Historic Preservation: Incentivizing Companies Through Tax Credits.

• Author: Adorno, Ejulius

1. INTRODUCTION: THE IMPORTANCE OF HISTORIC PRESERVATION II. BACKGROUND: THE DEVELOPMENT OF HISTORIC PRESERVATION TAX CREDITS A. The Development and Process of Historic Preservation B. Economic Benefits of Historic Preservation C. Incentives and Tax Credits 1. Federal Tax Credit 2. State Tax Credits and Incentives for Companies III. ANALYSIS: VARYING STATE TAX CREDIT PROGRAMS AND THEIR IMPACT ON PRESERVATION INVESTMENT A. Characteristics and Structure of Historic Rehabilitation Tax Credits 1. Specific Percentage Rates 2. Annual Aggregate Caps 3. Rehabilitation Requirements 4. Transferability of the Tax Credit B. The Structure and Impact of Specific State Tax Credit Programs 1. Iowa Tax Credit Program 2. New York Tax Credit Program 3. Oklahoma Tax Credit Program IV. RECOMMENDATION: MAXIMIZING PERCENTAGE RATES AND MINIMIZING ANNUAL CAPS A. Maximizing Percentage Rates B. Maximizing or Eliminating Annual Aggregate Caps C. Clear and Concise Requirements D. Freely Transferable Tax Credit V. CONCLUSION: THE FUTURE OF TAX CREDITS I. INTRODUCTION: THE IMPORTANCE OF HISTORIC PRESERVATION

   The preservation of historic structures not only helps preserve the cultural history of communities across the United States, but it also provides these communities with an enormous amount of economic benefits that come in the form of jobs, revenue, and increased property values. Company investment in historic structures has been a vital part of historic preservation and bringing these benefits to communities all across the country. The single largest way to get companies to invest in local historic structures is to provide a monetary incentive in the form of tax credits.

   This Note looks at the role tax credits play in incentivizing businesses to invest in historic preservation. Particular interest is placed on the unique characteristics different states use in their tax credit programs and how different states are better able to incentivize investing in historic preservation through their respective tax credit programs. First, the Note will give a brief background on historic rehabilitation tax credits at the federal and state level and look at the economic benefit historic rehabilitation provides for states, local communities, and companies. The next part will comparatively analyze the tax credit programs of three different states to determine what types of characteristics best incentivize companies to invest. Finally, this Note recommends that states alter their tax credit programs to include several features that will likely increase company investment in historic structures in their state.

2. BACKGROUND: THE DEVELOPMENT OF HISTORIC PRESERVATION TAX CREDITS

   In recent decades, historic preservation, or landmarking, has developed into one of the most vital tools to protect American architectural culture and heritage. (1) Historic preservation is utilized to maintain traces of historical events, persons, and spaces that have shaped communities across the United States. (2) Today, historic preservation is a complex system of laws, policies, and advocacy groups at the national and local levels of government with participation from private and public sectors. (3) The benefits of historic preservation--including increased economic activity, job growth, increased tourism, neighborhood stabilization, and the promotion of arts and culture--are far reaching and drastically outweigh any possible disadvantages that come with preservation. (4) As a result, the Federal and state governments provide tax incentives or credits for individuals and companies who invest their money in purchasing and rehabilitating historic structures. (5)

   The tax credits help to encourage companies to rehabilitate and invest in historic structures.

   1. The Development and Process of Historic Preservation

      Preservation began late in the nineteenth century when citizens of Virginia sought to preserve Mount Vernon, the historic home of George Washington. (6) However, historic preservation did not gain momentum until the early twentieth century, when Congress enacted the Antiquities Act of 1906, which gave the President power to designate historic landmarks and structures located on federal land. (7) In the 1960s, Congress began increasing historic preservation efforts and raising public awareness, which culminated in the National Historic Preservation Act of 1966 (NHPA). (8) The NHPA authorized the Secretary of Interior to maintain a National Register of Historic Places, such as districts, buildings, and certain monuments to protect historic property at a national level. (9)

      Additionally, the NHPA encourages states to maintain their own preservation programs by following the guidelines and criteria set forth by the NHPA. (10) Governors of each state are required to designate a State Historic Preservation Officer (SHPO) to implement and oversee a state preservation program, as well as implement the required federal preservation program. (11) The responsibilities of the SHPO include conducting a survey of historic properties statewide, identifying and nominating historic properties to the National Register, and overseeing the applications for listing historic properties on the National Register. (12)

      Preservation also occurs at the local level, and the SHPO is required to assist local governments in developing their own preservation programs. (13) Once a local program is certified, it is authorized to carry out the responsibilities delegated to it by the NHPA and is eligible for funds through the program. (14)

      More than 90,000 properties are listed in the National Register, and almost every county in the United States has at least one historical structure listed. (15) A wide range of historic buildings are preserved each year. (16) For example, commercial buildings may be restored for commercial or residential usage, while residential buildings can be restored as housing units or commercial usage. (17) The National Register is "expansive in its inclusion and potential inclusion of historic, corporately owned or operated property because of its relatively lenient criteria for listing." (18) To be considered eligible for the National Register, a property must meet the criteria set forth by the federal preservation officers. The property must be at least 50 years old, and it must be associated with historically important events, activities, people, or achievements. (19) Nominations for historic preservation sites can be sent to the SHPO and proposed nominations are reviewed by the state's historic preservation office and National Register Review Board. (20)

   2. Economic Benefits of Historic Preservation

      Historic Preservation and rehabilitation efforts have resulted in a wealth of economic benefits to local communities across the United States. According to the Advisory Council on Historic Preservation, in 2008, preservation projects that were approved for a tax credit generated 55 jobs each, and historic preservation activities in Texas alone have generated more than $1.4 billion of economic activity each year. (21) Preservation projects involving rehabilitation have a local impact on the economy due to the hiring of local construction workers and service personnel. (22) For instance, Colorado, Texas, and California have estimated that historic preservation programs have created tens of thousands of new jobs in their states. (23) Historic preservation has a large impact on tourism in states across the country. More than 15 states, including Colorado, Tennessee, and Arizona, report a positive economic impact of cultural tourism and historic preservation in their states. (24)

      Preservation efforts also help to maintain property values in both residential and commercial areas and visitors to these sites spend billions of dollars. (25) Regional variations in property values make nationwide studies on the impact of historic preservation on property values impossible. (26) However, local studies where historic districts are compared to non-historic districts provide conclusive data showing how property values in historic districts increase much faster than those in non-historic districts. (27) Studies on property valuation show "a uniform pattern of some percentage of increase to property values resulting from rehabilitation efforts to historic properties or properties located in historic designation districts." (28)

      Although this is not an exhaustive list of the economic benefits of historic preservation and rehabilitation, it is a good representation of how it can contribute to state economies and why the federal and local governments want to encourage corporations to invest in historic preservation sites.

   3. Incentives and Tax Credits

      To encourage preservation of historic resources, the government provides incentives for those who own and rehabilitate a structure designated as a historic preservation site. (29) Some of these incentives include federal preservation grants for rehabilitation, federal and state level tax credits, and preservation easements (30), which are described in Section 170 of the Internal Revenue Code as conservation easements. (31)

      While tax credits are not the only incentive for those interested in purchasing and rehabilitating a historic structure, they arguably provide the biggest enticement. (32) Congress adopted a tax incentive in the Tax Reform Act of 1976, and two years later, the Supreme Court decision in Penn Central Transportation Co. v. City of New York (33) established that historic preservation was a valid outlet to utilize land-use controls, such as certain building and renovation restrictions. (34) Both federal and state laws offer tax credits that can come in the form of local property tax freezes or income tax credits. (35) Tax freezes exclude the value of funds spent on rehabilitation of a historic structure for a certain number of years, whereas a tax credit refunds a portion of rehabilitation expenditures. (36) Numerous examples...