Exhibit C.pdf

Cover: Historic Preservation Tax Credit project: “The Millworks” located in Harrisburg, Pennsylvania.

About the Independent Fiscal Office

The Independent Fiscal Office (IFO) provides revenue projections for use in the state budget process along with impartial and timely analysis of fiscal, economic and budgetary issues to assist Commonwealth residents and the General Assembly in their evaluation of policy decisions. In that capacity, the IFO does not support or oppose any policies it analyzes, and will disclose the methodologies, data sources and assumptions used in published reports and estimates.

Independent Fiscal Office Rachel Carson State Office Building

400 Market Street Harrisburg, PA 17105 phone: 717-230-8293 email: contact@ifo.state.pa.us website: www.ifo.state.pa.us

The Independent Fiscal Office was created by the Act of Nov. 23, 2010 (P.L.1269, No.120).

mailto:contact@ifo.state.pa.us http://www.ifo.state.pa.us/

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INDEPENDENT FISCAL OFFICE

January 14, 2019

The Honorable Members of the Performance-Based Budget Board and Chairs of the House and Senate Finance Committees:

Act 48 of 2017 requires the Independent Fiscal Office (IFO) to review various state tax credits over a five-year period. For the first year, the IFO reviewed three tax credits: the Historic Preservation, Film Production and Jobs Creation Tax Credits. The act requires the IFO to submit tax credit reviews to the Performance- Based Budget Board and the Chairs of the House and Senate Finance Committees and to make reports available to the public on the IFO website.

This report contains the tax credit review for the Historic Preservation Tax Credit (HPTC). The IFO reviewed numerous studies on state HPTCs, held discussions with various stakeholders and met with agency staff that administer the tax credit. Based on that research, the IFO submits this report to fulfill the requirements contained in Act 48.

The HPTC differs from other tax credits because short-term economic development is not a primary goal.

Rather, the credit seeks to revitalize distressed communities, preserve state and local heritage and facilitate longer-term economic development. The tax credit can yield benefits over very long time horizons, so policymakers should also judge its effectiveness using the same time frame. Moreover, rehabilitation pro-jects can have significant positive spillover effects that are difficult to quantify. These attributes complicate comparisons of the HPTC to other credits used to promote economic development and job creation.

The IFO welcomes all questions and comments on the contents of this report. Questions and comments can be sent to contact@ifo.state.pa.us.

Sincerely, MATTHEW J. KNITTEL

Director

Rachel Carson State Office Building, 400 Market Street, Harrisburg PA 17105 www.ifo.state.pa.us | (717) 230-8293 | contact@ifo.state.pa.us mailto:contact@ifo.state.pa.us http://www.ifo.state.pa.us/

Table of Contents

General Findings and Recommendations

Section 1: Introduction

Section 2: Overview of the HPTC

Purpose and Goals

Administration and Implementation

Historical HPTC Data

Section 3: State Tax Credit Comparison

Section 4: Economic Analysis and Issues

Technical Issues That Affect Economic Impact

Two State Comparisons Using Federal Tax Credit Data

Modest Tax Credit Precludes Pennsylvania Economic Analysis

Positive Spillover Effects from Rehabilitation Projects

Section 5: Tax Credit Plan

General Findings

Specific Recommendations

Key Decision Points

Conclusion

Appendix

Tax Credit Review Mandate

Performance-Based Budgeting and Tax Credit Review Schedule

Sources

DOR Administration, Enforcement and Compliance Efforts for the HPTC

Letters Submitted by Agencies and Stakeholders

General Findings and Recommendations | Page 1

General Findings and Recommendations

Enacted in July 2012, the Historic Preservation Tax Credit offsets up to 25 percent of qualified rehabilitation expenses for historic structures approved by the Pennsylvania Historical and Museum Commission (PHMC) and selected for a tax credit allocation by the Department of Community and Economic Development (DCED).1 The tax credit seeks to incentivize rehabilitation to preserve certified historic structures, revitalize communities and preserve culture and history that is unique to Pennsylvania. The maximum amount of credits that can be awarded annually is $3 million and approved projects are capped at $500,000. The tax credit sunsets on June 30, 2020.

The general findings of this report are as follows:

• The current tax credit is insufficient to motivate large projects and likely incentivizes small projects only. Historically, the credit has offset roughly one percent of total qualified rehabilitation expenses (QREs).

• The credit allocations are subject to too many constraints: an aggregate dollar cap ($3 million), a per project dollar cap ($500,000) and regional considerations. Due to these factors, DCED does not approve credits that exceed $250,000 per project.

• Stakeholders note that the application process generally works well, but the awards process would benefit from quicker turnaround, more transparency and predictability.

• There are many positive spillover effects from rehabilitation projects that are difficult to quantify.

Policymakers should not base their decision to extend or increase the tax credit solely on short-term economic returns or job creation.

The recommendations of this report are as follows. A more complete discussion of these points can be found in the final section of this report.

• If the tax credit is extended, policymakers should increase the aggregate dollar cap and per project cap, assuming that the allocation process is changed from a lottery system to a scoring system. If possible, a fixed schedule should be used for credit allocation dates.

• The regional allocation requirement should be relaxed. If desired, regional preferences can be built into a scoring system and adjusted on an annual basis.

• If the tax credit is increased, policymakers should consider separate allocation pools for small and large projects.

• The current credit is transferable. It should also be made refundable.

• Applications should include a fee to offset new and existing program costs.

• If the credit is extended and increased, PHMC or DCED should track specific performance metrics for the next evaluation that will occur in five years.

1 Article XVII-H of the Tax Reform Code of 1971 (P.L. 6, No. 2), as amended.

General Findings and Recommendations | Page 2

Introduction | Page 3

Section 1: Introduction

Act 48 of 2017 requires the Independent Fiscal Office (IFO) to review 22 state tax credits over a five-year period.2 For the first year, the IFO reviewed three tax credits: the Historic Preservation, Film Production and Jobs Creation Tax Credits. The act requires the IFO to submit tax credit reviews to the Performance- Based Budget Board and the Chairs of the House and Senate Finance Committees and to make reports available to the public on the IFO website.

The act specifies that tax credit reviews shall contain the following content:

• The purpose for which the tax credit was created.

• Whether the tax credit is accomplishing its legislative intent.

• Whether the tax credit could be more efficiently implemented through other methods.

• Any alternative methods which would make the tax credit more efficient.

• The costs to provide the tax credit, including the administrative costs to the Commonwealth and local government entities within this Commonwealth.

The act also specifies that the IFO shall develop a tax credit plan for all tax credits subject to review. The plans should include performance measures, and where applicable, the measures should reflect: outcome-based measures (including efficiency measures), measures of status improvements of recipient populations, and economic outcomes or performance benchmarks against similar state programs or similar programs of other states or jurisdictions. The IFO submits this report on the Historic Preservation Tax Credit (HPTC) to fulfill these requirements.

The remainder of this review contains four sections. Section 2 discusses how the tax credit is administered and presents historical data. Section 3 presents pertinent data (e.g., applicable dollar caps) for states that provide an HPTC. Section 4 contains a discussion of the factors that affect the economic return of the tax credit and the many positive spillover effects from historic rehabilitation. The section also contains an interstate comparison that examines whether state tax credits leverage or motivate additional federal tax credits. Section 5 concludes the review with the tax credit plan, as required by Act 48. A complete list of reports, studies and data sources used for this review can be found in the Appendix. If submitted, written comments provided by stakeholders and affected agencies are also included in the Appendix.

2 Act 48 of 2017 is also known as the Performance-Based Budgeting and Tax Credit Efficiency Act. See the Appendix for the Tax Credit Review Schedule.

Introduction | Page 4

Overview of the HPTC | Page 5

Section 2: Overview of the HPTC

Act 85 of 2012 enacted the Historic Preservation Tax Credit (HPTC). Beginning July 2012, qualified historical structures may be eligible for a 25 percent credit against the costs associated with the rehabilitation of a historic structure approved by the Pennsylvania Historical and Museum Commission (PHMC) and selected for a tax credit allocation by the Department of Economic and Community Development (DCED). The max-imum amount of credits that can be awarded in a year is $3 million and approved projects cannot receive more than $500,000 per annum. Tax credits cannot be awarded after June 30, 2020.

This section begins the analysis with a general description of the purpose and goals of the tax credit. It then discusses the application process and administration of the tax credit, and concludes with a presen-tation of program data since the tax credit became effective in fiscal year (FY) 2013-14.

Purpose and Goals

Act 48 of 2017 requires that all tax credit reviews published by the IFO shall discuss (1) the purpose for which the tax credit was created and (2) whether the tax credit is accomplishing its legislative intent. For the HPTC, the IFO was unable to locate any documents that describe the purpose or legislative intent of the tax credit. However, the purpose and goals of the tax credit must be established so that the analysis can fulfill the requirements described in statute.3

While performing the literature review for this analysis, the IFO did find descriptions of legislative intent for HPTCs in other states and the federal tax credit. The following excerpts provide a summary of those de-scriptions. The excerpts are verbatim and sources are noted in the footnotes.

U.S. National Park Service (federal tax credit) The HTC is designed to not only preserve and rehabilitate historic buildings, but to also promote the eco-nomic revitalization of older communities in the nation’s cities and towns, along Main Streets, and in rural areas.4

State of Maryland In a recent report issued by the Maryland Department of Legislative Services, five legislative points of emphasis were noted as motivating the state HPTC:

• Historic properties significant to the State’s heritage are being lost or substantially altered, often inadvertently, with increasing frequency;

• Historic properties are vital part of our community life and development and cannot be replaced if lost or destroyed;

• It is in the public interest to preserve the State’s heritage and enrich present and future generations with the cultural, educational, inspirational, social, and economic benefits of the past;

3 For the purpose of this review, the term “goal” reflects a broad, long-term outcome.

4 “Annual Report on the Economic Impact of the Federal Historic Tax Credit for Fiscal Year 2017,” U.S. National Park Service (September 2018).

Overview of the HPTC | Page 6

• Increasing knowledge of our historic resources, establishing better means of identifying and ad-ministering them, and encouraging their preservation will assist the economic and cultural growth of the State; and

• The State’s heritage has been enriched by the accomplishments and contributions of the State’s private preservation organizations, and their continuing activities are in the public interest.5

State of Iowa This tax credit was established to help with the costs of rehabilitating historic buildings, to ensure the character-defining features and spaces of buildings are retained, and to revitalize surrounding neighbor-hoods.6

State of Louisiana The legislature of this state has determined that the historical, architectural, and cultural heritage of this state is among the most important environmental assets of this state and furthermore that the rapid social and economic development of contemporary society threatens to destroy the remaining vestiges of this heritage, and it is thus hereby declared to be the public policy and in the public interest of this state to engage in a comprehensive program of historic preservation, undertaken at all levels of the government of this state and its political subdivisions, along with the private sector, to promote the use and conservation of such property for the education, inspiration, pleasure, and enrichment of the citizens of this state.7

State of Georgia Although not explicitly stated, this review assumes that the purpose of the tax incentive is to stimulate rehabilitation of historic structures and homes. The credit reduces the cost of the rehabilitation project by subsidizing the activity and reducing the risk to the developer. It is typically expected that successful reha-bilitation projects serve to generate additional economic and social benefits to an area. Because of these positive spillover effects associated with the rehabilitation efforts, there may be an underinvestment in these projects in the absence of government intervention. Therefore, providing the credit serves to address this underinvestment.8

From these excerpts, it is clear that states regard the main purpose of the HPTC is to rehabilitate historic structures in order to (1) revitalize older or distressed communities, (2) preserve the state’s heritage and

(3) promote conservation of historic property for the enrichment of state residents. The descriptions do not emphasize job creation, return on investment or economic development as the main purpose or even a goal of the tax credit.

Due to the lack of explicit legislative intent, the IFO assumes that the Pennsylvania HPTC would have a similar purpose and goals as identified by other states. Specifically, the analysis assumes that the purpose of the tax credit is:

5 “Evaluation of the Sustainable Communities Tax Credit,” Maryland Department of Legislative Services (July 2016), p.

13.

6 “Iowa’s Historic Preservation and Cultural and Entertainment District Tax Credit: Tax Credits Evaluation Study,” Iowa Department of Revenue, Tax Research and Program Analysis Section (December 2014), p. 10.

7 Acts 1974, No. 273, Section 1. Amended by Acts 1975, No. 592, Section 1, effective August 1, 1975.

8 “A Review of the Georgia Historic Rehabilitation Tax Credit,” Fiscal Research Center, Georgia State University (De-cember 2017), p. 2.

Overview of the HPTC | Page 7

• The preservation of culture and history that is unique to local communities or the state, and if applicable, the long-term revitalization of historic communities.

The analysis assumes that the main goals of the HPTC are as follows:

• To increase the number of certified historic structures that are preserved and rehabilitated than would otherwise occur.

• The reduction of urban blight and abandoned buildings.

• The enhancement of positive social and psychological factors that make communities an attractive place to live, work and visit.

• Long-term economic development as reflected by various economic metrics, such as business sales, income and jobs.

Administration and Implementation

The Pennsylvania Department of Community and Economic Development (DCED) and the Pennsylvania Historical and Museum Commission (PHMC) administer the tax credit and review applications.9 The appli-cation process has five steps. The text that follows is a summary of the more detailed explanation contained in the Program Guidelines for the Historic Preservation Tax Credit published by DCED:10

Step 1: Determination of Qualified Historic Status

• A property qualifies if it is listed individually on the National Register (NR) of Historic Places or is a contributing building to a NR-listed historic district. In both cases, the applicant must submit a PHMC Part 1 application to verify status.

• The PHMC reviews and issues decisions within 30 calendar days after receipt of a complete appli-cation. If all criteria are met, the PHMC determines that the structure is a certified qualified historic structure by signing the Part 1 application form and provides a copy to the applicant and DCED. If a structure does not qualify, then the PHMC provides a written explanation for the denial.

Step 2: Approval of the Proposed Qualified Rehabilitation Plan (QRP)

• The applicant must submit a PHMC Part 2 application form and rehabilitation plan that includes:

(1) photographs of the interior and exterior keyed to appropriate site and floor plans, (2) a written description of the project, (3) a project site plan, (4) any additional information necessary to eval-uate the proposed rehabilitation work, (5) estimated cost and (6) evidence of qualified historic structure.11

• The PHMC reviews the application and issues a decision within 30 calendar days of a complete application. If all criteria are met, then the PHMC determines that the proposal is a certified quali-fied rehabilitation plan (QRP) by signing the Part 2 application form and provides a copy to the applicant and DCED. If a plan does not qualify, then the PHMC provides a written explanation for the denial.

9 The Department of Revenue performs compliance checks on applicants and ensures that approved tax credits are used appropriately.

10 See “Historic Preservation Tax Credit: Program Guidelines,” Department of Community and Economic Development (January 2018).

11 If the applicant has obtained an approval for Part 2 of the federal HPTC, then they have satisfied the requirements for Step 2 but must submit a PHMC Part 2 application cover sheet to fulfill state application requirements.

Overview of the HPTC | Page 8

Step 3: Preliminary Certification and Reservation of Tax Credits

• To obtain a preliminary certification to reserve tax credits, the applicant must submit a certificate of legal existence and an itemized budget of estimated qualified rehabilitation expenses (QREs).12

• Within 30 calendar days after receipt of all information and forms, the PHMC issues a determination that the structure is a qualified historic structure with an approved QRP and notifies DCED. DCED will then issue a preliminary certification and reserve tax credits.

• DCED determines the amount of tax credit allocation. DCED must ensure that all credits are awarded in an equitable manner to each of the five regions of the Commonwealth. Preliminary certification is made available on a first-come, first-served basis based on the date received. Appli-cants cannot qualify for more than $500,000 in tax credits per annum. DCED cannot award more the $3 million per annum.13

Step 4: Final Certification of a Complete Rehabilitation Plan

• The applicant must submit a PHMC Part 3 application form and photographs of the interior and exterior of the structure that document the completed rehabilitation work to the PHMC. The appli-cant must also submit the date the structure was placed in service, submit a copy of a certificate of occupancy by the municipal authority that has jurisdiction and provide a certificate of title.

• If the work conforms to the approved QRP, PHMC signs the Part 3 application form that identifies the amount of QRE and provides a copy to the applicant and DCED.

Step 5: Issuance of the Tax Credit Certificate

• Final certifications are issued on a first-come, first-served basis.

• The applicant must submit a certification of costs prepared by an independent CPA.

• DCED issues the tax credit certificate and notifies the Department of Revenue.14

After issuance, the Department of Revenue (DOR) tracks the utilization of the tax credit certificate and ensures that the tax credit is applied appropriately to outstanding tax liability.

Agency staff provided estimates for staff time and annual costs to administer and enforce the tax credit:

• For PHMC, less than one full-time equivalent (FTE) staff person ($55,800).

• For DCED, less than one FTE staff person ($6,000).

• For DOR, less than one FTE staff person ($14,300).

A detailed explanation of the DOR’s administration, enforcement and compliance efforts related to the HPTC can be found in the Appendix.

12 Costs attributable to new construction that do not qualify as QRE include new additions, parking facilities, driveways or sidewalks, fencing, landscaping, environmental remediation, sewer and water lines and various movable appliances.

13 If available credits have been exhausted, DCED will notify the applicant in writing and place the application on a waiting list.

14 Upon application and approval by DCED, the applicant may sell or assign all or part of the tax credit. Tax credits may only be sold or assigned once. The assignee or purchaser must claim the credit in the taxable year in which the purchase or assignment is made. Purchasers or assignees cannot carry forward or back, obtain a refund or sell or assign the tax credit. Tax credits can be carried forward for seven tax years, but cannot be carried back or used to obtain a refund.

Overview of the HPTC | Page 9

Historical HPTC Data

Table 1 provides detail for the Pennsylvania HPTC for FY 2013-14 through FY 2017-18. The data reflect awards, as opposed to the application of tax credits to offset tax liability. The data show that 15 to 21 projects received a credit allocation, and allocations typically comprise one-half to three-quarters of the requested amount for projects that ultimately received an allocation. Credit allocations comprise roughly one percent of estimated project costs. Data from the PHMC show that additional projects sought credit allocations, but available funds had been exhausted by the time the applications were received and ap-proved.

The bottom of Table 1 displays data from the U.S. National Park Service for federal tax credits used by rehabilitation projects in Pennsylvania. The federal credit is equal to 20 percent of QRE. For FY 2016-17, the PHMC notes that 71 of 73 state applicants also applied for federal tax credits. An applicant is not required to apply for the federal program in order to apply for the state program. Between 25 to 39 projects received a federal tax credit, and those projects reported $250 to $431 million of federal QRE. The average QRE per project ranged from $7 to $12 million. The PHMC notes that QRE typically represents roughly 82 percent of the total project costs for a rehabilitation project because certain costs (e.g., acquisition costs, landscaping and parking lots) do not qualify for the federal or state tax credit.

2013-14 2014-15 2015-16 2016-17 2017-18 Received PA State Tax Credit Number Approved 15 15 16 15 21 Requested Credits $6.1 $3.3 $5.4 $6.6 $7.4 Approved Credits $3.0 $3.0 $3.0 $3.0 $3.0 Estimated Project Cost1 $263.8 $321.5 $269.1 $242.7 $257.7

Average Cost $17.6 $21.4 $16.8 $16.2 $12.3 Approved Credit/Cost 1.1% 0.9% 1.1% 1.2% 1.2%

Approved but Funds Exhausted Number Approved 19 14 7 6 45 Requested Credits $14.7 $16.6 $4.4 $3.0 $6.9

Received Federal Tax Credit2

Number Approved 30 35 31 25 39 QRE at Completion3 $249.5 $430.6 $249.5 $172.7 $330.9

Average QRE $8.3 $12.3 $8.0 $6.9 $8.5

Source: PA Historical and Museum Commission and National Park Service, Annual Report (various years).

Table 1

1 Project costs represent estimated costs and are not final.

2 Calendar year basis. The FY 2013-14 column corresponds to calendar year 2013.

3 QRE is qualified rehabilitation expenses. The federal credit is equal to 20 percent of the QRE.

Fiscal or Calendar Year ($ millions)

Historic Preservation State and Federal Tax Credits

Overview of the HPTC | Page 10

Table 2 provides a breakdown of tax credits based on the project costs. For FY 2017-18, a breakdown of the 21 approved projects was as follows:

• Five recipients exceeded $25 million in project costs and the state tax credit offset 0.5 percent of total costs.

• One recipient reported project costs between $10 and $25 million and the state tax credit offset

1.5 percent of total costs.

• Nine recipients reported project costs between $1 and $10 million and the state tax credit offset

3.7 percent of total costs.

• Six recipients reported project costs under $1 million and the state tax credit offset 18.6 percent of total costs.

Cost Per Project 2013-14 2014-15 2015-16 2016-17 2017-18 Under $1 Million Number Approved 3 2 4 2 6 Total Project Cost $1.7 $1.0 $2.9 $0.7 $2.1

Average Cost $0.6 $0.5 $0.7 $0.3 $0.3 Approved Credits $0.2 $0.2 $0.5 $0.1 $0.4

Approved Credits/Total Cost 13.7% 15.5% 16.3% 18.8% 18.6%

$1 to $10 Million Number Approved 5 5 4 7 9 Total Project Cost $27.0 $26.8 $16.9 $34.6 $37.7

Average Cost $5.4 $5.4 $4.2 $4.9 $4.2 Approved Credits $1.2 $1.0 $0.7 $1.5 $1.4

Approved Credits/Total Cost 4.4% 3.6% 4.3% 4.2% 3.7%

$10 to $25 Million Number Approved 4 4 6 2 1 Total Project Cost $70.7 $50.8 $111.3 $36.7 $13.5

Average Cost $17.7 $12.7 $18.6 $18.4 $13.5 Approved Credits $0.9 $1.2 $1.3 $0.5 $0.2

Approved Credits/Total Cost 1.3% 2.4% 1.2% 1.3% 1.5%

Greater Than $25 Million Number Approved 3 4 2 4 5 Total Project Cost $164.5 $242.9 $138.0 $170.8 $204.4

Average Cost $54.8 $60.7 $69.0 $42.7 $40.9 Approved Credits $0.6 $0.8 $0.5 $0.9 $1.0

Approved Credits/Total Cost 0.4% 0.3% 0.4% 0.5% 0.5%

Source: PA Historical and Museum Commission.

Table 2 Pennsylvania Historic Preservation Tax Credits

Fiscal Year ($ millions)

State Tax Credit Comparison | Page 11

Section 3: State Tax Credit Comparison

For 2018, more than 30 states offered an Historic Preservation Tax Credit (HPTC) for income-producing commercial properties.15 Table 3 displays relevant information for states that have an HPTC in ascending order based on the size of the annual dollar cap on credit awards. The table lists the year the credit became effective, the annual dollar cap, the per project dollar cap, the base credit rate, the transferability (T), refundability (R) or allocation (A) by partner agreement of the credit and the actual dollar amount of the credit for the latest year that data were available.16 The data show that:

• Seven states have an annual dollar cap of $10 million or less (includes Pennsylvania).

• Eleven states have an annual dollar cap between $12 and $60 million.

• Thirteen states do not have an annual dollar cap.17

• Most states also have a per project dollar cap, although many states with high dollar caps or no cap have no per project limit.

Nearly all states offer a base credit rate between 20 to 25 percent of qualified rehabilitation expenditures (QRE). Two exceptions are North and South Carolina, which have tiered rates based on the total dollar amount of QRE (North Carolina) or the original purpose of the structure (South Carolina). Certain applicants will not receive the base credit rate if the computed allocation amount exceeds the per project dollar cap.

In those cases, the effective credit rate will be lower. For example, for Pennsylvania, the average effective tax credit rate is roughly 1.0 percent across all projects ($500,000 per project cap). For Ohio, the average effective credit rate ranges from 14 to 19 percent ($5.0 million per project cap).18 For uncapped states, the effective credit rate will equal the base credit rate.

Nineteen states allow tax credits to be transferred (T) to taxpayers through a direct sale. For Pennsylvania, data from the Department of Revenue show that 91 percent of tax credits are resold for an average amount of 84 cents on the dollar. Twenty-six states allow allocation (A) to partners within a partnership (includes disproportionate allocations) and nine states allow the refunding (R) of tax credits. Refundable tax credits are most attractive to developers because complex partnerships do not need to be set up and developers receive the full value of the tax credit.19

15 Utah and Indiana offer credits for residential properties or rental properties only. New Mexico offers credits to properties listed in the State Register of Cultural Properties and per project caps are $25,000 or $50,000.

16 Data for actual credit amounts are from state tax expenditure reports. A complete list of those reports along with hyperlinks can be found here: https://itep.org/state-by-state-tax-expenditure-reports/. Most data pertain to 2017 or 2018. Some data pertain to credits claimed, while others pertain to credits issued.

17 North Dakota does not have an annual dollar cap, but buildings must be part of a renaissance zone project that is eligible to be on the National Register of Historic Places.

18 “Ohio Historic Preservation Tax Credit Economic Impact Study,” Maxine Goodman Levin College of Urban Affairs, Center for Economic Development, Cleveland State University (October 2015).

19 For federal tax purposes, refundable tax credits are treated as income and subject to tax. For this and other reasons, an analysis by the Missouri State Auditor found that for every dollar of HPTC issued, between 49 cents up to 85 cents effectively went to project costs. The remaining portion of each dollar was lost to the federal or state government in the form of income taxes generated from selling the tax credit, investors who demand a return and tax credit brokers or syndicators who sell the tax credits. See “Historic Preservation Tax Credit Program,” Missouri State Auditor, Report No. 2014-018 (March 2014) pages 9-10. The higher estimate (85 cents) assumed the use of a loss partner who has operating losses that can be used to offset the taxable gain generated when the credit is sold to a third party.

https://itep.org/state-by-state-tax-expenditure-reports/

State Tax Credit Comparison | Page 12

The final column lists the amount of tax credits claimed or issued in the latest year for which data were available, or the latest projection from the state. Not all states make these data available, and for those states, the entry appears as an “n.a.”. For most states with annual dollar caps, roughly half issued credits up to the cap limit. Other states fell far short of the annual dollar cap, such as Mississippi, West Virginia and Rhode Island. In terms of tax credits awarded, the top six states were Missouri ($154.1 million), Louisiana ($91.8 million), Virginia ($87.8 million), Ohio ($57.9 million), Minnesota ($56.6 million) and Mas-sachusetts ($55.6 million).20 These states have no dollar caps or very high annual and per project dollar caps.

20 The figures for Missouri, Louisiana, Virginia and Ohio pertain to FY 2016-17. For other states, the fiscal years are as follows: Minnesota (2017-18) and Massachusetts (2018-19).

State Tax Credit Comparison | Page 13

Year Credit Transfer Credit State Effective Annual Project Rate or Refund1 Amount2

Vermont 1998 $2.4 none .10 T n.a.

Pennsylvania 2013 3.0 $0.5 .25 T $3.0 Arkansas 2009 4.0 0.4 .25 T, A n.a.

Kentucky 2005 5.0 0.4 .20 T, R, A 5.0 Delaware 2000 5.0 none .20 T, A 1.4 Maryland 1997 9.0 3.0 .20 R, A 10.0 Colorado 2015 10.0 1.0 .25 T, A n.a.

Mississippi 2016 12.0 none .25 R, A 2.5 Nebraska 2015 15.0 1.0 .20 A n.a.

Illinois 2019 15.0 3.0 .25 A n.a.

Alabama 2018 20.0 5.0 .25 T, R n.a.

Georgia 2002 25.0 5.0 .25 T, A 31.0 West Virginia 1999 30.0 10.0 .25 T, A 1.0 Connecticut 2007 31.7 4.5 .25 T, A 18.9 Rhode Island 2002 34.5 5.0 .20 T, A 4.7 Iowa 2000 45.0 none .25 A, R 33.9 Massachusetts 2005 55.0 none .20 T, A 55.6 Ohio 2007 60.0 5.0 .25 A, R 57.9 Missouri 1998 140.0 none .25 T, A 154.1 North Dakota 1999 none 0.3 .25 A n.a.

North Carolina 2016 none 4.5 .15 / .25 A 8.0 Texas 2015 none none .25 T, A 14.1 Minnesota 2010 none none .20 T, R, A 56.6 Oklahoma 2009 none none .20 T 7.5 Maine 2008 none 5.0 .25 A, R 13.1 New York 2007 none 5.0 .20 R 43.5 South Carolina 2003 none none .10 /.25 A n.a.

Louisiana 2002 none 5.0 .20 T 91.8 Kansas 2001 none none .25 T, A 5.2 Montana 1997 none none .05 A 0.2 Virginia 1997 none 5.0 .25 A 87.8 Wisconsin 1989 none 3.5 .20 T, A 11.0

Sources: Credit amounts from various state tax expenditure reports. See https://itep.org/state-by-state-expenditure-reports/ for a full set of links to existing reports. Other data from Historic Tax Credit Resource Center (Novogradac and Company) and National Trust for Historic Preservation, Preservation and State Historic Tax Credits.

Table 3 States with Commercial HPTC

Caps ($ millions)

1 Key is as follows: A (allocation among partners), T (transfer or sale), R (refundable).

2 Millions of dollars. Credit amount is latest amount reported by state agency that administers the credit. Most values pertain to fiscal year 2016-17, 2017-18 or 2018-19. Some data pertain to credits claimed, other pertain to credits issued.

State Tax Credit Comparison | Page 14

Economic Analysis and Issues | Page 15

Section 4: Economic Analysis and Issues

An economic analysis of the HPTC is more complex than other tax credits because there are unique factors that should be included in the analysis. Unfortunately, it is not possible to quantify many of those factors, such as the preservation of state heritage or the impacts on local communities that manifest themselves over long periods of time. While this analysis discusses those issues, and cites results from other studies, it does not attempt to quantify the impacts.

This section contains three subsections. The first subsection discusses certain technical issues that will affect the computed economic return from the tax credit. The second subsection contains two interstate comparisons that examine whether state tax credits incentivize rehabilitation projects and leverage addi-tional federal tax credits. The final subsection considers the impact of non-economic factors and positive spillover effects from the state HPTC.

Technical Issues That Affect Economic Impact

There have been many studies published on the economic impact of the state HPTC. (See the Appendix for a list of reports reviewed for this analysis.) Most studies were performed by consultants or other non-governmental entities and find that an HPTC would eventually pay for itself through higher tax revenues that result from new economic activity induced by the tax credit. For example, some recent studies obtained the following results:

• For Wisconsin, full repayment of the tax credit occurred after 5 years, and a 110 percent return was realized after 10 years.21

• For Virginia, full repayment occurred in 9 years if only state tax revenues are counted, but declined to 5 years if local tax revenues are also included.22

• For Alabama, full repayment occurred in roughly 5 to 6 years if both state and local taxes are included.23

However, these and similar studies make a number of critical assumptions that drive the results. Many of those assumptions are not appropriate for an analysis that seeks to determine the net economic impact of a tax credit from the perspective of the government entity that provides the funds. For this reason, this report does not cite specific “economic return on investment” results from other studies beyond those noted above. Rather, it presents general findings and selected observations that may be relevant for Pennsylvania.

The IFO did not perform a formal economic analysis as part of the HPTC review. However, it is important that policymakers understand the relevant economic issues if they consider increasing the annual dollar cap of the HPTC. A number of critical assumptions motivate the strong economic results reported by existing

21 “Wisconsin Historic Tax Credit Analysis: Impact Analysis Calendar Years 2014-2016,” Baker Tilly International (April 2017).

22 “Preserving the Past, Building the Future: HRTC at Work in Virginia,” L. Douglas Wilder School of Government and Public Affairs, Center for Urban and Regional Analysis, Virginia Commonwealth University (January 2018).

23 “Alabama Historic Rehabilitation Tax Credit Program Comprehensive Economic Impact Study,” Novogradac and Com-pany LLP (January 2016).

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HPTC studies. A discussion of those assumptions is necessary to understand the underlying dynamics of the HPTC and its potential economic impact.

The critical assumptions that affect an economic analysis are as follows:

Do state tax credits induce new investment that would not have otherwise occurred? Do state tax credits leverage/motivate additional federal tax credits that would not have otherwise been used?

While these questions appear different, they address the same issue. Nearly all reports reviewed by the IFO assumed that no rehabilitation projects would have been undertaken if the developer had not received a state tax credit. However, reports by government entities note that assumption is not plausible.24 The lone study that allowed for a different outcome is a recent report on the Virginia HPTC. Based on a survey, the study assumed that 70 percent of spending that qualified for tax credits were dependent on the tax state credit, and 30 percent would have been completed without the state tax credit.25

A related question is: do projects that receive state tax credits leverage federal monies (credits) that would not otherwise flow into the state? If projects that receive state funds would not have moved forward without the tax credit, then those projects indeed leverage federal monies if a federal tax credit is also used. However, if those projects would have occurred regardless of the state tax credit, then no incremental federal monies are truly leveraged.

Studies refer to this assumption as the “but for” assumption, meaning the rehabilitation would not have occurred but for the state tax credit. This assumption is a critical aspect of any economic impact analysis, which most studies disregard. Some rehabilitation projects would have been completed with only the fed-eral HPTC (20 percent). In those cases, a state tax credit could actually have a net negative economic impact because it did not alter outcomes, and the funds could have been used for other purposes, such as education, healthcare and road construction that have economic implications.

Without the state tax credit, would a firm choose a different (non-historic) structure or start new construc-tion?

If a state tax credit is sought but not awarded for a historic structure, a firm could opt to purchase, lease or build in another location. Historic structures have unique characteristics besides their location, but firms may have multiple potential locations for their business operations. Nearly all studies assume that no con-struction or rehabilitation would have occurred in any location without a state tax credit. From a statewide perspective, the alternative activity need only occur within the state (as opposed to the same community) to have a similar economic impact.

If the rehabilitated structure will have regular business operations (e.g., a pub or restaurant), does the project merely shift sales from nearby businesses?

From a statewide perspective, the net economic gain is the incremental activity that would not have oth-erwise occurred at some location within the state. For rehabilitation projects that operate as retail estab-lishments, sales may simply represent activity shifted from other retail establishments within the local or

24 Supra, note 8 (Georgia) and note 19 (Missouri).

25 Based on the survey, the analysis found that 54 percent of projects were fully dependent on the state tax credit and 31 percent were partially dependent (i.e., would have been scaled back without the tax credit). The analysis assumed that the partially dependent projects would have been scaled back by 50 percent without the tax credit. See supra, note 22.

Economic Analysis and Issues | Page 17 metro region. Such shifting nets out across the state and does not increase overall activity. Studies typically disregard whether activity has been shifted from other businesses. For a statewide economic analysis, only non-resident spending or new resident spending can increase long-term economic activity.

What is the alternative use of the resources that fund tax credits?

States must raise taxes or lower spending to fund tax credits. Similar to an HPTC, those actions would also have direct, indirect and multiplier effects on a state economy. In order for policymakers to assess whether the credit is an efficient use of state resources, they must know the economic impact from alternatives to provide context. For example, if an analysis finds that the HPTC generates 1,000 new jobs, there is no way to determine if that figure is a good outcome if alternatives are not presented and discussed. All spending by a state government will generate jobs if considered in a vacuum.

Nearly all analyses of the HPTC (and other state tax credits) compute a state return on investment (ROI).

The ROI is the additional state tax revenues that are projected as a result of the new economic activity induced by the tax credit. While that metric is useful, by itself it has limited value to policymakers because they do not know the ROI from potential alternatives.

What is the economic value of the positive externalities associated with rehabilitation projects?

The positive externalities or spillover effects from rehabilitation projects that are triggered by a tax credit can be substantial. Unlike other incentives, the main goals of the HPTC do not include short-term economic development, but rather community building, the revitalization of distressed areas and the preservation of state heritage. These projects may also incentivize other construction and upgrades in the vicinity, reduce blight, raise surrounding property values and establish synergies within the local community. Unfortunately, it is extremely difficult to quantify those spillover effects, and most studies do not attempt to do so. How-ever, the effects are tangible and should be noted in any analysis.

Due to these technical factors and the small size of the tax credit, quantifying the net economic impact of the HPTC would be subject to a high degree of imprecision. Therefore, the IFO did not perform a formal economic analysis for the purpose of this review. However, data are available that can be used to make general inferences regarding the ability of state tax credits to incentivize rehabilitation projects and leverage additional federal tax credits. Those results would have direct implications for any computed economic return to the tax credit. The next subsection uses federal tax credit data to examine those issues.

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Two State Comparisons Using Federal Tax Credit Data

For the HPTC, the most complete data source available for the purpose of analysis is the annual federal tax credit data for each state published by the U.S. National Park Service. Federal tax credit data can be used to compare activity across states that (1) do and do not offer HPTCs and (2) offer credits at relatively high or low levels. All else equal, if state tax credits affect outcomes (i.e., projects would not have gone forward without the tax credit), then states that offer tax credits should also utilize a materially larger amount of federal tax credits because the great majority of rehabilitation projects use both credits if they are available.26

Prior to the state comparisons, it is useful to note that there are four possible outcomes for rehabilitation projects that may qualify for federal and state tax credits. They are as follows:

• A project could be viable without a federal or state tax credit.

• The federal tax credit alone (20 percent) could be sufficient to make a project viable.

• Both a federal and state tax credit (generally 40 to 45 percent combined) could be necessary to make a project viable.

• Federal and state tax credits could be insufficient to make a project viable.

Ideally, state policymakers would like to provide the least amount of funds in order to incentivize the maximum number of projects in the third category only. However, the staff who administer the state tax credit do not have the required information and cannot differentiate between the second and third class of projects, and both types will submit applications for state tax credits. Therefore, some projects that would have moved forward with only the federal tax credit will also receive state funding, and those funds do not generate new economic activity.

For this analysis, the IFO used two simple comparisons in order to assess whether state tax credits incen-tivize new projects that would otherwise not be viable and leverage or motivate additional federal credits, as well as the relative strength of that response.27 The first comparison considers states with and without HPTCs in the same geographic region. The second comparison considers states that recently adopted HPTCs during the past decade to examine how the level of federal Qualified Rehabilitation Expenses (QREs) responded. (The federal credit would generally equal 20 percent of the QRE. The National Park Service publishes QRE by state, as opposed to the amount of the tax credit.) It is noted that these comparisons are merely suggestive and do not prove causation. It is also noted that an inherent difficulty in these types of comparisons is controlling for the number of viable projects that could qualify for a federal and/or state tax credit, as well as unique economic conditions across states.28

26 Some projects only use state tax credits, and not federal. For Pennsylvania, the PHMC notes that for FY 2016-17, 71 of 73 applicants also applied for federal tax credits. The analysis assumes that the great majority of tax credits (on a dollar basis, as opposed to number of projects) issued by states also qualify for the federal tax credit.

27 Due to the high volatility of state data, more complex statistical techniques (e.g., regression analysis) are not used for these comparisons.

28 Based on a review of the literature, the IFO was only able to identify one recent analysis that examines the potential leveraging of federal tax credits using a sophisticated econometric method. In theory, an econometric analysis is able to control for various factors that could impact the level of federal tax credits. The analysis found that the presence of a state HPTC increases federal QRE by $15 to $35 million. However, the study also found no significant result related to the level of the state credit: an uncapped credit was no different from one capped at $5 million per year. See “Leveraging Federal Economic Development Resources with State Historic Rehab Tax Credits,” Jeffrey Oakman and Marvin Wood, Presentation at the National Tax Association 105th Annual Conference on Taxation (January 2013).

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Regional Comparison

The first comparison considers states within the same geographic region where one or more state did not have an HPTC. States from the same geographic region are compared in an attempt to control for de-mographics, general economic conditions and the relative number of viable projects that might qualify for tax credits. The data show that geographic regions have much different utilization levels of federal tax credits. For example, New England states have much higher levels of utilization compared to southeastern states. (Most western states do not have an HPTC.) Part of that outcome is due to the fact that those states have relatively more structures that qualify for historic status.

The analysis compares federal QRE on a per capita basis. The per capita basis is used to control for the size of the state. All else equal, it would be expected that states offering HPTCs would have higher per capita QRE levels than their geographic counterparts that do not. That outcome would suggest that state credits leverage federal monies, and that at least some portion of the projects undertaken that qualified for the federal credit would not have occurred without the state credit.

Table 4 shows the geographic comparison. The first group of states are in the Midwest. Indiana and Michigan did not have an HPTC in 2015 to 2017 while Illinois, Ohio, Wisconsin and Minnesota did. The table shows the average level of federal QRE for 2015, 2016 and 2017 and the state population for the same years. The final column shows the per capita QRE, or the ratio of those two figures. A three-year average is used because federal QRE can change dramatically from year to year and a multi-year average is a better representation of long-term activity. For Indiana, the per capita ratio is $8.4 million in federal QRE per one million residents. For Michigan, the level is $18.7 million. For states that offered credits, the per capita amounts are $21.8 million (Illinois), $32.5 million (Ohio), $16.4 million (Wisconsin) and $46.8 million (Min-nesota). For this region, the data supply a mixed picture as one state that did not offer credits (Indiana) had a much lower level and another (Michigan) had roughly the same per capita QRE level as two states that offered a credit.

For other geographic regions, the results are as follows:

• For the lower Southeast region, Florida (no credit) had a lower level than other states.

• For New England states, New Hampshire (no credit) had a much lower level than other states.

• For Mid-Atlantic states, New Jersey (no credit) had a similar level to three states that offered relatively low levels of credits.

• For the upper Southeast, Tennessee (no credit) had a lower level than most…