The HTC remains a valuable tool in making historic preservation profitable.
President Donald Trump's election in November 2016 foreshadowed major changes to our nation's tax code - initially threatening preservation of the Historic Tax Credit Program.
Early tax reform conversations among the Big Six - Senate Finance Committee Chairman Orrin Hatch; Senate Majority Leader Mitch McConnell; House Speaker Paul Ryan; House Ways and Means Committee Chairman Kevin Brady; Treasury Secretary Steven Mnuchin; and former Trump economic adviser Gary Cohn - included elimination of the HTC altogether. This prospect sent shockwaves through the HTC community, which rallied fast and furiously to lobby to save the HTC from elimination or other negative modification.
Through these efforts, the HTC's prospects went from quite bleak (complete elimination), to a cut in half from 20 percent to 10 percent, to remaining at 20 percent but being allocated over five years instead of all at once at project completion. This final treatment of the HTC is what ultimately was signed into law by President Trump in the Tax Cuts and Jobs Act of 2017.
Comprehensive tax reform was conceived of, pushed through, and put into law breathtakingly quickly - less than three months from start to finish. But as a result of a robust campaign undertaken by stakeholders in the HTC industry, the worst potential outcome - elimination of the HTC - was avoided.
The Federal Historic Tax Credit is an incentive created to help offset the cost of rehabilitating historic buildings, a process that frequently is more expensive than ground-up construction. The HTC originally was created as part of the Tax Reform Act of 1976, signed into law by President Jimmy Carter. It subsequently was expanded by the Economic Recovery Tax Act of 1981, also known as the Kemp-Roth tax cut, and was made a permanent part of our tax code as part of the Tax Reform Act of 1986, signed into law by President Ronald Reagan.
Since the HTC's inception, more than 43,000 projects leveraging nearly $90 billion in private investment have been completed in all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, according to the National Park Service, which administers the program. Perennial top users of the credit include Louisiana, Missouri, New York, Ohio, and Virginia. In 2017, use of the HTC resulted in $5.8 billion in private investment and more than 100,000 jobs being created, according to the NPS Annual Report for Fiscal Year 2017. The use of the HTC often is bolstered by state historic tax credits, which currently exist or are pending in more than 35 states. State HTC programs often mimic the federal HTC in eligibility, credit amount, and process.
The HTC is currently 20 percent of qualified rehabilitation expenditures, which include most, but not all, of the costs incurred when renovating historic properties. In a much-simplified example, if a developer purchases a qualified historic property for $1 million and spends $1 million renovating it, he could qualify for a $200,000 credit offsetting his or her federal taxes. The credits also can be monetized by partnering with those looking to offset federal tax liability for a discounted exchange rate. Using the example above, the developer may partner with a corporation or individual looking to offset income taxable at the federal level and be able to turn the $200,000 in credits into $150,000 in project equity.
The HTC had been taken in a lump sum at project completion prior to Jan. 1, 2018. With a few exceptions, it is now taken over five years following project completion. Given the time value of money, a longer credit disbursement period equates to less value per credit. This is compounded given lower corporate tax rates.
The statistics cited earlier with regard to the number of projects completed, jobs created, and private dollars invested are indicative of the HTC's performance year-over-year. The program has had a major impact in communities large and small in the 40 years of its existence. Despite the changes undertaken to the HTC during tax reform, it remains a valuable tool without which many historic rehabilitation projects would not be undertaken.