On Tuesday, I attended a portion of the meeting of the Missouri Tax Credit Review Commission at the Old Post Office. The Commission, appointed by Governor Nixon, is charged with "review[ing] the state's 61 tax credit programs and mak[ing] recommendations for greater efficacy and enhanced return on investment." Due to time constraints (mine, not the Commission's), I was unable to give the testimony I had prepared for the meeting. Luckily, the Commission is accepting testimony by mail and e-mail (see
this post for information on how to contact the Commission).
Here are the comments that I have delivered to the Commission:
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Missouri Court of Appeals, Eastern District
En Banc Courtroom
One Post Office Square |
As I’m sure the members of the Commission know, Missouri has what is widely hailed as the best, most effective historic tax credit ("HTC") program in the entire nation. Missouri's program has been dubbed a "national model" for economic development by the
Wall Street Journal. Respected preservationist and real estate consultant Donovan Rypkema
has stated that "the Show Me State has shown the rest of the country how to attract private capital into our historic buildings." The credits have long been recognized as a key economic driver of the state’s economy.
According to a
March 2010 evaluation of the program by the Missouri Growth Association, economic impacts of the program include $670 million in new sales/use and income taxes for state and local governments, $2.9 billion in leveraged private investment, significant property tax collections, $75 million in earnings tax revenue in St. Louis City and Kansas City, and significant job impacts. The MGA
concluded that the program "pays for itself in economic impacts to the state."
Governor Nixon's own executive branch--if not the governor himself--recognizes these benefits. Until very recently, the Missouri Department of Natural Resources' website continued to call historic preservation "a major source of new jobs and additional revenue for municipalities, counties, and the state itself," with the economic benefits of the credits "extend[ing] far beyond the initial investment in buildings and communities."
The job-creating impacts of historic preservation in Missouri also are significant. The 2010 MGA report concluded that the HTC program is associated with 43,150 new or retained jobs with an average salary of $42,732. The program is believed to be indirectly responsible for tens of thousands of more jobs. Annual job growth associated with HTC projects is higher than expected, with higher than expected increases in "high-paying sustainable jobs." In this economic climate, it is critical that we act very carefully in changing any program that has such a clear history of creating jobs.
An analysis of the benefits of the Missouri historic tax credits is not complete without taking into account the corresponding benefits of federal tax credits. As detailed in the 2010 "
First Annual Report on the Economic Impact of the Federal Historic Tax Credit," Missouri ranks #1 in federal tax credit-aided historic rehabilitation, with $419 million of such rehabilitation in fiscal year 2008. I won’t go into all of the numbers (which you have surely seen before), but the national impacts of that one year of activity (in terms of jobs, income, and generated taxes) were immense. The in-state retention rate of those benefits was 76%. The benefits accruing to Missouri residents from the federal program—in other words,
dollars that are invested in our own communities as opposed to being paid to the federal government or invested elsewhere—are a direct result of Missouri's own superlative program.
The HTC program has been a critically important component of the ongoing rejuvenation of the City of St. Louis, and downtown in particular. In downtown alone, more than
100 historic buildings were redeveloped in the last decade, with 4,400 new residential units coming online and 5,000 new downtown residents, making downtown "
the fastest growing community in the St. Louis region." By the end of this year, over $5 billion dollars will have been invested in the redevelopment of downtown in the last decade, much of which could not have occurred without the HTCs used to help finance the high-cost rehabilitation of the City's historic buildings. There are numerous projects in St. Louis that very likely would not have occurred without historic tax credits, including the critical Washington Avenue corridor.
So, on a local level, Mayor Slay and others
have rightly opposed changes to the HTC program that are likely to hinder continued urban development. Of course, HTCs benefit not only just large projects in downtown St. Louis. Neighborhoods all over the city, and other communities all over the state, benefit from the program. As
noted by one commentator, most historic tax credit projects in Missouri are undertaken not by large-scale redevelopers, “but rather [by] small homeowners and developers. . . . the independent 'mom and pop[s]' in communities across the state." With tens of thousands of eligible properties across the state, the benefits to smaller communites will only continue to increase over time.
A critical point to appreciate is that a mature, efficient market for HTCs is what allows Missouri's program to be so successful. As you know, Missouri HTCs are transferable to tax-paying corporations and individuals, allowing developers to obtain up-front cash for projects by selling the anticipated credits for a discount (typically $0.90 to $0.95 on the dollar). Purchasers know that the credits will be issued as long as apolitical, objective criteria are met, creating the certainty necessary for the tax credit market to thrive.
The Commission, the Governor, and the General Assembly need to carefully consider the extent to which changes to the program might affect this market. Measures such as lowered caps--and, even worse, subjecting the issuance of HTCs to appropriations--not only will cause direct negative impacts to rehabilitation efforts, but are likely have unintended and devastating effects on the entire program.
Indeed, significant damage already has occurred. This is partly the result of the “expanded review process” recently announced by the Department of Economic Development, that has resulted in developers having no clear sense of when or if final tax credit approvals will be obtained. This vague process, coupled with
new program caps and other changes implemented recently and the governor's pursuit of further limits on historic tax credits, have created the uncertainty and confusion in the tax credit marketplace feared by supporters of the program. In a July 20th
front page article, the Post-Dispatch reported that only $13.4 million in HTCs were authorized in the first half of 2010, down from $87.7 million in the first half of 2009. The number of applications fell by over 60% in the same period, with half of those "still awaiting approval."
That Post-Dispatch article is instructive on another point. The reporter noted that "a dozen local bankers, developers and others who work with historic tax credits" would not speak publicly "for fear of alienating the powerful state Department of Economic Development." Assume, now, that the HTC program is made subject to a political (or otherwise subjective) appropriations process. How can a market for tax credits--one that, in prior years, was held up as a national model and a key driver of the Missouri economy--function efficiently in that environment? Not surprisingly, it can't. As one prominent St. Louis architectural firm noted with respect to HTCs, “uncertainty = deal over." And who is most likely to be hurt by new restrictions on the program? Not the “fat cat developers” so disdained by some opponents of the program, but by the smaller, politically unconnected businesses across the state.
Hopefully the slowdown in restoring our state's historic assets is a temporary setback. Whether the harm done to the program will be made permanent is largely dependent on the recommendations given to the Governor by this Commission.
I understand that there are both benefits and costs to consider here. There is no question that the use of Missouri tax credits, including HTCs, has greatly increased over the last decade. I understand and appreciate the grave economic and budgetary times that many states, including Missouri, are going through. It is only sensible to evaluate the efficiency and return on investment not only of HTCs, but other tax credits and state programs.
But all tax credits and state programs are not equal. One way to distinguish the HTC program from at least some other programs is that it has been
proven to work to the benefit of the state as a whole. The program has a long-term track record of achieving extremely beneficial results for the state in creating jobs, increasing tax revenues, and breathing new life into our historic communities and buildings. The Governor and state legislators should think long and hard about altering an extremely successful program which is the envy of many other states.
Consider also that tax credit-aided historic rehabilitation is consistent with a growing nationwide movement toward urban infill, conservation, and restoring the historic architecture of communities. Particularly for younger generations (whom hold the keys to our state's future), there exists an ever-increasing demand for walkable, smart-growth communities, and disdain for abandoning the neighborhoods of our past in favor of continued sprawl (as opposed to real metropolitan
growth). I believe that, in coming years, these values will grow in importance to the businesses and workers that our state must be able to attract and retain to stay competitive in the national and global economies.
Rehabilitating our state's urban cores and historic communities is, then, an investment in Missouri's future--an investment that has been proven to be returned to the state many times over. We simply cannot risk hobbling our HTC program at exactly the wrong time, particularly when other states (including neighbors Kansas and Iowa) are making positive changes to their own HTC programs. To the extent Missouri's HTC program becomes less attractive to tax credit purchasers, Missouri's economy will lose investments to other states that would have been made in our own communities. And to the extent Missouri's cities fail to become the type of cities that an increasingly mobile workforce wants to live and work in, the state as a whole will suffer.
I would like to express one thing directly to the educators on the Commission. As I'm sure you do, I believe that the most important work of our state government is to ensure the education of our children. If I truly believed that a dollar given as HTCs was a dollar going into a “fat cat developer’s” pocket at the expense of a child, I would have no problem saying that, despite its benefits, the program is not worth the cost.
I simply don’t believe that that is true. I would encourage the commission to look past the “zero sum game” characterizations of the program used by the Governor and the Department of Economic Development. This is not an either-or situation. In order for development interests to "win," it is not necessary for educational (or, for that matter, rural) interests to "lose." As
noted in the MGA report, "the value of credits issued are far less than the volume of private investments that otherwise would not have been created." These investments lead to additional economic benefits for the state, including tax revenues (used for education, among other things) that would not have existed but for the development activity.
In conclusion, I would simply note that the charge of this Commission is to review each of our state’s tax credit programs and to recommend changes as necessary. With respect to the HTC program, I would suggest that the only change that is necessary is to restore the certainty that previously allowed historic redevelopment efforts to thrive across the state. I would respectfully request that the Commission recommend to the Governor and the General Assembly that the historic tax credit program otherwise remain unmodified.
Thank you for your consideration.
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