Illinois recently extended the sunset date for their historic rehabilitation tax credit for the second time in less than a year. Taxpayers now have until Dec. 31, 2021, to claim a tax credit for qualified expenditures on a historic structure, as opposed to Dec. 31, 2018. While Illinois taxpayers may claim the federal credit statewide, the state-level credit is only available for structures located in the River Edge Redevelopment Zone. However, organizations like the National Trust for Historic Preservation seek broader parameters from legislatures for historic preservation credits.
The National Trust frequently engages in lobbying efforts for historic preservation/rehabilitation tax credits on both the state and federal level. The National Trust is a private organization that was chartered by Congress in 1949 and advocates for the preservation of historic sites by providing petitions, media toolkits, and taxpayer letter templates to legislators, as well as a host of informational resources. Along with advocating for changes to specific credits, they also produce policy recommendations for ideal tax credits.
Typically, state-level historic preservation credits are based primarily on the federal tax credit. The federal Historic Preservation Tax Incentives Program, enacted in 1976, allows owners of income-producing properties, like a business or rental home, to receive a 20 percent tax credit on expenditures for rehabilitation or preservation. The structure must generally be listed on the National Register of Historic Places and must be used for an income-producing purpose for at least five years. In addition, the rehabilitation project must exceed the pre-rehabilitation cost of the structure and the rehabilitation work must meet certain standards. There is no cap on the dollar amount that taxpayers may claim. Examples of this credit being used can be found nationwide from the San Francisco water front to Washington, D.C.’s Union Station. States that have enacted similar credits tailor the requirements to their own needs by broadening or decreasing eligibility and amounts.
The National Trust is in favor of easing restrictions. They argue that aggregate credit caps should be increased or eliminated because they can discourage necessary but expensive renovations while encouraging cheaper projects that may not even need an incentive. Some states set individual project caps to increase the total amount of projects that are able to receive the credit. However, the National Trust believe caps may hinder larger building rehabilitation projects.
The organization also wants state credits to extend beyond federal credit limitations by applying to private owner-occupied residences, noting that over 23 states currently allow it. To increase the usability of the credits, they also lobby for allowing carry-back, transferability, and applicability to industry-specific taxes. Without those aspects, they believe qualified projects may not apply for the credit because they may not have the ability to apply them to their own taxes.
Problematic Preservation in Missouri
Missouri’s June 2017 Governor’s Committee on Simple, Fair, and Low Taxes report on tax credit reform analyzed the state’s current historic preservation program and suggested vastly different policy changes. With an annual aggregate credit cap of $140 million, Missouri offers the largest amount of rehabilitation credits in the nation. Further, projects receiving less than $275,000 are not subject to the cap. Missouri has issued over $1 billion in preservation credits from 2007 through 2016. The credit also has broader eligibility compared to the federal credit and other states in that a maximum of $250,000 can be awarded to private owner-occupied residences.
While the report acknowledged that the program can be used to encourage further development in otherwise underutilized areas, it also found that the current costs of the program outweighed the benefits. For every dollar awarded in 2005 to 2015, residents of the state only received $0.26 of economic benefit. In response, the committee proposed general credit guidelines, including denying applications for activities that may occur without state incentives. The report also found that there was no clear way to determine how many rehabilitation projects may occur without any state incentive. Some development projects are already eligible for the federal level credit and other incentives and therefore can stack multiple credits for the same project. Unlike other economic development credits, Missouri’s historic preservation credit was not designed to create revitalized areas or jobs, so there is no way to measure how often either are created. In sum, the credit currently appears to primarily benefit developers, not residents.
Therefore, the report suggested more restrictions, not fewer. In contrast to the National Trust, the report argued for a lower aggregate and per-project cap, including adding a new per-square footage value cap so that luxury upgrades are not subsidized by taxpayers and more money is available for other credit programs. To provide for more predictable budgets, the report proposed removing the three-year credit carry-back and shortening the current 10-year carry-forward. It would also add a sunset provision to evaluate the project every few years. In keeping with the report’s general tax credit reform proposal of denying awards that do not meet a public purpose, the state would no longer allow private owner-occupied residents to be eligible for the credit.
If Missouri adds restrictions to eligibility or credit amounts, it would hardly be alone. Some states have already implemented similar restrictions. Other states go even further, like Ohio, which only approves credit applications on a case-by-case basis in a highly competitive process. However, states that offer credits have some help in funding the projects. The National Trust found that states with a program receive an additional $3 to $7 million in federal dollars. Could that be enough to persuade the Illinois legislature to expand their program?
Continue the discussion on the BBNA State Tax Group on LinkedIn: Should historic preservation tax credits focus on increasing economic development or rehabilitating historic buildings?
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