Sometimes on blogs people don’t take the time to read comments left to posts. Sometimes those comments provide valuable discussion and illumination of public policy issues. So here I take a moment to elevate a few comments left to a recent blog post.
On Wednesday afternoon, a reader — we’ll call him “Larry” — left this comment to my post Kansas historic preservation tax credits should be eliminated. In that post, I argue that tax credits for the preservation of historic buildings are economically the same as a direct payment by the state to the developer, and that this practice is bad public policy that should be ceased. Here’s what Larry wrote:
Bob, I want to understand your point of view. I do not claim to be an expert in this area so these are observations / questions.
1. Wasn’t Wichita High School owned by the WATC and therefore tax exempt?
2. If a developer puts, say $6M into the building to get it open the property with 68 units renting for $1000 to $2000 a month then I would assume it would have a value that in turn would generate higher taxes than the building now pays, correct?
3. As I understand the Historic Tax Credit the person that put up the $6M and now has to pay the new property tax can take a credit of about 25% of the eligible construction cost (not all of the construction cost is eligible) against the new taxes he/she would pay to the state, correct?
So if I have this right a building that is paying no taxes to the state has $6M spent on it and now is paying taxes into the state coffer but will pay 25% less in taxes than it would have if the building were not historic. Do I have it right? If so where is the payment you allude to being made by the state to the developer? Also don’t forget that when renovating a historical building you can not renovate it using the most economical methods but have to keep it “historically” correct and that in itself is more expensive.
Then the reader “Pat” wrote this comment:
Larry, you are correct in that there is no money given to the developer by the state. No payments. Typically, the tax credits are used as barter for a developer to sell the credits at a significant discount on the open market to those that need are in need of a “credit”. On historic projects, the money raised by the sale of the tax credits has to be used on certain eligible costs. The building will not pay property taxes on a reduced valuation but will pay taxes on its fair market value.
Wednesday evening I left this comment:
For Larry’s points 1 and 2, I’ll take his word that these are correct. I don’t think I’ve ever made a claim to the contrary.
For point 3, the issue of the historic preservation tax credits and property taxes are entirely separate matters. The savings of 25% of building costs arising from the historic preservation tax credit is a one-time event, while property taxes are an ongoing event year after year.
The payment made by the state to the developer is the tax credit itself, which might take the form of a document from the state containing language like “This certificate may be sent to the state of Kansas instead of a check for $1,000,000 in payment of taxes.”
As Pat correctly notes, the recipient of such a certificate might keep it and use it to pay all or part of their taxes, or might sell it to someone at any price they mutually agree on. This ability to sell the tax credit document has been cited by WDDC president Jeff Fluhr as important.
So how is issuing a tax credit not the same as making a payment to the developer?
(By the way, Pat, if I knew I was getting a tax credit, I would immediately adjust my periodic tax payments to the state. It’s not necessary to wait until annual tax time to benefit from the credit.)
Furthermore, the fact that the tax credit may be used for only certain purposes is a total red herring. If I gave you $100 on the condition that you could spend it only on a Monday, would you deny that I had enriched you by $100? Or would you contend that I had enriched you by something less than $100? I would think that you would simply shift your spending around and benefit fully from the $100 that I gave you.
Finally, the fact that historic renovation is expensive is just like having granite countertops. It’s a premium amenity that is freely chosen by those who value it, it benefits those who choose it, and should be fully paid for by them.
Interesting? Or not?