is designed to direct money from investors to low-income communities. A Senate measure released last week would preserve the New Markets program, but would make historic rehabilitation credits less generous.

The tax-writing Ways and Means Committee last Thursday approved the House legislation, which is expected to get a floor vote in the chamber later this week. Discussion on the Senate plan began in the Finance Committee on Monday afternoon.

“Both the New Markets tax credit and the historic tax credit ... are designed to encourage investment in communities where, absent the federal tax incentive, the normal market wouldn’t make the investment work,” said Jane Campbell, head of the National Development Council’s office of public policy and advocacy.

GOP lawmakers are looking to help counterbalance tax cuts for individuals and corporations by slicing away deductions and carve-outs elsewhere in the tax code. In doing so, they are trying to come up with a plan that does not add more than $1.5 trillion to federal deficits over a decade.

The House tax bill would not allocate any additional New Markets tax credits after 2017. This would boost federal revenues by $1.7 billion over a decade, according to congressional Joint Committee on Taxation estimates. Repealing the historic rehabilitation tax credit, as proposed in the House bill, would raise another $9.3 billion, the estimates show.

Calls to chop the credits come alongside other tax rewrite proposals that have chafed state and local government officials, such as rolling back the federal deduction for state and local taxes and eliminating tax exemptions for certain municipal bonds.

“This bill is just draining the availability of capital out of cities on every front,” Michael Wallace, program director for community and economic development for the National League of Cities, said last week by phone as he discussed the House legislation.

In some smaller cities, especially places where venture capital isn’t accessible, he added, “these tax credits are the only game in town.”

‘Doesn’t Even Make Financial Sense’

Tax credits are different than tax deductions. Whereas deductions reduce taxable income, credits directly lower the amount of taxes owed—$1 in credits generally means $1 less due in taxes.

With historic rehabilitation credits, a taxpayer can claim a 20 percent credit for the amount spent restoring certain certified historic structures. There’s also an option for a credit equal to 10 percent of the money spent to renovate some buildings constructed before 1936.

While the House tax bill would eliminate the credits, the Senate proposal would repeal the 10 percent credit for pre-1936 buildings and would cut the one for certified structures in half to 10 percent.

Between 1978 and 2016, the historic rehabilitation tax credit program, after adjusting for inflation into 2016 dollars, has spurred roughly $131 billion in investments, according to a report from Rutgers University’s Center for Urban Policy Research.

The report also says the credit program, during its lifespan, has produced a net benefit to the U.S. Treasury, generating $29.8 billion in tax receipts, compared to $25.2 billion doled out in credits.

“Eliminating the historic tax credit doesn’t even make financial sense,” Campbell said.

In Detroit, Joe Heaphy, president of Ethos Development Partners, a consultancy, said his firm is currently working with a nonprofit, the Coalition on Temporary Shelter, on a real estate project that will incorporate historic rehabilitation tax credits.

The coalition plans to renovate a building it owns so that it will have 56 units of affordable housing for homeless families. The tax credit program is slated to contribute almost $2.5 million in equity to the roughly $14 million project, according to Heaphy.

“That deal does not work without the historic tax credits,” he said.

Mechanics of the New Markets Credit

The New Markets program, which dates back to 2000, is kind of complicated. But, in a nutshell, investors and lenders contribute money that goes to so-called “community development entities,” or CDEs. And CDEs invest the money, commonly via loans, to businesses and other projects in low-income areas.

Investors in CDEs benefit by gaining access to the tax credits.

A range of organizations, including banks, nonprofits, cities and counties might create a CDE. Investors typically include large banks, like JPMorgan Chase, PNC and Wells Fargo.

New Markets credits are worth 39 percent of qualified investments and are claimed in increments over seven years.

So, in a basic example, a major bank might invest $1 million of $3 million in a CDE. During a seven-year span, the bank would get credits equal to 39 percent of the $3 million, or about $1.17 million.

That’s roughly equivalent to a 4 percent return on the bank’s investment, after considering the “time value” of money, according to Gordon Goldie, a partner with the accounting firm Plante Moran, who is familiar with the New Markets credit program.

Has New Markets Worked?

One of the more thorough assessments to date of the New Markets credit was a 2013 evaluation by researchers at the Urban Institute. It found “the most prevalent results," at least in the program's earlier years, included advantageous financing, real estate development in low-income areas, strengthened local tax bases and job creation.

“On the whole, I think it has been used to drive investment to communities and for purposes for which there would not otherwise be investment,” Brett Theodos, a senior research associate in the Metropolitan Housing and Communities Policy Center at the Urban Institute, and one of the authors of the study, said as he discussed the New Markets Tax Credit program last week.

The U.S. Government Accountability Office has scrutinized the New Markets credit multiple times over the years.

In 2014, the watchdog issued a report saying the program needed better controls and data, and that investments through it had become more complex and less transparent over time. About four years earlier, GAO said the tax credit had indeed helped to fund projects in low-income communities, but that it could be simplified.

Nearly 30 percent of the New Markets projects the Urban Institute evaluation looked at involved office or retail activity.

And Theodos noted that “a good deal of the program has some sort of real estate component to it.” But he said New Markets investments have gone to variety of ventures, including charter schools, health care facilities, parks and grocery stores.

On Capitol Hill, the New Markets credit enjoys bipartisan support.

Republicans in the House and Senate have introduced legislation this year with Democratic and GOP cosponsors to make it permanent. And Sen. Rob Portman, an Ohio Republican, has filed an amendment to the Senate tax legislation that would do the same.

'Missing Piece of Equity'

Steven Weiss is a partner at Cannon Heyman & Weiss, LLP, a boutique law firm in Buffalo, New York that specializes in affordable housing and community development law.

He highlighted Buffalo’s Electric Tower, a skyscraper originally opened in 1912, as an example of a project in the city that involved both historic and New Markets tax credits. The tower was in disrepair and threatened for demolition, but now provides commercial office space.

Weiss said that in Rust Belt cities, and other places facing economic stress, the credits can help make the finances work for real estate projects that otherwise wouldn’t be viable given depressed rent prices.

“What these credits do is they supply the missing piece of equity,” he said. Weiss added: “You're taking blighted buildings, that are boarded up, and you’re putting them back into use.”

Bill Lucia is a Senior Reporter for Government Executive’s Route Fifty and is based in Washington, D.C.

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