How Gubernatorial Races in 2018 May Affect State Historic Tax Credits

It is a big election year–perhaps bigger than any other midterm election in recent history. Among the most highly anticipated contests are 36 gubernatorial races. 
How will these races affect state historic tax credit policy? Does a governor’s party indicate where they may stand on this issue? Good questions to consider when headed to the voting booth. 

Are Historic Tax Credits a Partisan issue?

According to election predictions from sources like The Cook Partisan Voting Index (as of June 29, 2018), it appears that the majority of the races lean Republican or are the Republicans’ to lose, about 10 of the 36 races are a tossup. The rest are leaning or expected to go to a Democrat. For this reason, the following commentary focuses on candidates and values of the two political parties. 

By almost every account, support for historic tax credits (HTCs) does not fall squarely along party lines.

In the past year, for example, both Republican and Democratic politicians have led efforts to support effective HTC legislation at the state and federal levels. Some of the most outspoken support for retaining the federal HTC in the 2017 tax reform bill came from Republican Sens. Bill Cassidy of Louisiana and Tim Scott of South Carolina. On the other side of the aisle, Democratic Sen. Ben Cardin of Maryland and Rep. Earl Blumenauer of Oregon were co-sponsors and vocal supporters.

As part of the effort to enact sweeping tax reform legislation that lowered rates and simplified the tax code, however, it was the Republican majority in the House that proposed to eliminate many tax expenditures, including the HTC. Fortunately, at the end of the tax reform debate, Republican majorities in the House and Senate reached a consensus to reaffirm the HTC as an indefinite part of the tax code. 

Legislative debate at the state level also suggests that HTCs are not a partisan issue. More often than not, legislative decisions about state HTC programs come down to managing budgets and have less to do with policy concerns about incentivizing historic rehabilitation. While some legislators seek to defund programs they perceive as less important in order to conserve state funds, others take issue with the idea that successful real estate developers might receive public funds at the expense of other social programs.

Criticisms of state HTCs from the left and the right are typically based not on the idea that historic rehabilitation is unworthy, but that social and economic return on investment often takes time to manifest. After a thorough review of the economic impact of state HTCs, legislators on both sides of the aisle usually reach the conclusion that HTCs provide a net positive for a state’s economic and social objectives. This is why states continue to adopt some form of state HTC. 

The Role of a Governor in HTC Legislation

The support (or opposition) from a governor can make or break HTC legislation. 

Take, for instance, North Carolina. In 2015, legislators let the robust 20 percent state HTC sunset. After hearing from resident preservationists and an outspoken business community who felt they were losing an economic development battle with their southern neighbors in South Carolina (which recently enhanced its credit from 10 to 25 percent), then-Gov. Pat McCrory embarked on a statewide campaign to bolster support for reinstating an HTC program. (Incidentally, the South Carolina program that was largely modeled on of the successful North Carolina program.) His tour, led by his Secretary of Natural and Cultural Resources Susan Kluttz, included his promise to include an HTC in his proposed budget for 2016 and an appeal to constituents to contact legislators and sign petitions in support of the measure. His outspoken support helped to secure the passage of a new program with a 15 percent base credit. 

Similarly, West Virginia’s Gov. Jim Justice added a widely supported bill to increase the state’s HTC from 10 to 25 percent in a 2017 special session that led to its swift passage. Like Gov. McCrory, preservation organizations convinced Gov. Justice that they were losing out to neighboring states that had more effective HTC programs: Ohio, Pennsylvania, Virginia, Maryland and Kentucky. 

New York Gov. Andrew Cuomo has been a supporter of his state HTC, proudly announcing in the spring of 2017 that the Empire State led the country in number of projects completed using the federal program. Therefore, an early announcement in 2018 that part of his plan to address budget concerns would be to cap all credits in the state and defer their benefits for three years was a surprise to some. Fortunately, the New York state legislature did not support this proposal. The struggle highlights the vulnerability of HTCs when a governor’s priority to serve the bottom line results in sweeping changes to an entire set of legislative tools without considering their individual merits.

In addition to the support that governors can bring to the table, their ability to veto legislation led to several states going without HTCs. California is the prime example of this case. Gov. Jerry Brown, who is not eligible for re-election this term, vetoed a state tax credit bill that was unanimously passed by the California Assembly. New Jersey also faced this gubernatorial opposition from former Gov. Chris Christie during his tenure. New Jersey’s new governor, Phil Murphy, elected in 2017, has been signing a slew of tax credit bills–including solar, production and TV tax credits–in recent months. This could indicate a favorable condition for HTCs to be reintroduced. 

Wisconsin’s Gov. Scott Walker caused a stir in 2017 when he made a line-item change to the state’s budget item that capped its state HTC at $5 million per project. His removal of one zero resulting in a $500,000 project cap sparked a sudden outcry from preservation and development communities and advocates quickly went into action. After some negotiation, which appears to have been Walker’s intent in taking such an action, a project cap of $3.5 million compromise was reached. 

Races to Watch this November

In states without HTCs, a change in the governor’s mansion may make the way for such programs. With an Illinois HTC passing both chambers in the General Assembly, Republican Gov. Bruce Rauner has the opportunity to sign the first true statewide HTC bill into law before November elections. Rauner is running a tight race with Democratic challenger J.B. Pritzker. If for some reason Rauner does not act, the winner of the race will be a critical component of this legislation. 

Similarly, efforts to revive a state program in Michigan have been thrust into the spotlight with Ford Motor Company’s purchase of the historic Michigan Central Station in Detroit that would stand to benefit greatly from such an incentive. Republican Gov. Rick Snyder is term-limited, and the Michigan primaries take place Aug. 7. Advocates are hopeful, however, that Gov. Snyder will look favorably on the proposed state HTC if the bill should pass the full House later this fall.

Perhaps most notably, because of Gov. Brown’s personal dislike of HTCs even when the legislature overwhelmingly supports them, the new California governor–Democrat and current lieutenant governor Gavin Newsom or Republican and businessman John Cox–will be a key factor in the passage of a Golden State program. Undoubtedly, this change in guard has been anticipated by advocates, who are ready to re-engage their elected officials in the coming months. 

Several states that have HTC programs will rely on gubernatorial support in the next term. Georgia’s program sunsets in 2021 with roughly 80 percent of the credits already allocated. Demand for the program has not waned as communities like Athens, Augusta, Carrollton, Columbus, Macon, Savannah and Valdosta have benefited and look toward new historic rehabilitations. Gov. Nathan Deal is term-limited, so a new governor (likely a Republican) will be instrumental in the future of the program. 

Pennsylvania also recently began to explore the possibilities of increasing its HTC to compete with surrounding states New York, Ohio and West Virginia. Either incumbent Democratic Gov. Tom Wolf or Republican challenger Scott Wagner will need to believe in the merits of such an increase in order to sign proposed legislation into law. Gov. Wolf just last year was in favor of limiting all tax credit programs in the state in order to reduce the state revenue available for them by 20 percent or $100 million. Pennsylvania’s Senate Republican Majority Policy Committee and Senate Urban Affairs and Housing Committee are calling for a study to determine if an increase in the annual aggregate cap of $3 million (and $500,000 per project) is feasible. Polls indicate that Wolf will likely be re-elected, so an economic impact study would likely be the next step in convincing him (and the General Assembly) of the program’s potential ROI. 

In every state, the governor’s support for their HTC matters. Their support cannot necessarily be gauged by his or her political party. What does play a factor in successful state HTC programs is grassroots advocacy and a demonstration of what economic benefits will result. Economic impact studies, ribbon cuttings, catalytic investment in underserved communities, and hearing from grassroots and industry professionals–this is what influences our elected officials. 

Special contributors to this article were Renee Kuhlman and Shaw Sprague of the National Trust for Historic Preservation. Learn more about NTHP’s advocacy for state HTCs at forum.savingplace.org/learn/fundamentals/economics/tax-credits/state-htc. 

Bill MacRostie is the senior partner of MacRostie Historic Advisors LLC and is located in Washington, D.C. In private practice for more than 30 years, Bill has advised clients nationwide on historic rehabilitation projects of many sizes and types. He can be reached at [email protected] or 202.567.6055. Visit www.macrostiehistoric.com for more information about MHA and our expert team.