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Sun, 13 Apr 2008
A historic blunder on tax credits
We got a taste last week of how House Finance intends to deal with the fiscal crisislast week. What did we learn? We learned that the distance between the House leadership and the Governor can be measured in small fractions of a millimeter. Challenged to do something about the burgeoning cost of the Historic Structure tax credit, they decided not to limit it to affordable housing developments, or to cap it, but to deep-six it altogether.
To understand this story, you need to understand how tax credits like this work. It's not that hard. Suppose you want to rehabilitate some historic building. If it meets the criteria, you are eligible for a 30% credit against your taxes. But suppose you don't ever owe that much, or suppose you're a non-profit who doesn't pay taxes? In that case you can sell your credit to someone who wants a break. If you have a credit for $100,000, and you sell it to your friend for $80,000, then you're $80,000 ahead, and your buddy gets to use your credit to pay his taxes, so he's ahead $20,000. Sweet, no?
Of course, it usually isn't quite so clean. First, you can usually only get about 78 cents on the dollar. (If our taxes were higher, you could get more. Federal credits sell for 90 cents on the dollar.) Usually there's a broker involved, so you might get $78,000, and your buddy pay $83,000, and the guy in the middle scoops up the remaining $5,000. So when it all settles out, here's the score: the state is out $100,000, but has netted only $78,000 in housing improvements. The rest has been pocketed by the broker and whoever it was who owed enough in tax to think this was a good bargain.
As perhaps you can tell, I'm not a fan of big tax credits. When offered at a modest scale, they can offer a valuable discount on activity the state wants to encourage, without the bureaucracy of a grant-making panel and oversight apparatus. (We do have a residential historic tax credit program which is a different thing, and limited to a couple of thousand dollars a shot. My house was built in 1889, and I have used this one.) But tax credits offered in the amounts we're talking about here are just a way to get less bang for your buck while well-connected brokers and savvy corporations and individuals get paid off for no compelling public purpose. It would be far smarter -- and cheaper -- just to give out grants for good projects.
There are two big problems, then. One is that the state really doesn't have an affordable housing program worth the name, and the historic tax credit was the most effective thing we had. Unfortunately, the credits granted to little non-profit housing developers like Providence's Elmwood Foundation and AS220 were swamped by credits given to build the fancy hotel across from the state house, and to a few big developers, like Streuver Brothers, Eccles & Rouse, the developers of the American Locomotive condos and several other projects in Providence.
Throwing babies out with the bathwater is one of the things our state government does best, so when a program costs too much, the immediate response is just to end the whole thing, and that's what House Finance has approved, in a bill sponsored by Majority Leader Gordon Fox (D-Providence).
Think that's bad? The other problem is worse. Apparently we've already given out a few hundred million dollars of these credits that have not yet been cashed in. The House Finance plan is to issue a bond for around $280 million to pay the costs of these tax credits. The theory is that the credits out there are already one kind of debt, so borrowing is just a way to make it a more predictable debt. We can schedule the repayments of bonds, but not the timing of people cashing in tax credits.
Fine, you say, so what's the issue? It's only this: the people to whom the tax credits were issued were only planning to get 78% of the cost of the credits, but we're going to pay 100%. In other words, 22% of that money -- around $62 million -- will be borrowed for no other reason than to write a check to whoever it was who bought the credits. It's bad enough that we give tax cuts to people who don't really need or deserve them, but do we have to borrow to pay for something so dumb?
A more sensible plan would simply be to offer to buy the credits back at a slight premium, say 80%. We'd get them back at a discount, but the people we gave them to would be getting more than they expected, so there's no reason for them to be unhappy. People who had already paid for them would get a tax cut, but not as big as they'd planned. Labor folks, among others, have suggested exactly this, in a bid to keep a limited version of the credit in place. But House Finance is not in the business of making rich people and brokers unhappy, so they declined.
Mad yet? Do you still want to blame our fiscal troubles on the $25 million we spend on welfare and child care. Or the $4 million the Governor thinks he'll save by cutting immigrants off RIte Care? (He won't, but that's a different story.) Just remember this the next time you hear someone say there's pain all around this budget year, because it's just not true.
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