Missouri auditor criticizes historic tax credit program

A new audit of Missouri’s historic tax credit program, the oldest and largest in the nation, concludes that it has been helpful in restoring many buildings but is not an effective use of state resources.

The report by Missouri Auditor Thomas Schweich released Tuesday estimated that each historic tax credit dollar yielded 49 to 85 cents toward rehabilitation costs. Since its beginning in 1998, Missouri has authorized $1.35 billion in historic credits, the most in the country.

“While the goals of the program are laudable in some respects,” the report stated, the program “is an inefficient use of state resources.”

The report is expected to provide additional ammunition to critics of the program, including Gov. Jay Nixon and the Missouri Senate, which have called for the program to be capped at $90 million annually from the current $140 million. Over the years, the program has grown to be the state’s third-largest tax credit program.

“In addition to the (low-income housing tax credit) audit earlier this month, the governor hopes this report is a wake-up call for the General Assembly about the need to reform these programs so that they generate stronger returns for taxpayers, our economy and our communities,” said Nixon spokeswoman Channing Ansley.

But advocates for the program say that it has been invaluable and that each historic tax credit dollar generates $4 to $5 in private spending.

It has been a critical part of the financing in dozens of preservation projects in downtown Kansas City, including the Hanna Rubber building, Hilton President Hotel, Cosby Hotel, old U.S. Courthouse and 909 Walnut, Missouri’s tallest apartment tower at 35 stories.

A study by the Alliance for Investment, Jobs & Preservation, a lobbying group, estimated $6 billion in private investment had been triggered by the program since its beginning.

“From a practical level, they’re imperative, and the value of the credit goes directly into the project,” said Denise Mathisen, an official with O’Reilly Development of Springfield.

Her firm is about to begin a $35 million redevelopment of the former Folgers complex in downtown Kansas City into 146 apartments.

Mathisen also questioned the audit’s conclusion that the tax credit dollars yielded low cash returns, saying her firm obtained about 92 cents for each tax credit dollar for the project.

“The market is competitive,” Mathisen said. “I can’t imagine anyone at 49 cents.”

Missouri was one of the first states to authorize a historic tax credit program to complement the federal historic tax credit program launched in 1976. Since then, about 30 other states have launched similar programs, but none have come close to the amount used here.

The state program authorizes tax credits to be issued for 25 percent of the eligible costs of historic preservation projects. When combined with the federal program, which allows tax credits for 20 percent of those costs, it has proved to be a powerful redevelopment tool for historic buildings.

Developers generally sell those tax credits to an entity that needs a tax shelter to raise cash for their projects. The purchaser then redeems them for credit on state taxes.

The report observes there was “no dispute” the historic tax credit has been a significant factor in helping renovate hundreds of historic properties in Missouri but adds its $1.1 billion in redemptions the past decade made it the largest in the country and far exceeded what was originally estimated to the General Assembly when it was approved.

The state has a $140 million cap on the amount of tax credits that can be issued annually, but the report observed that figure was so high it didn’t contain actual spending. Program redemptions have averaged $123 million annually the past five years.

The audit said its estimate that the average historic credit dollar netted 49 to 85 cents for actual rehab costs was based on the amount diverted for other purposes.

“The remainder goes to investors, tax credit brokers or syndicators,” the report stated, “and the federal and state government in the form of income taxes.”

Michael Marsh, a local CPA who specializes in historic tax credit programs, said returns can go that low if tax credits are sold to a third party. He added that’s happened only twice during a period that has averaged 50 projects annually. The current market for Missouri historic tax credits is 90 cents per dollar.

He said the state audit was “not accurate in the real world I operate in.”

Schweich’s audit supported reforms suggested by a tax credit review commission established by Nixon that called for a $75 million annual cap.

It also suggested making the tax credit refundable to attract more investors, eliminating or reducing the credit for owner-occupied residences, ending the practice of combining historic and affordable housing tax credits, and establishing “sunset” provision that would require the legislature to renew the program.

The audit gave the program an overall grade of fair.

This story was originally published March 25, 2014 at 8:39 PM with the headline "Missouri auditor criticizes historic tax credit program."