Racine Mayor John Dickert predicts a 20 percent state tax credit for renovating historic properties would be high enough to attract developers from outside Wisconsin and even overseas to his city.
But if lawmakers decide to double the state’s 10 percent preservation tax credit without also letting developers sell those tax breaks to outside investors, the change will be made in vain, Dickert said at the state Capitol on Wednesday.
“That,” he said “will be a bill killer.”
Dickert’s comments came just after the Senate Committee on Workforce Development, Forestry, Mining and Revenue had voted in favor of Senate Bill 132, which would increase Wisconsin’s tax credit for renovating commercial properties on the National Register of Historic Places to 20 percent and allow the credits to be sold to investors who are not taking a direct part in a renovation project. An amended version of the same bill would offer a similar 20 percent credit for renovations of buildings that are not on the Historic Register but were brought into service before 1936.
But no matter how much of a tax break is offered, Dickert said, not many out-of-state developers would benefit unless the credits could be sold.
The reason for that prediction, he said, is that the tax breaks can be applied only to Wisconsin income taxes, which out-of-state companies probably would not owe in large amounts, especially right after they have completed a project. Dickert said most of the interest in renovating parts of Racine’s downtown and riverfront is coming from Illinois developers.
Until Wisconsin makes its state tax credit useful to them, he said, they will be just “kicking the tires.”
So far, such arguments have failed to move two Republican members of the GOP-controlled Joint Finance Committee, where proposals that would affect revenue collections often receive scrutiny before moving on to the full Legislature. State Rep. Dale Kooyenga, R-Brookfield, and state Sen. Glenn Grothman, R-West Bend, have said they are at odds with members of their own party who say the state credit should be set at 20 percent to compete with Illinois, Minnesota, Iowa and other states that offer breaks of at least that amount.
Part of the two lawmakers’ objections, they said, stem from their belief that the state should not use the tax code to favor certain developers. On Wednesday, Grothman noted developers already receive a 20 percent preservation tax credit from the federal government, and he questioned the need to supplement that with an equal credit from the state.
“There are many buildings,” he said, “to which the government contributes almost nothing.”
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Grothman said the two credits combined amount to a fairly enormous tax break, one that would let developers subtract an amount equal to 40 percent of their expenditures on historic renovations. A company that spent $100 million, for instance, would get a $40 million benefit.
Others, though, say the high cost of many renovation projects puts everything but the smallest jobs out of reach for developers that cannot rely on generous relief from state income taxes. Those proponents cite as evidence the success other states have had with larger breaks.
A 2012 study by the school of planning and public policy at Rutgers University tallied up the total expenditures on historic renovation projects that had qualified in 2011 for federal tax credits. About $54.7 million was spent on the projects in Wisconsin, while $167.8 million was spent in Minnesota, $406 million in Illinois and $179.9 million in Iowa. All three states also allow their credits to be transferred.
The numbers, proponents of a higher tax break argue, offer sufficient evidence that Wisconsin is not doing enough to attract developers. But some Republican lawmakers, as recently as spring, were inclined to move in the opposite direction.
Kooyenga had contemplated eliminating Wisconsin’s preservation credit as part of a campaign to simplify the tax code. Although he and his colleagues removed almost 20 seldom-used tax breaks, he met opposition from members of his own party over the preservation credit, which some wanted to be set at 20 percent.
Kooyenga compromised, agreeing to increase the credit from 5 to 10 percent, and he probably would compromise again, he said. But if the credit is to be doubled a second time in less than a year, he and Grothman said, lawmakers at least should ensure the benefit accrues to those who are doing the renovation work.
At the hearing Wednesday, Grothman had a name for the investors who would take advantage of tax credits that could be bought and sold: “rich wheeler-dealers.”
His chief concern, Grothman said, stems from the practice of attracting buyers by selling the credits for less than their face values. A credit that would reduce an investor’s income taxes by $1 million, for instance, might be sold for $900,000, providing not only an immediate supply of cash to a developer but also a $100,000 profit to an investor.
Proponents of SB 132 say they recognize such arguments have merit and are proposing changes. State Rep. Cory Mason, D-Racine, and another member of the Joint Finance Committee, said he is in favor of adopting an amendment stipulating the credits could be sold only through a bidding process, ensuring they would fetch the highest price the market would support.
“That makes sure it is as close to the dollar value as you can get,” he said. “You will not be having double-digit losses.”
Like Dickert, Mason contended that disallowing the sale of the credits would put up obstacles to attracting out-of-state developers, but he said such a prohibition could be nearly as hard on Wisconsin companies.
Kit Richardson, a developer who has undertaken preservation projects in the Minneapolis-St. Paul area, agreed. He said that even though his company, Schafer Richardson Inc., has its offices in Minnesota, it could not take full advantage of the 20 percent tax break Minnesota adopted for historic renovation if the credits could not be sold. For one, he said, the tax code puts strict limits on what sorts of companies can use the credits; those that are organized in a certain way can, but many others cannot.
“The vast majority of private individuals cannot use them,” he said. “So they could have little or no value to an individual even with a very high tax liability.”
Second, he said, many small developers simply do not owe enough in state taxes to be able to take full advantage of the credits. That’s true, he said, even in states that allow the breaks to be claimed over the course of several years, a policy meant to make the breaks useful to companies with small incomes.
Increase alone can help
Others, though, contend that historic renovators that cannot sell the credits still can put deals together. Joe Alexander, president of Alexander Co. Inc., a Madison-based development company, said investors with large state income tax liabilities could be made direct partners in renovation projects, an arrangement that would let them use the credits without the need of a transfer.
Alexander said it has been years since his company did preservation work in Wisconsin. The projects it has undertaken have instead been in states such as Missouri and Ohio, which both offer more generous tax breaks than Wisconsin.
If Wisconsin lawmakers want to attract business from developers such as Alexander Co., the essential step will be to raise the state’s tax credit, Alexander said. Being able sell those credits, he said, would be icing on the cake.
“Either way, whether the credits are transferable or not,” Alexander said, “having a 20 percent credit will put Wisconsin back on the map.”
A March report by the National Trust for Historic Preservation listed the policy of allowing the sale of preservation credits as being one of several steps states can take to promote the renovation of historic properties. Wisconsin already has adopted provisions similar to many of those recommended in the report.
State lawmakers, for instance, have not put a cap on the amount of historic preservation credits a developer can claim in a single year, and they have not capped the total amount of money in tax relief allowed for a particular project. With SB 132, Wisconsin is on a path to offering the credits at what the report deems “appropriate rates,” meaning 20 percent or higher.
If lawmakers are serious enough about historic redevelopment to bother with making that change, Mason and Dickert said, they might as well give developers something they can use.
“This is about: How do you capitalize these projects?” Mason said. “This isn’t about giving a sweetheart deal to developers.”