Exhibit B Maine.pdf

TAX

EXPENDITURE

REVIEW

FINAL

REPORT

Evaluation of the Maine Historic Rehabilitation

Tax Credit (HRTC)

Report No. TE-HPRES-20 a report to the

Government Oversight Committee from the

Office of Program Evaluation & Government Accountability of the Maine State Legislature

November

Exhibit B

Maine Historic Rehabilitation Tax Credit

GOVERNMENT OVERSIGHT COMMITTEE OF THE 130th LEGISLATURE .

Senator Nathan Libby, Chair Representative Genevieve McDonald, Chair

Senator Lisa Keim Representative H. Sawin Millett, Jr.

Senator Donna Bailey Representative Amy Arata

Senator Richard Bennett Representative Mark Blier

Senator Susan Deschambault Representative Margaret M. O'Neil

Senator Jeffrey Timberlake

Representative Holly Stover

OFFICE OF PROGRAM EVALUATION & GOVERNMENT ACCOUNTABILITY

Director Lucia Nixon

Staff: Mailing Address:

Matthew Kruk, Principal Analyst 82 State House Station

Scott Farwell, Senior Analyst Augusta, Maine 04333-0082

Jennifer Henderson, Senior Analyst Phone: (207) 287-1901

Amy Gagne, Senior Analyst Fax: (207) 287-1906

Kari Hojara, Analyst Web: http://legislature.maine.gov/opega

Joel Lee, Analyst Email: sabrina.carey@legislature.maine.gov

Ariel Ricci, Analyst

Sabrina Carey, Administrative Secretary

ABOUT OPEGA & THE GOVERNMENT OVERSIGHT COMMITTEE

The Office of Program Evaluation and Government Accountability (OPEGA) was created in statute (Title 3, Chapter 37) in 2003 to assist the Legislature in its oversight role by providing independent objective reviews of the agencies and programs of State Government. The Office began operation in January 2005. Oversight is an essential function through which legislators determine whether current laws and expenditures are achieving intended results.

OPEGA is a nonpartisan independent legislative office overseen by the Government Oversight Committee (GOC) a bipartisan joint legislative committee. OPEGA conducts reviews at the direction of the GOC. Independence, sufficient resources and the authorities granted to OPEGA and the GOC by the enacting statute are critical to OPEGA’s ability to fully evaluate the efficiency and effectiveness of state agencies and programs.

Requests for OPEGA reviews are considered by the Government Oversight Committee in accordance with a standard process. Requests must be made in writing and must be initiated or sponsored by a legislator. Information regarding the process and FAQs are posted on OPEGA’s website at http://legislature.maine.gov/opega/request-for-a-review. There is also a request form available there.

Legislative committees can request reviews directly through a written communication to the Government Oversight Committee.

OPEGA reviews of tax expenditures are conducted in accordance with 3 MRSA §§998-1001.

Copies of OPEGA’s reports are free.

Reports are available in electronic format at:

http://legislature.maine.gov/opega/opega-reports

Hard copies of reports may be obtained by contacting OPEGA at:

(207) 287-1901

Office of Program Evaluation & Government Accountability

82 State House Station • Augusta, ME • 04333-0082

Table of Contents―――――――――――――――――――――――――――

I. Introduction 1

II. Program Background and Overview 2

A. Program Design 2

B. Program History and Origins 4

C. Program Use and State Costs 4

III. Evaluation Results 6

A. Assessment of Program Structure and Administration 6

B. Comparison to Best Practices 9

C. Program Data Available for Oversight 13

D. Overall Program Alignment with Goals 17

E. Program Performance: Contribution to Historic Preservation 18

F. Program Performance: Contribution to Community Revitalization 20

G. Program Performance: Contribution to Affordable Housing 22

H. Program Performance: Contributions to Job Creation and Economic Growth 25

IV. Opportunities for Improvement and Recommendations 28

A. Data Management 28

B. Data on Jobs Outcomes 30

C. Legislative Reporting Requirements 31

D. Small Project Credit 32

E. Property Types Eligible for the Credit 33

Acknowledgements 35

Appendices 36

Appendix A: Evaluation Scope and Methods 36

Appendix B: Performance Metrics 39

Appendix C: Comparison to Other State HRTCs 42

Agency Response: 44

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I. Introduction ――――――――――――――――――――――――――

As directed by the 130th Legislature’s Government Oversight Committee (GOC), OPEGA has completed a review of the Maine Historic Rehabilitation Tax Credit (HRTC) in accordance with 3

MRSA §999. The Legislature’s tax expenditure review process provides for systematic evaluation of tax expenditures according to a schedule approved by the GOC (3 MRSA §998).

OPEGA conducted this evaluation project based on the parameters approved by the GOC on April

23, 2021 (included in Appendix A). The project parameters set forth the goals, intended beneficiaries, and base performance measures for the HRTC for the purpose of evaluation (see

Appendix B for a list of performance measures). Both the GOC and the Legislature’s Joint Standing

Committee on Taxation expressed interest in having this evaluation’s results available for policymakers considering tax credit legislation and policies during the 2nd Regular Session of the

130th Legislature. To that end, this evaluation relied on existing, available data to address the evaluation objectives to the degree possible, providing a high-level assessment of the credit.

The Maine HRTC is administered by the Maine Historic Preservation Commission (MHPC) in consultation with Maine Revenue Services (MRS). To complete the evaluation of the HRTC, OPEGA considered program information and data from the MHPC and its federal partner—the

National Park Service (NPS). We also considered research literature on historic rehabilitation tax credits nationally, perspectives from program stakeholders and information from private consultants who have conducted economic analysis of the HRTC. MRS provided guidance and information on the HRTC. OPEGA did not request, nor receive, any confidential taxpayer information from MRS to support this evaluation. The complete scope and methods for this review can be found in Appendix A.

The remainder of this report is organized in three key sections as follows:

• Section II: Program background and overview;

• Section III: Evaluation results, addressing four key areas:

o Program structure and administration;

o Comparison to best practices;

o Program data available for oversight; and o Program alignment and performance relative to goals; and

• Section IV: Opportunities for improvement and recommendations.

II. Program Background and Overview ――――――――――――

The Maine HRTC, authorized by 36 MRSA §5219-BB, is a tax expenditure program1 that provides a refundable income tax credit to taxpayers who rehabilitate certain income-producing historic properties in Maine. The credit was enacted in 2008 and was made retroactively available to taxpayers with qualified rehabilitation expenditures determined to meet program standards after

January 1, 2008. As of the writing of this report, the credit will sunset after December 31, 2025.2

The Maine HRTC is administered by the Maine Historic Preservation Commission (MHPC) in consultation with Maine Revenue Services (MRS).

A. Program Design

Maine’s HRTC, like many other state historic rehabilitation tax credits, is built on the scaffolding of the federal rehabilitation tax credit and relies on the definitions and standards of that program.

This report details the administrative relationship between Maine’s credit and the federal credit on pages 6-9. There are two versions of the state credit, only one of which can be used in conjunction with the federal credit:

1) The substantial rehabilitation credit provides a tax credit for 25% of a taxpayer’s certified qualified rehabilitation expenditures (QREs) on a certified historic structure in Maine.

Taxpayers claiming this Maine credit must also claim the corresponding federal credit under

Internal Revenue Code (IRC) Section 47.

2) The small project rehabilitation credit provides a tax credit for 25% of a taxpayer’s certified qualified rehabilitation expenditures (QREs) of between $50,000 and $250,000 on a certified historic structure in Maine. Taxpayers claiming this Maine credit must not claim the corresponding federal credit under IRC Section 47.

During the review period 89% (102 of 115) of certified HRTC projects claimed the substantial rehabilitation credit. These projects receive both state and federal credits.

1 OPEGA refers to the HRTC interchangeably throughout as a tax credit or tax expenditure program (program). The term tax expenditure program refers to the tax credit along with its administration.

2 36 MRSA §5219-BB(C). The credit has had a number of different sunset dates. Upon implementation in PL 2007, c.

539, the program included a 2013 sunset. PL 2011, c. 453 extended the credit end date from 2013 to 2023 and required

MHPC to report to the Legislature in 2013 and every 4 years thereafter with analysis on the use of the credit. PL 2019, c.

659 extended the sunset from 2023 to projects from which MHPC or NPS issued a determination on or before December

31, 2025. There is currently a bill on the Special Appropriations Table (LD 201) that would extend the sunset from

December 31, 2025 to December 31, 2030.

Layered together, the 20% federal HRTC and 25% Maine credit can reduce the cost of qualifying rehabilitation expenses (QREs) by almost half.3 For example:

Total Project QRE $1,000,000 less: Federal 20% Credit -$200,000 less: State 25% Credit -$250,000

Post-Credit QRE Cost $550,000

For affordable housing projects4 that are certified by the Maine State Housing Authority

(MaineHousing), the applicable HRTC (substantial rehabilitation credit or the small project rehabilitation credit) is increased. Currently, the credit is increased to 35% of the certified qualified expenditures for a certified affordable housing project. The increased credit is subject to repayment if the structure does not remain an affordable housing project for 30 years.5

In all versions of the HRTC—substantial, small, and affordable housing—a taxpayer’s allowable credit becomes available across four years, with 25% available in the taxable year the credit is first claimed and 25% available in each of the following three taxable years. The law governing the

HRTC (36 MRSA §5219-BB) does not cap the total credits allowable on an annual basis, but does cap the credits allowable per qualifying project to $5 million (or $5 million per building for projects with multiple eligible building components).

The determination of a certified historic structure for the purposes of the credit is made by the

Director of the Maine Historic Preservation Commission (MHPC) (27 MRSA §511). To be certified, a building needs to be a structure that is listed individually in the National Register of

Historic Places (NR), or that is located in a registered historic district and certified by the NPS as contributing to the historic significance of that district. Certified QREs, the amount the credit is based upon, are defined in IRC Section 47.

Maine is one of thirty-five states that have tax credits for the rehabilitation of historic income-producing6 properties. Credit percentages range from 5% to 50% of qualified rehabilitation expenses, or QREs, with roughly 49% (17/35) of states having credits of 25%, as is the case in

Maine. Across the 35 states, the credit programs vary in terms of caps on annual aggregate credits issued by the state, on credits per building, or credits per taxpayer. Additionally, some states have other versions of the credits for specific types of buildings (like mills or barns), circumstances (like disasters or high poverty), or regions of the state. See Appendix C for a comparison table of state

HRTCs.

3 Assuming the taxpayer is able to derive the full value of the federal credit, which is not refundable.

4 “Affordable housing project” is a defined term in statute that means new housing that meets a minimum square footage test (for the portion that is affordable) and is limited to households that do not exceed 60% of the median income of the area (30-A MRSA section 4722(1)(DD)(1)).

5 For projects certified as affordable housing projects under 30-A MRSA section 4722(1)(DD) the rate of the increased credit started at 30% and, per statute, increased in one percentage point increments if certain affordable housing creation targets are unmet. Statute allows for the annual assessment of the increased credit and caps the credit at 35%, with the cap currently met.

6 The incentive is limited to income-producing properties by a reference in Title 36 to the Internal Revenue Code §47. The

Code limits the tax incentive to “depreciable structures” which are those used in a business or income-producing activity

(see IRS publication 946 2020 Publication 946 (irs.gov) ).

https://www.irs.gov/pub/irs-pdf/p946.pdf

B. Program History and Origins

The current HRTC, which was enacted in 2008 (36 MRSA §5219-BB), replaced a previous version of the credit (36 MRSA §5219-R) that was much more limited than the current version.7 Since enactment, the current HRTC has undergone relatively few substantive changes. The enacting law and changes are as follows:

• PL 2007, c. 539, Part WW enacted the current HRTC under 36 MRSA §5219-BB.

• PL 2007, c. 693 provided for the allocation of credits under the HRTC to project partners, members or owners that are exempt from taxation.

• PL 2009, c. 361 changed the basis for determining “certified affordable housing” and the basis of qualification as a “certified qualified rehabilitation expenditure” and assigned responsibility for certifying historic structures to the Director of the MHPC.

• PL 2011, c. 240 provided for the application of the credit to condominiums.

• PL 2013, c. 550 changed the $5 million cap from per certified rehabilitation project to either per certified rehabilitation project or per each building that is a component of a certified historic structure, whichever is greater. This change allowed a portion of a building or a single building in a complex to qualify for the $5 million cap. It also provided that a certified rehabilitation project placed in service over multiple taxable years is allowed up to $5 million in credit for the portion of the certified rehabilitation placed in service for each taxable year.

Since enactment, much of the current credit’s overall design has remained unchanged, including key elements such as eligibility requirements, credit percentage, and credit limitations. For many of these design features, there may have been changes if the underlying federal eligibility requirements changed.

C. Program Use and State Costs

Between 2009 and early 2021, a total of 115 projects have been certified (completed and eligible for the state credit). As shown in Table 1 on the following page, the highest number of certified projects per year was 16 in 2015. Over the period, post rehabilitation building use was divided between housing (45), commercial (36) and mixed use (34).

7 The limited, pre-2008, version of the HRTC is not included in the scope of this OPEGA evaluation. Instead, this evaluation focuses on the costs, impacts, and administration of the current state HRTC, from its enactment in 2008 through the year

2020.

Table 1: Certified HRTC Projects

Year Projects

Post Rehabilitation Use

Mixed Housing Commercial

2009 3 0 2 1

2010 6 0 2 4

2011 7 3 1 3

2012 9 2 5 2

2013 13 3 4 6

2014 10 4 3 3

2015 16 6 6 4

2016 12 1 8 3

2017 10 2 5 3

2018 5 1 2 2

2019 7 2 3 2

2020 14 9 2 3

2021* 3 1 2 0

Totals 115 34 45 36

Source: OPEGA analysis of MHPC data.

*Partial year data limited to January-February 2021.

After peaking at 16 projects in 2015, there was a decline in certified projects followed by an uptick from 7 projects in 2019 to 14 in 2020. While the credit structure and availability has been fairly consistent, the number of projects per year has varied. This variation can occur for a number of reasons and shifts external to the tax credit, including shifting economic conditions and project planning considerations.

Based on MRS data reported to OPEGA, the tax revenue loss from the state HRTC was roughly

$84 million in total for the 9-year period of 2011-2019.8 During this period, administrative costs to the State for this tax expenditure program have been minimal. MRS reports that their adminstration of the HRTC is largely absorbed by the resources dedicated to processing Maine income tax returns generally. MHPC estimated the resources required to administer both the federal and state HRTC for FY 2020 combined as about $43,126, of which only approximately $2,355 is not covered by federal funding sources. MHPC staff noted that they could not identify the resources distinct to administering the state, rather than the federal, credit since adminstration of the two is so intertwined.

MHPC staff also noted that while program rules allow them to charge an application fee for the state HRTC, they do not do so at this time. They explained that because most of the projects also use the federal credit, and the state credit builds on the same process used for the federal credit, there is not a lot of additional adminstrative cost beyond that already covered by federal funding.

8 MRS provided OPEGA with State revenue loss data. MRS stated that these figures may include claims that are data errors or improper claims, particularly individual claims below $2,000. In total, MRS estimates improper claims paid for the 2011-2019 period amount to 0.1-0.2% of total HRTC claims over this period. MRS reports this is not a unique problem to the HRTC but arises due to the complexity of the tax code and taxpayer compliance issues. OPEGA did not focus on

MRS’ processing the HRTC on tax returns in this review. Should the GOC have questions or concerns, this may be something to address in follow up with MRS or further work.

III. Evaluation Results―――――――――――――――――――――――

OPEGA’s evaluation of the HRTC addressed 4 key areas:

o Program structure and administration;

o Comparison to best practices;

o Program data available for oversight; and o Program alignment and performance relative to goals.

The evaluation objectives and performance measures as approved by the GOC for the purposes of OPEGA’s evaluation of the HRTC are listed in Appendix A and a table of approved performance measures is provided in Appendix B. Discussion of relevant evaluation objectives and measures is integrated throughout the report as appropriate.

A. Assessment of Program Structure and Administration

➢ Maine’s HRTC is built on the federal HRTC.

The Maine HRTC is built upon the federal tax incentive for preserving historic properties administered through the National Park Service (NPS). As a result, many of the MHPC’s administrative duties for the Maine HRTC would be occurring even in the absence of the state credit as MHPC staff support the federal HRTC.9 Application for both the state credit and the federal credit is done at the same time through the same MHPC processes. If a project is certified, the project can receive both the federal credit and the state substantial rehabilitation credit.

The federal credit, and thus Maine’s HRTC, requires a three-part application and certification process (the small project credit application mirrors this process but only goes through MHPC).

Applicants first submit their materials to MHPC and are encouraged to work with MHPC to prepare the applications. MHPC reviews and processes the applications and forwards applications to the

NPS with a recommendation for whether or not the project should be certified. The three parts are as follows:

• Part 1 of the application establishes a building’s eligibility as a certified historic building. If a building is already individually listed on the National Register of Historic Places (NR), a

Part 1 application generally does not need to be completed.

• Part 2 requires a description of the rehabilitation work that will be completed, including elements of work that will not be credit eligible, so that MHPC and NPS can approve that the work will maintain the historic character of the building being rehabilitated. The

9The small project credit is only available to Maine projects that do not claim the federal credit and incur a specified amount of qualified rehabilitation expenditures. Despite this, OPEGA notes that the small project credit generally follows the guidance and limitations of the federal credit with the exception that qualifying properties do not have to meet the substantial rehabilitation test.

application requires descriptions of each piece of work that will be undertaken. MHPC encourages applicants to go through this approval process before beginning work to increase the likelihood that the final work will be credit eligible and meet standards.

• Part 3 is completed after the building is rehabilitated and requires submission of pictures showing the final work. NPS certification of Part 3 of the application makes the applicant eligible for the federal and the state substantial credits (provided that the building has been certified as a historic structure). Small project credit recipients must meet all federal standards other than the substantial rehabilitation test. In lieu of that standard, the small project credit is available to taxpayers who incur between $50,000 and $250,000 in certified qualified rehabilitation expenditures and do not claim the federal credit.

MHPC requires additional reporting beyond the federal Part 3 application (see pages 13-15 for additional discussion of program reporting). Applicants file for the credit as part of their normal income tax return. Applicants cannot receive tax credits for the state HRTC unless the application and reporting forms, signed by MHPC, are attached to the tax worksheet.

Table 2 provides a summary of the key provisions of the federal and state HRTC side-by-side with indication of where they overlap.

Table 2. Comparison of Key Provisions of Federal and State Historic Rehabilitation Tax Credits

Federal HRTC Maine HRTC

Administration Credit is jointly administered by the US Dept.

of the Interior and Dept. of Treasury. The

National Park Service (NPS) acts on behalf of the Secretary of the Interior in partnership with the State Historic Preservation Officer

(SHPO)10 in each state. The IRS acts on behalf of the Secretary of the Treasury.

Administered by the MHPC, in consultation with MRS.

MaineHousing certifies affordable housing projects, generally, and in the context of this program.

Eligibility Rehabilitation must be of a certified historic structure—a structure that is listed individually in the National Register of

Historic Places (NR), or that is located in a registered historic district and certified by the NPS as contributing to the historic significance of that district. Rehabilitation must be of an income-producing structure.

Rehabilitation must meet the Secretary’s

Standards to preserve the historic character of the building.

Rehabilitation must meet the substantial rehabilitation test11 according IRC Section

47.

Follows the eligibility criteria for the federal credit set in the IRC, with the limiting condition that eligible projects must be located in Maine.

MHPC can make site visits for up to 5 years after a building is place in service to ensure that standards were met and requirements followed.12

*Note that small project credit applicants do not have to meet the substantial rehabilitation test.

10 In Maine, the Director of MHPC serves as the SHPO upon appointment by the Governor.

11 The “substantial rehabilitation test” requires that the cost of rehabilitation must exceed the pre-rehabilitation cost of the building. See National Park Service guidance for the particulars of this standard: Eligibility Requirements—Technical

Preservation Services, National Park Service (nps.gov) 12 Chapter 813 Rules, Section 4 https://www.nps.gov/tps/tax-incentives/before-apply/eligibility-requirements.htm.

https://www.nps.gov/tps/tax-incentives/before-apply/eligibility-requirements.htm.

Table 2. Comparison of Key Provisions of Federal and State Historic Rehabilitation Tax Credits

Federal HRTC Maine HRTC

Application

Process

Three part application process:

(1) Establishing property as eligible; if already listed on National Register, don’t have to submit part 1;

(2) Approval of planned work as meeting eligibility standards;

(3) Certification of completed project as meeting standards and following approved plan.

Applications are submitted to the SHPO, who coordinates application and sends to NPS with a recommendation. NPS makes the final decision regarding approvals and certification.

Maine approval process mirrors federal process. The role of the MHPC would be the same whether a project was just applying for the federal credit, or for both the federal and state credit, except that MHPC is the final decision-maker on applications for the small project credit.

Claiming

Credits

Credit may only be taken after work is certified and building is “placed in service.”

Credit equals 20% of qualified rehabilitation expenditures; taken over 5 years.13

May generally be carried back one year and carried forward 20 years.

Credit may only be taken after work is certified and building is “placed in service.”

Credit is 25% of qualified rehabilitation expenditures; taken over 4 years.14

Fully refundable credit.

Review &

Audit of

Expenses

IRS is responsible for reviewing and auditing qualifying expenses.

Qualifying expenses subject to both IRS and

MRS review and audit. Except for small project credit expenses, for which the IRS has no responsibility.15

Recapture Credit is recaptured if the property is disposed of, or otherwise ceases to be investment credit property, during the 5-year recapture period.

Subject to the same recapture provisions as the federal credit.

➢ The scaffolding of the federal HRTC provides the state HRTC with increased efficiency for administrators and applicants and increased oversight and quality control.

Being built on the scaffolding of a federal tax credit program makes Maine’s HRTC much more efficient for the administrator, and for participants to apply for, than a stand-alone state credit would otherwise be.

Because Maine’s credit relies on federal definitions, and primarily uses the same federal application forms, Maine agencies do not have to do the work of continually updating program standards and processes because this responsibility is borne at the federal level. Additionally, the fact that Maine’s credit is embedded in an existing federal program also means that it includes multiple levels of quality controls and oversight. The application process is staged, with each stage including review

13 The Tax Cuts and Jobs Act of 2017 requires taxpayers to take the 20% credit ratably over five years (previously it was all taken in the year they placed the building into service).

14 For the Maine substantial rehabilitation credit, this state credit is taken in addition to the federal credit.

15 For both the small project and substantial credits, MRS applies the IRC Section 47 criteria to determine what expenses qualify as eligible.

and approval at both the state level –by the MHPC – and at the federal level – by the NPS. The credit’s performance and cost are also overseen at both the state and federal levels, though federal oversight extends beyond Maine projects.

Building the state credit on the federal credit also provides benefits for program participants, who experience a more efficient application process, because federal forms serve as the applications for both the federal and state credit.16 Additionally, having their federal and state applications processed simultaneously provides credit participants with predictability about whether they will be able to combine both credits on a particular project.

The efficiency that comes from being built on the scaffolding of the existing federal HRTC processes and forms also helps to minimize administrative costs.

B. Comparison to Best Practices

The HRTC largely follows two distinct sets of best practices each with a different focus and aim.

First, the HRTC follows best practices for historic preservation incentives listed by the National

Trust for Historic Preservation, an organization focused on maximizing historic preservation.

Second, it follows best practices identified for tax expenditures, which aim to balance program efficacy with state oversight and fiscal responsibility.

➢ Maine’s credit largely follows the best practices laid out for HRTCs by the National

Trust for Historic Preservation.

The National Trust for Historic Preservation is a private 501(c)(3) nonprofit organization established by Congress to “further the policy enunciated in the Historic Sites Act (49 Stat. 666) and to facilitate public participation in the preservation of sites, buildings, and objects of national significance or interest and providing a national trust for historic preservation.”17 In its 2018 report, State Historic Tax Credits: Maximizing Preservation, Community Revitalization, and Economic Impact, the

NTHP defines the highest performing tax credits for historic preservation as “those that preserve the greatest number of historic buildings and drive the most reinvestment, generally follow the framework of the federal historic tax credit” and that incorporate a number of specific design elements.18

OPEGA compared Maine’s HRTC to the best practice elements identified by the NTHP, and found that Maine’s credit reflects most of the recommended elements. These recommendations included following the framework of the federal HRTC, making credits easily transferable to ensure that taxpayers can access their value, avoiding aggregate caps which can make their value less predictable to taxpayers, having a high enough rate, regular performance evaluation and effective

16 With the exception of the Maine small project credit, which has its own application.

17 National Trust for Historic Preservation Congressional Charter is found at: https://nthp-savingplaces.s3.amazonaws.com/2017/09/07/09/19/04/659/NTHP_Charter_2015_Recodification.pdf 18 “State Historic Tax Credits: Maximizing Preservation, Community Revitalization, and Economic Impact.”2018. National

Trust for Historic Preservation.

https://nthp-savingplaces.s3.amazonaws.com/2017/09/07/09/19/04/659/NTHP_Charter_2015_Recodification.pdf https://nthp-savingplaces.s3.amazonaws.com/2017/09/07/09/19/04/659/NTHP_Charter_2015_Recodification.pdf program management. How Maine’s program compares to each NTHP best practice is shown in

Table 3 below.

Table 3. Comparison of Maine’s HRTC to Best Practice for Historic Rehabilitation Tax Credits

NTHP Best Practice Criteria for HRTCs Does Maine’s HRTC Include the NTHP Best Practices?

Follow the framework of the federal historic tax credit

Yes - Maine’s HRTC is based on the federal HRTC framework, though the small project credit applies a different minimum rehabilitation cost.

Tailor credits to address state priorities such as projects:

• in smaller communities or rural areas

• in specific areas of physical deterioration or economic distress

• that rehabilitate housing

• that rehabilitate specific types of buildings such as historic mills or barns

Partially - Maine allows a credit for rehabilitation of affordable housing under §5219-BB(3), but does not otherwise target specific state priorities.

Maine does have the additional small project credit but this credit is not targeted towards particular communities or project types.

Make credits easily transferrable to ensure taxpayers can access their value, via:

1) syndication of the credits to third parties

2) direct transfer

3) refundability

Yes – The NTHP notes only a few states offer all 3 options, but 21 offer more than one option. Maine offers 2 options – syndication19 and refundability. Although the report also notes that most states (26) offer direct transfer, which Maine does not, Maine does offer refundability, which is the least common option, only offered by 9 states.

Avoid aggregate credit limits that can make credit values less predictable

Yes - Maine has no aggregate limit, and instead has a per project limit which is viewed more favorably by the NTHP.

Set the credit rate at a level high enough to constitute a meaningful incentive, typically 20% to 30% of qualified rehabilitation expenditures

Yes - Maine’s normal credit is 25%, with 35% available for new affordable housing projects.20

Set a lower minimum rehabilitation cost than the federal standard to encourage small projects

Unclear - Maine’s substantial credit applies the federal standard, but the small credit is available to projects with between $50K and $250K that don’t meet the federal standard for “substantial rehabilitation.” It’s unclear if this is a sufficiently low threshold to encourage small projects.

Maximize the different taxes the credit may offset beyond income tax, such as insurance premium tax, particularly in states without income tax

Yes - Maine’s HRTC may offset income taxes under Title 36, Part

4 or insurance premium taxes under 36 MRSA §2534.

Extend the time period over which credits can be claimed via carry forwards or carry backs

N/A – Maine credits must be taken over 4 years. However, since the credits are refundable, carry forward or back would add no value for taxpayers.

Require rehabilitation projects to start and be completed timely, and reallocate credits from projects that miss deadlines

Yes – Maine HRTCs require qualifying rehabilitation expenses to be incurred within a 24-month period (or a 60-month period for projects completed in phases). Reallocation of credits is not applicable in Maine because there is no aggregate cap on credits.

19 State Historic Tax Credits: Maximizing Preservation, Community Revitalization, and Economic Impact. 2018. National

Trust for Historic Preservation, pg. 7 explains that “The syndication process begins by identifying prospective investors like corporations, entities with pooled funds or individuals, for a state tax credit project. This transfer mechanism gives developers, who often do not owe enough to state taxes to use all the credits themselves, the ability to form a limited liability corporation (LLC) and admit outside investors as partners.” OPEGA notes that in Maine, with the refundable credit, developers would not be limited by tax liability but that this mechanism could allow more parties to benefit from the credit beyond the direct property owners.

20 As defined in 30-A MRSA (1)(DD)(1).

Table 3. Comparison of Maine’s HRTC to Best Practice for Historic Rehabilitation Tax Credits

NTHP Best Practice Criteria for HRTCs Does Maine’s HRTC Include the NTHP Best Practices?

Expand who can claim the credits Partially - Maine’s HRTC applies the federal HRTC definitions requiring qualifying properties to be “depreciable,” in other words, income-producing. Based on this definition, commercial property owners are eligible to claim the credit. However, homeowners are not.

Evaluate performance on a regular basis Yes - MHPC is subject to annual and biennial state reporting requirements for the HRTC and covers the measures suggested by NTHP. These reports are discussed more in recommendation

C.1.

Effective program management, including:

• streamlining the process by reviewing proposed rehabilitations for both state and federal credits concurrently

• application fees that fully support the costs of administering the HTC

Yes - Maine’s HRTC does process applications concurrently for projects that are also seeking federal credit qualification.

Statute authorizes the MHPC to establish fees to cover the cost of administering the program. However, the Commission chooses not to do so.

➢ Maine’s credit is also aligned with many general tax expenditure best practices.

In addition to the best practices identified by the NTHP, which center on encouraging historic preservation, best practices for tax expenditures provide another relevant lens for the HRTC. Tax expenditure best practices focus on, and balance competing priorities between, multiple policy goals including state fiscal responsibility, program oversight, and transparency. There are multiple sources of tax expenditure best practices and variation between these sources in how the various policy goals are prioritized and weighted against each other. Overall, we found that the HRTC does align with many of the best practices for tax expenditures.21

The HRTC follows tax expenditure best practices in the following areas of program design and administration:

• Transparency and Accountability—Program data for the HRTC is publicly available and regularly provided to the Legislature to support the oversight role of policymakers. The data reported to policymakers is relevant to the oversight of the program (see recommendations

A.1 and A.2 for more information on how data management could be strengthened). Not only is the program accountable at the state level, but the added level of federal oversight provides a check on the program administration that it is meeting federal standards.

• Program Ownership—The HRTC has a clear owner in the MHPC with direct responsibility for program administration. The objectives of the HRTC align with the objectives of MHPC increasing the likelihood that the MHPC will appropriately tend to the administration and effectiveness of the program.

21 OPEGA reviewed a number of sources of tax expenditure best practices including GAO-05-1009SP. GAO. 2005.

“Understanding the Tax Reform Debate: Background, Criteria, and Questions;” GAO-13-167SP. GAO. 2012. “Tax

Expenditures: Background and Evaluation Criteria and Questions;” Murray, Matthew N. and Donald J. Bruce. 2017. “Best

Practices for Design and Evaluation of State Tax Incentive Programs for Economic Development.” Report prepared under contract with the Alabama Department of Revenue.

• Simplicity for Participants—Being built on the scaffolding of the federal credit, which does have some complex requirements, keeps the HRTC application as simple as possible.

The HRTC adheres to the same rules and requirements as the federal credit and applications are processed concurrently (with the exception of the small project credit). Additionally, MHPC offers a high degree of printed guidance and staff support to assist applicants and participants with questions about program requirements and rehabilitation standards.

• Fiscal Certainty for the State and Participants—Caps on the HRTC are imposed at the project level, but not at the program level, and the credit is refundable. This means availability of the credit is predictable for participants—they do not have to wonder whether their tax liability or the number or cost of other projects in a particular year might limit their access to the credit (36 MRSA §5219-BB(4)). On the other hand, not having an aggregate annual cap on the amount of credits claimed makes the cost of the credit less predictable for the State budget. Additionally, any refundable credit can be more of a hardship to the

State than a non-refundable credit when the State runs into periods of revenue decline. The per project cap on the HRTC, however, does limit how much the state will invest in any particular project and protect the State against ballooning costs. Additionally, HRTC statute dictates the timing of credit claims as 25% per year over 4 years (36 MRSA §5219-BB(5)), which provides predictability for future year claims.

• Checks on Program Performance—The HRTC is a “pay-for-performance” program— it only provides benefits to participants after they have completed the rehabilitation of historic properties in the State. The pay for performance element of the program design ensures that the State will receive a benefit in connection with providing the tax credit.22

The HRTC also requires regular reporting to the Legislature on program outcomes

(annually) and the costs and benefits of the program (biennially), providing another opportunity to monitor performance. In addition, the HRTC law includes a sunset date, after which the program is repealed, unless Legislative action is taken. By requiring

Legislative consideration to continue a program beyond a future date certain, a “sunset” is a valuable oversight tool for policymakers. We note that frequent reconsideration decreases certainty for program participants and this can create a challenging balancing act.

While Maine’s HRTC generally follows best practices for HRTCs and tax expenditures in general, there are opportunities for policymakers to consider adopting additional best practices.

➢ Maine’s credit is limited to income producing properties and therefore limited in its impact to overall historic rehabilitation in the State.

The NTHP’s list of best practices included making credits available for different types of buildings to increase the potential impacts from historic rehabilitation in states.

22 However, it is not a guarantee that the State would not have otherwise received those benefits. See page 19 for a discussion of the “but for” problem and the HRTC.

Maine’s HRTC is currently limited in the impact it can provide by its narrow application only to the rehabilitation of income-producing properties (see pages 17-27 for more detailed discussion on what impacts can be expected). According to MHPC, most historic buildings listed individually in the National Register or located in historic districts in Maine are not income-producing properties, with the remaining most likely being private residences.23

While the federal credit is also limited to income-producing historic properties, if Maine did choose to expand the state’s credit, it would not be unique in this regard. Twenty-two other states have historic rehabilitation tax credits for homeowners and New York offers a credit specifically for the rehabilitation of barns (see Appendix C). OPEGA heard from stakeholders that there is interest from homeowners for such a credit, and Maine’s 2021-2026 Edition Statewide Historic Preservation

Plan notes that the creation of a tax incentive for historic homeowners was a common request during the preparation of the plan.24 OPEGA provides more information about a potential opportunity for improvement regarding a tax credit for non-income producing historic rehabilitations in recommendation E.1.

C. Program Data Available for Oversight

OPEGA’s scope for this evaluation involved using existing data to assess the degree to which the program is performing as intended (see Appendix A for information about the scope). OPEGA looked first at state-held MHPC data on the HRTC, and second to data analyses commissioned by program stakeholders, which are used by MHPC to meet its biennial reporting requirements to the

Legislature.

Taken together the data reported to and by MHPC and the economic impact analyses, commissioned by program stakeholders, provide a wealth of program data on the HRTC. None of the existing data is perfect, but it does provide estimates of the credit’s costs and impacts adequate for legislative oversight. Improvements to MHPC’s data management practices would increase the reliability of reported program data in the future.

➢ Maine’s HRTC program requires fairly robust data reporting, and program administrators are diligent about data collection and reporting.

The HRTC is unique among OPEGA’s recently-reviewed State tax expenditures in the degree of program transparency and accountability that is required and achieved. Under 27 MRSA §511, 23 In 2007 MHPC conducted an analysis of buildings in Maine listed individually on the National Register of Historic Places or in a historic district (with the exceptions of districts in York and Castine) to understand their primary usage. MHPC updated the analysis for OPEGA during this review and estimates that of the 7,948 properties listed, 28% may be income-producing. The remaining buildings would be other property types, most being private residences.

24 Heritage for the Future: Maine’s Statewide Historic Preservation Plan. 2021-2026 Edition. Compiled by Maine Historic

Preservation Commission. MHPC is responsible for developing and updating the plan but it does not serve as an internal work plan. It is a plan for Maine. OPEGA notes that the plan is currently undergoing NPS approval and has not yet been made public. When it is made public, it will be available at https://www.maine.gov/mhpc/about-us/state-preservation-plan https://www.maine.gov/mhpc/about-us/state-preservation-plan https://www.maine.gov/mhpc/about-us/state-preservation-plan

MHPC has annual and biennial reporting requirements for the HRTC that include program metrics, net program cost to the State, analysis of the effectiveness of the credit as an incentive for historic rehabilitation and economic development, and recommendations for changes to, repeal of, or extension of the credit. These requirements exceed those of many other State tax incentives that

OPEGA has recently reviewed or is currently reviewing (see Table 4).

Table 4. Reporting Routinely Required by Statute from Administrators of Tax Expenditures

Tax Expenditure

Program

Metrics 25

Net Cost

Analysis

Recommendations to Extend, Repeal, Amend

Historic Rehabilitation Tax Credit (27 MRSA §511(5)) X X X

Pine Tree Development Zones (30-A MRSA §5250-P) X - -

Research & Development Tax Credit (36 MRSA §5219-K) - - -

Seed Capital Tax Credit (36 MRSA §5216-B(6)(B)) X - -

The overall data reporting structure for the HRTC is robust. OPEGA found that MHPC staff are diligent about fulfilling statutory reporting requirements for the HRTC and about collecting the data required to do so. Program rules were developed to require HRTC participants to provide project-specific data to the MHPC before and after project completion. In order to ensure HRTC participants provide the required data, program rules also require the reporting forms to be signed by MHPC staff and attached to HRTC tax worksheets to support HRTC claims. This prevents

HRTC participants from claiming the credits without first providing the project data the MHPC needs to support legislative oversight of the credit.

Not only is substantial program reporting required for the HRTC, the data elements collected and reported for the HRTC are well aligned with the credit’s goals (see Table 5 on the following page).

This is a strength of the credit’s design and administration. It ensures that the Legislature receives relevant information with which to assess how effectively the credit is meeting the chosen goals.

25 Refers to reporting required beyond Maine State Tax Expenditure Reports produced biennially by Maine Revenue

Services.

Table 5. Comparison of HRTC Goals with Data Collected and Reported

HRTC Goals

Data Collected Relevant to HRTC Goals

Data Collected to Fulfill Annual Report

Requirements

Additional Data Collected to

Support Biennial Reporting

Historic

Preservation

• Approved & certified state historic preservation certification applications

• Total aggregate square footage rehabilitated and developed

• Total housing units created

• Total aggregate square footage of housing

• Prior use of structure

• Post-rehabilitation use of structure

Community

Revitalization

• Location of structure

• Assessed value before rehab

• Assessed value post rehab

Affordable

Housing

• Total affordable housing units created

• Number of affordable housing units preserved

• Total aggregate square footage of affordable housing

Economic Impacts

& Jobs

• Total certified rehabilitation expenses

• Total new construction expenses

• Construction jobs created

• Jobs in building after completion

Later in the report, OPEGA suggests that there may be an opportunity for the Legislature to lessen some of the MHPC administrative burden while still meeting Legislative needs for data, by reconsidering the biennial reports. The basis for this suggestion is discussed on in recommendation

C.1.

➢ Improvements to MHPC’s data management practices would increase the reliability of the reported program data, but much of the existing data is reasonable.

OPEGA noted that MHPC is a good program steward when it comes to data—collecting relevant program data and evidencing care and caution when interpreting and presenting the data. At the same time, we noted that there are opportunities for MHPC staff to improve data management.

Struggles with data management are not at all unusual for tax expenditure program administrators, particularly when staff may be asked to take on increasing data management responsibilities over time and are not provided training or support to do so. However, weaknesses in data management are worth tending to, as they can reduce confidence in data provided to evidence the program’s effects and can snowball as the program ages and the quantity of data increases beyond what can be managed manually.

To test the reliability of the data reported by the MHPC, OPEGA requested the raw HRTC data and compared it to the annual report the Commission provided to the Legislature in February 2021.

We also requested the original reporting forms filed by HRTC participants from 2008 to date.

Through our analysis of these data sets, we observed that MHPC’s HRTC data management process is highly manual, and therefore, subject to increased error. We identified a number of opportunities to improve management of the data – many of which do not necessarily need to be costly or labor intensive. These improvement opportunities are discussed in recommendations A.1 and A.2.

Though we found that there are opportunities to improve the precision, and reliability, of HRTC data, we also determined that the reports produced by MHPC to date do provide reasonable information to support policy-making. OPEGA also notes that HRTC is both designed and implemented with an aim to “prove” its worth, with extensive reporting requirements and the diligence of MHPC in meeting those requirements. This stands in contrast to some of the other tax incentives reviewed by OPEGA, where we observed less reliance on, and support for, data collection from program participants.