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Tax reform looks like an attack on cities | Opinion

In an effort to generate savings, the tax packages have taken aim at the tax credit programs and bond financing that underpin the American community development sector.

Tax credits helped with the restoration of the Divine Lorraine on North Broad.
Tax credits helped with the restoration of the Divine Lorraine on North Broad.Read moreDAVID SWANSON / Staff Photographer

As Congress tries to pass tax reform, the debate in the media and on Capitol Hill is focused on how these packages will affect the average taxpayer. But the what-it-means-for-your-wallet analysis misses what these tax changes might mean for your community.

In an effort to generate savings, the tax packages have taken aim at the tax credit programs and bond financing that underpin the American community development sector.

When the House Ways and Means committee initially unveiled its tax reform proposal, it called for eliminating the federal tax exemption of Private Activity Bonds (PAB), which underwrite many municipal economic development projects like hospitals and airports, but also affordable housing. It also called for getting rid of Historic Preservation Tax Credits, which provide the subsidy often needed to adapt and reuse old buildings, and New Markets Tax Credits, which incentivize the construction of projects in low-income communities, including businesses, schools, supermarkets, food banks, and health clinics.

Some saw these tax changes as a purposeful attempt to stall development in Democratic-driven cities and solidly blue states. Removing the tax exemption on PABs would make it much harder for municipalities to finance infrastructure improvements or maintenance, and eliminating the tax credit programs would greatly harm urban revitalization efforts.

However, the Senate Finance Committee's most recent bill reinstated the Private Activity Bonds exemption, allowed New Markets Tax Credits to continue until 2019, and eventually kept historic tax credits.

As the House and Senate versions of the bill go to a conference committee to be reconciled, our representatives will be debating the need for government incentives for development that serves the public good or requires subsidy (in most cases, both). In Philadelphia, PABs have financed many municipal projects, as well as university infrastructure, and nationally account for 27 percent of all long-term municipal debt. Historic tax credits have made possible more than 277 projects since 2001, including the revitalization of the Divine Lorraine, Ortlieb's brewery building, and the Wireworks in Old City. New Markets Tax Credits have been leveraged to generate more than $1 billion in investment in projects in low-income neighborhoods such as Paseo Verde, El Corazon Cultural Center, Pan American Academy Charter School, and Oxford Mills.

These tax credit programs were not created as some social welfare scheme. They were started by Republicans as a way to incentivize private business to participate in projects that serve a public good and to generate greater economic activity by enabling more development. Historic Tax Credits came about under Gerald Ford, and Low-Income Housing Tax Credits (so far spared this round of cuts), were included in the last major tax reform effort in 1986. A Republican-led Congress during Bill Clinton's administration added New Markets Tax Credits to the mix.

These efforts replaced direct federal subsidies with public-private partnership programs; but the House's proposal to cut these programs replaces them with nothing. Instead it makes clear that the federal government is willing to abandon its involvement in community development.

No one should be shocked by these tax proposals, given that practically every year, New Markets Tax Credits are on the congressional chopping block, only to be saved at the last minute. The president of the National Trust for Historic Preservation wrote months ago, "Over the past few years, some tax overhaul plans drawn up in Congress have included a repeal of the historic tax credit." Even if the programs are saved this year, it's just a matter of time before they are abolished.

With the federal government slowly rolling back its support of urban development, perhaps it's time to start talking about other alternatives. While no substitute for the historic tax credit, Philadelphia should consider more programs that incentivize homeowners to buy, restore, or keep an old home in good repair. While new construction and substantial rehabilitation get a 10-year tax abatement, homeowners who make more minor repairs to old homes (like fixing old roofs and buckling brick walls) get practically no support. Recent efforts like Council President Darrell Clarke's $100-million basic systems grants and new home repair loan program are a step in the right direction.

One additional step might be to swap the blunt homestead tax exemption, which reduces the taxable value of a home by $30,000, for tax credits that offset the cost of home improvements. This would create work for contractors while improving the overall value and livability of a home. Indeed, there are a lot of jobs in repairing homes, not just creating new ones.

Another strategy might be to strengthen Pennsylvania's inadequate state historic tax credit program, and for the commonwealth to follow the 14 states that have already created (and two others that have proposed) their own statewide New Markets tax credit programs. These programs can provide the needed stimulus to get development done and pay the state back in new job creation, property taxes, and the economic value of revived urban spaces.

The greatest irony here is that President Trump himself used the historic tax credit after he was elected, for a tax subsidy worth as much as $32 million to develop his new hotel in D.C.'s Old Post Office building. He of all people should know why tax credits have a good return on investment for the government.

Diana Lind, managing director of Penn Fels Policy Research Initiative, is a board member of the Philadelphia Citizen, where this article was first published.