As part of the subsidy plan for Douglas Place, a downtown Wichita hotel being proposed, developers plan to make extensive use of historic preservation tax credits to fund their project. This form of developer welfare, besides being inefficient, is largely hidden from public view.
According to Allen Bell, Wichita’s Director of Urban Development, the project’s team, which is lead by David Burk, plans to tap $3.8 million in state tax credits and $3.5 million in federal tax credits, for a total of $7.3 million in this form of subsidy.
Tax credits may be a mystery to many, but there is no doubt as to their harmful effect on state and federal budgets. When using tax credits, the government, conceptually, issues a slip of paper that says something like “The holder of this document may submit it instead of $500,000 when making a tax payment.”
This is a direct cost to the government, according to both reason and the Kansas Division of Legislative Post Audit. Last year, after conducting an audit of Kansas tax credit programs, auditors explained: “Tax credits, which the government offers to try to induce certain actions by the taxpayer, reduce income tax revenues because they are subtracted directly from the amount of taxes due.” (emphasis added)
The audit found that in 2001, when the Kansas historic preservation tax credit program was started, the anticipated cost to the state was about $1 million per year. By 2007, the actual cost to the state was reported at almost $8.5 million.
Further, the audit found what many already knew: tax credit aren’t an efficient way of transferring subsidy to developers. Most of the time, the developers sell the credits to someone else at a discount, as the audit explains: “The Historic Preservation Tax Credit isn’t cost-effective. That credit works differently than the other three because the amount of money a historic preservation project receives from the credit is dependent upon the amount of money it’s sold for. Our review showed that, on average, when Historic Preservation Credits were transferred to generate money for a project, they only generated 85 cents for the project for every dollar of potential tax revenue the State gave up.”
The audit concluded this is not efficient: “That’s not a cost-effective means of generating funds for these projects because 15% of the money gets pulled out and never actually goes for preservation activities.”
(Besides this efficiency problem the audit also found that the Kansas Department of Revenue was not accurately tracking the tax credits after their issue. See Kansas historic preservation tax credits audit reveals inefficiency, data problems.)
In the case of the Douglas Place project in Wichita, the inefficiencies that Legislative Post Audit found are present. According to Bell, the developers plan to sell the tax credits for 87 cents on the dollar. So they’re doing a bit better than the average project.
Still, Kansas taxpayers will give up $3.8 million in tax revenue in order to give Burk and his team about $3.3 million cash. Federal taxpayers will give up $3.5 million in order to give Burk $3 million.
And it is a gift. It’s not an exemption from paying property or sales taxes, or letting a hotel keep 75 percent of the guest tax it generates, or tax increment financing for a garage, or the state charging customers extra sales tax that the hotel keeps, or sweetheart lease deals. Burk and his partners are getting all that, too.
The tax credits stand out as a direct transfer of money from taxpayers to private parties. But being accomplished through the tax system shrouds the process in mystery. And, no direct action is required by any legislative body. The tax credit program is in place. The developer applies, and if accepted, the credits are granted. No one — at least no one elected by and accountable to voters — votes to grant the specific credits.
The historic preservation tax credit program, in a short time, has grown from a program designed to help spruce up a few old buildings here and there to a developer welfare program on steroids. The Drury Plaza Hotel Broadview in downtown Wichita benefited from this program too, costing Kansas taxpayers over $4 million to pay for its tax credits, and that’s on top of other forms of subsidy.Learn how you can support the Voice for Liberty. Click here.