Crimson Fried

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Alabama reveals the politics of Historic Credits

Alabama’s state legislature let its Historic Tax Credit (HTC) expire in May 2016, but the credit’s legislative opponents were telling colleagues it would be reinstated —with the same seven-year extension—later this year or in 2017.

Welcome to the often-strange saga whereby states slowly embrace and improve tax credits that encourage the preservation and rehabilitation of historic buildings—in general, emulating the federal Historic Tax Credit, which is now in its fifth decade and was made permanent in 1986 by Ronald Reagan.

“For $60 million in state of Alabama historic tax credits over three years the result is almost $400 million in investment across the state,” says David Fleming, President and CEO of REV Birmingham, a public-private partnership formed in 2012 to “stimulate business growth and improve quality of life” in the city. “The Historic Tax Credit has clearly created momentum for revitalization in communities large and small.  It has encouraged investment in parts of our cities that have struggled to attract reinvestment for a generation.” Such figures, he emphasizes, speak for themselves: “A total of 52 preservation and rehabilitation projects, many of which would not have happened without this tax credit; nearly $55 million in federal tax credits are coming to Alabama, due to the investment of these projects; 2,133 direct construction jobs and 1,373 operational-phase jobs; and for every one dollar of tax credit allocation the state invests in the program, $3.90 is returned to state/local tax collections over a 20-year period.”

Bottom line, Fleming says: “the tax credit is too smart an investment for the state to pass up. We know from numerous studies that rehabilitation of historic buildings usually does more to improve or enhance your local economy than even the same amount of new construction.”

Rebirth of Birmingham
Walk through downtown Birmingham today and you see building after building being reinvented, calling forth the community’s past to help provide economic growth to its future. Many are located near each other in clusters that magnify each one’s impact; e.g. the 19-story, luxury Thomas Jefferson Hotel, opened in 1929 and is the site of world’s “last rooftop zeppelin mooring mast;” the Pizitz Building (see “Ritzing Up the Pizitz,” TCA, May 2015) flagship store for a regional department store chain founded in 1899; and the Lyric Theater, a vaudeville and silent movie venue opened in 1914.

Thus, says Birmingham Mayor William Bell, state legislators should be raising the overall amount of

Historic Tax Credits available each year because “to lose that tax credit would really bring a halt to a lot of the renovations.”

Nonetheless, the Alabama HTC died. “It is difficult to anticipate exactly where such expiration-renewal battles will emerge,” says Renee Kuhlman, who studies state HTCs for the Washington, DC-based National Trust for Historic Preservation. “This is true because the state incentives were adopted in different years and they also differ in the length of time that they are authorized – some, for four years and some have been authorized to continue for ten.”

Such political battles persist even though no study anywhere challenges the conclusion that a state gains tax revenues by adopting a Historic Tax Credit. Such tax credits, notes the Comptroller of the Currency, an independent office within the U.S. Treasury Department, “attract new private capital to the historic cores of cities and Main Streets across the nation,” and “have enhanced property values; created jobs; generated local, state, and federal tax revenues; and revitalized communities.”

But the return on Historic Tax Credits may not reach state coffers until several years have passed, and some of the benefits—such as a more vibrant street life—can be difficult to measure.

Politics over policy
HTC opponents gain leverage from an enduring American tradition: seemingly endless opportunities to obstruct legislation. “The Alabama expiration appears to be a political one,” says Fleming. “Supporters have proven its value to our state and the credit has broad support among cities, economic developers and state political leaders. It passed the house 91-4 and had 32 out of 35 Senators as co-sponsors. But the leader of the Senate, Senator Del Marsh, decided to keep the bill ‘in the basket,’ meaning it was never assigned to a committee. It is clear it would have passed the Senate if it had come out of the basket. The credit was clearly the price for something. Politics, not sound policy, prevailed.”

Anti-HTC state legislators most often evoke an anti-government philosophy. Thus, “it’s [the state’s Historic Tax Credit] a directed government subsidy that manipulates the marketplace,” writes Alabama-based policy analyst Cameron Smith.” If developers won’t restore older properties without the credit, the state is radically manipulating the market. If the projects would have happened anyway, the credit doesn’t really have a purpose other than letting developers avoid income tax…. Alabamians are enjoying renovated offerings, like the Lyric Theater in Birmingham and the Admiral Semmes Hotel in Mobile. There’s no question about that. The bigger issue is whether they’re paying attention to the fact that they’re massively subsidizing the project costs for private developers.”

Another common argument is that HTCs benefit “big developers and not regular people.” Thus, Alabama State Sen. Trip Pittman, the state incentive’s biggest critic, considers it “welfare for rich people program,” that, if placed in perpetuity, creates an economic imbalance among developers competing in the open marketplace. “It’s time to let people stand on their own two feet,” Pittman says. “Once it becomes a permanent credit, people become dependent on it. I don’t believe in permanent incentives.”

Marsh, president pro tem of the state senate, explains, “there are people out there who will take on these projects and yes, they will take the tax credits if they can get them. Who wouldn’t? But I don’t think the credits are necessary for preservation.”

Arguments pro-and-con “remain fairly consistent when the issue does arise, like in Alabama,” says Kuhlman of the National Trust for Historic Preservation. “There’s concern about whether or not the state’s investment is prudent given its other priorities. I think once legislators understand how the program works and how they recoup their investment, the majority support these incentives – not just because they make economic sense and help revitalize older areas but because they are also preserving a state’s unique heritage.”

While many states are being creative, e.g. enacting Historic Tax Credits for projects too small to qualify for Federal credits, more and more states are focusing on the basics by:

  • adopting their own HTCs; ten years ago, about half of all states had such credits; now, 33 do;
  • making their HTC credit permanent;
  • increasing the annual HTC limit or eliminating limits entirely, as has the Federal government; and,
  • focusing on technical characteristics that increase a HTC’s effectiveness—such as transferability, whether the recipient of a state Historic Tax Credit can allocate that credit to a partner not involved in the actual rehabilitation; and refundability, whether the state will issue a tax refund to cover unused historic tax credits.

Ultimately, Alabama and other states embrace Historic Tax Credits because of market forces—they compete with each other for capital. “Developers look to see where to invest their private dollars based on whether or not the state offers an effective tax credit,” explains Kuhlman. “Mainly whether or not it’s a big enough percentage to make the projects pencil out or whether or not it’s because they can monetize the credit. When Wisconsin was examining whether or not to increase its credit from 5% to 20% in 2013, two large development companies based in Wisconsin testified that they would work in their home state if the credit were workable at 20%. Until it was increased, they were working in the surrounding states, like Iowa and Minnesota, which had more effective credits.”

In the meantime, strange politics continue. The 17 states without their own HTC fall into no regional or ideological pattern. New Jersey and Wyoming have little in common politically other than the absence of a state HTC. California usually leads the country in trends, but current governor Jerry Brown vetoed the state HTC even after both chambers of the state legislature unanimously approved it.

And Alabama? With expiration of its state Historic Tax Credit, there was extra attention as the Alabama Historical Commission and the Alabama Trust for Historic Preservation recently released their annual “Places in Peril” list.

“Can anyone recall the last time Democrats and Republicans, blacks and whites, urban centers and rural, north, central and southern Alabama, became so united over an issue? I certainly can’t,” John D. Peebles, a Mobile, Alabama-based real estate broker, wrote in a newspaper column published less than two weeks before the state legislature allowed the HTC to expire.