Sign Up For Novogradac Industry Alert Emails

Washington Wire: Sentiments Vary on Benefit of State Tax Credits

Published by Michael J. Novogradac on Saturday, May 1, 2010

Journal cover May 2010   Download PDF

Several recent studies have shown that state tax credits have generated considerable economic activity resulting in new and retained jobs that are often high-paying and sustainable, as well as new state and local sales and tax revenue and increases in investment. One of those studies, authored by researchers from the Center for Urban Policy Research at Rutgers University and released by the Historic Tax Credit Coalition, found that the federal historic tax credit (HTC) is a highly efficient job creator, accounting for the creation of 1.8 million new jobs over the life of the program. Thirty-one states have HTC programs and supporters are quick to remind us that historic rehabilitation generates jobs in the construction trades at a time when employment in this sector is needed desperately. (To read more about the Rutgers report, please see page 61 of the April issue of the Novogradac Journal of Tax Credits.)

Some states, recognizing tax credit benefits at the federal level can carry over to the state level, are taking steps to increase, strengthen and add tax credits as the revenue sides of their budgets come up short. Others see state tax credits as a drain on their economies and are taking aim at trimming or eliminating them.

Colorado, Iowa and Missouri Look to Cut Tax Credits
In Colorado, Gov. Bill Ritter recently proposed eliminating or suspending 13 tax credits and exemptions. He says the move would generate an estimated $131.8 million for the 2010-11 budget year that begins in July, which this year was facing at least a $1.3 billion deficit.

Ritter has proposed removing for two years the sales tax exemption for energy used in manufacturing. This change would generate an estimated $48 million in the 2010-11 budget. He also favors scaling back for three years a corporate enterprise-zone investment tax credit, which he says would generate $4.5 million for 2010-11.

In Iowa, the Ways and Means committees in the House and Senate voted in mid-March to move forward with legislation to curtail the state’s tax credit programs. H.F. 2527 and S.F. 2380 would cap and eliminate some programs, cut many credits by 10 percent, suspend the controversial film tax credit for two years, and subject each tax credit program to review and evaluation by the legislative tax expenditure committee at least once every five years. If the results of any evaluation indicate that a program is not producing a return on investment, then the tax credits will be amended or terminated.

One of the bills’ provisions would lower the cap on historic preservation tax credits from $50 million to $45 million for each taxable year, beginning in July 2012.

In Missouri, the cost of the state’s HTC program is under intense fire. Gov. Jay Nixon laid out a far-reaching plan to downsize the state’s tax credit programs by consolidating about 60 tax credit programs under the Missouri Department of Economic Development and cap them at $314 million a year, less than half of the $656 million authorized in 2009. Nixon’s proposal would trim roughly $135 million from the tax credit pool, and eliminate tax credits for such programs as the Neighborhood Preservation Act, Historic Preservation and Rebuilding Communities.

While Nixon specifically targeted some historic and low-income housing tax credits, a new study by the Missouri Growth Association and Saint Louis University found that the state’s HTC program spurred $2.9 billion in private investment from 2000 to 2009, and either saved or created 43,150 jobs. The study found that Missouri issued nearly $832 million in HTCs from 2000 through 2009 and received approximately $162 million in sales or use tax revenue and almost $395 million in income taxes from economic activity associated with HTCs, all since 2000. Combined, those figures represent an estimated total of more than $669 million in revenue for the state.

Zack Boyers, chairman and CEO of US Bancorp CDC in St. Louis, calls the Missouri HTC “an unparalleled tool for its ability to create jobs, catalyze sustainable economic development and revitalize communities throughout the state.” Boyers, who leads a team of professionals who generate and manage equity investments in federal and state tax credit related projects and real estate developments throughout the country, cites the many studies that indicate the HTC generates far more revenue than it costs. As such, he said, the HTC serves as a model for programs being developed in many other states. “If there’s one incentive that drives results — and does so in an efficient, cost effective way that leverages other resources and private capital — this is it,” he said.

Missouri Democratic State Rep. Steve Hobbs and Republican State Rep. Sam Komo on March 30 introduced H.R. 2399, which would implement Nixon’s proposal to limit issuance of all economic development tax credits to not exceed 70 percent of the total dollar amount of all state tax credits redeemed during the fiscal year ending on June 30, 2009. The bill would severely reduce the state HTC as well as the low-income housing and brownfields tax credits, and cut the LIHTC program by $17 million. The Job Creation and Economic Development Committee of the Missouri House of Representatives considered H.B. 2399 on April 6 and no further hearings are scheduled as of this writing.

Good News from Kansas and Minnesota
March 30 brought good news as the Kansas House and Senate each overwhelmingly voted in favor of removing the annual cap on the Kansas state HTC. A two-year cap was imposed last year to help state budget woes, but because the cap was stalling some large projects, the state decided it needed investment and jobs from those projects and the cap was removed after just one year. Gov. Mark Parkinson signed S.B. 430 on April 19, restoring the state’s HTC program.

Meanwhile, Minnesota’s Gov. Tim Pawlenty on April 1 signed a bill comprised of tax incentives to stimulate job growth in Minnesota. The bill establishes an uncapped state HTC that mirrors the federal HTC. The new law allows a state income tax credit equal to 20 percent of the cost of rehabilitating a qualifying historic property. Supporters say the tax credit will create between 1,500 and 3,000 construction jobs annually if Minnesota’s program is consistent with similar states’ programs.

The law allows a developer to choose either a certificated, refundable credit or a grant, which supporters say will stimulate not-for-profit use of the incentive. The tax credit also can be used against the insurance premium tax, which widens the investor pool. Homesteaded residential projects are ineligible. Projects will be eligible to claim the state credit if they are allowed the federal credit.

New York and Maryland Act to Change Preservation Tax Credit
On the East Coast, New York Gov. David Paterson called on state legislators to pass key changes to expand the state’s historic preservation tax credit. Those changes include allowing developers to sell the tax credits to banks and insurance companies — something not allowed by current law. The changes are meant to help developers generate capital for large-scale projects that carry heavier upfront costs.

S.B. 7042 and A.B. 10168 were introduced March 9 by Sen. David Valesky and Assemblymember Sam Hoyt. The companion bills could jumpstart more than $175 million in redevelopment activity by allowing developers to bifurcate the state tax credit from the federal HTC and allowing banks and insurance companies to use the credit to offset their franchise taxes. If passed, the changes would apply to projects started after January 1, 2010. The bills were referred to committee.

Meanwhile, Maryland Gov. Martin O’Malley, whose state is facing a $2 billion budget gap for fiscal year 2011, won support of his Smart, Green and Growing initiative. Before it adjourned April 12, the Maryland General Assembly passed the Sustainable Communities Act of 2010. The legislation provides $10 million for the Sustainable Communities Tax Credit, to upgrade historic structures and buildings in sustainable communities. It replaces the former Maryland Heritage Structure Rehabilitation Tax Credit. Of the $10 million, only 10 percent can go to the rehabilitation of non-historic structures.

O’Malley had urged continuation of the tax credit, which during the past 14 years had leveraged more than $1.5 billion in rehabilitation spending on an investment of $347 million. Smart Growth Maryland reports that along with construction and new jobs wages, and state and local revenues that were generated, more than $8.50 in economic output was realized for every $1 invested by the state. The not-for-profit Abell Foundation reported last year that commercial projects over the life of the program had employed roughly 15,120 people, earning $673.1 million in 2009 dollars. The study found that the state’s tax credit investment in labor-intensive building renovation generated 1,850 more jobs than would have been created had the same funds been used for new construction.

Wisconsin and Idaho Consider Adding NMTC and RETC Tax Credits
Wisconsin lawmakers are considering a bill to create a state new markets tax credit. A.B. 642 was introduced on January 4, a public hearing on the matter was held January 5 and the Committee on Jobs, the Economy and Small business approved the bill on February 17. A companion bill, S.B. 461, was approved unanimously the previous week by the Senate Committee on Economic Development. The bill would authorize the Wisconsin Department of Commerce to certify an individual who applies, has made an investment in a qualified community development entity, and is eligible to receive federal new markets tax credits to receive a credit against state income and franchise taxes and against license fees paid by insurers. At this writing the bills remain in committee.

In Idaho, H.B. 720 will provide an income tax credit for certain renewable energy facilities. The bill will promote economic growth, job creation and rural economic development by offering tax credits to Idaho eligible applicants that invest in high efficiency combined heat and power facilities, renewable energy resource facilities, and sustainable building practice facilities.

Those of us in the various sectors of the tax credit industry see evidence every day of the positive economic performance of tax credits, be they low-income housing, new markets, historic, or renewable energy.  Their economic benefits have been even more pronounced during the recession. If administered responsibly, tax credit programs should continue to have positive effects on jobs, investment and state and local revenues. More information on the studies mentioned here can be found at www.taxcredithousing.com.

Editor’s Note: Due to an editing error, the following in the Journal of Tax Credits’ April Washington Wire should have been attributed to an Enterprise press release:

Among the Senate-passed provisions is the placed-in-service deadline extension, which will allow developers an additional two years to use Gulf Opportunity Zone (GO Zone) LIHTCs. These tax credits represent more than 6,000 affordable homes and $1 billion in construction activity that have been stalled and at risk of not being built. This legislation would shift a congressionally mandated deadline of December 2010 for completing construction by two years, providing more time for state governments, developers and investors to overcome financial challenges and enable the use of previously allocated housing credits.

Learn more about Novogradac's expertise and many services