Historic tax credit faces new review <br> <i>All agree it’s beneficial, but the cost is high</i>

Call it a victim of its own success.
Rhode Island’s historic preservation tax credit, which has supported
$545.6 million worth of completed real estate projects and $911.8 million in active projects, is once again under scrutiny as Gov.
Donald L. Carcieri and the General Assembly seek to close a nearly $360 million deficit projected for the next two fiscal years.
Both the executive and legislative branches agree that the program has benefited the state by promoting the rehabilitation of abandoned and underused properties and thus created jobs in the construction industry and expanded communities’ tax bases.
But while the program’s impact on individual cities and towns has been positive, its impact on the state’s income-tax revenue is a growing concern.
To date, there are no specific plans on the table to alter the credit, which was implemented in 2002. Carcieri’s budget for fiscal 2008 only makes one concrete proposal in that regard: to give the R.I. Economic Development Corporation $50 million to buy back at least $60 million worth of credits, generating at least $10 million in savings for the state.
However, at a budget briefing last month, the governor mentioned the program several times, saying that the credit’s success is hindering the state’s revenue growth. In fiscal 2007 and 2008, budget documents show, the credit is expected to cost the state a total of $64.4 million.
A narrative accompanying the budget suggests making alterations to the credit, with an eye toward capping the number of projects approved each year. However, Carcieri stressed in an interview last month, “I think it’s an excellent program, and I want to see it stay.”
House Majority Leader Gordon D. Fox, D-Providence, who sponsored the initial bill to create the historic tax credit, said that the biggest issue with the program is its lack of predictability. Because tax credits given to developers are often sold to third-party investors, it’s hard to pinpoint exactly when they are going to be redeemed, he said.
A cap might help, Fox said, and he would support in-depth discussions between the governor’s office and the legislature about ways to curtail the impact on the state’s finances while keeping the program viable.
“We’re concerned about the amount of liability that is out there in terms of tax credits that are redeemable,” Fox said. “We don’t want to get in a situation where all these credits all come through all at once and would have a detrimental impact on very necessary programs.”
Scott Wolf, executive director of Grow Smart Rhode Island and one of the program’s most vocal advocates, said that his organization has concerns about any specific cap on the program because it could discourage “worthwhile projects.” And to date, the program has spurred many of them.
According to a report commissioned by Grow Smart issued in 2005, 111 projects through 2004 had generated $484.91 million in investment across the state, creating projects that were forecast to generate
$795.25 million in economic activity.
The state’s cost for those projects: $145.47 million.
“There’s an assumption there that the more projects that are built, somehow the worse off the state is,” Wolf said. “I think [the governor’s budget summary] is too narrow an analysis of the tax credit impact.”
In East Providence, City Planner Jeanne Boyle said the tax credit program has helped spur several projects that will expand the city’s tax base, boosting property tax revenue by “hundreds of thousands” of dollars each year.
“They’re putting a substantial investment into all of these properties,” Boyle said. “If we were to look at what the net [gain] is … it’s a substantial increase.”
Urban Smart Growth, a California-based developer with more than $100 million of development projects under way in the state, came to Rhode Island primarily because the tax credit program enabled the company to take on otherwise unfeasible projects, said Ron Wierks, director of operations for the East Coast.
Wierks, who also sits on the Pawtucket Foundation’s board of directors, said the jobs created by projects tied to the tax credit will add to the state’s income-tax revenue, and the projects themselves are transforming properties that had contributed very little to their host communities’ property tax revenue.
“We’re creating retail, offices and housing,” Wierks said.
“Furthermore, these old buildings, which are minimal to tax bases, will eventually increase the tax base, because the buildings have increased in value.”
While the cap discussion is still in its infancy, Carcieri will move forward with attempts to get the money for the EDC buyback program in the state’s fiscal 2008 budget. Carcieri points to a successful endeavor by the quasi-governmental agency last year.
In that transaction, EDC was able to purchase $22 million worth of tax credits for $14 million from Sage Hospitality, the developer of the Renaissance Providence Hotel in the abandoned Masonic Temple – considered the marquee project of the tax credit program.
Fox said that he is not necessarily opposed to the buyback plan.
However, Wolf said that he worries that the buyback could create a back-door cap on the program if the state only began issuing the credits to companies that agreed to sell them back if requested.
“If it can be designed as a win-win, where the incentives for rehabbing these buildings is not reduced and the state gains some money from it, that in theory is fine,” Wolf said. “We just worry about whether in execution … there would be some negative side effects from this.”