Inefficiency in Economic Development: Money Looking for Makers
Readers of Philip Marcelo’s article, in today’s Providence Journal, about restoration of the historic-structure tax credit program in Rhode Island should see some warning signs indicative of a broader flaw in government economic development:
… the national recession and a 2008 moratorium on the tax-credit program brought such projects to a near halt.
Dozens stalled or never got off the ground, leaving around $150 million in credits –– which can be redeemed to offset business and personal income taxes — still pending final approval. …
Millions of dollars more in credits also could become available, if developers do not meet a May 2013 deadline to show some progress on their projects. (A project must be fully completed and its expenses reviewed before state officials approve issuing credits.)
Rhode Island first instituted the historic tax credit program in 2001 and gained the attention of the 49 other states as a 1st in nation NATIONAL MODEL. It allowed developers to receive tax credits up to 30% of the cost of a project. In other words, for every $1,000 invested into a project in up front funds, a developer could receive back after completion of the project a $300 credit. Ted Sanderson, director of the RI Historical Preservation and Heritage Commission which administered the program, has previously stated that the program contributed to the restoration of 200 historic buildings across Rhode Island. The program generated $1.3 billion in new private investment in Rhode Island’s real estate economy and helped generate an estimated 22,000 construction jobs and 6,000 permanent jobs, paying total wages of over $800 million, exactly the kind of job creation Rhode Island needs. Two independent fiscal audits over the span of the program proved for every $1 in tax credit given generated over $5 of direct economic activity within the State of Rhode Island during and after the construction project. Over the short life spand of the program 200 historic buildings were rehabilitated and put back on the local tax rolls at substantially higher tax value and large amounts of affordable housing and commercial space for small and large businesses were created. The program was suspended in 2008 due to political misunderstanding of the program, misinformation on how the tax credits were generated and the recession. With the suspension of the Rhode Island historic tax credit program Rhode Island has become regionally noncompetitive to Maine, Connecticut, Massachusetts and Vermont because those states have copied Rhode Island’s historic tax credit programs, which they have used to create jobs, spur large private sector investments and increase income and property tax… Read more »
I wonder what would have happened with that “$5 of direct economic activity” had the government not subsidized projects that nobody was willing to undertake without government’s knocking 50% off the price tag.
Justin,
You don’t have to wonder about what would have happened without the tax credit; just look at the economic condition of Rhode Island now compared to the other New England states that copied Rhode Island’s Historic tax credit program from 2008 to 2012.
Don’t forget, the investors paid up front full price for the project and upon successful completion were promised essentially a percent tax credit (rebate) of their money so the State of Rhode Island was really not using taxpayer funds.
I’m not saying that one program is a state saving grace but the $1 to $5 return was spread across a broad state-wide spectrum of products, services, jobs, rentals, sales, taxes and bringing buildings back onto the tax rolls. Every little bit helps the state.
The 20% Federal tax credit is a separate program not related to the Rhode Island Historic tax credit (commercial program) 30% so it should not be lumped into the state program as it skews the state numbers and causes confusion which is what happened when the state canceled the program in 2008.
If the Rhode Island Historic Tax Credit program is restored it will no longer be 30% but now reduced to a 22% tax credit so the $1 to $5 ratio will be smaller
But you ARE saying that “one program is a state saving grace.” Quote:
With program: Massachusetts. Without: Rhode Island. Baloney.
You and I both know how government-friendly accountants come up with their $5-for-every-$1 statistics, and a light breath of economics 101 blows it into pure speculation. The two fundamental questions remain:
1. Where was that mysterious money coming from?
2. What would that mysterious money have gone to had it not gone to otherwise insolvent projects?
Justin,
If you look at the economic numbers related to just the historic tax credit program between the New England states you’ll see Rhode Island is a big zero and a lot of activity that was to happen in Rhode Island moved to Massachusetts and Connecticut.
The audits of the Rhode Island Historic tax credit program were not done by “government-friendly accountants” nor instituted by the State of Rhode Island but commissioned by a third independent party; “Grow Smart” which RFP a general request and finally contracted with an audit firm I believe out of New York. In the final published audit they were the ones who documented the $1 to $5 ratio not anyone in Rhode Island or tied to the State of Rhode Island.
If you can’t believe a tax project was created in the State of Rhode Island that actually benefitted the state, withstood two independent 3rd party audits not commissioned by the state, did not use taxpayer funds and actually created jobs and put property back on the tax rolls and money into the general fund then that is your problem.
As for your two questions I don’t understand what you are talking about; mysterious money and insolvent projects?
“The two fundamental questions remain:
1. Where was that mysterious money coming from?
2. What would that mysterious money have gone to had it not gone to otherwise insolvent projects?”
1. Where did that additional $5 come from?
2. What else would it have gone to otherwise?
Justin,
1: I already said the $5 is a result of the overall economic activity generated by the historic property being commercially rehabilitated in the form of hiring workers, purchasing construction material, payroll taxes, sales taxes, gasoline tax, diesel tax, transportation of materials, utility costs, insurance costs, workman’s compensation insurance payments, payroll tax, increased restaurant traffic near location for lunch, rentals or sales of rehabilitated properties, new small or medium or large business inhabiting new spaces, new hires for new companies, payroll taxes, income taxes, higher city/town real-estate taxes on rehabilitated properties.
2: If I’m in construction and I don’t have a job rehabilitating a historic property I might have another job and my income may or may not be higher so I might not be spending money and might be on unemployment so I would not be spending what money I have. If I am a small business looking for new affordable space and there are no new spaces near where I want to locate my business then I’ll have to wait to expand or move out of state. Same goes with medium and large business. If I am looking for affordable or luxury housing and none is available then I’ll wait or move out of state.
I think it is short sighted not to see that Rhode Island has relatively few “resources”. One of them is the number of unused mill buildings. I would also like to say that they should be renovated before the fad fades, or new codes make it uneconomic.
I am not familiar with the Rhode Island credit scheme, but in the case of Federal credits, I believe they can be sold at some discount. That translates to “no money down”, or, recovery of your down stroke. That can be very appealing.
“cost to the taxpayers”? What are those buildings paying now? Probably many are paying nothing but the cities and towns don’t want to take ownership. As renovated buildings, their assessments would probably be 5, to 10, times the current assessment. They would also probably be paid.
As compared to “green technology” or “high tech”, I think this is a surer thing. It would require some investigation of the current “absorption rate” of new residential units in the current economy. That may be poor.
I am beginning to see some increase in the number of new subdivision plans being filed in nearby Massachusetts. Of course, plan approval and construction are two different propositions. They may be expecting further regulation and want a lock on the current regulations.
What is the story on the locomotive works on Valley Street. I assume that was a recipient and it appears very underused.
Although it seems a rare occurrence, I think Justin is somewhat confused about the “tax credit”
Since the credit relies on renovation to create “revenue” that does not currently exist; i.e. real estate tax from a building which currently probably pays next to nothing.
The “credit” is a “forgiveness” of expected “revenue” from the building which does not currently exist. In other words, if you agree to take a “problem property” and convert it to some economic use which creates a larger real estate assessment, we will agree to forgive some of that “revenue” for a period of time. After which, it is all ours.
While we might wish that the state’s “economic engine” was sufficient to generate this sort of activity without aid, it simply is not. Meanwhile we add layer upon layer of new codes and regulations which diminish the economic viability of renovation. The evidence of this is everywhere, we have all seen buildings demolished to make way for newer buildings. Many times these buildings have become diseconomic by design for their intended use. I saw this recently in a building off Valley street. It was a steel fabrication plant, it simply had too many “turns” in it to be competitive. The steel had to be lowered off gantries and maneuvered around corners too often to be economic. It was auctioned, and someone bought it (I assume). But, it might have another life as a “distribution center”, it had very high ceilings. Perhaps residential. Naturally, it was all brick, with zero insulation.
Warrington,
You are incorrect. See here:
http://www.preservation.ri.gov/credits/commstate.php
1) The tax credit amounts are related to the cost of work, not the anticipated revenue.
2) The tax credit is given in full at the satisfactory completion of the renovation project.
3) The tax credit is salable.
So, the developer can sell the entire credit and use the money for the project (prospectively) or to pay off debt engaged in anticipation. Or the developer can use the money to offset taxes due for revenue from other sources. The economics might (might) be different if the program were a tax-forgiveness program realizable over subsequent years, but that’s not what this is about.
And neither you nor Ken is appreciating the complexity of the economy. A town government probably benefits, on net, from the big influx of state subsidies, but it’s not as clear as you suggest. Perhaps neighbors’ property values go up because of the renovation, or perhaps they go down because of the increased number of units in the area. Perhaps the money going into the project would have been spent elsewhere, or perhaps it would have been spent on different (more economically feasible) projects locally.
The higher the level of government reviewed, the less obvious the benefit is.
Justin, “ http://www.preservation.ri.gov/credits/commstate.php 1) The tax credit amounts are related to the cost of work, not the anticipated revenue. 2) The tax credit is given in full at the satisfactory completion of the renovation project. 3) The tax credit is salable.” “1) The tax credit amounts are related to the cost of work, not the anticipated revenue.” True; if I as a developer arrive in Rhode Island and see an historic building I can rehabilitate into small business space and lofts, luxury condominiums and affordable housing under this program I give the State of Rhode Island $1 million of my money to hold (estimated cost of work in fees, permits and taxes) for the 15 months it will take me to hire local workforce, purchase materials, pay required state taxes, healthcare and workman’s comp to complete the work. The State of Rhode Island is holding my $1 million with a promise that they will give me back 30% and keep 70% plus if they were smart any interest income they might gain. “2) The tax credit is given in full at the satisfactory completion of the renovation project.” True; the State of Rhode Island is holding my $1 million for 15 months till I finish rehabilitation project. “3) The tax credit is salable.” True; the State of Rhode Island has indicated because they held my $1 million for 15 months during the duration of the project and the 30% of my money they are rebating me as a state tax credit I can do anything I want with the tax credit including selling it for gain as I had no direct access to the money during the 15 months of construction. The city/town where my project resides gains in local tax base with the historic property put back on the… Read more »
Justin, Philip Marcelo’s Providence Journal article FALSELY claims Rhode Island’s Historic tax credit “it was among the most generous in the country.” as both Connecticut and Maine also matched Rhode Island’s 30% tax credit when affordable housing was included in the project. “2008 moratorium on the tax-credit program brought such projects to a near halt. Dozens stalled or never got off the ground, leaving around $150 million in credits –– which can be redeemed to offset business and personal income taxes — still pending final approval.” Philip Marcelo’s Providence Journal statement FALSELY gives the reader an impression that this $150 million in tax credit can be handed out without project completion. Those are projects never started but were proposed on paper. Philip Marcelo’s Providence Journal article; “According to the state tax division, some 15 projects have officially forfeited around $27 million worth of credits provisionally assigned to them.” When the State of Rhode Island created the 2008 moratorium there were developers that indicated to the state they would pull out of the state and let their projects die because it was more cost effective so they actually walked away from $27 million in total credit that they already paid into the State of Rhode coffers. It’s now FREE money so close the fiscal budget and pension gap. Philip Marcelo’s Providence Journal quoted; “It’s a great opportunity,” Paiva Weed said. “That [$27 million] could generate $75 million to $100 million in construction work.” The $27 million is in the state coffers most likely the ominous general fund black hole. She has no idea what she is talking about. Philip Marcelo’s Providence Journal quoted; “But the taxpayer-subsidized renovations also, controversially, benefited well-heeled institutions, including Providence’s Hope Club, the Newport Country Club and the private Clambake Club of Newport.” The Rhode Island Historic… Read more »
1) The tax credit amounts are related to the cost of work, not the anticipated revenue.
This is not the same as saying that the additional revenue is not reasonably anticipated.
3) The tax credit is salable.
As are most government obligations.
I havve never done any work in Providence, but I wonder if most people have a grip on the amount of work a developer has to do to get permission to build. In addition to Zoning and Planning, most cities have additional “overlay districts” (such as historic designation) which have sets of regulations that must be satisfied. Harvard Square, in Cambridge, is notorious for having eleven “overlay districts”, each with a separate body of regulations. I do not find it offensive that a little incentive is offered.
“You and I both know how government-friendly accountants come up with their $5-for-every-$1 statistics”
Last week I was discussing the potential costs and benefits of a regulation update with some government economists.
Me: You’re assuming a 70% compliance rate for the existing regulation?
Economists: Yes
Me: Are you making the same assumption for the proposed regulation?
Economists: No, we always assume 100% compliance for proposed regulations.
Me: So if you photocopied the existing regulation and published it in the Federal Register as a new regulation, you would show a benefit under your metric?
Economist: Well… yes.
I am consistently horrified by the assumptions government makes to justify its own existence and expansion. I have dozens of similar anecdotes. Ask me about their statistical assumptions of event likelihood sometime.