State Historic Tax Credits Demonstrate Importance of ‘Local’ Funding for Community Development

Published by Michael J. Novogradac on Tuesday, September 5, 2023

Journal Cover September 2023   Download PDF

The use of federal historic tax credits (HTCs) across the nation demonstrates how well-designed and coordinated state and local financial incentives attract disproportionately more federal tax credit assistance to a given area. State HTCs are an example of such a subsidy. States with HTCs attract more federal HTCs. More federal tax credit assistance in a particular state equals greater levels of community development, economic activity and state and local tax revenues.

Prevalence of State Historic Tax Credits

Thirty-eight states have their own version of an HTC, nine more than the number of states that have state low-income housing tax credits (LIHTCs) and nearly three times the number of states with a state new markets tax credit (NMTC) equivalent. For this comparison, Novogradac excludes renewable energy due to the multitude of state and local incentives for clean energy that rarely duplicate the structure of the federal credits.

State HTCs often nominally match or exceed the federal HTC. This means the state credit can significantly increase the total amount of tax credit equity raised.

The prevalence of state HTCs is growing: So far in 2023, Indiana’s legislature created a new state HTC and Minnesota reinstated its state credit. Several other states (Rhode Island, Louisiana, Illinois, Kentucky) extended or expanded their state credits, while California prepared to launch the credit that was approved by the Legislature in 2021. Legislatures in Arizona, Florida and New Hampshire introduced bills this year to create state HTCs (New Hampshire’s would be for housing only), but none became law. Nebraska’s state HTC expired at the end of 2022.

This is perhaps the golden age of state HTCs–just 10 years ago, five fewer states had state-level credits. Data shows the extra tax credit equity is key to closing funding gaps.

With 38 states having local HTCs, it’s easier to list those that don’t: Alaska, Arizona, Florida, Idaho, Nebraska, Nevada, New Hampshire, Oregon, South Dakota, Tennessee, Washington and Wyoming (Washington, D.C., also does not have an HTC). Notably, eight of the 12 states without a state-level HTC are in the West: only Florida, Nebraska, New Hampshire and Tennessee are entirely in the Central or Eastern time zones. The West’s delay in adding HTCs could be symbolic of less interest in historic preservation due to their comparatively more recent growth in population and general economic activity.

The National Park Service (NPS) oversees the federal HTC incentive. The NPS has outlined a three-part process, with associated information filings, for developers seeking federal HTCs:

  • For Part 1, the taxpayer presents information about the significance and appearance of the building, establishing the building’s historic status (buildings listed individually on the National Register of Historic Places can skip this step).
  • For Part 2, the taxpayer describes the building’s condition–including the original construction type and building use, and the proposed use after renovation–and documents renovations and estimated cost.
  • Taxpayers submit Part 3 after the renovations and includes the start date, completion date, placed-in-service date and estimated rehabilitation and total costs.

The NPS must approve all three parts for the taxpayer to qualify for the federal HTC.

The NPS annually reports the amount of HTC activity for the previous fiscal year. The report includes a state-by-state chart showing the number of Part 1, Part 2 and Part 3 applications received and approved by the NPS, along with the estimated QREs at Part 2 and Part 3. The NPS also provides with a five-year cumulative total of Part 3 approval and their qualified rehabilitation expenditures QREs (final amount for which HTCs can be claimed).

NPS data regarding Part 3 approvals illustrates those states without HTCs see less relative historic preservation activity. For example, over the period of 2018-2022, of the 12 states without a state HTC, seven are among the bottom 11 in terms of Part 3 approvals. Furthermore, the highest-ranking state for Part 3 approvals without a state credit is Tennessee, which had 43 such approvals during that period. That ranks 25th among the 50 states and District of Columbia. A brief analysis demonstrates that Tennessee vastly underperforms its neighboring states that have HTCs.

Case Study: Tennessee

Over the five-year period reported on by the NPS, the Volunteer State saw 43 properties rehabilitated, with $470 million in QREs. The number of Part 3 approvals ranks 25th among states and the amount of QREs ranks 23rd–putting Tennessee in the middle of rankings in both areas. But Tennessee is the nation’s 15th-largest state by population, so those rankings are lower than relative population would predict.

Comparing relative population of border states to relative Part 3 approvals over the five-year period 2018-2022, more starkly demonstrates that Tennessee is underperforming its neighbors.

State% of Tennessee Population% of Tennessee Part III Approvals
North Carolina152%512%

Key Benefits of State Tax Credits

What are some of the key benefits of a state tax incentive? A January report by the National Trust for Historic Preservation (NTHP) cited four benefits in a well-designed state HTC, factors that generally apply to other credits. The NTHP said a good state HTC:

  • makes historic rehabilitation financially feasible,
  • creates high-wage local jobs,
  • increases the amount of rehabilitation occurring in the state, and
  • attracts private capital to areas that have not seen public investment in decades.

Considering those benefits, not all states are equal when it comes to HTCs. Such specifics as the percentage of QREs that constitute the credit, the per-project cap, the statewide annual cap and the number of years over which the credit is taken all play a role in the efficacy of the credit in helping development.

The NTHP report says the optimal state HTC percentage is between 20% and 30% of QREs and that greater transferability for credits adds to the value. It’s not surprising that the three states that have HTCs and still rank in the bottom 10 for Part 3 approvals are Montana (with just a 5% state HTC), New Mexico ($25,000 per-project cap) and Hawaii ($1 million annual statewide cap).

Understanding the importance of the per-project amount of state HTCs, as well the statewide volume cap (if any), state legislatures ramped up their HTCs in 2023.

Arkansas and Louisiana each added bonus HTC percentages for rural areas and Kentucky raised its annual cap from $5 million to $100 million (the second-largest single-state cap, behind Ohio. Fifteen states have no annual cap). Other legislation was introduced but not passed to increase the cap (Arkansas, Virginia), provide a boost for specific types of properties (Maine, New York), expand the credit to new types of properties (Pennsylvania, Utah, New Hampshire) and to make the HTC refundable (Connecticut, Mississippi).

Lessons for Other Credits

The success of state HTCs–and the awareness of their import by state legislators–provides a roadmap for other federal tax credits that support community development efforts. It’s already happening: So far this year, three states (Texas, Ohio, Rhode Island) enacted state LIHTCs and six others (Alabama, Louisiana, Mississippi, Montana, North Carolina, Oregon) saw bills introduced to do so. Meanwhile, legislators in three states (Indiana, Minnesota, West Virginia) introduced bills to create a state-level NMTC (none passed), while Florida repealed its state NMTC.

The success of state HTCs–and strategies used by advocates–provide guidance for stakeholders in the 21 states that lack a state-level LIHTC and the 37 states without a state-level NMTC (as well as the 12 states without a state HTC). Two actions are recommended practices to encourage legislators to create, expand or enhance a state-level community development tax credit.

  • Remind state legislators of the role that state credits play (or could play) in attracting federal tax credits to make more community development projects financially feasible. Invite legislators to events such as grand openings and always remind them of the role that a state credit played or could have played.
  • Provide financial information (available from the A.C.T.I.O.N. Coalition for LIHTCs, the NMTC Coalition for NMTCs and from the Historic Tax Credit Coalition for HTCs) documenting the economic benefit from state credits, including job creation, the amount of federal benefits that accrue and the number of properties that would not be completed but-for the state credit.

State HTCs demonstrate the catalytic role state credits can play in increasing community development in a state, which in turn brings additional jobs, economic activity and higher state and local tax revenue. A win, win, win, win, situation.

Learn more about Novogradac's expertise and many services