City Council favors only short-term extension of historic preservation tax credit

City Council members recommended a short-term extension Tuesday for a tax credit meant to preserve Baltimore’s historic character, responding to a finance department analysis that concluded the credit is overly generous and failing to boost struggling parts of town.

For over 25 years, the Historic Restoration and Rehabilitation Tax Credit, or CHAP, has granted 100% tax exemptions on the renovation and redevelopment of several thousand properties in designated historic neighborhoods of Baltimore. The credit has been extended periodically since its creation, and has seen a boom in usage over the last 15 years as the city designated more historic districts.

But the tax credit for historic preservation has drawn scrutiny from the city’s Department of Finance, which issued a report last summer calling Baltimore’s menu of property tax breaks “highly inequitable.” The report, produced with the consultancy Ernst & Young, singled out the historic preservation credit as particularly in need of reform, arguing that the incentive is both inefficient and skewed in favor of wealthier neighborhoods.

The credit cost the city about $12 million in unrealized tax revenues in the 2022 fiscal year, according to the report.

The City Council’s Ways and Means committee was considering a five-year extension Tuesday, but council members opted to recommend a one year extension instead. The Finance Department had requested a shorter extension to allow time to come up with long-term alternatives, like reducing the tax break for sought-after neighborhoods or doing away with the historic zone requirements for the incentive.

In hearings over the last two weeks, Councilmen Eric Costello and John Bullock praised the impacts the credit has had for Baltimore neighborhoods, as well as the market stability that would come with a multiyear extension. But Costello nonetheless proposed an amendment for a shorter extension Tuesday, with the understanding that a work group established by Mayor Scott will examine the city’s options for the credit over the next year.

That commission to review Baltimore’s portfolio of tax credits was first announced by Scott in October of 2022. A spokesperson for the mayor’s office did not respond to questions about the status of the work group Tuesday afternoon. Work was slated to start last fall, according to information provided by the mayor’s office in August.

The historic preservation tax credit is set to expire on Feb. 28. The one-year extension advanced out of committee unanimously on Tuesday with one member absent, and is likely to be approved by the full 15-member council later in the month.

The vast majority of properties that cash in on Baltimore’s historic preservation credit are relatively small residential renovations, according to a dataset provided by the finance department. Large projects exceeding $5 million fall into a separate tier eligible for an initial 80% tax break, with the discount decreasing over the course of 10 years.

Deputy Finance Director Bob Cenname, who helped lead last year’s critical evaluation of Baltimore’s tax credit system, acknowledged that the CHAP credit has played an important role in encouraging small-scale renovations of residential properties over the last decade, but he pointed to two “critical flaws” with the program.

First, Cenname argued that the designated historic zones eligible for the incentive “are not at all aligned” with the areas the city has been trying to develop. The areas eligible for the credit — and those that have most often benefited from it — tend to fall along the city’s affluent and predominately white north-south corridor, the finance official noted, while disinvested neighborhoods in East, West, Southwest Baltimore and Park Heights either aren’t eligible or have seen relatively little use of the credit.

Cenname also criticized the program’s 100% subsidy, which he noted prevents the city from collecting any new tax revenue on the restoration of qualifying properties for a decade. Such a generous tax break isn’t needed to prompt investment in many cases, he argued, adding that other local incentives for far more complicated developments grant more limited benefits and generate at least some revenues for the city.

“When these credits come up, it kind of either feels like you’re pro-development or not,” Cenname said. “I feel like we’re pro-development, but we also want to be pro-common sense.”

Officials with the city’s historic preservation office, meanwhile, defended the program, asking council members for the full five-year extension. The credit has been instrumental in large-scale rehabs of places like American Brewery and York Road’s Senator Theatre, said historic preservation planner Stacy Montgomery, but it’s been most useful as tool for encouraging the renovation of vacant rowhomes.

An overwhelming majority of people who have utilized the tax credit tell the city they wouldn’t have done rehab work without the incentive, she said, and tax revenues from homes that have graduated out of the tax credit have climbed from $1.3 million in 2000 to close to $6 million in in 2019.

A 2020 city report on the historic preservation credit acknowledged that the incentive has been disproportionately used in neighborhoods that already benefit from greater private investment, an imbalance the report explained by noting that “success breeds success.” But Montgomery told council members the program has been seeing much more uptake in the last four years from lower-income parts of the city like East Monument and Broadway East.

But if the city wants to scrap or revamp its historic tax credit, one year may be a tight window to get the job done. Eric Holcomb, executive director of the city’s historic preservation division, said in an interview that his office hasn’t had much discussion with other agencies about how to reform the program.

“There are some ideas out there,” he said. “But we’re in no stage right now to really push an idea or a policy change forward yet because we haven’t crafted that.”

Reporter Sophie Kasakove contributed to this story.

adam.willis@thebaltimorebanner.com