Successful state tax credit program may be trimmed
BYLINE: Steve Peoples, Journal State House Bureau
The program has spurred the rehabilitation of rundown buildings across Rhode Island, but has the cost to the state become too great?
PROVIDENCE - Rhode Island's historic tax credit program will cost more this year than it ever has before.
The state will distribute credits worth an estimated $82.5 million in tax revenue to entice developers to revitalize abandoned mills and dilapidated buildings across the Ocean State, according to data released last week by the state Historical Preservation & Heritage Commission.
The 2002 program is credited with bringing neighborhoods back to life. Dangerous eyesores have become homes and businesses. Jobs have been created. Environmental hazards have been removed. Property tax revenues are growing.
Each dollar of tax credit creates $5.47 in total economic output, according to a 2005 study commissioned by the nonprofit Grow Smart Rhode Island. And 90 percent of investment is going to neighborhoods where the median household income is below state average, according to an analysis provided by the Rhode Island Economic Policy Council.
"You have probably the best economic development program that Rhode Island has seen in the last decade, but it's not free," says Grow Smart executive director Scott Wolf. "It's not really a wise thing to mess with."
But lawmakers are poised to do just that.
In spite of its success, the program's price tag makes it a target for policymakers desperate to find savings. The cost of the historic tax credit towers over other popular credits. The state's film credit, for example, will cost an estimated $10.5 million this year.
"While it's doing a great job of revitalizing buildings across the state, it's becoming so costly we really can't afford it right now," said Stephen D. Alves, D-West Warwick, chairman of the Senate Finance Committee. "There's going to be a lot of programs that have dramatic changes. Facing the kind of deficits we're facing, everyone's going to have to share in the pain."
State officials have projected budget deficits of $360 million over the next two years. And it might be worse than that. House and Senate fiscal advisers learned last week that an expected $80-million insurance settlement probably won't come through this year.
"The last few years we've been able to pull rabbits out of our hat," Alves said. "They're all gone."
The development community is watching closely.
The group taking advantage of the historic tax credit has shifted in recent years from homeowners to major developers such as Baltimore-based Struever Brothers, Eccles & Rouse, which has invested more than $500 million in Rhode Island since its arrival three years ago.
The firm occupies a Providence office in the Rising Sun Mills on Valley Street - the site of its first completed project in Rhode Island, which cost $68 million.
"Our number-one business is historic rehabilitation in urban centers. That's what we excel at," said John Sinnott, managing director of Rhode Island operations. "Struever Brothers came to Rhode Island because of the historic tax credits. That's why we're here."
The local office employs about 45 people, Sinnott said.
Overall, developers have created 1,925 new housing units since the program began, of which 480 are low-income units, according to the Economic Policy Council.
"We're addressing all the major problems that face cities, towns, states. And one tool that we use as effectively as possible is the historic tax credits," Sinnott said. "Without them, these buildings wouldn't be touched."
Struever Brothers also understands the political debate that surrounds the credit. The firm has a constant presence at the General Assembly, paying $7,500 each month for three registered lobbyists, according to the secretary of state's office.
A tax credit works this way: Developers can get a credit for up to 30 percent of their qualifying historical rehabilitation construction costs. However, developers usually don't have much need for the state credits because they typically don't have large state tax liabilities. Instead, they sell their credits at a discount, typically to wealthy individuals who use them to reduce their Rhode Island personal income taxes. A $100,000 credit might be sold to a taxpayer for $90,000. The taxpayer can then redeem the credit to take $100,000 off his tax bill. The taxpayer saves $10,000 and the developer gets cash for a credit he might not otherwise use.
While the House and Senate leadership has voiced support for the program in recent years, Governor Carcieri has called for reforms. His 2008 budget summary calls for the state to make the program "less lucrative, and to cap the number of projects approved each year, thus ensuring that the state's finances are not compromised by an overly successful program."
A proposal in which the state would buy back some of its own credits is expected to save $10 million next year.
It appears, however, that any major reform will come from the legislative branch, as the governor's office has not followed through on the cap - a policy Massachusetts uses.
Alves describes Rhode Island's historic tax credit as "the most generous in the nation."
He is considering a cap and/or a reduction in the reimbursement rate for rehabilitation costs - set at 30 percent in Rhode Island. States such as Connecticut, New York, Ohio, Kentucky and Mississippi have smaller reimbursement rates.
"Everything's on the table," Alves said, adding that he is working with House Finance Chairman Steven M. Costantino, D-Providence, to craft specific reforms.
Sinnott said that such reforms would probably cause his firm to reduce development.
"We'd still be in Rhode Island," he said. "But we may be rethinking our business plan. And we may not be doing as much."
The historic tax credit is either too successful or expensive for policymakers to ignore.
Historic redevelopment is expected to continue at an unprecedented pace next year as the cost of the tax credit rises to $92 million, according to the state Historical Preservation and Heritage Commission.
"The frustration is that the governor has said this program is too successful. When I had a chat with him, I said, 'Governor, I didn't mean to run a successful program, give me some pointers on how to run a less successful program,' " joked commission executive director Edward F. Sanderson. "I think everybody is trying to figure out a balance between very clear economic benefits of the program and its short-term costs."
While social benefits generally appear immediately as neighborhoods come alive, the economic benefits from historic development often take years to materialize. The costs do not.
"Most of the cost is up front," Governor Carcieri spokesman Jeff Neal said. "It has a disproportionate impact on the state's budget, contributing significantly to the current fiscal crisis."
The fate of the historic tax credit will probably be decided after this week's revenue estimating conference, in which legislative budget experts decide exactly how much lawmakers can spend next fiscal year. Lawmakers have already proposed a host of expensive legislation, such as expanding healthcare coverage for children.
Sinnott, of Struever Brothers, acknowledged the predicament facing his industry.
"They're going to have to make tough decisions," he said of lawmakers. "You're looking at balancing a budget and what's best for the greater good."
speoples@projo.com / (401) 277-7513
Rehab work at the Masonic Temple in Providence made use of the state's historic tax credit program. The building, near the State House, is being transformed into a luxury hotel.
The Providence Journal / Sandor Bodo