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Friday, November 23, 2012

Want an Efficient Historic Tax Credit?

 Want an Efficient Historic Tax Credit? Raise Taxes

As the maneuvering in advance of the next legislative session gets into gear, we keep hearing that the state’s historic structures tax credit is to be revived.

To recap: for several years, Rhode Island had a tax credit available for developers who restored historic buildings.  It was essentially a subsidy for 30% of the cost of the project.  In a variety of ways it was a decent program, with low overhead to administer, and the subsidies went to a variety of worthwhile projects, mostly in the cities that need it.  

Some of the projects were a bit too gentrifying, and I regret that the credits didn’t come with strings to insure better wages for the people who work on them, but it was, for several years, the most effective affordable housing program in the state.
The downside, though, was big.  Because the program was available to any qualifying project, it was impossible for the state to budget for it.  The credit was much more popular than budget-writers anticipated, and this made not only a big hole in the budget, but an unpredictable one.  When the program was closed in 2008, there were around $300 million of credits outstanding, waiting to be cashed in for lower tax bills.
It made sense at the time to float a bond to make the redemption of the credits a bit more predictable, so the state borrowed to create a trust fund to make payments to the people who held the credits.
However, there is another down side to our tax credits.  When the state gives a $5 million tax credit to some project, the project only receives around $4 million or less.  The rest is shared between some tax credit broker (Michael Corso has become a famous one for his involvement with 38 Studios) and a business or rich person who wants to lower their tax bill.  
That is, less than 80% of the face value of the tax credit goes to the public purpose to which the credits are supposed to be devoted, and the other 20% is for a benefit that goes directly to the richest citizens of our state.  Being a perfect example of government overpaying (by a lot) for a service, one might think this the very definition of “government waste,” but somehow the label never seems to be applied there by the fiscal watchdogs.
Contrast this to federal tax credits, where it is usually more than 95% of the credit that goes to the stated purpose.  Federal taxes are higher than Rhode Island taxes, so credits against those tax bills are worth more than credits against a state tax bill.  
So one way to increase the efficiency of state tax credits would just be to raise the state business and personal income taxes on the top end by a lot.  Yes, I know, that’s just my little joke, but with the recent “reforms” of the tax rates, prices for state tax credits are going to be even lower than they were in 2008, when they were 80 cents on the dollar or less.
Here’s the bottom line: credits against state taxes are a great way to waste a ton of money and create unpredictable budget costs.  The projects that the tax credit funds are worthwhile, but if they are to be subsidized they should be funded by grants, with a set annual budget and rules to demand that projects pay at least a living wage to their contractors.  As they were constituted, they did useful work, but also served as a giveaway to wealthy insiders who don’t need your tax dollars to live a life of ease.
Tom Sgouros is a freelance engineer, policy analyst, and writer. Reach him Buy his book, "Ten Things You Don't Know About Rhode Island" at