Eliminate, Reduce, Discount, or Cap? Considering the Future of Missouri’s Historic Tax Credit
Missouri’s Tax Credit Review Commission, like the Bowles-Simpson National Commission on Fiscal Responsibility and Reform, is a far-from-perfect mechanism for devising sound public policy recommendations. After all, politics is ever-present in government commissions. That said, I could not be happier about reports that the Tax Credit Review Commission has suggested that Missouri’s Historic Preservation Tax Credit is in desperate need of improvement.
According to a Nov. 18, 2010, St. Louis Post-Dispatch article, “Historic tax credit could face big cut,” the Tax Credit Review Commission has proposed the following changes to the historic tax credit:
- Reduce the program’s annual cap of $140 million, imposed in 2009, to $75 million.
- Eliminate “stacking” of the Historic Preservation Tax Credit and the Low Income Housing Tax Credit on the same project.
- Cap the amount that an owner-occupied home could receive in credits at $50,000 per project, and only for homes purchased for less than $350,000.
Using data from the Show-Me Living tax credit tool, we see that the state of Missouri expended $973 million on historic preservation from 2000 to the present, the highest expenditure for any tax credit program after the low-income housing tax credit. Historic preservation represents 28 percent of the $3.4 billion in total tax credit spending by the state during this period.
Of this historic preservation spending, $530 million — or 54 percent of the state’s total expenditure under this program — went to projects located in the Fifth Senate District, which includes downtown St. Louis.
Since the year 2000, 1,734 projects received the state historic preservation tax credit. The median amount received per project was $78,400. Of these projects, 761 — or 44 percent — also received the federal historic preservation tax credit. For these projects, the median Missouri expenditure per project was $157,607. For projects receiving only the Missouri state historic preservation tax credit and no federal historic preservation tax credit, the median Missouri expenditure was $55,690.
Projects in the top 25 percent by cost accounted for $780 million of the $970 million spent by the state on historic preservation. The bottom 75 percent of projects received 20 percent of the funding.
A proposed cap of $50,000 per owner-occupied residence would impact fewer than 500 of the projects represented in the data above, because projects that receive the federal historic preservation tax credit are not owner-occupied.
The following chart considers the impact of a proposed $75 million annual cap on historic preservation spending:
We see that for the years 2002 through 2007, the cap would have limited the amount of Missouri taxpayer money expended. Over time, we see that the cap could have reduced total Missouri spending by $220 million.
The Tax Credit Review Commission is right to draw attention to tax credit “stacking,” with its recommendation that the historic preservation tax credit should not be combined with the low-income housing tax credit for the same project.
Consider this: Missouri’s various tax credit programs, despite their many names, perform very similar activities. Low income housing tax credits reimburse project costs incurred by “housing professionals, such as architects, appraisers, attorneys, accountants, contractors and property managers.” Historic preservation tax credits reimburse “costs associated with work undertaken on the historic building, as well as architectural and engineering fees, legal expenses, development fees, and other construction-related costs.” In both programs, expenditures of taxpayer dollars accrue to the exact same activities and individuals. Thus, “stacking” of tax credits on a project may yield the holy grail of public subsidy: “zero dollars” in private equity development.
In such a scenario, the stacking of tax credits is likely “crowding out” private investment, while potentially distorting the stated function of the tax expenditures. (Is the “historic credit” building low-income housing, or is the “low-income credit” building historic?)
The Tax Credit Review Commission’s report is only a start. Missouri has much to debate.
To add my two cents, I think that the most efficient way to reduce state expenditures on historic preservation would be to discount the state’s spending on projects that also receive federal reimbursement for the same costs.
Fantastic post. This statistic that you provide is particularly striking:
Policymakers tend to point out how Missouri has 61 tax credit programs, implying that they are so numerous. SIXTY-ONE. It’s a tremendous number of programs, right? ugh…
When debating whether targeted tax credit programs in Missouri should be reformed, many people question whether we should address the historic preservation tax credit program or leave it alone. It’s my opinion that Missouri couldn’t reform these programs WITHOUT addressing this particular program since it accounts for such a large percentage of the total, in terms of dollar amount.
Comment by Christine Harbin — December 3, 2010 @ 5:04 p.m.
It’s not an expenditure if the project wouldn’t have happened without it!
Comment by Rob — December 7, 2010 @ 7:30 a.m.
Rob,
As tax dollars, HPTC funds necessarily come at the expense of other activities. Ceteris paribus, this Missouri spending would have occurred. Instead of going elsewhere, it went to building construction meeting certain criteria.
How much is too much, however? 25% 40% 45% 100%?
Is it not reasonable to suggest that if private investors see no potential in a building project, then the project should not then become the responsibility of the state?
Is it not reasonable to suggest that state policy must be designed to foreclose the possibility of spending even a single dollar more than is absolutely necessary to accomplish the goal of a state program?
I’ll say it again: Missouri has a lot to debate, because “historic preservation” can mean pretty much anything at this point. The functions of this spending are indeterminate at best. (Eg., is it a banker, lawyer, builder credit, or does it actually do something more than polish the occasional building facade?)
Comment by Thomas Duda — December 7, 2010 @ 7:47 a.m.
But first you have to prove that the construction activity would have gone elsewhere. You haven’t even attempted to do that. One step further, you’d have to prove that the amount of the credit exceeds the difference between the project cost and what the cost would have been if it had occurred “elsewhere.” If you can’t prove these things, your whole argument falls apart.
And LIHTC and HPTC credits do not do the same thing at all. LIHTC covers reduced collectable rent over a set period of time while HPTC covers the additional costs associated with stabilizing and restoring older buildings. Your last comment clarifies a good point you made in the post- how involved are bankers, lawyers, etc in restoring historic buildings? My feeling is that the legislation is written this way because costs and payment streams need to be able to be moved around. But this gets back to my first paragraph — you have to prove that the credit exceeds the cost of the historic preservation-specific work before you can call it an “expenditure.”
Comment by Rob — December 8, 2010 @ 6:57 a.m.
Sorry- I kept saying “costs.” I meant tax revenue generated by the difference in costs between the historic-preservation project and those if it had occurred elsewhere (if at all).
Comment by Rob — December 8, 2010 @ 7:05 a.m.
Rob,
I disagree that “[I] have to prove” anything along the lines that you suggest. This post recommends an alternative/additional policy proposal to reduce state spending on historic preservation.
I have demonstrated, using data from a June 2010 FOIA to Technical Preservation Services at the National Park Service DC Office and data from showmeliving.org, that the state of Missouri expends, on average, nearly three times as much on historic preservation tax credit projects that also receive the federal tax credit as Missouri spends on projects receiving only the state historic preservation tax credit.
I often hear the contention that a tax credit does not constitute a fiscal outlay. That requires some fanciful budgeting.
Monies used to absolve tax credit beneficiaries of their state tax liabilities would otherwise fund state services. Hence, my contention: “Ceteris paribus, this Missouri spending would have occurred.”
Apparently, we disagree as to the appropriate role of government. I don’t think it’s government’s job to fund private historic building rehabilitation, regardless of aesthetic character.
Comment by Thomas Duda — December 8, 2010 @ 9:40 a.m.
I was just talking about the “expenditure” part. Your arguments make sense, they just rest on some big assumptions.
Comment by Rob — December 9, 2010 @ 6:18 a.m.
Rob,
I think “tax credits” throw everyone off. As far as I’m concerned, they’re dollars. As dollars, their allocation by the state constitutes spending.
Thanks for all the comments!
Comment by Thomas Duda — December 9, 2010 @ 6:22 a.m.
I should add that there’s no “but-for” requirement for the HPTC.
Comment by Thomas Duda — December 9, 2010 @ 6:25 a.m.