Kansas historic preservation tax credits: the hearing

On Wednesday, the Taxation Committee of the Kansas House of Representatives heard testimony on HB 2496, which would expand the historic preservation tax credit program. This program provides tax credits to qualified historic preservation projects. I testified at the hearing, and my written testimony is at Kansas historic preservation tax credits should not be expanded.

The idea of tax credits confuses some people. Some may confuse credits with a tax deduction. Some may believe that tax credits are given out at no cost to the state. But in fact, the tax credits are quite costly. As I told the committee members, if the state grants a tax credit, and then does not reduce state spending by the amount of the tax credit, other taxpayers in Kansas have to make up the difference.

That’s one of my core reasons for opposing the tax credits. Since the state does not — and is not likely to — reduce spending by the amount of credits granted, the result is a transfer of money from Kansas taxpayers to the recipients of the credits. But even if the state did reduce its spending, the result would still be a implied decision by the state that it can better decide how to spend money than its citizens can.

Besides this, the arguments of those in favor of the historic preservation tax credits are self-serving and in some cases misleading. Some of the conferees are involved in projects that were to receive tax credits. They are not happy now that they may not get them.

Other conferees were local units of government such as Dale Goter, lobbyist for the City of Wichita. Wichita has a big stake in the tax credits, as the renovation of the Broadview Hotel is on hold because the developers may not receive the tax credits. The developers and the city claim that the project is not economically feasible without the tax credits. We don’t really know whether this is true. When government subsidy is available, people have a way of designing project budgets in a way the requires the subsidy. Why would someone turn down free money?

It should also be noted that the tax credits the Broadview developers are seeking — perhaps $3 million to $4 million — are on top of many millions in subsidy the city has already approved.

The arguments of other conferees must be questioned. Brenda Spencer of Wamego, who owns a preservation consulting business, told of a project in Leavenworth that will house a company employing 400 people. This results, she said, in an annual payroll of $26 million, with resultant tax dollars flowing to the state and local government.

The problems with this illustration of the purported success of the historic preservation tax credit program are these: Would the jobs not have been created unless there was a historic property to house the workers? Could the workers work somewhere that wouldn’t require tax credits? These jobs: are they new jobs? Were the workers formerly unemployed, or did they leave other jobs to work in the historic building? To the extent that happened, the jobs, with their tax payments to the state, can’t be counted as new.

Christy Davis, owner of another preservation consulting firm, testified that since 2001, the tax credit program has leveraged $264 million in private dollars, which she said is a 400% return on investment for the state. The problem with this analysis (it was made by others, too) is that it assumes that none of the projects would have proceeded if not for the tax credits. It credits the program as being the only reason why this activity took place. This is undoubtedly false.

Further, this analysis treats the state as though it were the owner of these properties. That isn’t true, either.

Davis also testified that since work on historic buildings is 50% more labor intensive than new construction, the tax credit program has the effect of a jobs creation program. I doubt that the developers of historic preservation projects see creating a lot of jobs as a benefit. To business, workers are a cost to be controlled, not a benefit to be expanded. If the state wants to view historic preservation as a jobs creation program — meaning that more jobs are better than fewer jobs — let the state mandate that, say, power tools can’t be used on these projects. Then even more workers will be needed.

Can we also agree that owners of firms that profit from a government program qualify as a special interest?

Goter, Wichita’s lobbyist, also stated in his written testimony: “The return on investment for the public dollar spent on historic renovation is totally recovered in a 10 year span from increased property taxes alone. That return is shared by local and state governments through their respective mill levies.”

This statement reveals the flaw in the reckoning used by government in making economic development calculations. To government, the return is in the form of increased tax revenue. Many citizens don’t view things the same way. For government to make an investment of taxpayer funds just so it can receive even more tax revenue is appealing to government bureaucrats and politicians who want to expand their sphere of influence and control. But not so much for everyone else.

For me a lesson I learned from the hearing is how easily those who consider themselves fiscal conservatives can become derailed by programs like this. Olathe Representative Arlen Siegfreid, a member of the Taxation Committee as well as Speaker Pro Tem of the Kansas House of Representatives, offered written and oral testimony in favor of this bill.

Support of this bill is at odds with his stated positions. On his personal website, under the heading “Fiscal Responsibility” appears this sentence: “However, particularly in times of economic peril, sometimes the ‘wants’ we’ve fertilized with ample resources grow to become ‘needs’ and our well intentioned investments in promising ideas and programs become the dangerous government growth that each candidate swears to defend against at all costs on the campaign trail.”

The historic preservation tax credit program, as reported in an audit recently completed by the Legislative Division of Post Audit, has grown tremendously from its initial cost. The audit, titled Kansas Tax Revenues, Part I: Reviewing Tax Credits, identifies the historic preservation tax credit as a program that the legislature may want to re-evaluate, as the program is significantly more expensive than originally planned. The fiscal note that accompanied the tax credit legislation when passed in 2001 and revised in 2002 reported an estimated annual cost of $1 million. In 2007, the actual cost was $8.5 million.

This is an example of a government spending program growing out of control — the type of “dangerous government growth” Siegfreid mentioned above.

Siegfreid’s website also states: “My subsequent re-elections affirm that notion, and I’m now more committed than ever to reducing the strain government and it’s [sic] failed policies are placing on individual taxpayers — and our local businesses.”

As mentioned above, when the state grants tax credits, other Kansas taxpayers have to pay more taxes to make up the shortfall in revenue. This is an example of the type of strain Siegfreid says he is against.

Finally, Siegfreid has authored a tax simplification bill, stating that “Kansas tax policy is too complicated.” Tax credits are an example of increasing complexity of the state’s tax code.

2 thoughts on “Kansas historic preservation tax credits: the hearing”

  1. Yes 25 members on this House Conference committee and not one stood up and said what are we going to cut to allow this tax credit for people like Dave Burke and Drury inns southwest. I am sure these to VERY RICH DEVELOPERS needed these tax dollars much worse than homeless people, school children, highways, medicaid recipients, and the working poor.

  2. Bob, Thank you very much for making the trip to Topeka and speaking on our behalf. I particularly liked your point:

    “For government to make an investment of taxpayer funds just so it can receive even more tax revenue is appealing to government bureaucrats and politicians who want to expand their sphere of influence and control.”

    I can only imagine how difficult it must be for our legislators to be IN the state government and not be OF it. Thank you for reminding them where these tax credits ultimately come from.

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