Deja Vu

State budget proposes redo on changes to Wisconsin's historic rehabilitation tax credit program.


 Tom Larson  |    May 09, 2017
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From property tax cuts to an increase in funding for K-12 schools, the proposed 2017-19 state budget contains numerous provisions that are favorable to the real estate industry. However, the proposed budget contains several changes to Wisconsin’s Historic Rehabilitation Tax Credit (HTC) Program, which would limit the usefulness of the program and harm economic development. These same changes were proposed in the 2015-17 state budget but were eliminated by a bipartisan vote of the Joint Finance Committee (JFC). The WRA is working with a broad coalition of groups to eliminate the proposed changes and is using new data on the economic performance of the HTC program over the last several years to help persuade members of the JFC to repeat its actions from two years ago and remove the changes from the state budget once again. 

Background

In 1989, the state of Wisconsin began offering a 5 percent HTC on the qualified rehabilitated expenditures on building projects and renovations across the state. When coupled with the 20 percent federal HTC, the Wisconsin HTC program provided an attractive incentive to rehabilitate and repurpose historic buildings. 

On January 1, 2014, the Wisconsin Legislature increased the credit to 20 percent as a way to further stimulate economic development and assist in the redevelopment of downtowns throughout Wisconsin. Because the tax credits are awarded only after the project is completed, the legislature believed that increasing the tax credit was a relatively low financial risk to the state. Moreover, the construction activity that occurs prior to the payment of the tax credit generates approximately 40 cents in income and sales taxes for every $1 that is awarded in tax credits. 

The remaining 60 cents is paid back in full within seven years on average. By increasing the credit to 20 percent, the HTC program is one of the best in the country and an important tool to attract economic development to the Badger State given that Wisconsin is one of 32 states that offer historic tax credits, and is one of only 14 states that have no aggregate cap on credits on the number of credits that can be awarded each year. While the details of each state’s program vary, 10 states have a match equal to Wisconsin’s 20 percent HTC and 22 states have a higher HTC percentage, most commonly in the form of a 25 percent credit. Prior to the 2014 tax credit program expansion, Wisconsin’s HTC program averaged 11 projects a year. Since its expansion, 31 projects were approved in 2014, 49 projects approved in 2015, and 37 projects in 2016. 

Proposed changes in the state budget

The state budget proposes three principal changes that would negatively impact the HTC program. 

 

  • $10 million cap on credits: The proposed changes would place a $10 million cap on overall tax credits per year, which would artificially limit the amount of economic development activity, jobs and tax base generated by the program. For example, if the $10 million cap was in place for 2016, only seven of the 38 projects would have been awarded credits, and 4,003 of the 4,912 jobs that were created would have been lost. Moreover, a single, large project could deplete the entire cap, and many smaller communities would likely lose out on the economic development opportunities created by the HTC program.¬†
  • Competitive grant process: In addition, the proposed changes would award grants annually on a competitive basis based on the number of jobs and tax revenues generated. This change would significantly delay projects, make smaller projects ineligible, and prevent residential projects from qualifying despite the fact they would increase jobs in the surrounding area.
  • Clawback provision: Third, the proposed budget would require recipients to pay back the tax credits if the economic development activities and job creation numbers fall short of estimated projections. Requiring tax credits to be paid back after they are awarded would make it difficult to sell tax credits on the secondary market and will harm an owner‚Äôs ability to secure project financing since banks must underwrite the additional risk of a potential credit recapture.¬†

 

Economic success of the HTC program

The current HTC program has been very successful in meeting its objectives ‚ÄĒ producing economic development, creating jobs, growing local tax bases, restoring historically significant buildings, and generating state and local tax revenues. A recent study by Baker Tilly analyzing over 117 projects in Wisconsin that received $171 million in HTCs from 2014 through 2016 demonstrates that the HTC program is one of the state‚Äôs most successful economic development programs. Specifically, the study demonstrated that the HTC program has produced the following results:

 

  • Powerful economic engine: Over the three years, the HTC projects have generated or are projected to generate a total of $832 million directly into the state‚Äôs economy. This includes $683 million during the construction phase and another $149 million after construction is completed. In addition, almost 10,000 jobs were created during the construction phase and approximately 4,380 full-time jobs were created.
  • Nine times the return on investment (ROI) in year 1: In 2014, 25 commercial, residential and mixed-use projects were approved and received approximately $35 million in HTCs. In the first year after being awarded the HTCs, these projects have become a successful economic engine, generating an economic impact that is approximately nine times greater than the original investment, or 9:1 within the first year, based on direct spending alone.
    • $277.7 million in private investments/expenditures.
    • 2,185 new jobs, including construction and permanent.
    • $22 million in annual state income, sales and payroll tax revenues.
    • $ 2.11 million in annual local property tax revenues.
  • Ripple effect on economy: In addition to these direct economic impacts, the HTC program also has a ‚Äúripple effect‚ÄĚ that results in new economic development activity on surrounding properties and neighborhoods.¬†
  • Immediate payback: The tax credit is not a drain on state revenue. In fact, 40 percent of the credit is paid back in other taxes, such as sales and income taxes, before the credit is paid out, and the remainder is recouped in five years after the credit is paid out.

 

Maintaining a vibrant HTC program is one of the top state budget priorities of the WRA. We will work with the governor and lawmakers on both sides of the aisle to continue to build strong support for the program and hopefully prevent any changes that would make the program a less effective development tool.

Tom Larson is Senior Vice President of Legal and Public Affairs for the WRA.

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