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The Effectiveness and Fiscal Impact of Tax Incentives for Historic Preservation 

12-09-2015 17:35

The quality and character of a city`s built environment influence a wide range of business and residential location decisions, and can serve as either a dampener or catalyst for tourism and other cultural activities. Because of these factors, historic preservation has become recognized as an important economic development tool.


The protection and enhancement of the assets found in our built environment becomes a question of setting priorities and making difficult choices. Financial considerations for the local government, for individuals and for developers are frequently the primary factors upon which the decision to preserve, rehabilitate, or demolish a building rests. These considerations can include the cost of rehabilitation, the value of the site in alternative uses, the current or potential use of the building, and the taxes paid on the property.

Although local land use and zoning regulations have been used in the past to protect specific historic buildings and sometimes neighborhoods, they are typically unresponsive to the financial pressures faced by owners of historic properties. On the other hand, limited public resources generally constrain the local government`s ability to provide meaningful subsidies for historic preservation.

The primary purpose of the Government Finance Research Center`s (GFRC) study for the Atlanta Historic Preservation Negotiation Project was to examine various types of policies and procedures used to promote effective and fair preservation programs. Specifically, it analyzes the fiscal impacts, both short- and long-term, of selected publicly provided financial incentives for historic preservation. The study provides guidance for evaluating the effects of certain incentive programs on both the landowner`s decision to improve the property and on the city`s resources. The ultimate goal was to provide guidelines and techniques that could be used to facilitate the development of a policy that is both effective in achieving preservation and practical in terms of fiscal impacts on the community.

Financial incentives attempt to affect market forces in a way that recognizes community values and makes financially feasible the preservation of local history and heritage found in the built environment. They are intended to relieve the economic pressure to demolish older, usually smaller, buildings and to redevelop to the highest use.

There are many variations on the incentive theme. A summary of the factors that justify the use of financial incentives follows.

Preservation:  The continued use, restoration or adaptive reuse of historic buildings is a public benefit and property owners who invest in these properties and thereby extend their economic life, should be rewarded for contributing to the public`s benefit.

Compensation:  Justification for financial incentives is most frequently based on the notion that owners of historic buildings are unfairly burdened by historic preservation laws that prevent alteration or demolition of their buildings. The logic continues that property owners should be compensated for their inability to develop their property to its highest and best use.

Protection:  Incentives are also used to protect property owners from market forces (demand for downtown development) or government regulations (high zoning floor area ratio (FAR)), which escalate their property assessment values and their operating costs.

Land Use Planning:  Incentives are used to counter the economic forces that encourage land speculation in the central business district, leading to demolition of existing buildings, vacant property, and leap frog development.

Uncertainty About Federal Rehabilitation Credits:  Because federal tax credits for historic rehabilitation have been reduced, many feel that incentives provided by state and local governments may be the only tools available to maintain current preservation activity levels, regardless of other justifications.


Several state and local governments have enacted legislation that encourages historic preservation through tax relief. The local government provisions generally center on the ad valorem taxation of private property, since it is their primary source of revenue. Local governments do not have the inherent power to levy taxes or grant tax relief, but derive this power from the state constitution or other state legislation. Consequently, enabling legislation must generally be enacted before property tax relief can be provided for historic property owners.

Property Tax Abatement
Tax abatement is a procedure that decreases or delays the taxes due on property over a fixed period of time. By lessening the tax burden on the owners of historic preservation projects, a major operating expenditure is reduced. A tax abatement program can compensate for the fact that frequently the property tax functions as a disincentive for building rehabilitation or improvement because such activity results in revaluations and steep increases in assessment for property tax purposes. Tax abatement programs are structured in several ways. For instance, the program can provide a "full" tax abatement. Although called an abatement, a 100 percent tax abatement on a specific property would essentially constitute a tax exemption. Abatement programs are more typically structured to reduce a specific percentage of taxes due, or are accomplished by applying a lower tax rate than usual. A program that uses a specific percentage would, for example, be defined as a 25 percent abatement on the property taxes due. A variant is a program structured to provide a lower effective tax by assessing at a lower ratio than other property (e.g., at 30 percent of actual market value rather than 40 percent). In either approach, the local government must determine the length of time for which the tax abatement is available: i.e., five, ten, or more years. Generally, at the end of that period, the assessment returns to the current market value or the assessment ratio to its full rate.

Property Tax Credit
Another approach that can be taken to provide economic relief for historic property owners involves granting a credit upon fulfillment of certain conditions, such as rehabilitation or restoration. The tax credit allows for the subtraction from a presented tax bill, so that as Richard Westin in Lexicon of Tax Terminology defines it, a credit is "an amount that directly offsets tax liabilities, as opposed to a deduction that only offsets income". The primary advantage of a tax credit is that it specifically links the amount spent on improvement to the tax subsidy. Tax credit programs are also relatively easy to administer, since the burden of providing documentation is shifted to the property owner and the amount of the credit must be determined only once-at the time the property qualifies. A few states-New Mexico, Montana, and California-provide for credits on state income taxes to encourage historic preservation. New Mexico established its program because its property tax exemption was found to be unconstitutional. Property owners can now claim a credit equal to one-half of their rehabilitation costs up to a maximum of $25,000, or five years of tax liability, whichever is less. In the state of Maryland, local governments are allowed to provide a credit against real property tax up to ten percent of maintenance and restoration costs for properties in locally designated historic districts; and a credit of five percent of expenses incurred in constructing buildings that are architecturally compatible with the historic district in which they are located. Both credits may be spread over a period of up to five years. The state of Washington also allows for credits against local real property tax bills.

Property Tax Freeze
The tax freeze approach provides tax relief by holding tax payments at prerehabilitation levels and not taxing increases in value for qualifying properties. Using this method, a rehabilitated building has its assessment frozen at the level before rehabilitation and retains that value for a specified period of years. The length of the freeze ranges from five years in some states to as many as fifteen years in others.

According to various authors, this type of financial incentive for historic preservation appears to be the most widely used approach. Some programs or state statutes provide that assessment freezes be limited to residential buildings, others solely to commercial buildings; and still others are for any building type.

Sales Tax Exemption
A sales tax exemption on goods used for historic preservation purposes was also proposed by the Atlanta Historic Preservation Negotiation Project. A sales tax exemption for historic preservation can be used separately, or in conjunction with, more substantial financial incentive programs, such as the tax abatement and tax freeze methods described above. The preservation goal is accomplished by reducing construction costs for the project being contemplated. Used alone, the sales tax exemption method, representing a small component of capital costs, does not appear to provide sufficient "incentive" or cost reduction to the property owner to spur historic preservation efforts.


The primary purpose of the GFRC report was to develop methodologies for assessing the effectiveness and fiscal impacts of incentive programs for historic preservation in the city of Atlanta. The property tax incentives described above represent foregone tax revenues to the city as well as tax savings for individuals owning historic properties. These foregone revenues are the opportunity costs the city must absorb in order to encourage the preservation of the community`s historic structures.


To determine the financial feasibility of property tax incentive programs, it is important to develop a means of evaluating each program in terms of its costs (foregone revenues) to the local government and its benefits to the community. Just as businesses evaluate their potential activities and future invest- ments with a bottom-line perspective, so too must a local government evaluate its financial decisions. To be financially viable the public benefits of an incentive program should not only outweigh the public costs but the program should generate the maximum benefit for the community relative to the costs incurred. However, the simplicity and elegance of this theory are greatly complicated by the fact that public costs and benefits are difficult to quantify.

The GFRC developed a property tax model to measure the direct public expenditures (foregone revenues) of the tax incentive methods described above. The model also demonstrated the time value of each--which of the alternatives generated public benefits sooner or costs later. The property tax model was applied to a hypothetical Atlanta building, and to 37 "endangered" historic sites (under certain hypothetical conditions). This presented the range and magnitude of the cost to the city of different types of incentive programs. Initial review of the tax incentives and their uses indicated that for income-producing properties, the property tax taken alone as a project cost component was not powerful enough to foster rehabilitation, but could influence land use decisions in that direction by increasing rates of return.

Given the study assumptions, application of each of the proposed incentive programs provides tax revenues that are equal to, or greater than, those under current law over a twenty-year period. However, this is only true if it is assumed that the property will not be rehabilitated without the incentive program; if the property is renovated without incentives, greater revenues are realized under current law. The foregone revenues in the early years vary considerably as does the margin of increase in revenues. These are important factors in program design; the choice of a specific alternative rests on program objectives and the locality`s ability or desire to subsidize preservation activities in the early years of the program.

Using a simplified pro forma, city officials should be able to estimate the impact of the property tax on the property owner`s total costs and anticipated rates of return. The city is then in a position to evaluate the potential value of a given tax incentive in terms of the property owner`s hurdle rate.


Ideally, before any tax incentive program is implemented, a fiscal impact study that projects the public costs and benefits of the proposed action should be undertaken. However, many of the benefits in the case of historic preservation are difficult to measure in quantitative terms. Beyond the financial considerations, some of which can be quantitatively measured, many factors worthy of consideration can only be discussed in a qualitative sense.

For example, specific historic preservation projects may have substantial neighborhood effects. That is, as a result of such a project, other structures may be rehabilitated and the character of the neighborhood substantially changed. Population changes, such as the out-migration from central cities, may be reversed. These changes have real economic impacts, although they may not be easily measured. The benefits are often marginal or incremental; the effects are secondary (indirect or induced) rather than primary. The GFRC attempted to quantify these benefits whenever possible and identified many of the measurement issues that must be addressed in developing a tax incentive program.


The report examines a method (pro forma analysis) that local governments can, and should, use to assess the impact of alternative incentive programs on commercial property owners` investment decisions. All commercial properties are subject to investment decisions--acquisition, new construction, or rehabilitation-and are examined for their impact on the owner`s net profits and rate of return on invested capital. The final measure of the efficacy of a given incentive program is its impact on investor behavior. Does the program provide significant economic inducement to the landowner to assure retention and/or rehabilitation of the historic structure in question? Current fiscal and economic development pressures require that city policymakers understand not only public finance but private real estate finance as well to evaluate the effects of incentives. An important tool in this analysis is pro forma. A pro forma is a projection of the anticipated financial performance of a project. Landowners use pro formas to gauge the sensitivity of a project`s operating income and rate of return to external changes in the economy and to government regulations and incentives. The analysis of a project`s pro forma by the city improves its negotiating position and should leave little doubt as to the explicit (or implicit) rates of return the owner expects and how that can be influenced by the city. The detail of the pro formas will differ, but some sense of how the tax incentives discussed above would work can be gained by examining how incentives would affect the pro forma. Tax incentives may affect the rate of return on investments in the property by lowering the cost of construction, the cost of financing, the operating expenses, or more indirectly, by improving the prospects for gross revenues. The GFRC report applied the tax incentives alternatives to the pro forma of a hypothetical rehabilitation project in Atlanta.


The methodologies developed to analyze the fiscal impact and effectiveness of tax incentives for the historic preservation of the city of Atlanta are applicable to many other local governments. Although additional steps are necessary before an incentive program could be implemented, this report provides a basis for measuring the potential cost and benefits of such a program.

The full research report, on which this article is based, co-authored by John E. Peterson and Susan G. Robinson, is available from the Government Finance Research Center, Government Finance Officers Association, 1750 K Street, N.W., Suite 200, Washington, D.C. 20006. (202) 429-2750. The cost is $16, including postage.

Susan G. Robinson is a manager with the Government Finance Research Center of the Government Finance Officers` Association in Washington, D.C. She is responsible for a variety of research, training and advising projects in the areas of financial management and planning.

Ms. Robinson received a Bachelor of Science degree in political science from the University of Utah and a Master of Public Administration degree from the George Washington University.

Tax Abatement Case Study: San Antonio, Texas

In June 1980, the city of San Antonio instituted a program to encourage the preservation and rehabilitation of historic buildings. The program provides tax abatements for commercial and residential structures. Commercial structures that have been restored and certified receive a 100 percent property tax abatement for five years after verification. After that, the property is appraised at current market value and assessed at half that value for the next five years. Ten years after certification the property assessment returns to the current market value.

Certified and approved residential structures receive a freeze on assessed value for ten years after certification. At the end of that period, the assessment returns to the current market value. The impetus for both San Antonio ordinances came from the authorizing legislation passed by the Texas legislature in 1977.

Prior to approving the ordinances, the city council reviewed alternative incentive mechanisms. The use of an assessment freeze las opposed to an assessment abatement) was rejected by the city council for commercial property as providing too little monetary incentive for restoration. The assessment freeze was viewed as sufficient for the residential market, since residential home buyers may weigh the bottom line impact from property taxes somewhat less heavily than commercial ventures.

At the time of this report, there were 110 properties in San Antonio receiving an abatement or assessment freeze; 33 residential and 87 commercial. The market value of the property is $86.7 million. Since enactment of the historic preservation ordinances, city staff estimate that approximately $200 million in historic preservation and restoration has taken place. This investment has been split about evenly between residential and commercial property.

For city council review of the ordinances, staff prepared an analysis that projected the impact of various tax incentive packages. Each of these scenarios projected 20 years of assessments, with the first ten years serving as the period of incentive operation. The incentive packages examined ranged from full abatement for the ten years to an assessment freeze. The assumptions that drove the alternative scenarios were based on actual properties in San Antonio that had been rehabilitated in which the impact on assessments was known. The tax receipts resulting from the alternative scenarios over the 20 years were compared to tax receipts if no restoration had been done and receipts remained flat throughout the period. Under the assumptions used, the tax receipts generated from restored property exceeded those received from unrestored property in all cases; the proportions ranged from 1.26 times to 3.65 times unrestored property tax receipts. The analysis concluded that the incentiveswould not damage the city`s tax collections, and could improve them. Although this analysis is incomplete (the study did not consider inflation-driven increases in property values), the conclusion is credible.

In practice, the results in San Antonio have exceeded the projections. This may be partially a result of the city`s policy of terminating the incentive mechanism if the property changes ownership. When restored property is sold, the city returns the assessment to full value, and thus receives full tax collections. This impedes property changing hands while the abatement is in effect.

The administration of the historical preservation program has been relatively easy, according to San Antonio Historic Preservation staff members. By placing much of the administrative burden on the applicant, the paperwork handled by the city staff is minimized. The approval process for historic sites is handled by the city`s building inspectors, who coordinate with the Historic Preservation staff. The city is currently working with overlying and underlying jurisdiction jschool districts, the county, etc.l to develop a more consistent incentive property tax mechanism among the local governmental jurisdictions. It is hoped that this will improve the incentives and streamline the process for applicants.

Tax Credit Case Study: Seattle, Washington

In 1985, the Washington State Legislature adopted a law that allows a special valuation for certain historic properties. The incentive mechanism operating in this case is a reduction in the property valuation that corresponds to the value of improvements made on the property. In order to receive the credit against property taxes, the property owner must make improvements to the property equal to at least 25 percent of the prerehabilitation value of the structure. The credit, which acts as a reduction in assessed value to create a special valuation, applies to the property for 10 years after approval by the local review board.

The following examples will clarify the operation of the Washington program. In the first case, assume a $50,000 structure exists on a $100,000 parcel of land. The owner performs the minimum level of restoration of the structure ($12,500) to apply for the program. Upon approval of the special valuation application, the assessor increases slightly the appraised value of the property and structure to $152,000. Consequently, the special value on the tax rolls is $140,000 ($152,000 less the $12,500 of restoration cost). In another case, assume the structure and land values of the first case. If the owner performs $175,000 in restoration on the structure and land at $165,000 the special valuation is $0. It will remain at $0 until the property value (land and structure) exceeds $ 175,000.

A property owner must live in a local jurisdiction that has implemented the state law in order to benefit from the program. There are currently 12 such jurisdictions in Washington. The local government must identify the types of historic properties that are eligible and designate a local review board to approve applications. The state developed three broad criteria to guide localities in their evaluation of properties. These include: properties listed in the National Register of Historic Places, or contributing to the significance of a National Register Historic District; properties listed in the Local Register of Historic Places established by the local government; and properties that are of a class approved by the local government.

After improvements are approved and the special valuation has been applied, the property owner must agree during the ten years to maintain the property, to obtain approval before making additional improvements and to make the property available to the public once a year. If property owners violate any of these provisions, they stand to lose the special valuation and must pay back taxes and incur a penalty equal to 12 percent of back taxes.

Applications for special valuation to the local assessor must be made within 24 months of the initiation of restoration work. If property receiving a special valuation is sold, the new owner may continue to enioy the benefits of the valuation if an agreement is signed with the local review board ensuring that satisfaction of the program requirements continues throughout the balance of the period.

After the applicant submits an application to the assessor, the assessor reviews the application and, within ten days of receipt, submits it to the local review board. The local review board approves or denies applications no later than December 31 of the application year. Upon approval, the board notifies the applicant, the assessor and the state within ten days. The board then executes an agreement with the applicant and returns the application to the assessor. The assessor records and files the agreement with the county recording authority. The special valuation is calculated and entered into the tax rolls as a value separate from the normal assessed value.

Since 1985, when the program was adopted in Seattle, 36 properties have received special valuation and a total of approximately $100 million in restoration costs have been approved. The feeling within the city is that the program is an effective means of encouraging historic preservation, and it is increasingly easy to administer as staff improves the communication channels with the county assessor`s office and state preservation office.

Tax Freeze Case Study: State of Oregon

In 1975, the state of Oregon enacted an historic preservation tax incentive program that allows the freezing of tax assessments on National Register of Historic Places` properties for 15 years. The program is administered by the state.

Although there is no tax credit or abatement associated with the program and no physical restoration of property is required, the Oregon program has been successful. Residential or commercial property approved by the state and meeting all procedural and maintenance requirements met, receive the abatement. Part of Oregon`s success with the tax assessment freeze stems from the state`s tax structure. Oregon does not have a state income tax; therefore, the property tax is relatively more significant to citizens there than in other states.

Under Oregon`s program, an owner of a property listed in the National Register can have the market value of the property frozen for 15 years. During this period, the property owner may choose to restore and improve the property without facing an increased property tax bill as a result of reassessment. The market value is restored at the end of the period, as are the property taxes. The logic of the program is to postpone the negative consequences (increased taxes) of restoring historic sites. By postponing that cost to property owners, the state is encouraging investment in historic preservation. The greatest advantage of the program, other than meeting preservation goals, is the ease with which the program is administered.

Since the program began in January, 1976, the state has placed 843 properties with value of approximately $120 million on the frozen assessment roles. However, there is no plan for administering the return of historic properties to their full valuations, the first of which will occur in 1991. The legislation that established the property tax assessment freeze is scheduled to cease in 1993 absent further legislation. At that point the state will have had 17 years of experience with the existing program, and legislators will be able to examine the program`s costs and benefits, as well as the administration of historic properties after the freeze has lapsed.

When ownership of property with a frozen assessment transfers, the assessment freeze may be transferred if the new owner agrees to abide by the terms of the program. The new owner may also choose to reapply for the entire 15 year assessment freeze. The new property owner will again be required, at a minimum, to maintain the condition of the property at a level equal to when it was designated as historic. The penalty for failure to abide by the statute is the amount of taxes that have been avoided multiplied by a 15 percent additional charge.

The Oregon program is not without problems. In periods of rapidly rising property values, individuals have used the program as a hedge against rising property taxes. The fact that there is no requirement to improve or enhance the property makes this type of strategy easier to exploit. A second problem is the converse of the first. Oregon was hurt more than most states by the recession of the early 1980s. The impact of the recession was the deflation in the housing market. As a result, some properties approved for the program had assessments frozen above the true market value as property values dropped. This removed the primary reason for participating in the program. The economy`s subsequent improvement has largely resolved this problem.

A third problem with the Oregon program is one shared by all programs that provide property tax incentives; namely, the shift of taxes not collected from historic properties to properties not so designated. The City of Salem, Oregon has examined this issue extensively and has concluded that the tax shift is very small. Under a "worst-case" scenario in which 75 percent of assessable property is designated historic and property values increase at 3 percent annually, the shift to undesignated properties amounts to only two cents per $1,000 after 15 years.

A final problem with the Oregon program is that because it does not require actual rehabilitation to take place, it is difficult to evaluate the real value of the tax freeze incentive in terms of actual restoration of historic properties.

Publication Date: Winter 1988-1989


Author(s):Susan G. Robinson