Historic Tax Credit Update: The Sky is Not Falling, But Work Still Remains

“This program was as good as dead”

I’m an historic tax credit attorney and developer.  I’m also an historic preservation consultant.  So, when Congress proposed to eliminate the federal historic tax credit (HTC) program last fall, let’s just say I had a few sleepless nights.

Fortunately, I had a productive outlet for my anxious energy through the loosely knitted coalition of HTC stakeholders and preservation advocates that made it their (second) job to retain the HTC program.  Industry groups and agencies at the national, regional and local levels led a relentless lobbying and advocacy campaign to save HTCs.  By any measure, the advocacy response on behalf of the program was unprecedented.  After all, the HTC program has performed so well, for so long, that there had never been a meaningful attempt to eliminate it, until the fall of 2017.  And the 2017 bid to eliminate the HTC was indeed meaningful.  As a Beltway lobbyist remarked at a recent HTC development conference: “I did not expect to be back here this year; this program was as good as dead six months ago.” 

But it survived.  Not entirely surprisingly, I suppose, given what the HTC program has weathered during the last ten years alone:  from an economic recession that crippled the construction industry (2008) to an anti-industry tax case that rocked the program (2012) to IRS regulations that countered decades of settled industry practice (2016).  Each of those events damaged the value of the federal HTC (as the 2017 changes certainly will), but none of them killed the program.

That being said, while the federal HTC program survived, it sustained a pruning.  The House’s slash-and-burn tax bill was draconian toward the HTC: outright repeal effective as of year-end, with a precariously short transition period for projects already underway.  In anticipation of the tax reform bill’s quick passage in the House, the HTC industry turned its attention, and lobbying efforts, to the Senate.  After topsy-turvy deliberations that initially included repeal, Senator Cassidy (R, Louisiana) led an effort to retain the HTC, proposing instead to downgrade it to a “five-year” tax credit (more on that in a minute) and to eliminate the “non-historic” 10% rehabilitation tax credit.  That proposal ultimately won the day, and the industry immediately moved to analyze the new law and its market impact heading into 2018.

Developers Jason Yots and Karl Frizlen leveraged Historic Tax Credit Investment
in the rehabilitation of 170 Florida Street, Buffalo NY

A Whole Lot Better Than No Credit At All

A primary goal during tax reform negotiations was to find sources of revenue to offset the expensive tax cuts Congress sought.  On a dynamic basis, the HTC program more than pays for itself, once all economic activity resulting from the HTC investment is accounted for.  However, on a static basis, the HTC program looks like a give-away of taxpayer money because that method only accounts for the cost to the government.  Not surprisingly, the tax reform “scoring” process was largely static, and the HTC scored “high” enough to be lumped in with other budget-plugging cuts in the House bill. 

            The HTC program has always enjoyed bipartisan support, and bipartisanism ultimately saved the program.  The House’s static valuation approach, however, ignored one of the HTC industry’s strongest advocacy talking points: that the program is a lean government catalyst that sparks far more economic activity than it costs taxpayers.  Instead, HTC proponents emphasized more traditional arguments in favor of the program, such as the deep community impact afforded by many HTC projects and the fact that the program is an effective rental housing and middle-class job creator.  These more accessible grassroots arguments caught the attention of both politicians and their constituents, and the effort to save the HTC gained traction.

But Senator Cassidy and his coalition still needed to reduce the HTC program’s static cost to the Treasury to ensure its survival, leading to the five-year credit that became effective at the end of 2017.  Under the old HTC program, a taxpayer/investor receives her HTCs in the year that her project is “placed in service” (available for legal use).  Under the new HTC program, HTCs now are available “ratably” over the five-year period beginning with the project’s placement in service.  While reducing the hit to the federal budget, this shift also reduces the market value of federal HTCs because a taxpayer/investor is receiving the same tax benefit over a longer period of time.  From a simple time-value perspective, HTCs are now worth less than they were under the old HTC program.  In New York, we’re seeing this programmatic change translate into a $.10 - $.15 decrease in gross “pricing” for federal HTCs available under the new program.  On a $10 million project, that translates into roughly $200,000 – 300,000 in lost HTC value. 

While this lost HTC value will require more resources from developers and economic development agencies in the short-run, it will not kill many New York projects, in part due to proactive changes recently made to New York’s HTC program, explained in more detail below.  As a result, the general consensus among HTC industry members is that the five-year credit will remain workable for most deals, and certainly is a whole lot better than no credit at all.

The Sky Is Not Falling, But Work Remains

The good news is that the HTC program likely will survive for the foreseeable future; the not-as-good news is that the less valuable five-year format likely also will.  Whether or not Republicans retain control of the House in November 2018, it is unlikely that the sweeping “tax reform” that was accomplished in 2017 could be repeated any time soon.  In reality, past tax code overhauls have proven to be generational, at their quickest (the last was in 1986).  Also, the Treasury Department still has not issued most of the technical clarifications required to smooth over the hastily drafted and adopted 2017 law (for example, “ratably” was not defined in the new HTC law, but the concept is central to its operation).  To the extent that we do see Tax Reform 2.0 soon, it likely will be a much narrower bill that focuses on technical corrections to the 2017 law.  And, if Democrats gain control of the House in November, the HTC program is almost assured of survival, if not improvement.

While the sky may not be falling, there remains work to be done to protect and improve the HTC programs.  For their part, New York lawmakers acted proactively this year to separate and protect New York’s HTC from devaluation as a result of the federal HTC changes. First, New York HTCs were “decoupled” from federal HTCs so that New York HTCs will remain one-year tax credits, rather than five-year.  This change has helped to stabilize the market value of New York HTCs, and may even increase their value now that the federal corporate tax rate has been reduced to 21% (state HTCs are federally taxable).  Second, the New York HTC program was extended through the end of 2024, removing investor uncertainty that was growing in anticipation of the New York program’s prior 2019 sunset.

On the federal side, it will be an uphill climb to restore the federal HTC program to its 2017 format, whether or not the House flips in November.  This is due to a number of factors, including more pressing legislative priorities and a growing consensus among some HTC industry members to leave well-enough alone and focus on getting deals done under the new program.  However, while we may not see a feasible proposal to restore the old HTC program, we have already seen legislative efforts to improve the program in other ways.  Recently, a bipartisan group of lawmakers introduced the Historic Tax Credit Enhancement Act (S. 3058 and H.R. 6081), which would eliminate the requirement for a taxpayer to reduce her tax basis in an historic building by the amount of the federal HTC.  In short, that change would eliminate complications created by the 2016 IRS regulations mentioned above, would generally boost the net value of HTCs and would help to broaden investment options for HTC projects.

If we’ve learned anything from the 2017 tax reform, it’s that even a successful federal economic development program that has enjoyed bipartisan support for nearly 40 years is vulnerable to ideological shifts in Congress.  To protect against early extinction, HTC industry members and preservation advocates must remain battle-ready, even during apparent times of peace.  If we allow complacency to creep back in, we may be doomed to repeat history.