Urban Policy in Disguise

Introduction

Since the mid-1970s, the federal government has used the tax code to incentivize the preservation and rehabilitation of historic buildings. The goal of this article is to explore the history of federal rehabilitation tax incentives to understand the motivations of supporters, the policy’s evolution over time, and critiques that arose. An analysis of the legislative history of historic tax incentives clearly demonstrates that this was an urban policy framed almost entirely around the need to rehabilitate and modernize a disinvested and outmoded urban built environment as a central tenet of urban revitalization. While the history of rehabilitation tax credit (RTC) policy reflects broader narratives about changing federal urban policy in the 1970s and 1980s, namely reduced direct federal funding for urban improvement and the rise strategies to entice private sector actions, the history of the RTC is rarely discussed within the scholarly conversation about post-urban renewal federal urban policy. ¹ The reasons for this disconnect abound: the National Park Service (NPS) and state historic preservation offices oversee the program and it has to direct ties to the federal Department of Housing and Urban Development; its main advocates (today) tend to be preservation organizations such as the National Trust for Historic Preservation (NTHP) and the Historic Tax Credit Coalition; and despite its more than thirty-five-year history, only minimal research exists the impact of RTCs as an urban revitalization tool. ²

Tax credits, including those for historic preservation, increased in popularity in the late twentieth century, although they are not without their critics who argue that these incentives disproportionately benefit wealthy investors and developers in high tax brackets and that they fail to ensure equitable outcomes. According to these critics, historic tax credits are indicative of federal devolution and the rise of policies that herald the free market and private sector as the appropriate driving forces for urban development. ³

Initial congressional support for historic tax incentives (first adopted in 1976 and revised in 1978) was bipartisan, with significant backing from prominent conservative legislators. At that time, policy makers were seeking more grassroots ways of achieving federal urban policy goals and were heightening their efforts to entice the private sector into urban development. A growing concern for urban decline and environmental conservation provided powerful arguments in support of incentivizing historic preservation. In other words, the original congressional motivation for adopting rehabilitation tax incentives emphasized urban revitalization and economic development more than purely preserving the nation’s architecture. The first efforts to revise the US tax code to promote preservation focused on reducing demolition incentives, offering favorable tax treatment to historic rehabilitations and creating historic conservation easements. ⁴

Although President Reagan and Congress supported a highly favorable historic tax credit when he signed the Economic Recovery Tax Act (ERTA) of 1981, efforts to reduce lost revenue occurred almost immediately. Reflecting the increasingly fiscally conservative political climate in Washington and the rise of “Reaganomics,” conservative support for the credits declined by the mid-1980s and efforts were underway to gut the program (if not eliminate it all together). By 1986, the credit was threatened with complete elimination. Rather than taking a strong position for improved tax incentives, as had been the case in the 1970s, preservation advocates were relegated to trying to retain any incentive and promoting a significantly reduced credit (in the Tax Reform Act of 1986) as a legislative win.

The RTC established in 1986 remains in effect today. Private-sector developers can receive a 20 percent federal income tax credit for rehabilitating properties listed in (or eligible for listing in) the National Register of Historic Places or within national historic districts. Since their creation, federal historic tax incentives have spurred more than US$69 billion in the private-sector rehabilitation of more than 39,000 historic buildings, rehabilitating more than 247,000 housing units, creating more than 236,000 new units. ⁵

The popularity of historic tax credits and their success in bringing vibrancy back to historic neighborhoods and downtowns has spurred additional policy advancements at the state and federal levels. Most notably, thirty-one states have subsequently adopted state-level RTCs, which developers can partner with federal incentives and which, sometimes, apply to a wider variety of properties (i.e., owner-occupied housing). ⁶

After briefly discussing the duel histories of historic preservation and urban policy in the decades prior to 1970, the article chronicles the adoption and evolution of federal tax incentives. The focus is on four major pieces of legislation: the Tax Reform Act of 1976, the Revenue Act of 1978, the ERTA of 1981, and the Tax Reform Act of 1986. Throughout, the article places the history of federal tax incentives within narratives about urban revitalization, economic development, and the benefits of historic preservation. The article concludes with a brief discussion of RTC activity after 1986, the impact of the credit in terms of other state and federal urban policies, and the RTC’s role in shaping historic preservation practice in the late twentieth and early twenty-first centuries.

Historic Preservation and Urban Policy in the Mid-twentieth Century

As the historic preservation movement evolved over the course of the twentieth century, the profession took an increasingly urban focus. The dominant narratives frame preservation’s early roots in efforts to preserve sites affiliated with the nation’s founding via philanthropic conservation of historic house museums. ⁷ Preservation historians, though, have found that preservation was part of a broader urban and city-building agenda in the late 1800s and early 1900s in cities ranging from Boston to New York to Charleston. ⁸ In other words, “preservation was envisioned as part of the development of modern cities, not as a reaction against city building.” ⁹

By the mid-twentieth century, urban historic preservation interests were often at odds with those of mainstream urban planning. Facing a severe postwar housing shortage, outmoded infrastructure and buildings, and increasing competition from rapidly expanding suburbs, local leaders across the country partnered with the federal government to modernize American cities—mostly through clearance and redevelopment. When combined with the construction of the federal interstate highway system, which tore through urban neighborhoods, mid-century city development often resulted in the loss of countless historic buildings and the wholesale destruction of urban neighborhoods. There were exceptions to the urban renewal versus preservation dichotomy, with cities such as Providence and Philadelphia creatively using federal urban renewal funds to support historic preservation. ¹⁰

By the 1960s, though, the loss of urban fabric had reached a crisis point. Publications such as Jane Jacobs’ The Death and Life of Great American Cities (1961), Herbert Gans’ The Urban Villagers (1962), and Martin Anderson’s The Federal Bulldozer (1964) captured and catapulted public sentiment against urban renewal, while the 1963 demolition of New York City’s Penn Station came to symbolize the destructive nature of mid-century urban planning. ¹¹ Urban civil unrest and the civil rights movement brought additional national attention to the devastated conditions of many low-income, predominantly African American neighborhoods. By the 1970s, it was harshly clear that urban renewal had failed to successfully modernize American cities. Rather, after two decades of postwar redevelopment efforts, cities were in severe distress. The infamous 1975, “Ford to New York City: Drop Dead” headline and Cleveland’s falling into default in 1978 epitomized this crisis point. ¹² Suburban domination escalated; racial tensions and “white flight” left many urban neighborhoods near collapse; industry changed forms and relocated to new parts of the United States and, increasingly, overseas; and retail jobs and other services followed middle-class patrons to the greenfield sites along the new interstate highways. ¹³

The federal government’s response to the failure of urban renewal and the increasing urban crisis was generally to devolve control over federal funds to local governments through block grant programs and to spur improved practices on the part of lending institutions, the real estate industry, and private-sector developers. ¹⁴ For instance, the Housing and Community Development Act of 1974 established Community Development Block Grants (CDBG), giving local governments more discretion in spending federal funds. The Housing and Community Development Act of 1977 created the Urban Development Action Grant (UDAG) program, which similarly devolved control over spending to local governments. That same year, the federal government passed the Community Reinvestment Act in an effort to stymie longstanding redlining practices by encouraging banks to lend in disadvantaged communities.

Amid many cities’ state of despair during entering the 1970s, a national recession and global energy crisis gave urban leaders hope that a turnaround was still possible. Fuel shortages and rising fuel costs resulting from the 1973 and 1979 energy crises spurred people to seek out urban housing with its access to mass transit and a walkable daily environment, generating a so-called back-to-the-city movement. Furthermore, the fuel crises escalated the cost for building materials, which effectively stalled new suburban construction and made existing urban housing more attractive to potential homebuyers. ¹⁵ As middle- and upper-income households became interested in older urban neighborhoods, critics took note of the possible negative outcomes for disadvantaged, low-income residents—thus, the seeds of gentrification (and its perceptive ties to historic preservation) were born. ¹⁶

Preservationists took particular note of the opportunities presented by these macro-contextual forces, arguing that there “were solid economic reasons…why it no longer made sense to obliterate or discard all things old.” ¹⁷ On one hand, the renewed interest in long-neglected urban historic buildings provided a boon to the field. On the other hand, increased demand for urban living could result in demolition and redevelopment—an approach supported by the federal tax code through the early 1970s.

Popular support for preservation, community efforts to save and utilize historic fabric, and federal preservation policy had rapidly expanded in the latter half of the twentieth century. In 1965, the US Conference of Mayors, with the NTHP, published With Heritage So Rich—a landmark book that framed the loss of urban historic fabric as catastrophic for the future of cities and provided the framework for the National Historic Preservation Act (NHPA), which became law in 1966. ¹⁸ The NHPA stated that the federal government would “give maximum encouragement to organizations and individuals undertaking preservation by private means” and called for “financial and technical assistance” to support private-sector rehabilitation of historic buildings. ¹⁹ While CDBG funds, established in 1974, could be used for preservation, they placed preservationists in a position to “compete for scarce dollars with other urgent urban demands such as police and fire protection, street improvement, education, health care, and tax reduction.” ²⁰ By the late 1970s and early 1980s, there was an increase in urban preservation on many fronts. For instance, grassroots community groups in Pittsburgh and Cincinnati devised innovative community development programs that relied on restoring historic housing for low-income neighborhood residents. The NTHP established its trademarked “Main Street” program in 1977, geared toward revitalizing small town downtowns. The program was expanded in 1986 to apply to urban neighborhood business districts and downtowns of medium-sized cities. Additionally, the federal government amended the NHPA in 1980, creating the certified local government program, which gives local communities access to funding and technical assistance from their state historic preservation office. ²¹

Incentivizing Historic Preservation: The Tax Reform Act of 1976

It was within the context of 1970s-era federal devolution, back-to-the city momentum, and increasing popular support for preservation that the federal government began incentivizing historic preservation. Recognizing a need for federal financial support of historic preservation, preservationists turned to the US tax code to reduce demolition incentives and create incentives for private-sector preservation activity. To generate support for the idea, key organizations including Preservation Action, a national lobbying group, the NTHP, the Advisory Council on Historic Preservation, and the Office of Archeology and Historic Preservation (a division within the NPS) worked with congressional leaders and advocated the economic and urban benefits of historic preservation. ²² For instance, the National Trust held a series of conferences on the issue, including a 1975 event on the “Economic Benefits of Preserving Old Buildings” in Seattle and, the following year, a conference on “the influence of taxation on the preservation of the built environment” in Washington, DC. ²³ Also in 1976, the Trust published a special supplement entitled “Preservation and Taxation” in their membership magazine, Preservation News. These articles focused on the need to provide more support for private-sector preservation efforts where decisions “to rehabilitate or maintain an older property, rather than allow it to deteriorate or tear it down and build something new, will depend in large measure on economic considerations, including tax considerations.” ²⁴

Preservationists had generated congressional support for changing the tax code to support preservation as early as 1972, although tax incentives for preservation would not be official for another four years. In a legislative proposal from 1972 that focused on incentivizing environmental conservation, Representative John W. Byrnes, a Republican from Wisconsin, introduced tax reforms for historic preservation, including “the rehabilitation of older buildings, the restoration of historic landmarks and the gift of easements and other partial interests to protect historically and environmentally significant properties.” ²⁵ Representative Byrnes retired from Congress that year and no action was taken on the proposed bill. The following year tax benefits for historic preservation gained traction as Representative Barber B. Conable, also a Republican, of New York reintroduced the idea in the House of Representatives and Senator James G. Beall, a Maryland Republican, proposed the Historic Structures Tax Act (which he reintroduced in 1975), although neither moved forward. ²⁶

The proposals were reintroduced to the 94th Congress the following year and tax incentives for historic preservation became a reality when Congress passed the Tax Reform Act of 1976 and President Ford signed it into law on October 4. ²⁷ Section 2124 of the Act specifically addressed the “Tax Treatment of Certified Historic Structures,” which Senator Beall had introduced as amendment. The Senate passed the amendment “by a vote of 94 to 2, with the Chairman of the Finance Committee even voicing his support for the amendment to his Committee’s bill.” ²⁸ The preservation-related provisions of the 1976 Act “focused on amending amortization and depreciation rules to encourage rehabilitation instead of replacement of historic structures.” ²⁹ From the outset, the motivation for the changes had a decidedly urban bent. As quoted in a 1976 issue of Preservation News, Senator Beall stated, “My amendment seeks to reinvigorate our urban communities and reaffirm our sense of neighborhood while at the same time preserving our heritage.” ³⁰ The Congressional Record provided further explanation of the urban motivation behind the new tax incentives:

At the present time, the destruction of older structures and their replacement with new buildings or with parking lots and related low-density facilities are given tax benefits unavailable to the owner who wishes to substantially rehabilitate the original structure. The resulting loss of architectural variety, especially in the downtown areas of cities, and the continued deterioration of older buildings until a decision to demolish is made, have resulted in degradation of the urban environment. ³¹

Preservationists recognized that it was crucial to demonstrate early interest, use, and success of the new incentives. The Office of Archeology and Historic Preservation, which oversaw the program in its early years, “immediately recognized that it had to initiate a vigorous educational program…if reforms were to show a significant impact.” ³⁶ To do so, federal preservation staff traveled around the country to work with local preservationists, investors, lawyers, and others needed to successful select, structure, and carry out incentive projects. ³⁷ The first preservation tax incentive projects were completed in 1977 and within one year property owners and developers were using the incentive and completing projects. The Advisory Council on Historic Preservation reported that in the first year of the program, there were 192 applications for certified rehabilitations that amounted to more than US$175 million in investment. ³⁸

Investment Tax Credits for Historic Buildings: The Revenue Act of 1978

Despite the advances to preservation in the Tax Reform Act of 1976, advocates and congressional leaders continued to work for additional federal support for historic rehabilitations. For instance, in 1977, Senator Strom Thurmond of South Carolina introduced a bill that would have extended the preservation incentives from the 1976 Act to homeowners. ³⁹ As reported in a 1977 issue of Preservation News, Thurmond argued that “to deny to these owners the benefits granted commercial owners would be to thwart the expressed intent of the Congress” and that “any encouragement we can provide to owners of these valuable structures to save the integrity and the structural purity of their buildings will accrue to the benefit of all Americans.” ⁴⁰

While Thurmond’s bill was never adopted, preservation did receive another tax boost with the adoption of a 10 percent investment tax credit (ITC) for commercial building rehabilitation via the Revenue Act of 1978 (Table 1). ⁴¹ The new credit was intended to fill a significant void in an ITC that was first adopted in 1962 to support the modernization of American businesses. The Revenue Act of 1962 included a 7 percent ITC (it was increased to 10 percent in 1975) for investment in “tangible personal property (such as machinery and equipment) which is used in a trade or business or for the production of income,” but it explicitly prohibited the use of the ITC on buildings. ⁴² Without the ability to use the ITC for building improvements, one likely (but undocumented) outcome of the credit would have been the relocation of businesses out of older buildings to more modern facilities. ⁴³

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Table 1.

Historic Rehabilitation Tax Incentive Activity, 1977–1984^a.

Year	Number of Historic Tax Incentive Projects	Rehabilitation Investment (Real Dollars)	Rehabilitation Investment (2013 Dollars)
Tax Reform Act of 1976
1977–1978	549	US$140 million	US$518 million
Tax Reform Act of 1976 and/or Revenue Act of 1978
1979	807	US$300 million	US$1.02 billion
1980	931	US$346 million	US$1.04 billion
1981	1,654	US$738 million	US$1.96 billion
Economic Recovery Tax Act of 1981
1982	2,215	US$1.13 billion	US$2.76 billion
1984	3,200	US$2.13 billion	US$4.83 billion

Source: ACHP, Federal Tax Law and Historic Preservation and Advisory Council on Historic Preservation (ACHP), Report to the President and Congress of the United States (Washington, DC: Advisory Council on Historic Preservation, 1984).

^aNo data were available for 1983.

The Revenue Act of 1978 ameliorated this gap in the policy by permanently extending the 10 percent ITC and broadening its application to include “Certain Rehabilitated Structures.” ⁴⁴ The credit was available to properties with rehabilitation work completed after October 31, 1978. Again, the motivation behind the credit lay in hopes of spurring urban revitalization and the physical upgrading, or modernization, of industrial and commercial facilities. The legislation was designed to counter “the declining usefulness of existing, older buildings throughout the country, primarily in central cities and older neighborhoods of all communities” ⁴⁵ and to “promote greater stability in the economic vitality of areas that have been deteriorating.” ⁴⁶

The ITC for building rehabilitation applied to all structures that were at least twenty years old, thus including both historic and non-historic buildings. For certified historic structures, the Secretary of the Interior was required to review the rehabilitation work and certify it as having met federal preservation standards. ⁴⁷ Continuing the intent of the general ITC to support business modernization, the new rehabilitation credit applied only to business-related buildings, fully disqualifying all residential properties. The law used the building’s function after rehabilitation to determine eligibility for the credit. In other words, eligible projects included the upgrading of industrial facilities or the conversion of an historic apartment building into offices, but not the adaptive reuse of a downtown department store as housing. ⁴⁸ Additionally, taxpayers had to choose between the 10 percent credit and the five-year rapid amortization established in the 1976 Act, which limited the number of applicants choosing the ITC (Table 2).

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Table 2.

Summary of Tax Benefits for Certified Historic Properties through 1978^a.

Type of Historic Property	Depreciation Options	Investment Tax Credit Options
Residential (rental properties only)	Amortize rehabilitation costs over a sixty-month period or Use 200 percent declining balance depreciation	Unavailable
Nonresidential (commercial, office, industrial, etc.)	Amortize rehabilitation costs over a sixty-month period or Use 150 percent declining balance depreciation	No investment credit for amortized expenditures 10 percent investment credit available and may be combined with the 150 percent declining balance method

^aThe data in the table are adapted from Joint Committee on Taxation, General Explanation of the Economic Recovery Tax Act of 1981 (H.R. 4242, 97th Congress, Public Law 97-34) (Washington, DC: Joint Committee on Taxation, 1981), 112.

The Revenue Act of 1978 set forth a number of conditions on the use of the 10 percent credit that laid the foundation for contemporary RTC policy. For instance, it required investors to make a “substantial rehabilitation” to a “major portion” of the structure. The only costs eligible for the credit were those explicitly spent on rehabilitation, excluding acquisition costs and any new construction associated with the project. It set the standard that replacing more than 25 percent of a building’s existing walls constituted new construction and would eliminate eligibility for the credit. Finally, the law extended the existing recapture rules for the ITC to rehabilitated buildings, stating that “if the property is disposed of or ceases to be qualifying property before the end of the appropriate useful life for which the credit was allowed, all or part of the credit will be recaptured.” ⁴⁹ In other words, if an owner used the ITC on a certified historic building and then proceeded to demolish it or alter it in ways that violated the federal preservation standards before the credits expired, the recipient would have to pay back the full amount of the credit. ⁵⁰

The Boom Years for Preservation: The ERTA of 1981

While the Revenue Act of 1978 laid the foundation of modern RTC policy, it received significantly less fanfare than the incentives established in 1976 and preservationists continued to fight for even stronger incentives. Additionally, opposition on the part of the real estate industry to the demolition disincentives established in the 1976 Act and a general concern about keeping preservation incentives in place spurred preservationists to tout the economic benefits of rehabilitation projects, particularly as an urban revitalization strategy.

In the fall of 1980, leaders of the NTHP testified to Congress regarding the economic benefits of preservation and the success of existing tax incentives. ⁵¹ The following spring, Representative Rostenkowski, an Illinois Democrat and the then-Chair of the House Ways and Means Committee, recommended creating new rehabilitation ITCs as part of the new Reagan administration’s tax reform package. Also supporting the idea was the then Senate Finance Committee Chairman, Robert Dole, a Kansas Republican. ⁵² On August 13 of that year, President Reagan signed into law the ERTA of 1981, which included an overhaul of the tax incentive program for historic preservation. ⁵³ Sections 212 and 214 of the Act, entitled “Rehabilitation Expenditures,” established a new three-tier ITC for rehabilitation expenses and repealed the former incentives from 1976 and 1978. ⁵⁴ The new system offered the following:

A 15 percent credit for nonresidential buildings at least thirty years old,

ERTA continued many of the limitations and definitions set forth in 1976 and 1978, including the limitations on qualified expenses, the retention of external walls standard, recapture rules, and the definition of certified historic structures. ⁵⁶ Additionally, it added a more specific definition of a substantial rehabilitation, which required either:

the qualified rehabilitation expenditures during the 24-month period ending on the last day of the taxable year exceed the greater of (a) the adjusted basis of the building (but not the land) as of the first day of the 24-month period, or (b) $5,000; or the qualified rehabilitation meets the above requirements, but substitutes 60 months for 24 months and is completed in defined phases. ⁵⁷

ERTA received mixed reviews from preservationists. On one hand, it significantly increased the tax credit for historic rehabilitations (from 10 percent in 1978) and allowed developers to use the credit for all income-producing properties, including residential buildings. The new law offered a higher credit rate for historic (vs. non-historic) projects to compensate for the additional requirements to adhere to federal preservation regulations—a provision for which the NTHP had strongly advocated. But, preservationists questioned whether the additional 5 percent would sufficiently offset the “higher architectural fees, more expensive craftsmanship and extra time required to complete the administrative certification process to receive the tax benefit.” ⁶¹ Additionally, ERTA repealed some of the demolition disincentives included in the 1976 Act, thus reintroducing a key threat to historic preservation. ⁶²

Despite some setbacks in the new law, preservationists generally heralded the new incentives, arguing that “the 25 percent investment tax credit for certified rehabilitation of certified historic structures has been an effective tax incentive for stimulating private investment in the preservation of significant historic buildings.” ⁶³ To educate key parties (local preservationists, real estate developers, etc.) about using the new credit, the National Trust partnered with the National Conference of State Historic Preservation Officers to host a series of conferences around the country in late 1981 and early 1982, which attracted more than 2,500 attendees. ⁶⁴ The Advisory Council on Historic Preservation reported a steady increase in historic tax credit activity (Table 1) with a marked increase after the new credit went into effect and ultimately, “the 25 percent credit proved to be a far more effective incentive to spur private sector investment in historic buildings than all the previous incentives combined.” ⁶⁵

Scaling Back: Preservation Tax Incentives after 1981

In the years immediately after the ERTA of 1981, the fate of the RTCs was in constant flux. Only eleven months after President Reagan signed ERTA into law, a proposal in the Senate “moved to cut a major incentive—the full depreciation write-off for the cost of rehab,” which was originally designed to entice developers to complete historically accurate projects. ⁶⁶ The article explained the depreciation incentive as such: “A developer rehabbing any building at least 40 years old can write off 80 percent of his expenses and receive a 20 percent investment tax credit. But a developer of a historic building can write off the entire rehab cost and receive a 25 percent credit.” ⁶⁷ A November 1982 issue of Preservation News reported that “Preservation Action and other groups are concerned that this year’s legislative changes may indicate a weakening of Congressional support for preservation incentives in general.” ⁶⁸

The credit’s success also provided fuel for new critiques—namely the issue of lost revenue from tax expenditures. Just two years after ERTA passed, the Congressional Budget Office and congressional committees “questioned the need for so high a tax credit,” with the Joint Committee on Taxation finding that the “25 percent tax credit will result in the loss of $170 million in Federal revenues in 1983, while the loss resulting from the 15 and 20 percent tax credits will total $595 million.” ⁶⁹ In 1984, a bipartisan amendment attempted to reduce the non-historic rehabilitation credits for thirty- and forty-year-old buildings by 5 percent each. ⁷⁰ Although championing the creation of the three-tiered credit system in 1981, by 1984 Senator Dole was lamenting that “incentives for rehabilitation of structures are too generous.” ⁷¹ Those in opposition to the reductions focused on the urban benefits of preservation, with Republican Senator John Chafee arguing that “the tax credit has been one of the greatest incentives for rehabilitation of older buildings in the core cities all over the country.” ⁷²

Ultimately, Congress retained all three credits and added demolition disincentives in the Deficit Reduction Act of 1984. The Tax Reform Act of 1976 had included changes to the US tax code that “prohibited owners from deducting the costs of destroying buildings listed in the National Register of Historic Places,” but this provision expired on December 31, 1983. In a show of support for preservation, Congress reinstated this law and actually “expanded the scope of the disincentive by prohibiting deduction of the costs of demolishing any building, whether historic or not.” ⁷³ Also in 1984, while running for reelection, President Reagan commended the historic tax credit policy, stating “our historic tax credits have made the preservation of our older buildings not only a matter of respect for beauty and history, but of course for economic good sense.” ⁷⁴

But, by 1985, preservationists faced the Reagan administration’s postelection threat to eliminate the credits as part of an effort to overhaul the US tax code. ⁷⁵ Preservation advocates “argued that proposed elimination of rehab tax credits would darken the prospects for older cities and doom thousands of historic buildings to obsolescence and demolition.” ⁷⁶ The President of the National Trust, J. Jackson Walker, stated that the proposal would end an “efficient and effective urban policy” and would cause the “diversion of real-estate investment into new construction and urban sprawl.” ⁷⁷

Reflecting the harsh political climate surrounding tax reform, in November 1985, Preservation News reported that the inclusion of RTCs in the House Ways and Means Committee’s draft tax reform bill was a great success and that the preservation community was “glad the committee is supporting some incentive”—despite the fact that the proposed changes significantly diminished the credit. ⁷⁸ By spring of 1986, preservationists were increasingly confident that a rehabilitation credit would survive tax reform. ⁷⁹ When President Reagan signed the Tax Reform Act of 1986 into law in October, preservationists cheered that “rehab of historic buildings has emerged as a relative winner.” ⁸⁰ The revised historic tax credit system included a 20 percent credit for certified rehabilitations of historic buildings and a 10 percent credit for non-historic buildings built prior to 1936. ⁸¹ The new system applied to properties placed in service after December 31, 1986.

Preservationists’ fight to retain historic RTCs had paid off. The official justification for keeping the credits focused on the public value of historic preservation and the need to reduce the cost of often complicated projects:

Such incentives are needed because the social and aesthetic values of rehabilitating and preserving older structures are not necessarily taken into account in investors’ profit projections. A tax incentive is needed because market forces might otherwise channel investments away from such projects because of the extra costs of undertaking rehabilitations of older or historic buildings. ⁸²

In the wake of the Tax Reform Act of 1986, preservationists feared that overall activity would decline due to uncertainty among developers, confusion about new rules included in the legislation, and limitations to the use of the credit. ⁸⁴ For instance, the Act limited the tax benefits a single taxpayer could receive from “passive investments,” including historic rehabilitations. In other words, investors could “no longer write off as much of their ‘active’ income—derived from salary, interest, dividends—using tax credits and deductions from ‘passive’ investments.” ⁸⁵ Reports confirmed these fears, with The New York Times reporting in 1988 that

two years ago, 2,964 jobs were completed nationwide; this year, only a third as many were. From a peak of 3,214 rehabilitation projects in 1984, only 1,092 were done this year. Investment has also dropped by two-thirds, from a peak of $2.4 billion in 1985 to $866 million in 1988. ⁸⁶

After a tumultuous first ten years (1976–1986), in which the historic tax incentives faced constant debate and relatively frequent changes, the credits established via the Tax Reform Act of 1986 have remained relatively unchanged in the thirty years since its adoption. The 1986 provisions do appear to have impacted the total number of projects completed each year, which now averages about 1,000 to 1,500 (as compared to the approximately 3,000 projects per year that occurred between 1983 and 1986). ⁸⁸ On the other hand, the annual amount invested in historic buildings via tax credits has nearly rebounded to the 1986 peak—countering, to some extent, the notion that the 1986 changes would significantly and permanently reduce the credit’s functionality.

In recent years, the debate about federal tax incentives for historic preservation has resurged, with preservationists facing the competing tasks of advocating for improved credits and fighting against their elimination. For the former, preservationists are cognizant of flaws in the current system and argue that the federal government could better support the national goal of protecting the nation’s historic resources with enhancements to the credit. ⁸⁹ For instance, the existing credit, as adopted in 1986, is difficult to use on small projects with low rehabilitation costs. This is primarily due to high overhead costs in terms of legal assistance, preservation and architectural consulting, accounting services, and administrative fees. If the credit is less than this overhead, it does not make sense for users. The credit also cannot be used for owner-occupied homes, which represent a vast stock of historic properties in the United States and ensuring their preservation is essential to the overall preservation of the nation’s cities, towns, and neighborhoods. The “income-producing” provisions also prevent the credit from supporting the rehabilitation of many other essential tax-exempt uses. For instance, the credit can support the adaptive reuse of a historic public school as rental housing (if sold from a school district to a developer), but the credit cannot be used to rehabilitate that school as a school.

In an effort to ameliorate these flaws, there has recently been bipartisan support to amend the federal historic RTC, with bills introduced in every Congress since 2004 (the 108th Congress). Each of these efforts has effectively died in the House Ways and Means or Senate Finance committee. For instance, Representative Robert Portman (R-OH) introduced HR 5378, the Community Restoration and Revitalization Act (CRRA) in November 2004, with the goal of improving both the rehabilitation and low-income housing tax credits. Among the provisions related to the historic tax credit, the bill proposed offering a 40 percent credit for small projects—those with rehabilitation expenses less than US$1,000,000, changing the 10 percent credit to apply to buildings fifty years old rather than those built before 1936, enhancing the credit for projects in distressed areas—allowing developers to claim 130 percent of the actual rehabilitation expenditures, allowing rehabilitated buildings to be used for owner-occupied housing, and easing the use of the tax credit for nonprofit or other tax exempt uses. ⁹⁰

After the CRRA of 2004 died in the House Ways and Means committee, Representative Portman reintroduced the bill (HR 659) to the 109th Congress in February 2005, and Representative Philip English (R-PA) introduced HR 3159, a slightly modified version of the CRRA, in June 2005—both also died in committee. Two years later, Representative Stephanie Tubbs Jones (D-Ohio) introduced English’s version of the bill as the CRRA of 2007, with Senator Blanche Lincoln (D-AR)—introducing the same legislation to the US Senate (S. 584). In 2009, Representative Allyson Schwartz (D-PA) reintroduced the CRRA to the 111th Congress. In this version of the bill, Schwartz and her colleagues kept many of the same provisions as prior versions of the CRRA, but proposed increasing the credit from 20 percent to only 30 percent for smaller projects—defined as those with less than US$7.5 million in rehabilitation expenses, increasing the credit if certain energy efficiency goals were also met via the rehabilitation, and easing the use of both state and federal tax credits on a single project. ⁹¹

Although none of the CRRA bills ever made it out of committee, legislators continued efforts to revamp the federal credit through the Creating American Prosperity through Preservation Act (CAPP)—introduced in 2011, 2012, and 2013. Again, the legislation has received bipartisan support—Representative Aaron Schock (R-IL) introduced it to the House in July 2011 (HR 2479) and Senator Benjamin Cardin (D-MD) introduced it to the Senate in February 2012 (S. 2074) and June 2013 (S. 1141). As of this writing, the current version of the bill is still active in the Senate Finance Committee, but there is little chance that it will be signed into legislation during the current congressional session. The CAPP Act continues many of the proposals of the CRRA, but simplifies the enhancements to four key areas: (1) offering a 30 percent credit for small projects—defined as those with less than US$7.5 million in rehabilitation expenses, (2) increasing the credit by 2 percent (to 22 percent) for buildings in which the rehabilitation also achieves a 30 percent increase in energy efficiency, (3) changing the 10 percent credit to apply to fifty years old buildings, rather than those built before 1936, and (4) enhancing the benefits of using both state and federal historic tax credits on a single project. ⁹²

At the same time that bipartisan legislators are working to enhance the historic RTCs, there are other efforts to overhaul the US tax code that involve eliminating these incentives completely. For instance, in July 2011, Senator Tom Coburn (R-OK) released his Back in Black report, which emphasized reduced federal spending and reforming entitlement programs and tax expenditures—including the historic tax credit. In the report, Coburn argues that

the tax credits are highly duplicative of numerous other federal grant programs allowing federal funds to be used for promotion of historic preservation, such as the Community Development Block Grant, the National Community Development Initiative, and USDA’s Rural Development program. ⁹³

In addition to the recent legislative proposals related to federal historic tax incentives, there have been high-profile legal challenges to the common structure of tax credit deals. Since the Internal Revenue Service (IRS) only releases the credit at the completion of a project, many deals are structured as limited liability company (LLC) partnerships, wherein an equity investor partners with the project developer—providing up-front equity for a project and receiving the federal tax credit upon project completion. In September 2012, the third Circuit Court of Appeals, in Historic Boardwalk Hall v. Commissioner, found that the equity investor in the rehabilitation of Atlantic City, New Jersey’s Boardwalk Hall “was not a partner because it had no real prospect of an upside and was fully protected from any downside risks” ⁹⁵ and upheld the IRS’ decision to not grant the credit. While this case certainly sent shock waves through the preservation community, there were many anomalies and unique circumstances in the structure of the Boardwalk Hall rehabilitation and federal historic tax credit projects are continuing to move forward across the nation. ⁹⁶

Current congressional proposals and legal challenges create an uncertain future for the federal historic tax credits. As such, the NTHP, the NPS, and others are actively advocating for the credits, promoting their benefits, and working to quantitatively articulate their federal, state, and local impact. For instance, NPS argues that the credit is “the nation’s most effective Federal program to promote both urban and rural revitalization and encourage private investment through historic building rehabilitation,” further stating that historic tax credits “generate jobs, enhance property values, create affordable housing, and augment revenues for Federal, state and local governments.” ⁹⁷ These arguments are supported by federal economic impact studies conducted by researchers at Rutgers University, with support from the Historic Tax Credit Coalition and the National Trust Community Investment Corporation, which found that “as a generator of jobs and GDP, HTC [historic tax credit]-related investment is stimulus on steroids.” ⁹⁸

Conclusion

Since their creation, federal historic tax incentives have spurred more than US$69 billion in the private-sector rehabilitation of more than 39,000 historic buildings. These investments have rehabilitated more than 247,000 housing units and created more than 230,000 additional new units. Of the total units in RTC buildings, more than 131,000 have provided affordable housing. For fiscal year 2013 alone, the NPS reports that there were 1,155 approved RTC applications amounting to US$6.73 billion in investment, creating 15,754 new housing units—7,097 of which are designated as low- or moderate-income units. ⁹⁹

By one account, the initial creation of historic tax incentives in 1976 “revolutionized the field of historic preservation.” ¹⁰⁰ Federal historic tax credits elevated the role of historic preservation in urban development and engaged the real estate development community in rehabilitation. Their creation reflected the onset of federal devolution, wherein federal policies worked to incentivize private-sector action rather than allocating direct federal funding for urban improvement, including preservation. Counter to some popular views that preservation is an impediment to change, ¹⁰¹ historic tax credits came with an implicit understanding that preservation could actually be an agent of change. In other words, from their creation in the 1970s, the intent behind federal historic tax incentives was to spur urban revitalization, find useful purposes for outmoded historic buildings, and upgrade the nation’s existing built environment. After more than thirty-five years of rehabilitation activity, progress has been surely made, but the task remains unfinished. The history of federal historic RTCs provides a robust understanding of how this policy evolved and fit within broader urban development narratives, but only the future will tell if and how it will continue to benefit our nation’s cities.