By Tom Sgouros in RIFuture.org
As the maneuvering in
advance of the next legislative session gets into gear, we keep hearing that
the state’s historic structures tax
credit is to be revived.
To recap: for several
years, Rhode Island had a tax credit available for developers who restored
historic buildings. It was essentially a subsidy for 30% of the cost of
the project. In a variety of ways it was a decent program, with low
overhead to administer, and the subsidies went to a variety of worthwhile
projects, mostly in the cities that need it.
Some of the projects
were a bit too gentrifying, and I regret that the credits didn’t come with
strings to insure better wages for the people who work on them, but it was, for
several years, the most effective affordable housing program in the state.
The downside, though,
was big. Because the program was available to any qualifying project, it
was impossible for the state to budget for it. The credit was much more popular
than budget-writers anticipated, and this made not only a big hole in the
budget, but an unpredictable one. When the program was closed in 2008,
there were around $300 million of credits outstanding, waiting to be cashed in
for lower tax bills.
It made sense at the
time to float a bond to make the redemption of the credits a bit more
predictable, so the state borrowed to create a trust fund to make payments to
the people who held the credits.
However, there is
another down side to our tax credits. When the state gives a $5 million
tax credit to some project, the project only receives around $4 million or
less. The rest is shared between some tax credit broker (Michael Corso
has become a famous one for his involvement with 38 Studios) and a business or
rich person who wants to lower their tax bill.
That is, less than 80%
of the face value of the tax credit goes to the public purpose to which the
credits are supposed to be devoted, and the other 20% is for a benefit that
goes directly to the richest citizens of our state. Being a perfect
example of government overpaying (by a lot) for a service, one might think this
the very definition of “government waste,” but somehow the label never seems to
be applied there by the fiscal watchdogs.
Contrast this to
federal tax credits, where it is usually more than 95% of the credit that goes
to the stated purpose. Federal taxes are higher than Rhode Island taxes,
so credits against those tax bills are worth more than credits against a state
tax bill.
So one way to increase
the efficiency of state tax credits would just be to raise the state business
and personal income taxes on the top end by a lot. Yes, I know, that’s
just my little joke, but with the recent “reforms” of the tax rates, prices for
state tax credits are going to be even lower than they were in 2008, when they
were 80 cents on the dollar or less.
Here’s the bottom
line: credits against state taxes are a great way to waste a ton of money and
create unpredictable budget costs. The projects that the tax credit funds
are worthwhile, but if they are to be subsidized they should be funded by
grants, with a set annual budget and rules to demand that projects pay at least
a living wage to their contractors. As they were constituted, they did
useful work, but also served as a giveaway to wealthy insiders who don’t need
your tax dollars to live a life of ease.
Tom Sgouros is a freelance engineer, policy analyst, and writer. Reach him
atripr@whatcheer.net. Buy his book, "Ten Things You Don't Know About
Rhode Island" at whatcheer.net