Rebuilding Place in the Urban Space

"A community’s physical form, rather than its land uses, is its most intrinsic and enduring characteristic." [Katz, EPA] This blog focuses on place and placemaking and all that makes it work--historic preservation, urban design, transportation, asset-based community development, arts & cultural development, commercial district revitalization, tourism & destination development, and quality of life advocacy--along with doses of civic engagement and good governance watchdogging.

Sunday, August 03, 2014

A failure to understand how economic development works in North Carolina while Wisconsin makes economic development tax credits syndicatable

"Tax loopholes" and governmental financial support for business activity are not necessarily "crony capitalism" and a misuse of the levers of government.

Often, such support is provided to deal with the failure of the market to adequately value certain economic activities and to support various public policy goals and objectives.

In part funded through historic preservation tax credits, the Winston Factory Lofts is an apartment development project created through the adaptive reuse of factory buildings originally constructed for the Hanes Knitting Company in Winston-Salem, North Carolina.  See "Lofty Appeal" from the Winston-Salem Journal.

For example, the sprawl real estate development paradigm and the various ways that resources are spent to subsidize it makes it difficult for extant places, especially center cities, to compete, especially in terms of "old buildings" versus new buildings. That's why many states and some local jurisdictions have created tax incentive programs to support the adaptive reuse of "old" (historic) buildings.

But North Carolina is ending this program because:
... the credit is inconsistent with the Republicans' tax reform plan, which aims to spur economic development and level the playing field by lowering tax rates across the board and getting rid of loop holes for specific industries or business sectors.
according to "Budget plan deals blow to historic preservation tax credit" from the Wilmington (NC) Star-News.

The only way to have a level playing field between cities and suburbs would be to eliminate all the various policies, financing systems, and other inducements that support suburban development at the expense of the cities.

Video produced by the Raleigh Historic Development Commission to explain the value of historic preservation tax credits.

A historic preservation tax credit assists cities primarily, when the field is otherwise shaped to favor suburbs.  See "NC credit to preserve historic properties pays for itself many times over" from the Raleigh News and Observer. From the op-ed:
Since 2001, the historic preservation program has attracted $1.4 billion of private investment and created an estimated 23,000 jobs. Projects in 90 of our 100 counties have leveraged these incentives by attracting private investment to preserve and improve historic properties. Qualifying projects receive a federal incentive that, combined with North Carolina’s, makes otherwise financial unfeasible rehabilitation projects work.

... None of these properties would have been saved and repurposed without the state’s investment in historic rehabilitation.

Much of the renovation work done by Self-Help and others has focused on old manufacturing and mill facilities – large buildings that often have stood as vacant eyesores for decades. By investing in their rehabilitation, developers transform these decaying buildings into places where people can gather to work, live and enjoy recreation. These projects create jobs, increase local property values, enhance tourism and attract business investment. Moreover, by revitalizing neighborhoods and communities, they actually increase tax revenues collected by the state.

Skeptics might wonder why a state incentive is necessary in addition to a federal incentive. The answer is that without the federal and state incentives, it is generally not financially feasible to pursue renovating historic structures. Why? Because these projects are technically difficult and far more expensive than comparable new construction. A typical historic renovation costs one-third more than building from scratch. And there is no site selection alternative.
Economic activity vs. "building a local economy."  Sadly, this is but another example of how most elected officials don't really understand how economic development works, and that there is a big difference between "economic activity" and "building a local economy."  (Image below from Restore Oregon.)

Ironically, earlier this year the State of North Carolina Main Street program published a report, DECADES OF SUCCESS: The Economic Impact of Main Street in North Carolina, documenting the economic success of this preservation-based commercial district revitalization program.

Where the North Carolina State Legislature should be focusing its efforts is on building a local economy. At the intra-state level, except in cases where tax rates are particularly high (for example in Detroit, property taxes are significantly higher surrounding jurisdictions because of the cost of maintaining legacy infrastructure and the decline in property values and tax revenues due to abandoned property), most businesses aren't making that many decisions based on tax rates.

See "Academic Research Lacks Consensus on the Impact of State Tax Cuts on Economic Growth: A Reply to the Tax Foundation" from the Center on Budget and Policy Priorities.

Monetizing economic development tax credits in Wisconsin.  The impact of the historic preservation tax credit program has been maximized by the ability to "sell" or syndicate the credit.

This is important in those situations when the recipient of the tax credit doesn't have significant income (this is especially the case for nonprofit property owners, such as operators of historic theaters).  Being able to sell the tax credit in return for cash allows projects to move forward.

Recognizing the need on the part of many companies to be able to monetize tax credits, the State of Wisconsin has altered their economic development tax credit program to allow recipients "to sell" the benefit, in those many cases where the recipient isn't able to generate the business profits necessary to be able to tax advantage of the credit.

See the press release "Change in State Tax Credit Law Expected to Help Spur Development Throughout Wisconsin: New rules for Economic Development Tax Credit Program will benefit more companies" from the Wisconsin Economic Development Corporation.

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