Historic Preservation Tax Credits Under Review in Jefferson City

By Jack Naudi
Show-Me Institute

JEFFERSON CITY — With tax credits of all sorts under a microscope in Jefferson City, supporters of historic preservation tax credits are starting to get nervous. They fear that a wholesale gutting of the credits could end up killing what they say is a proven redevelopment program.

Typical of the reaction was a recent editorial in the St. Louis Post-Dispatch, which opined:

“Residential projects have drawn homeowners into the city, including downtown, by the thousands, adding to the tax rolls and strengthening the fabric of neighborhoods. Commercial projects — office buildings, restaurants, hotels, entertainment districts — have become vibrant hubs and tourist destinations.”

But critics question the effectiveness of the tax credits. And some state lawmakers say they want to end tax credits as entitlements for developers. Historic preservation tax credits are awarded based on formulas. Project success generally isn’t considered.

A quick review of how historic preservation tax credits work is in order. In general, there are two types of historic tax credits available in Missouri: federal and state credits. The Missouri Department of Natural Resources doles out the federal credits. Developers or building owners can receive credits equal to 20 percent of the rehabilitation cost for an income-producing property in a local, state, or federal historic district.

Of more concern to Missouri lawmakers are state tax credits issued by the Department of Economic Development. The DED provides tax credits equal to 25 percent of rehabilitation costs, and homeowners are eligible to receive credits. Last year, the DED awarded $170 million in historic preservation tax credits, nearly a third of all tax credits given by the state.

Some state senators, led by Brad Lager (R-Savannah), want to restrict the annual historic preservation tax allotment to $50 million. In addition, they want to make the tax credits a part of the appropriations process.

That has stirred historic preservationists who point to studies showing that tax credits yield impressive economic returns. Missouri historic tax credit proponents often cite a study that was conducted by Rutgers University researchers for the state and the Missouri Downtown Association. Released in December 2001, it concluded that the $346 million in both state and federal historic tax credits issued up to that point added nearly 14,000 jobs, produced $459 million in income, and boosted tax revenues by $144 million.

However, a good chunk of the benefits, according to the study, flowed out of the state. More than 40 percent of the jobs were generated outside of Missouri. Only $70 million of tax revenues stayed in Missouri. The rest went to the federal government and to border states. And $249 million of the $459 million of income, or 54 percent, stayed in Missouri.

More recently, Washington, D.C.-based economist and historic preservation proponent Donovan Rypkema has estimated that during the last decade, state historic tax credits led to more than $2 billion in rehabilitation of old buildings, brought Missourians $1.3 billion in additional income, and helped create 40,000 jobs.

But critics of tax credits, such as University of Missouri–Columbia economics professor Joseph Haslag, zero in on the total money returned to the state. He figures that the state receives just 3 to 4 cents for every dollar of goods and services produced in Missouri. So, for every dollar of a tax credit, the state would have to produce $25 to $22 of final goods and services for the state to get its money back.

“I think the only justification for historic preservation tax credits is the existence of an externality — we like to look at old, well-maintained buildings,” said Haslag, who is also executive vice president of the Show-Me Institute. “There is no economic development justification for the preservation tax credit.”

Even the Rutgers study suggests that state government receives less than 10 cents back in taxes on every tax credit dollar invested. More recently, the Department of Economic Development reported that the return to the state amounted to 23 cents on every dollar in tax credits. Although higher, this is still much less than the dollar-plus figures that some have claimed.

That figure has been disputed by historic preservationists who say it doesn’t include indirect costs, including the multiplier effects. And Saint Louis city officials say it has contributed to $1.8 billion in investments in portions of the city that were dying.

“This isn’t off-the-wall stuff,” said Jerry Schlicter, a Saint Louis lawyer and one of the pioneers of Missouri’s historic preservation efforts. Historic tax credits create interesting places where people want to live, and businesses want to relocate and stay, he said.

“People in other cities, they talk often about how they’re dying to have such wonderful historic architecture,” Schlicter said. “I stand with what has proven to work over a decade in providing tens of thousands of jobs.”

The final piece of the puzzle missing in the pro–tax credit economic analysis, say critics, is an economic term called “opportunity cost.” Simply stated, it suggests that the $346 million used to finance tax credits would have yielded even larger economic gains if spent in more efficient ways.

Haslag, for example, favors giving the money back to taxpayers.

But Schlicter said low taxes alone don’t make an area more attractive. “If low taxes were the only factor, Mississippi would lead the nation in economic development. And it ain’t happening.”

Lager said he’s not debating the effectiveness of historic preservation tax credits. But he does want to place more controls onto how they’re granted.

“Today, that check and balance is not there,” Lager said. “We have a program with no cap, and it is an entitlement. I do not believe that it is a responsible government program. … The responsibility is ours to make sure the taxpayers’ money is spent in the best interest of taxpayers.”

But Schlichter said historic tax credits have built-in controls. The rehabilitation standards, for example, are comprehensive. And he argues that a cap does exist, because there is a finite number of properties eligible for historic tax credits.

“There have been multiple reports prepared by the state,” he said. “So the legislative oversight is there. Plus, the DED has oversight. And you’ve got to jump through a lot of hoops to qualify (for tax credits). So this this is not something that somebody hands you.”

This entry was posted on Tuesday, March 31st, 2009 at 6:13 pm. Both comments and pings are currently closed.