Where credits do: The anti-city bias of the federal tax proposal
As we’ve all read, House Republicans are proposing to cut a multitude of programs to cover a portion of the cost of an income tax cut. Parsing out who stands to benefit from and who would pay for the cut, is an interesting topic but not the subject of this post.
Instead, it’s worth focusing on the consequences of the House Republican plan’s proposed elimination of the federal Historic Tax Credit (HTC) and New Markets Tax Credit (NMTC) mechanisms. These credits are workhorses, and have served the public interest by restoring underutilized spaces to productive use as locations for employment and housing in core cities, suburbs and rural areas.
The HTC produces benefits that dramatically outpace its cost. Since its inception in 1976, the HTC has facilitated returning over 42,000 structures nationally to productive use. In 2016 alone, work was completed on over 1,000 structures where private parties had invested $5.85 billion, thanks to the HTC. Restoring these structures to productive use is good for local tax base, strengthens job creation, and makes efficient use of existing construction and infrastructure. That’s why everyone from business leaders in eastern Iowa to the City Council in Shreveport, Louisiana to a bipartisan coalition in Congress are calling on House leaders to keep the HTC.
A relative newcomer, the NMTC has performed strongly by leveraging $8 of private investment for every $1 of federal credit, in projects sited in distressed markets all across the country. Since 2003, the NMTC has financed businesses to create or retain almost 200,000 jobs, helped build 32 million square feet of manufacturing space and 74 million square feet of office, all in areas where barriers have inhibited economic growth. Like the HTC, the NMTC helps local markets realize potential from underutilized space and assets, which boosts employment and tax base. The credit works for public and private stakeholders, and so is the subject of a vigorous defense by industry users, leaders in Montana and Idaho, Kentucky and elsewhere.
Because most of these sites are in small and large cities, and because cities and inner ring suburbs are the highest potential zones in the modern economy, proposals to end these programs threaten to dilute prosperity not only locally in cities, but nationally.
Each element of the development process — planning, lending, legal, marketing, construction, operation — is more complicated, time consuming, and risky in urban places. Forgotten easements appear by surprise. Soils need testing and remediation. Neighboring property owners object. Zoning and building codes, while modernizing, often conflict with development plans and require adjustment.
Development continues in core cities and inner ring suburbs, in spite of this collection of hurdles that would individually halt a project in more distant suburbs or rural places. There are two reasons why.
First, demand for work and living space in these areas continues to grow, as US cities are reshaped by economic drivers that reward proximity to other people, suppliers and ways of shipping products. In a growing number of industries, shipping requires fiber cable, not loading docks and highways, and operating within a clustered network of related firms drives up productivity. These factors support and push up demand and rent levels for city space.
Second, by definition cities draw together a broad set of activities into limited space. The density of alternative uses reduces the longer term risk of redevelopment. A larger number of firms, in a larger number of industry specialties that will thrive in an urban area because access to customers, vendors, and employees is stronger. This is true in smaller cities, and particularly in larger ones. And the value of these forms of access is growing, evidenced by the increasing cost of operating in urban places.
It’s unclear what the Senate tax cut proposal will entail. Either way, the Historic Tax Credit entices investment in order to equalize the reuse of those older buildings worth saving, with new construction. The New Markets Tax Credit entices investment in order to equalize lending and development in less wealthy areas with lending and development elsewhere. In each case, taxpayers are repaid multiple times over for accepting less tax revenue up front. And as US economic activity shifts more and more to the areas where these credits are primarily used, a sound national policy will harness that market momentum rather than tamp it down. What’s good for cities is good for the country, and federal policy needs to reflect that reality.
