Preservation Tax Credits Working Too Well?

When a public program proves popular and effective, how much are we willing to pay for it? How much should we expect in return?

As states examine the economic potential of tax credits for renovating historic structures, experts say the question isn’t whether the programs accomplish their goals, but how to lure serious private investment without tearing bigger holes in already shredded state budgets.

Very few people challenge the concept of offering tax breaks to individuals who revive old, potentially valuable properties and preserve a little corner of the nation’s cultural heritage in the process. Instead, most offer superlative praise from points all along the political spectrum.

President Ronald Reagan once called the federal historic rehabilitation income tax credit “a matter … of course for good economic sense.”

Maryland Planning Secretary Harriet Tregoning, Gov. Parris N. Glendening’s go-to official for “Smart Growth” programs, calls her state’s 25 percent income tax credit “the most successful Smart Growth initiative in the state, bar none.”

National Park Service officials, who administer the 20 percent federal credit and keep the master list of historic buildings and districts that qualify, have called it “one of the most successful revitalization programs ever created.”

But for states such as Maryland, which is trying to reconcile expensive credits with a severely troubled budget, the question isn’t whether the program is worthwhile, but how to attract serious private investment without choking off cash flow.

“No one has to convince me of the value of the program. It’s proven itself,” said Maryland Sen. Barbara A. Hoffman (D-Baltimore). A key player in the creation and swift expansion of Maryland’s rehabilitation credits, Hoffman fears they could soon cost the state hundreds of millions of dollars each if left unchecked.

“All that we need to do is to make sure that it doesn’t get so expensive that the next General Assembly comes next year and says let’s just kill this program because we can’t afford it,” she said.

Congress enacted the original historic rehab credit in 1976. It covered 25 percent of the cost of rehabilitating a historic property for commercial use, and a handful of states from Rhode Island to Utah followed suit. They created modest programs supplementing the federal credits that their historic preservation offices already helped administer with state tax breaks. And they broadened a few provisions to make them more flexible and attractive to developers and financiers.

Then, during the economic boom of the late 1990s, the floodgates opened. Word got around that the credits worked by creating jobs, spurring new investment in surrounding communities and potentially paying for themselves in new tax revenues, not to mention saving hundreds of architecturally significant structures from the bulldozer each year.

Sixteen states established or updated income tax incentives for historic preservation between 1996 and 2001, often adding homeowner provisions to their adaptations of the federal model.

“They are not only good investments, they are extraordinary investments,” said real estate consultant Donovan D. Rypkema, an expert in the economics of historic preservation.

But no one can definitively say just how good they are. Rypkema is quick to point out that while studies have confirmed the positive effect tax credit projects have on such things as job creation and household income, no one has yet put a hard number on the full return states get for their money.

“I challenge anyone in the country who says they know a damn thing about that . . . But it ought to be measured. And my intuitive sense is that it would be a paying and not a costing catalyst,” he says.

Either way, “there’s a quality of life benefit that cannot be calculated with a dollar sign,” Utah preservation coordinator Roger Roper says.

States with the credits continue to tweak them. Changes proposed in Utah, Vermont and Wisconsin, where the credits’ cost has remained low, would spur new investment by broadening the credits. Other states are lining up to take a look at the possibilities. Proposals to establish tax credits rewarding preservation are under review in Alabama, Kentucky, New Jersey, New York, Oklahoma and South Carolina.

But Maryland and Missouri may move in the opposite direction because their programs threaten to strip more than $50 million from state revenues each year.

Eyes on Maryland

Hoffman, a 19-year veteran of the General Assembly, is now using her role as chair of the Senate Budget and Taxation committee to rein Maryland’s rehab back in.

Like many states that have adopted the programs, Maryland set out cautiously with a ten percent income tax credit on certified rehabilitation expenses. In a state where the political atmosphere smiles upon anti-sprawl strategies and the public promotion of arts and culture, lawmakers had little trouble expanding the credit to 25 percent by 1998.

Soon, proponents made the credits transferable to third parties and added a mortgage credit option for those who earned more income tax credits than they could use. Last year, in another move designed to make the mouths of developers and homeowners water, the credits became refundable, meaning that those whose credits exceeded the amount of their liability to the state could receive a check for the remainder.

Officials at the Maryland Historic Trust, the state agency responsible for approving projects and tracking the credits, say only $160,000 was claimed the first year. But that figure grew to a total of $4.8 million over the next three years. Now lawmakers have another number they didn’t have in 2001: the $143.2 million in earned and pipeline credits for projects the Trust has approved through 2004.

Hoffman, whose district straddles the boundary between Baltimore City and Baltimore County, said that 45 percent of the buildings in the city could qualify as properties listed individually or as part of historic districts in the Park Service’s National Register of Historic Places. Baltimore is home to the most expensive rehabilitations that have used the Maryland credits, including the $71 million conversion of a 1929 Proctor & Gamble waterfront soap factory into a 15-acre high-tech business campus.

While Hoffman applauds the results, she accuses the Trust of letting “advocacy” smother information about the project pipeline that would have led to more sober fiscal decisions. “We really believe we responded completely and honestly to all requests for information from the legislature,” Trust deputy director William Pencek told Hoffman’s committee last week.

Weighing Alternatives

Are other states’ programs headed in the same direction?

Maine’s new credit cost the state $166,299 in 2000, a figure revenue officials expect will grow by a modest five percent in 2001.

“The legislature keeps asking, what’s the potential impact. Well, hell, I don’t know,” said Richard Gray, who manages North Dakota’s brand new rehabilitation tax credit program for the state Department of Commerce.

States have tried a variety of tricks to balance the economic benefits and fiscal impacts of rehabilitation credits with varying success.

In Maryland, Hoffman’s initial reaction was to place caps on the amount of credits awarded to individual projects as well as on the total spent statewide each year. A bill in the Missouri legislature would establish an annual cap of $20 million. But the competitive, “first-come, first-served” nature of caps make preservationists cringe.

At least four states – Connecticut, Delaware, Indiana and Iowa – have taken the cap approach. Connecticut’s $3 million statewide cap is untested because no one has taken advantage of the credit yet. About 26 projects are certified each year for Indiana’s $450,000 credit program, but current projects won’t see their credits until 2012.

In Maryland, Hoffman would roll the credit back to 15 percent, tighten regulations governing eligibility for it, drop the refundability and make other adjustments. Her goal: a more predictable annual cost to the state of $35 to $50 million in lost revenue.

Another Arizona?

Often criticized as unnecessary corporate subsidies or as ineffective ways to promote public policy objectives, state tax credit programs came under a microscope after Arizona’s infamous alternative fuel tax credit threatened to knock a $600 million hole in the state budget in 2000.

While some Arizonans kept the spirit of that law, many stuck to the letter, abusing the poorly-designed plan by fitting their new cars and SUVs with one-gallon natural gas or propane tanks and accepting tax breaks that paid out as much as half of the cost of the vehicle. After losing $200 million to the failed program, lawmakers abandoned it.

Hoffman and her allies in the General Assembly say the comparison to Arizona is reasonable. But they want to see a different outcome.

So do preservation advocates across the country.

For a state-by-state summary of tax incentives available for preservation projects, visit the web site of the National Trust for Historic Preservation.