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Missouri Tax Credit News

Missouri Tax Credit Commission - they are getting close to a report - November 19, 2010


Reforming tax credits could save Missouri more than $200 million
By Brian R. Hook on November 18, 2010

A torrent of tax credits across the state may turn into a sprinkling if Missouri Gov. Jay Nixon accepts the proposals of his review panel, and if he is able to convince the Missouri General Assembly to make changes.

The bi-partisan Tax Credit Review Commission, set up by the governor in July, approved a number of recommendations to reduce and reform the state's 61- different tax credit programs during two full days of deliberations held in Jefferson City this week.

The recommendations by the panel, which held hearings around the state and split into several subcommittees to look at the different programs, could save the state more than $200 million, according to Chuck Gross, co-chair of the commission.

The former Republican state senator and current director of administration for St. Charles County, said the Republican-controlled Missouri General Assembly will not like all of the commission's recommendations.

But the current economic environment increases the seriousness with which the report will be discussed, Gross said. "It increases the likelihood that something positive will happen to get these programs under control, because there's just less money and you have to look at every place where there are dollars being spent."

Tackling tax credits

New state Sen. President Pro Tem Robert Mayer, a Republican from Dexter, said last week that lawmakers need to discuss tax credits. But he would not commit to a time frame, saying job creation needs to be tackled first.

If the Missouri General Assembly delays reforming the tax credit programs, it would not be the first time.

Lawmakers did not pass the governor's tax-credit proposals in the previous legislative session. Therefore, Nixon decided to get bi-partisan support and set up the panel to provide recommendations for reforms. He requested a final report by Thanksgiving, which would give him time to prepare for the upcoming session in January.

The governor, a Democrat, first outlined the commission's mission at a meeting in September. Nixon told the panel he wanted to ensure tax credits put people to work, boost development and build strong communities.

With an estimated budget shortfall between $500 to $900 million looming for fiscal 2012, starting on July 1, Nixon is looking for ways to cut spending. And as an audit report from the Missouri State Auditor in April shows, tax credit redemptions increased faster than general revenue collections for the state from fiscal 2001 to 2009.

Redemptions in tax credits increased 57 percent from $372 million to more than $584 million in eight years. Meanwhile, general revenue increased 15.7 percent from $6.44 billion to $7.45 billion, the audit finds.

Co-Chairs Chuck Gross and Steve Stogel working together, courtesy of Missouri News Horizon

Now that the entire 27-person commission has approved the recommendations by the 10-separate subcommittees, Gross said that he and co-chair Steve Stogel will work on a summary and fold it into the report's final draft, which Gross expects to be finished, approved by the committee, and ready for presentation to the governor and public by next week.

After hashing over the details from the subcommittees on Tuesday and Wednesday, the panel finalized its collective stance on the issues. All told, the revisions represent a projected savings of about $247 million, though expanded eligibility recommendations could reduce total savings.

"The governor's charge to the commission was to examine all 61 tax credit programs with an eye toward protecting the state's AAA ratings, to find efficiencies, measure return on investment, protect people who made investments, rebuild communities, and, with all those conflicting missions, get it all done in four months," said Stogel, who is president of the St. Louis-based developer DFC Group. "It's an amazing net result."

Capping tax credits

The two biggest tax credit programs out of the state's 61, in terms of total tax dollars deferred, are the historic preservation tax credit and the low-income housing development tax credit. Therefore, among the recommendations with the most potential to ease state budget strains are alterations to both programs, along with limiting projects to just one of the two funding options, eliminating so-called "stacking" of tax credits.

Old Post Office, courtesy of Missouri Court of Appeals

The Tax Credit Review Commission recommends dropping the annual cap on the historic preservation tax credit program from $140 million to $75 million.

Stogel, who is an active donor to Democratic candidates, was the co-developer of the Old Post Office Building located in downtown St. Louis.

One of the meetings held around the state to hear testimony about the tax credit programs was at the Missouri Court of Appeals, Eastern District, inside the building, which was restored in 2000 by DFC Group and DESCO Group using historic tax credits.

"I'm a big fan of the historic credit," Stogel said when asked if he could provide an example of an area where he had to make an exception to something, while working on the committee, that he might not have done on his own. "It's going to be tougher for developers to make a decision to start a project. But there's plenty of capacity left in the system. So, it will work itself through."

Historic preservation tax credits available for single-family homes should also be capped at $50,000, with houses purchased for more than $150,000 ineligible for tax credits, the committee plans to recommend.

The budget strain in Missouri imposed by future authorization of low-incoming housing tax credits around the state, meanwhile, could be lessened by dropping the tax credit period alloted from the current 10 years to five, with an annual cost cap of $16 million or a project total of $80 million, according to the committee.

Sunsetting and eliminating tax credits

In addition to recommending caps for all of the state's tax credit programs, where feasible, the committee will recommend putting tax credits on regular sunset schedules, which would set them up for routine evaluation.

Instituting a buyback program for outstanding credits could also yield savings, according to the committee.

Some of the tax credit programs have already exhausted their credits or are already set to sunset.

The panel will recommend eliminating six of the 61 existing programs, including the wood energy tax credit, the wine grape tax credit program and the film tax credit.

Although the film tax credit is small relative to other programs in terms of a dollar amount, it is one of the most visible and fiercely debated credits, said Christine Harbin, a research analyst at the Show-Me Institute, a free market think tank.

"The estimated economic and fiscal impact of these programs is debatable," Harbin explained to Missouri Watchdog. "Film tax credits do not result in permanent economic activity because the purchases are single-time expenses and they do not create permanent jobs. The film tax credit is an archetypical example of the government picking and choosing the industries that occur within its borders."

Furthermore, Harbin added, studies consistently show that states tend to spend more attracting filmmakers than the states generate in economic activity.

A new study from the Center on Budget and Policy Priorities is the latest research attacking state tax credit program for films. The Washington D.C.- based policy organization claims that the revenue generated by economic activity induced by film subsidies falls far short of the subsidies' direct costs to the states.

"To balance its budget, the state must therefore cut spending or raise revenues elsewhere, dampening the subsidies' positive economic impact," according to the research. "States would be better served by eliminating, or at least shrinking, film subsidies and using the the freed-up revenue to maintain vital public services."

Partnering with other states

The most "out-of-the-box" thinking from the panel comes from a subcommittee, the Tax Law Committee, said Amy Blouin, executive director of the Missouri Budget Project, a progressive public policy organization.

Blouin noted that according to the subcommittee report, Missouri may be able to save as much as 40 percent of the cost of tax credits by advocating for changes to federal tax laws and how states interact with tax credits.

"Missouri could effectively partner with other states to advocate for federal tax law changes, save about $120 million or more per year that could be directed at critical state services and yet retain the same positive economic and social benefit of the tax credits," Blouin told Missouri Watchdog.

The Tax Credit Review Commission identified an ongoing race to the bottom of sorts -- with states trying to undercut each other's efforts to hand out tax incentives to business -- and issued a resolution asking Congress to investigate the issue.

Looking for clarity and fairness

A global cap - a cap on the combined cost of the tax credit programs - was rejected as commissioners voiced fears that better-financed interests, such as developers, may end up gaining a greater percentage of available credit funding at the expense of programs desired to aid vulnerable populations. Opening tax credit programs up to the annual legislative appropriations process was also rejected based on the argument that such a move would introduce funding uncertainties great enough to eliminate all business interest in such programs.

Gross, one of the panel's co-chairs, said he is hoping to see greater clarity -- and by extension, greater fairness -- emerge in the state's tax credit programs as a result of the review process, in addition to greater savings.

"Maybe if there is a feeling among the public that incentives have grown to large, that they're taking up too much of our budget, that special favored groups are receiving too much favor... And that there should be a fairer process for distributing tax dollars... If that kind of thing could happen, I think that'd be a huge step," Gross said.

By Brian R. Hook, brhook@missouriwatchdog.org, (314) 482-7944

Rebecca Townsend, Missouri News Horizon, rtownsend@monewshorizon.org, contributed

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