TOPEKA – As historic buildings age, they sometimes need a little love and a hefty state subsidy to avoid becoming useless eyesores, advocates of the state’s historic preservation tax credits said Thursday.
But that government aid would go away under Gov. Sam Brownback’s tax plan, which cuts income tax rates and replaces some of the lost revenue by slashing several popular tax deductions and credits.
That small part of Brownback’s plan drew opposition from the city of Wichita and two historic preservation advocates during a House Taxation Committee hearing Thursday.
“In Wichita it’s been a significant component of the revitalization of our downtown area,” Dale Goter, the city’s lobbyist, told lawmakers. “But there are many other users of that credit throughout the community. They have proven to be effective in restoring historic properties, restoring them to the tax rolls and generally to be a benefit to the city.”
There’s little doubt the tax credits have played a key role in downtown development, including renovations to the Drury Broadview Hotel, River City Brewery, Carnegie Library and several others. And developers and city leaders say the incentive will likely play a key role in the renovation of Union Station near the train tracks on Douglas and the Commodore Hotel on North Broadway.
But a 2010 state audit cast doubt on the effectiveness of the program because less state money goes to the projects when developers sell the credits to banks to trigger loans before construction begins. More on that in a minute.
State government gives historic preservation tax credits to developers and individuals that are equal to 25 percent of what they spend – beyond the first $5,000 – to renovate historically significant buildings.
From 2002 to 2009, the credit helped fund 542 projects statewide, according to a study commissioned by the Kansas Historical Society.
In Wichita, Mayor Carl Brewer said historic tax credits encourage investors to undertake expensive renovations to buildings that may otherwise add to the deterioration of the core of Wichita and many other cities.
“These old buildings, although they may be vacant, they were built at a higher quality than most that you see today,” he said. “They’re part of the history of a lot of communities. They allow you to retain your identity and retain your history.”
Wichita officials say the credit spurred projects that generated $50 million in private investment and $9.4 million in state and local taxes over 10 years.
But the governor has argued that eliminating tax credits and deductions creates a fairer economic environment that leaves businesses and people with more money to invest as they see fit.
The Department of Revenue estimates that eliminating the credit would save the state nearly $4 million in the 2013 tax year, making it the sixth most valuable of the tax credits proposed for elimination in Brownback’s plan.
The program has involved a lot more money in past years. The state issued $15 million worth of credits in 2008 and $7 million worth in 2009 – a drop-off tied to the economic downturn and state belt-tightening.
Credit not as valuable as thought
A state audit in 2010 found that the program isn’t as efficient as many thought. It found that tax credit recipients sometimes sell those credits. Here’s how it works, according to the audit:
When building owners get preliminary approval for tax credits, they can use it as collateral to get loans from banks or other sources to finance the project. Then they can sell that credit to the bank or other financiers to get money up front. The banks usually buy the credits at a discounted amount. After the project is done, the state ensures the developer restored the building as promised and issues the credit.
Because the credits are sold at a discounted rate, the state gets less bang for its buck. The audit calculated sales from 2001 through most of 2009 and found that on average only 85 cents of every dollar actually goes to the historical preservation projects.
“Consequently, we concluded this tax credit isn’t cost-effective from the state’s perspective,” the audit said.
Bob Weeks, an advocate of limited government, said in Wichita that the historic tax credits have gone well beyond their original intent.
“The evolution has gone from helping out the small town courthouse to becoming a welfare program for developers,” he said.
Developers obviously see advantages to locating in these historic buildings, probably because they’ll draw more business or can charge more for products, Weeks said. He questioned why taxpayers need to help their deals work.
“What is it that’s special about these people and these buildings?” he asked. “I just don’t see an economic case that stands up.”
But Brenda Spencer, of the Friends of Historic Preservation coalition, told lawmakers that historic preservation projects are about 50 percent more labor intensive than new construction. She said the tax credit spurred hiring even during the recession.
In the past decade, the program created 15,000 jobs and had a $700 million economic impact, she said.
Alternative on the horizon?
In 2009, lawmakers zeroed in on historic tax credits when facing big budget problems and approved a 10 percent cut to the program that capped it at $3.75 million.
But lawmakers reversed the decision the next year under pressure from Wichita and others who said important development projects were stuck in limbo and could disintegrate without assurance of state funds.
House Republicans have put forth their own tax proposal, which would dial down income tax rates and phase out deductions and credits, including the historic tax credit, gradually. Rep. Richard Carlson, R-St. Marys, said House Republicans will likely unveil details of the proposal today.
“It’s a phaseout on both sides,” he said. “People can plan for them. They can put them in their business plan and in their personal plan. And over a period of years, it occurs without hardships.”