Historic tax credits: A 45% government subsidy wearing a mask
My apologies for interrupting the glowing love fest for Alabama’s historic preservation tax credit that’s set to expire next month, but there are a few things you should know.
Alabama offers plenty of tax credits that permit taxpayers to keep more of their income for certain activities. For example, an Alabama business with 50 or fewer employees may receive a one-time income tax credit equal to $1,000 per new job paying over $10 per hour. If the cost of a new hire is $25,000 per year, the state tax credit covers 4 percent in the first year and nothing in subsequent years. Nobody in his or her right mind makes a hiring decision based on such an insignificant tax reduction.
Alabama’s historic tax credit is a different beast entirely. It’s not a credit designed for the average taxpayer; it’s a directed government subsidy that manipulates the marketplace.
The program sets aside $20 million in tax credits each year for rehabilitation of historical properties in Alabama. Each qualifying commercial project is eligible to receive an income tax credit for 25 percent of the project cost up to $5 million. On top of the state credit, the federal government offers a similar tax credit for 20 percent of qualifying restoration expenses.
Yes, you read that correctly.
For certain rehabilitation projects, the combined credits could offset up to 45 percent of a developer’s project costs. This isn’t just about a nostalgic love of older buildings; it’s about money…and lots of it.
What industry wouldn’t thrive if the government shouldered a huge portion of the risk? If developers won’t restore older properties without the credit, the state is radically manipulating the market. If the projects would have happened anyway, the credit doesn’t really have a purpose other than letting developers avoid income tax.
The program permits a developer to either carry the credits forward for up to 10 years or sell them at a discount to another party with income tax liability. According to the Alabama Department of Revenue, developers for six of the 10 projects that have filed to claim the credit are selling the credits anywhere from 63 to 90 cents on the dollar. That’s a nice income tax cut for someone with connections.
Alabamians are enjoying renovated offerings like the Lyric Theater in Birmingham and the Admiral Semmes Hotel in Mobile. There’s no question about that. The bigger issue is whether they’re paying attention to the fact that they’re massively subsidizing the project costs for private developers.
There’s no difference to the state between foregoing a dollar of revenue into the Education Trust Fund and using that dollar to fund a direct subsidy for the same purpose. Legislators might wish to significantly subsidize historic restoration projects, but they shouldn’t be able to hide behind the fact it’s a tax credit.
If there’s enough economic demand for properties to be renovated, a developer will do it even without government subsidies. That’s how markets work.
It basically boils down to priorities. Would Alabamians rather have that money go to public education or businesses renovating old buildings? For conservative members of the Alabama legislature, that’s the choice. For the rest, they’ll just keep trying to raise taxes on everyone to pay for both.
