What the Republican tax bill does to cities

The Republican tax bill landed under the Christmas tree with a thud. Only 33% of Americans believe that it gives relief to the middle class. Indeed, experts calculated that between 60-80% of the benefits go to the top 1% of income earners. The package is tightly wrapped and it will take some time to  untangle since it was pushed through with so much speed and volatility that hardly anybody fully knows on what they just voted. However, it looks like the worst impacts on cities have been averted in the final negotiations.

It isn't surprising that southern, rural red state politicians who have the majority in the Senate would put a bill together that knocks big cities in the liberal northeast or in California.  The 12 Republican House members who voted against the bill all come from the metropolitan areas in the northeast and mid-Atlantic. Initially the bill eliminated all major tax credits that make the harder investments in big cities work. The deductions and credits were proposed to be eliminated in order to pay for the corporate tax cuts, the elimination of the alternative income tax, and other cuts.

New Market Tax credits (NMTC), low income housing tax credits (LIHTC), historic preservation tax credits (HTPTC), municipal bond tax deductions, and private activity bonds exemptions (PAB), are the most prominent tools to make difficult urban projects work, especially in legacy cities such as Baltimore . All of them were initially on the chopping block.

Lillian Jones affordable housing in Greenmount West (Photo: Philipsen)

There likely  still will be  negative impacts on cities resulting from the kind of unintended consequences which accompany almost any complex bill. For example, the mortgage deductions cap:  It makes a lot of sense to finally cap the mortgage deductions since they disproportionately benefit wealthier owners and generally favor owners over renters. The share of renters has lately increased along with more people living in cities. However, the cap is applied uniformly across the US, regardless of cost of living and housing prices, thus it will hit not only the very wealthy but also regular middle class people in high-cost cities. Even Maryland's Republican Governor warned of higher taxes for regular Marylanders and announced a State package he wants to sponsor to protect them.

The following is a quick overview of tax credits relevant to urban planning, affordable housing and preservation:.

Historic Tax Credit:

The federal historic tax credit program has been key in the revitalization of Baltimore and has brought almost all of this city's larger adaptive re-use projects over the finish line. There are federal, state and local credits and incentives. The federal tax credit will remain at 20% thanks to massive horsetrading and a big push of the Louisiana Congressional delegation and the advocacy group Preserve Louisiana. However, developers can no longer take the entire credit as an up-front cash infusion (by syndicating it with an investor) but the credit has now to be taken over five years.  The 10 percent pre-1936 non-historic “old building” credit has been eliminated by the tax bill.

Adaptive reuse through historic tax credits: Humanim
in East Baltimore (Cho Benn Holback)

Initially introduced without a historic tax credit the bill had caused the National Historic Trust for Preservation to make this observation:

“More than 30 years ago, former President Ronald Reagan spoke eloquently about the historic tax credit program he signed into law to preserve America’s historic buildings, calling it ‘economic good sense’. Today, led by Reagan’s own party, Congress introduced a tax reform bill that would halt this proven program despite its remarkable track record of success. (NHT on Nov 2, 2017)

After the bill had been reconciled between Senate and House,  NHT was carefully optimistic that favorable refinements may still be possible in the future:

At some point in the New Year, it is widely anticipated Congress will need to pass a “technical corrections” bill to amend certain aspects of the tax legislation. This may present an opportunity to encourage favorable changes to the HTC provisions that the National Trust, along with our partners at National Trust Community Investment Corporation and the Historic Tax Credit Coalition, will be working toward. (NHT on Dec 19,2017)

Low Income Housing:

Low income housing tax credits are a major tool for private developers to even consider affordable housing in the middle of a national shortage of such units, especially in larger cities. The conference committee rejected proposals to eliminate the existing exemption for artist housing, as well as new provisions for rural housing. The PABs were also maintained, leaving the effectiveness of LIHTC largely in place. However, negative effects may still come from the overall context of the bill. The private accounting form Novogradac analyzed the effects of the tax bill shortly before the final votes on Tuesday and concluded:

Gateway affordable housing on west North Avenue (Photo: Philipsen)

the final version of the Tax Cuts and Jobs Act, tax reform legislation approved by the House-Senate conference committee on Dec. 15 and likely to pass Congress this week would reduce the future supply of affordable rental housing by nearly 235,000 homes over 10 years. 

The effect stems less from the tax credit itself which survived but from the reduced corporate tax rate which would reduce the tax loss benefits of LIHTC investments, since the value of depreciation expense deductions would be reduced and from adjustments how inflation is calculated resulting in decreased inflation adjustments.


New Market Tax Credits:

The final bill maintains NMTC for 2018 and 2019 with annual $3.5 billion allocations. New Market tax credits are an important tool of investment in areas that have no or weak markets and was created in 2000 as a bipartisan effort to stimulate investment and economic growth in low-income urban neighborhoods and rural communities. It has been used in many Baltimore projects.

NMTC is an essential tool for community revitalization. Between 2003 and 2015, $42 billion in NMTC investments leveraged over $80 billion in total investments to businesses and revitalization projects in low-income rural and urban communities, generating some 750,000 jobs. The cost to the federal government was less than $20,000 per job. Further, 72 percent of NMTC activity was in the most distressed communities in America, with unemployment rates 1.5 times the national average, poverty rates of at least 30 percent, or median income at or below 60 percent of area median.  (Letter of  2100 businesses calling for maintaining the tax credit program)

New Markets Tax Credit Coalition

The federal tax bill actually added another similar provision that is supposed to aid investment in low income communities, the so-called Opportunity Zones. Defined by similar criteria as the NMTC the provision allows states to establish these zones and is based on the Investment in Opportunity Act introduced in February of this year.  The Denver Post opined that the Opportunity Zones could be easily abused.

  General impacts on large cities

As noted, impacts on large cities are still likely, whether through the lower mortgage cap or fewer doantions to non-profits which play a big role in providing services to vulnerable populations. The cap on mortgage interest deductions for first and second homes will be reduced from $1 million to $750,000.
Equally, the deduction for state and local taxes hits especially those in high tax urban areas: It is capped at $10,000 and can include property, sales, or income taxes. Changes to the standard deduction and corporate rates could also reduce incentives for individuals to itemize or business to seek certain credits. The bill also eliminates tax incentives for private employers to subsidize employee transit, parking, and bicycle commuting expenses.
Non-profits expect massiv losses in donations because the doubled standard deduction will sharply reduce the number of people who can benefit from itemized deductions for charitable giving.

Klaus Philipsen, FAIA
updated for Opportunity Zones provision

Most Planning, Development Tools Survive in Tax Reform Compromise
Affordable Housing Survives GOP Tax Bill’s Final Edit
The Tax Bill Provision That Could Hit Cities Where It Hurts (CityLab)