Will trimming state tax credits impede Missouri's economic recovery?
This article first appeared in the St. Louis Beacon, April 8, 2010 - Gov. Jay Nixon says Missouri's current level of tax credits are a luxury the state can't afford.
Developers say the credits are a tool that Missouri can't afford to lose.
And a state senator from Cape Girardeau says unless the state gets a handle on what the credits cost, any efforts to improve services from mental health to education will be "gobbled up" by future claims on money being approved today.
As lawmakers continue to sharpen their tools in Jefferson City to cope with a giant hole in the budget, tax credits are an obvious target. The governor started the conversation last month, proposing that all but two of Missouri's 61 tax-credit programs be consolidated into six broad categories, and the dollar amount be trimmed to $314 million, which is 70 percent of the credits redeemed in the last fiscal year.
"It's certainly challenging," John Fougere, spokesman for the state's Department of Economic Development, said of the planned cuts, "but it also presents an opportunity to reorganize our entire tax credit program.
"I think Missouri is better off than most states. This is a discussion that is going on across the country."
But to people like Richard Ward, who has been involved in much of the rehabilitation of old buildings in St. Louis that has been fueled by tax credits, the program is an investment that cities and towns across the state need to help Missouri compete and thrive.
"I do understand we have a budget to balance," said Ward, who is with Zimmer Real Estate Services. "I can't blame the politicians who throw up their hands and say, 'What solution do you have?' I don't have a solution.
"But I do think the historic tax credit has more than paid for itself, beyond a direct fiscal benefit, by making St. Louis a decent place to live and encouraging other people to come here. If they see a dumpy downtown, they're not coming."
Just in time for the debate over tax credits -- and the annual push to balance the state's budget before the Legislature adjourns in May -- a team from Saint Louis University released a study late last month detailing benefits from the historic preservation tax credit program, which is one of the highest profile programs under the microscope in the Capitol.
Funded by several development groups across the state, the study concluded that between 2000 and 2007, historic preservation tax credits totaling more than $963 million were tied to:
- 43,150 new or retained jobs, with an average yearly salary of $42,732.
- Nearly $670 million in new sales/use or income tax revenue to state and local governments.
- $2.9 billion leveraged private investment.
- Projects across the state, not just in the St. Louis and Kansas City areas.
The report said that the tax credits softened the blow that Missouri felt from the recession early in the decade, and "we see no reason why the (historic preservation tax credit) program will not be found to be associated with positive effects during the current recession and growth in the state of Missouri once it is over."
To bolster their arguments, the researchers compared areas of the state in terms of economic health -- jobs, investment and so on -- to what they judged to be comparable areas in Illinois, the only adjacent state that does not have a similar program.
No matter what the comparisons were -- St. Louis and Kansas City vs. Chicago, Cape Girardeau vs. Carbondale and Decatur, St. Joseph and Joplin vs. Rockford and the Quad Cities -- the positive effects were obvious, both in terms of cushioning the effects of bad times and kick-starting projects in good times.
Sarah Coffin, the lead researcher for the study, said the most obvious benefit of the historic tax credit program may be what she called the "but for" factor -- if it weren't for the developer being able to show the credit to potential financers, projects may never get past the planning stage.
"That's what really spurred these projects," she said in an interview, "because we found that the program created that equity opportunity at the beginning, to allow the developer to get that critical funding to secure debt financing. It allowed the developer to spend money up front, which is so critical to get these projects going."
Ann Auer, executive vice president of the Missouri Growth Association -- one of the funders of the SLU research -- said such a kick start is one of the most crucial benefits for tax credits, whether they are to rehab historic buildings or for other purposes like rehabilitating a brownfield site.
"Say you've got an old building or an empty lot that had a gas station on it," she said. "You can't get financing to do remediation. You have to do that upfront. The tax credit helps developers do that."
The Saint Louis U. study came out about the same time that the governor proposed his revamp of the tax credit program. It would exempt two current credits -- the circuit breaker and the homestead programs, which help older and disabled Missourians pay property taxes -- and consolidate the remaining 59 credit programs into six broad categories.
Each category would get a certain percentage of the $314 million cap the Nixon wants to impose:
- Business development, 30 percent
- Redevelopment, 25 percent
- At-large, including unforeseen situations, upfront costs and other items, 20 percent
- Affordable housing, 10 percent
- Public infrastructure, 6 percent
- Community assistance, 5 percent
- The remaining 4 percent would go for finance and insurance costs.
Nixon explained the proposal this way in a speech Tuesday in Kansas City:
"In many cases, tax credits are producing a positive return. But some aren't meeting that standard. When it comes to economic development, it is the state's responsibility to determine which state incentives are delivering for our taxpayers ... and which ones aren't.
"Those that don't perform have got to go. Because every dollar we spend on tax credits is a dollar that can't be spent on another priority, like health care, job training, or law enforcement."
Fougere, the spokesman for the Department of Economic Development, said the plan goes beyond simply cutting the costs of tax credits for the state, though that is a significant factor. It also changes the way in which tax credits are granted.
Now, he said, if a proposal meets certain requirements, developers are entitled to get the credits. Under the governor's plan, such entitlements would be replaced by a closer evaluation of the likely success of the project involved.
"Now," Fougere said, "we can't say we should authorize Project A over Project B because it has a greater likelihood of success. What we are saying is take a look at the current environment, see what changes are needed in a variety of state programs to control costs and adapt to changing economic realities.
"We should target projects with the best chance of payback to the public. In the Department of Economic Development, it is our absolute responsibility to ensure that every state incentive program is providing a tangible return to Missouri taxpayers."
The Nixon plan is embodied in legislation, House Bill 2399, which was the subject of a committee hearing Tuesday. Co-sponsor Sam Komo, D-House Springs, said the bill is intended to prompt a much-needed conversation about how to deal with the state's fiscal crisis, this year and into the future.
"Even if we don't address it this year," Komo said, "with a $500 million shortfall now and projections of anywhere from $800 million to $1 billion in the future, as long as we have to continue to downsize state government, we have to have discussions on tax credit reform. My key is to get everybody into the room.
"Every organization that utilizes a tax credit can argue the benefit of it. That's a discussion we've had before. Everybody will justify their program as the best one, and say if you're going to cut, cut someone else's. Our job is to make the hard decisions. That is what we are being paid to do."
The House plan isn't the only one in play. State Sen. Jason Crowell, R-Cape Girardeau, favors a different approach, as spelled out in Senate Bill 728. He says $2.3 billion in unfunded tax credits are out there, and he wants to give lawmakers more say over how such promises are made in the future.
"Basically," Crowell said, "they are spending future generations' money. That $2.3 billion is going to grow exponentially unless we do some reforms.
"I'm not in any way, shape or form limiting tax credits. All I have proposed is to move them within the appropriations process, so that you actually pay for them in the year you allocate or approve them. In my opinion, the governor has identified a problem, which is the General Assembly spending money it doesn't have, but he doesn't fix the problem, he just makes the problem smaller."
He likened the issue to the outrage the public felt when it learned of extravagant spending by the Pentagon on basic items like toilet seats and tools.
"The governor has said it is wrong to spend $1,800 on a hammer, but his proposal says, let's only spend $800 on a hammer. It doesn't solve the problem. The lack of oversight and checks and balances in the governor's proposal is astonishing. It's wholly deficient as any meaningful reform. All he's doing is keeping the same dysfunctional system in place."
Crowell also notes that the problem goes beyond the tax credits themselves, because "whether you're spending a dollar on a tax credit or a dollar on K-12 education, you're still spending a dollar. This is going to hit us as a state like left and right hooks in the next five to 10 years."
While lawmakers try to determine whether programs like mental health or Parents as Teachers need to be cut, he said, tax credits have been granted for a new practice facility for the Kansas City Chiefs and to Paul McKee for assembling property for his north St. Louis redevelopment project.
"Are those a reflection of the priorities of Mr. and Mrs. Missouri Taxpayer?" Crowell asked. "I would respectfully submit that it is not."
But the people whose projects have benefited from the historic preservation tax credit and others say that the jobs created by such activity have helped the state as a whole, and if the governor's plans go through, what has been a system based on merit would become too political.
"It has had a profound impact," Ward, who has been deeply involved in such projects, said of the historic tax credit. "I'm a great supporter of it. When it's overlaid with the federal tax credit, it makes miracles happen."
He listed developments like Washington Avenue and the Chase Park Plaza as ones that have succeeded, and he says that future beneficiaries could include the Arcade Building ("It sits there like a cancer"), the Jefferson Arms ("It's a monster sitting there, vacant and derelict") and St. Louis Center ("It just sits there rotting").
Though the credit can be beneficial all over the state, Ward said in St. Louis it is critical.
"We've got so many big clunkers that are up in the air," he said. "They will never get redone without the historic tax credit. If you withdraw the credit to make it unworkable, it will be a bad thing for those bit old buildings.
"It's not just preserving the history and the architecture. That's wonderful, and I applaud it. It's really deploying resources that otherwise will just drag the community down."
Maggie Campbell, head of the Partnership for Downtown St. Louis, is worried that Nixon's approach would undermine a sense of certainty that developers and their backers need. They deserve to know, she said, that if their projects meet well-defined criteria, they will get the tax breaks they need.
"Leave it in place as something that is predictable," she said. "Otherwise, you introduce so much more risk, and it becomes very politicized. I don't know where that leads, particularly for property owners in smaller towns."
She and Auer of the Growth Association are also concerned that such wholesale changes were introduced so late in the legislative session.
"There have been very little opportunities to have a public hearing," Auer said. "This is a very drastic solution to have without taking a lot more time and working with groups that care about this to come up with better ideas."
For Ward, the proposed changes would mean a dramatic halt to equally dramatic progress.
"We've come so far so fast. I think the bang has been fantastic for the buck. This is one of the benefits that has flowed to the metropolitan areas, but if you put on your big picture hat, it certainly accrues to the benefit of the whole state.
"I think the state tax credit program has done more than anything else to reverse the perception that St. Louis has a dying core. Let's finish up the job."