Tax credit changes could bring $220 million in annual savings, panel says
This article first appeared in the St. Louis Beacon, Nov 30, 2010 - Missouri should eliminate 28 of its 61 tax credit programs and improve the efficiency of 30 more to help the state ease its financial crisis and eventually save as much as $220 million a year in long-term and short-term costs, a commission appointed by Gov. Jay Nixon said Tuesday.
The 27-member panel did not recommend that tax credits be subject to the annual appropriations process in the Legislature, as some have sought. Instead, it said that the Legislature have some authority over the programs by "an orderly sunset schedule."
If its recommendations are adopted, the commission's report said, they will "eliminate the exponential growth of tax credit authorizations [and] improve budget forecasting, while at the same time better positioning the state to compete in the economy of today as well as the economy of the future."
In a letter to Nixon released along with the report, the commission said it "took very seriously your admonition that none of the commission's recommendations should disturb projects that are already underway and tax credits that have already been awarded. Accordingly, you will see that all of the commission's recommendations are for improvements to the state's tax credit programs solely on a prospective basis, so as to 'do no harm' to settled expectations, business certainty and the state's AAA bond rating."
In a statement from his office, Nixon said:
"This report is the product of a rigorous, open and inclusive process to evaluate the performance of our 61 tax credit programs in creating jobs, strengthening our communities and moving Missouri's economy forward.
"In the coming weeks, it will provide a useful framework for further discussion and debate in the General Assembly. I look forward to working with legislators on both sides of the aisle to ensure that state taxpayers get the greatest possible return on investment from tax credits, and that we use these financial tools wisely, effectively and efficiently to achieve our economic goals."
As reported earlier, the commission recommended that the historic preservation tax credit -- which developers have called essential to continuing the rehabilitation of older buildings in the St. Louis area -- be reduced from its current $140 million a year to $75 million a year, beginning July 1, 2011, and be governed by certain transition rules.
It also recommends that historic tax credits no longer be allowed to be stacked, or used concurrently, with neighborhood preservation tax credits.
"Considering the difficult economic climate," its report said, "such rules should ensure that certain existing projects proceed under the current cap rather than the new cap. In particular, certain distressed projects and projects where significant funds have been expended should be 'grandfathered' under the new annual cap."
A growing program
The report includes numbers that starkly show how the state's tax-credit programs have grown.
From fiscal year 1998 to fiscal year 2010, redemptions of tax credits have grown from $102.7 million to $521.5 million, a rate of 407.9 percent over the entire period and an average annual growth rate of 17.4 percent. During that same period, net general revenue collections have increased to $6.774 billion from $5.948 billion, a growth rate of 13.9 percent. Tax-credit redemptions have increased as a percentage of net general revenue from 1.7 percent in 1998 to 7.7 percent in 2010.
At its first meeting in September, Nixon told the commission that the state faces a budget shortfall of $400 million or more, but as state revenue has shrunk, tax credits have continued to expand.
After holding a series of hearings around the state, the commission put together its final report. Recommendations include:
- Eliminate or do not reauthorize 28 tax credit programs "that have outlived their usefulness and do not create a justifiable benefit in relation to their cost to taxpayers."
- Improve "the efficiency of 30 tax credit programs to provide a greater return on investment for taxpayers."
- Rather than subject tax credit to annual appropriations, make them "subject to review by the General Assembly according to an orderly sunset schedule."
- Make changes to state law and seek changes to federal law "that will improve the efficiency and overall value of Missouri's tax credit programs to both the state and the users of the programs."
Former state Sen. Chuck Gross of St. Charles, who co-chaired the committee with St. Louis developer Steven Stogel, said that the panel looked closely at all 61 programs under review. But he said that the tax credits with the largest authorizations -- historic, low-income housing and senior citizens -- naturally created the most tension during the group's deliberations.
He said that the reason the panel decided not to subject the tax credits to yearly appropriations review by the Legislature was to avoid the uncertainty that such a process would bring.
"Credits require the knowledge and the certainty that there is going to be money available for that project when the financing on the private side comes together," Gross said in an interview after the report was released.
"When that certainty is lost because of the appropriations cycle, the concern is that that deal may never happen. Maybe somebody a whole lot smarter than me can figure out how to make annual appropriations work without that uncertainty. But I wish them luck."
Stogel noted that when he was involved in the redevelopment of the Old Post Office downtown, "it was four years, two months and nine days before we started construction. In all that time, we got no payment. Without substantial dollars, you can't start a project like that if you know that in the year you start construction, you're going to have to get an appropriation.
"The counterpoint to that is that the sunset schedule is fairly strict. All programs are in an orderly schedule specified for review, and no one will be surprised."
The issue of legislative review
But Sen. Jason Crowell, R-Cape Girardeau, repeated his criticism of the refusal to improve the accountability of the process by giving lawmakers authority over the tax credits -- as well as his view that the credits are a poor way to guarantee growth in Missouri.
"The current system, which the commission apparently endorses, is an entitlement program that favors special interests and developers," he said in a statement, "forgetting about K-12 funding, higher education, autism services, mental health, access to health care, sheltered workshops, domestic violence shelters, prisons, roads, bridges and many other state services.
"Simply, the recommendation of the commission is that those who receive tax credit entitlements will continue to receive their money first, before Missouri's priorities are funded; just a little bit less of it."
Crowell said placing caps on tax credits has not worked in the past and will not work now.
"What we have failed to learn from history is that a tax credit is at best a short-term stopgap substitute for economic growth and, at worst, an unfair, unchecked special-interest redistribution of wealth. And like a narcotic's effect, it quickly fades as those addicted scream for more and more and more.
"True economic success ultimately depends on broad-based private sector growth where government does not pick winners or loser but instead fosters limited taxes, fair and consistent regulations and business confidence to expand."
Ann Auer, executive vice president of the Missouri Growth Association, said that if the recommendations of the commission are enacted, the effect could be the exact opposite of what Missouri needs.
"You have to look at all areas," she said. "But I think they still miss the point that historic tax credits and a number of others create jobs that generate employment taxes, income taxes and other things. If they go too far in the other direction, you will have a loss of revenue."
Gross and Stogel would not speculate on what is likely to happen with the commission's recommendations once the Legislature convenes in January. Nor would they project just exactly when the possible savings of $220 million a year may be reached.
"What that time will be is just impossible to tell," Gross said, "because of redemptions that will occur into the future. There will be savings immediately. There will be savings that occur over time."