Historic Tax Credit
Tue March 25, 2014
Schweich Casts Critical Eye Toward Historic Preservation Tax Credit
(Updated 4 p.m., Tues., March 25)
State Auditor Tom Schweich issued a tough audit of the Missouri’s historic preservation tax credit, saying that the incentive that’s refurbished countless buildings throughout the state is too expensive and structurally inefficient.
“With redemptions of over $1.1 billion in the past decade, Missouri's historic preservation program is the largest in the nation, has exceeded fiscal estimates provided to the legislature at its passage, and has a statutory annual limit that is so high that it does not contain actual spending,” Schweich’s report states.
Missouri’s historic tax credits started up in the late 1990s as cities across the state were struggling to restore older buildings. It helps renovate buildings on the National Register of Historic Places or part of a historic district on the national register.
Most of the time, the tax credit is sold to a third-party – usually a bank. The proceeds from that sale go to pay down the project’s construction costs. That setup has made the credit popular in the St. Louis region, so much so that it’s been widely credited with revitalizing downtown. (Click here to read an article on the credit’s impact on downtown’s growth.)
Schweich’s audit notes that no one disputes that “the historic preservation tax credit has been a significant factor in helping rehabilitate hundreds of the state's historic properties.” But it went on to question the program’s annual cost, efficiency and oversight.
Among other things, Schweich’s audit found:
- Even with an annual cap of $140 million a year, Schweich’s audit says that Missouri’s program is the highest among states with an annual limit. It added that the “level of historic preservation activity in Missouri” is attributable “to the large supply of historic buildings in the state, particularly in the metropolitan areas, and the existence of the state credit, which makes the rehabilitations more financially feasible.”
- Anywhere from 49 cents to 85 cents of every tax credit dollar goes toward rehabilitation costs, with the remainder going to investors, tax credit brokers or syndicators, and the federal and state government in the form of income taxes.
- Personnel at state agencies “do not conduct site visits to verify work has been completed,” and the cost certification work performed by the Department of Economic Development “is inefficient and redundant.”
In an interview, Schweich said, "There is no doubt that the historic preservation tax credit has been a major factor in the rehabilitation of hundreds of older structures across Missouri – both in cities and in rural areas.
"There’s no doubt there’s all kinds of older buildings across Missouri that are now in good use because of the tax credit," Schweich said. "So no one’s questioning that this is achieving an important end. We just point out that there are ways that it could be made more efficient and more money could go toward historic preservation."
Schweich’s audit made a number of recommendations to alter the tax credit, including shrinking the amount that can be issued every year or putting an expiration date on the program. The report said if Missouri limited the program to $75 million a year, it “would still have the largest state historic preservation program in the nation.”
Schweich also suggested making the credit refundable, offering the credit to governments or non-profit groups, or directly appropriating state money. The audit noted some states – such as Ohio -- have competitive applications, a step that could make the program more cost effective.
If Missouri adopted that system, Schweich said, people "would look to see if this is really benefiting Missouri."
"Is it really preserving something historic? Or is it just some marginal building that really has no architectural or historic significance?" Schweich said. "In Ohio, you have to go in and prove your case that the state is going to benefit, that the heritage of the state is going to benefit from this program. And then they award them on a priority basis."
The report concluded that procedures should be put in place requiring mandatory site visits and square footage cost analysis. Schweich pointed to a situation in Virginia where tax credit recipients "were vastly overstating the work that had been performed."
In a response within the audit, the Department of Economic Development said said there was “independent verification of cost certification documentation, review of extensive photographic evidence of completed work, and periodic site visits.” The response added that DED will work with the state Historic Preservation Office “to evaluate additional opportunities to employ site visits in the oversight process.” Pushback?
This marks the second time in recent weeks Schweich released a critical audit on a widely used tax credit program. Several weeks ago, he released an audit that contended the low-income housing tax credit was also too expensive and inefficient.
Whether the legislature takes Schweich’s considerations to heart remains to be seen. Efforts to rein in the tax credit have faltered since the General Assembly placed a $140 million cap on the program in 2009.
Proposals to shrink the cap have often run into strong opposition from business leaders and political figures in urban areas. Some – like attorney and state historic tax credit creator Jerry Schlichter – have argued that a lower cap would amount to a “chilling effect” on development.
Some St. Louis political figures, for instance, reacted negatively to Schweich's audit. Alderman Scott Ogilvie, I-24th Ward, Tweeted: "HTCs create jobs, increase property value, improve public safety, protect our history. @AuditorSchweich 'They're inefficient!' What a joke."
And Jeff Rainford -- chief of staff to St. Louis Mayor Francis Slay -- Tweeted: "The Historic Tax Credit is the most important state investment to fix empty buildings and improve neighborhoods. Being number one is good."
For his part, Schweich -- a history major and an self-described amateur historian -- said the program has clearly done a lot of good. But he said there are other avenues to make sure the most money goes to refurbish buildings.
"There are a lot of older structures that would either be dilapidated or vacant or maybe even knocked down had it not been for this tax credit," Schweich said. "So we applaud the success in that respect. With respect to concerns, we have concerns about the efficiency of the program."
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