What did the auditors find? A lot. For starters, HPTC tax credits have cost the state nearly $600 million over the last five years alone and more than a billion dollars over the last 10. Missouri leads the country in “qualified rehabilitation expenses” (QRE) for historic preservation, which relates to the expenses against which the HPTC could be applied. Broadly speaking, the higher the QRE that rehabbers claim under the HPTC, the more money the state will be spending on it.

So, how big is Missouri’s QRE lead? Check out this chart from page 8 of the audit.

For perspective, Massachusetts, Virginia, Pennsylvania, and New York are all original U.S. colonies. Are we to believe that Missouri should have been subsidizing preservation spending at almost twice the rate as the next closest state… and not only that, subsidizing it at that level for more than a decade?

I can appreciate that we love our old buildings in Missouri, but if anything and everything can get the stamp of being “historic,” then we degrade the things that are, in fact, historic and waste limited taxpayer resources in the process. Could some projects be worthy of taxpayer support? Possibly, but those cases would be an exception, not a billion dollar rule.

To name a fraction of the examples that underscore this reality, Norwood Hills Country Club should not have received taxpayer money. A whole host of private mansions that the HPTC subsidized should not have received taxpayer money. Check out this story, from the audit:

In 2011, the DED issued about $296,000 in credits to an applicant who renovated a 3-story, 5,400 square foot home in an affluent neighborhood in a metropolitan area. The applicant purchased the home in 1993 for nearly $300,000 and reported about $1.2 million in qualified rehabilitation expenditures. The home has a fair market value of approximately $434,000.

So the owner buys a $300,000 house, drops $1.2 million into it, gets nearly $300,000 (almost what he paid for the house originally!) in credits from the state, and the value of the house rises… about $130,000? On what planet does subsidizing a private residence in a wealthy neighborhood make any sense for taxpayers? Why did Missourians have to effectively reimburse this person the purchase price of their home? Who’s looking out for the taxpayers here? And who in their right mind and looking at the numbers thinks this is a good “investment” for the state?

The HPTC is a mess of a program. The least the legislature could do is set a date for this madness to end.

The post State Audit Recommends Sunset Of Historic Preservation Tax Credit appeared first on Show-Me Institute.

This is how Saint Louis City’s demolition specialist described the process of identifying vacant buildings for demolition during a meeting with Saint Louis housing and demolition employees.

Problem properties have long been an issue in Saint Louis, and preservationists question whether some buildings that get demolished are in that bad of condition.

Preservationists fear that knocking down existing houses that could be rehabbed speeds up the process of out-migration and neglect. Michael Allen, of the Preservation Research Office, says, “As many as half the buildings demolished in St. Louis were actually sound under the city’s building code.”

Is Allen’s assessment accurate? It’s hard to know. While the city’s demolition process involves ranking buildings on a scale to determine which are priorities for demolition, there is no specific criteria for each ranking. The demo specialist just drives by and conducts a quick assessment.

Let me be clear: I’m not accusing the demo specialist of doing a poor job. He could be an expert at determining a building’s condition, and only need a quick glance to make a decision.

But this method does leave the process open to influence. Without documenting criteria that determines the need for demolition, what prevents an alderman, developer, or other interested party from getting the buildings in his/her area to the top of the list? Or conversely, out-of-favor aldermen and developers could have high-priority buildings moved to the bottom of the list.

The City of Saint Louis could improve transparency and accountability to its citizens by implementing standards that determine demolition priorities. Or, better yet, make the process easier for private citizens to buy demo-ready properties and tear the building down themselves.

The post The Figure Skating Method For Building Demolitions appeared first on Show-Me Institute.

That extraordinary liability provides the state with a great opportunity — to pursue deep, substantive, and pro-growth tax cuts while mitigating their budgetary impact. I trust Missourians to invest their money more than the state to invest it on their behalf. Unfortunately, some in the Missouri House of Representatives appear to disagree (emphasis mine):

A Missouri House committee has approved a tax-credit reduction plan, but it stops short of the significant cuts passed by the Senate.

The legislation endorsed Thursday by a House panel would impose a $135 million annual cap on tax credits for historic renovation projects. That could essentially allow the program to continue as is, since it issued a total of $134 million of tax credits last year.

A Senate bill passed last week would impose a $50 million annual cap on historic tax credits.

The Historic Preservation Tax Credit (HPTC) returns 23 cents for every dollar the state plows into it. This, like so many other “development” tax credits, is a special interest money pit, not an investment. It is an affront to good governance that the House would impose a “reform” that fails to reform anything. That the House appears prepared to continue this destructive status quo by also creating new tax credits and maintaining others is beyond disappointing.

Missouri needs tax reform. It needs it now. Tax credits are central to that conversation, but it seems the House may want to talk about something else. That is very, very unfortunate.

The post The Emerging, Awful Response Of The Missouri House To The Tax Credit Crisis appeared first on Show-Me Institute.

A successful private club in north Saint Louis, it hosted the PGA
Championship in 1948. In 2005, the club sought and received designation
as an historic landmark, and as an historic landmark, it was eligible
for HPTCs from the state.

The post Public Money, Private Money appeared first on Show-Me Institute.

Cynics may suggest that I wrote this blog post as an excuse to share video of a really cool explosion, and to them I say, “kinda sorta.” But the other reason I am writing about the Blanchette Bridge is to reiterate a point I have made before: that not all old structures are “historic” or should be preserved. Missouri accounts for nearly one-in-seven historic preservation projects nationally. It preserves golf courses and taco stands with taxpayer dollars. Preservationists block redevelopment plans for buildings younger than the Blanchette Bridge, notably the AAA building in Saint Louis City, which was built in 1976. Yet the Blanchette Bridge was almost certainly a more unique structure than the AAA building.

Playing devil’s advocate, I ask: Why wasn’t the Blanchette Bridge protected as well?

The post Why Wasn’t the Blanchette Bridge Preserved? . . . Asks the Devil’s Advocate appeared first on Show-Me Institute.

In stark contrast to the study’s claims, official state figures actually show that historic preservation credits return 23 cents for each dollar the state spends. These tax dollars are often used on dubious projects of little or no public use, such as private mansions and at least one country club.

The main point I would like to highlight, however, is that the Columbia study was written explicitly to pump an agenda, a point that may not be immediately evident if casual newspaper readers just saw the headlines. The study’s authors were (refreshingly) transparent about this in the text of the study itself. Goal one on the study’s first page explicitly says that the report “will promote the economic development benefits of historic preservation to an expanded audience.” Goal two makes the study’s goals even clearer (emphasis mine): “This report will encourage tax credit eligible projects to homeowners and developers by promoting visible local examples.” And the “Vision Impact” outlined at the bottom of that page is clear that the objective sought is to preserve “historic areas” through “education, enforcement, and incentives” (emphasis mine) — namely, the HPTC. This is more about marketing than good policy, and should be understood as such.

We at the Show-Me Institute have seen this sort of report before, of course. Back when Aerotropolis was still a thing, I wrote about the National Center for Beef Excellence‘s “report” on whether it was “feasible” to “ship meat to China.” One would think that a state-funded group with “beef” in the name would make it clear that American beef was actually, er, banned in China. Alas, the NCBE attempted to pass off the study as objective when its only goal was to pump Aerotropolis.

That is, in the end, what is going on in Columbia, albeit with laudable transparency. There should be a vigorous debate about the merits of tax credits generally and particularly the historic preservation tax credit, but this report is only one especially biased side of that conversation. There should be no misconceptions about that fact.

The post Columbia’s Historic Preservation Study Should Be Understood As PR, Not Policy appeared first on Show-Me Institute.

Last month, Saint Louis City officials unveiled a plan to spend up to $18 million renovating the historic city-owned and managed Soulard Farmers Market. The city plans to partially rely on revenues from a proposed tax hike for funding. However, there is an alternative to a multi-million dollar taxpayer-funded makeover: privatization.

When nearly 40 farmers’ markets (see page 4) markets popped up across Saint Louis, including four markets within a 3-mile radius of the Soulard Market, and Walmart and Target began carrying fresh groceries, Soulard Market did not adapt. Its prices are higher than Walmart, it misses out on Sunday shoppers because it is closed, its structures are a mess, and it faces a branding problem as a nearly farmer-less farmers’ market, where “very few vendors grow what they sell.”

The market faces daunting odds: it has operated at a loss for most of its recent history and another downtown farmers’ market was cancelled last year due to a lack of interest. While the city’s plan makes strides in responding to evolving shopper preferences, it targets a symptom instead of the disease, doing so at the cost of millions in taxpayer dollars for another potential redevelopment failure.

The benefits from privatization could be numerous. The property, which is protected under historic ordinances and could potentially be further protected through historic preservation easements, would provide revenue to the city or allow slightly lower tax rates if it was sold. Private ownership would create a stronger profit motive because owners would be personally invested in the market. Owners/lessees, not taxpayers, would assume the risk of development. Even if the proposed plan is perfect, privatization would be beneficial to increase competition.

Currently, public planners are tip-toeing around vendors more concerned with maintaining their status quo of privilege (from a time “years ago when rules were a little more lax or when variances were allowed”) than promoting the long-term success of the market. The St. Louis Post-Dispatch describes the vendors’ reluctance to bring competition to the market:

[Vendors] worry that new vendors could drive them from their turf and scare away customers who rely on the market . . .They . . . worry that any reconfiguration of the market could change dynamics that have fallen into place over decades of doing business.

What vendors miss here is that the “dynamics that have fallen into place” are a major reason the market has become a ghost of its former self. Maintaining long-standing vendor-shopper relationships and character is important, even for a private market, yet respect for culture does not preclude dramatic change. But tell that to the vendors:

“I know what makes my place click,” [a vendor] said. “If they [re-situate] everything, it would throw off everyone’s business. Why don’t you just build this fantasy market across the street and see who stays in business longer?”

These fantasy markets are a reality. Others are doing what the Soulard Market does, but better. The proposed plan is a short-term gamble to solve a long-term problem. The best long-term bet for the market is private ownership and management.

As for who will stay in business longer, vendor Lenard Chartrand is not revealing any secrets when he when he says, “The market has to change or it will die.”

The post Best Bet To Save Soulard Market? Privatization appeared first on Show-Me Institute.

Now in its twelfth year, the program has sought to bring statewide attention to endangered places through a media campaign and offers support services to the properties on the list.

The list is a good one overall, calling attention to some notable structures that with some love and money — emphasis on money — could be saved.

But there seems to me to be one significant outlier in the mix: Kemper Arena, Kansas City’s 1970s-era predecessor to the new Sprint Center downtown. The cavernous space hosts few events these days since Sprint opened, and even the family of the arena’s namesake is calling for the place to be torn down. (It is worth noting that our Chairman of the Board (who also is a Show-Me co-founder) is a Kemper, although I have not discussed this issue with him.)

Is Kemper Arena historic? Sure. It housed the 1976 Republican National Convention, countless sporting events, and served as the backdrop of some of the greatest rodeos and barbecues in the country. But does that, therefore, mean it is off limits for demolition, if it comes to that? No.

State-underwritten historic preservation efforts, particularly in and around Saint Louis, have been operating with an open throttle for more than a decade now, with the state issuing more than $1 billion in tax credits for preservation since 1999. As obvious preservation projects have dwindled, the preservation net has widened in some cases to simply keep the subsidies pumping. But are we saving historic buildings, or just saving — and oftentimes subsidizing — aging properties under the pretext of historic preservation? Shouldn’t that blurring distinction bother preservationists?

As a born-and-bred Kansas Citian, a movement to save Kemper absent a plan the private market would embrace would be mystifying to me. There is a difference between advocating for ingenious uses of old properties and trying to force old and obsolete properties on the community for all time. I support the former. I am not keen on the latter. Indispensable history is all around us, but not every building is indispensable.

Kemper Arena has certainly had some fine days, and to the extent Missouri Preservation is highlighting that history, the organization should be applauded. But while Kemper has had historic days, much like so many buildings of its kind, that does not mean it should stand until the end of days.

Preservation has a place. It’s just not every place.

The post Missouri’s Buildings Immemorial, And The Right Place For Preservation appeared first on Show-Me Institute.

This program sounds great for property developers, but what about everyone else? Shouldn’t Saint Louis concern itself with rejuvenating the entire city, not just a few old properties? Here is an idea: eliminate the earnings tax. It would be like a tax credit for everyone. It might even attract more businesses to the city, bringing economic growth.

For Show-Me Institute material on eliminating the earnings tax, click here and here.

The post We Need Historic Tax Cuts, Not Tax Credits appeared first on Show-Me Institute.

The two-and-a-half-year process of applying (to both state and federal agencies) was arduous and intensely bureaucratic . . . But in February of this year [2005], Norwood Hills was finally notified that it did indeed qualify to be included on the registry. And with the honor came a huge financial benefit: specifically, the ability to earn tax credits for 45 cents of every dollar spent on the renovation project.

How did the club get 45 cents on the dollar? The state HPTC offers 25 cents on the dollar for qualifying renovation expenses, but the federal version of the HPTC offers an additional 20 cents on the dollar for those expenses. At the Show-Me Institute, we talk a lot about state incentives because we are, after all, a state-focused think tank. However, taxpayers should understand that there oftentimes is more than just state money involved in renovation and building projects like this — so much government money, in fact, that nearly half of the cost of a multi-million dollar renovation to a private golf club could be underwritten with tax credits. Have taxpayers gotten their money’s worth? I report, you decide.

One other noteworthy tidbit from the article is that the original idea of making Norwood Hills a Historic Place came from a real estate developer — who apparently did not think Norwood Hills was that historic of a place (emphasis mine):

Another huge boost to the renovation project came after a Norwood Hills member who is a real estate developer suggested that the club, which hosted the 1948 PGA and has a long and rich connection with St. Louis-area social history, look into the possibility of applying for placement on the National Registry of Historic Places. Successfully securing that status, the developer member advised, would then qualify Norwood Hills, which operates as a for-profit corporation, for renovation tax credits.

“[The member] felt we could qualify not so much because of the club’s history or architecture, but because of the distinction of our members in the St. Louis community through the years,” Wright says.

If Norwood Hills as a place was not itself historic, what exactly was the Historic Preservation Tax Credit preserving? “History” is no doubt in the eyes of the beholder, but for taxpayers on the outside looking in at Norwood Hills, what they gained in this process is of considerable interest, sweat or no sweat.

The post “Norwood Hills CC: No Sweat and Plenty of Gain” appeared first on Show-Me Institute.

Due to faulty electrical outlets in the home’s bathrooms, Laura said that they are forced to dry their hair in the kitchen, and with the extra money needed to pay for college, they will be forced to continue this practice. Laura also said that the family may have to forego putting new tires on their son’s car. It is not difficult to imagine the unnecessary worry this young man’s parents will feel when their son drives to and from Columbia on old and worn out tires, especially if it is raining or snowing.

While the University of Missouri raises tuition on families such as the one described above due to state cuts in higher education funding, historic tax credit authorizations in Missouri are on an upswing. In fact, the $91 million in Historic Preservation tax credits authorized in the first six months of fiscal year 2012 have almost surpassed state estimates for Historic Preservation authorizations for the entire year.

The question should be asked whether handing out tax credits of questionable value (like the $1 million tax credit issued to Norwood Hills Country Club)  is worth more to the citizens of the state than preventing a tuition increase that will affect families across the state.

Considering that the state of Missouri faces a large budget shortfall, it would behoove the state to make sure that, at the very least, tax credits go to worthwhile projects. A possible avenue for oversight of the tax credit system would be to subject tax credits to the appropriations process. Missouri Sen. Jason Crowell (R-Dist. 27) has submitted a bill (SB 436) that does just that, and there are items in the bill that deserve commendation. Subjecting tax credits to appropriations would enable the state to keep closer tabs on these programs and help ensure that questionable issuances are examined. Considering the price that all Missourians pay for these tax credits, is subjecting tax credits to some sort of appropriations process too much to ask?

The post A ‘Historic’ Surge appeared first on Show-Me Institute.

Norwood Overview from Norwood Hills CC on Vimeo.

Norwood Hills Country Club first opened in 1922. A successful private club in north Saint Louis, it hosted the PGA Championship in 1948. In 2005, the club sought and received designation as an historic landmark in the federal government’s National Register of Historic Places. As a designated historic landmark, it was eligible for Historic Preservation tax credits from Missouri, and the state issued credits to Norwood the next year, in 2006.

Whether credits for a country club are an appropriate use of taxpayer money is a question worth considering. The Missouri Department of Economic Development administers the Historic Preservation tax credit program, so tax credits in that program are imbued with a presumption that a fundamental objective of the credit is economic growth. Indeed, entire studies have been devoted to trying to measure the HPTC’s impact in terms of jobs and growth. But does granting historic preservation credits to a private country club that markets a $1,000 entry-level membership package really promote economic growth? Is that what Missourians thought they were paying for by offering these credits?

The HPTC is often defended as a way of correcting market failures and increasing positive externalities — that is, giving an intangible boost to the standard of living of those who can see and enjoy the property. Is it likely that there was a market failure at Norwood Hills that the state had to step in and correct? And is it reasonable to believe that Missourians will really be able to enjoy the externalities promoted as a result of sending their tax dollars to a private club?

To be clear, determining whether a building is “historic” is oftentimes in the eye of the beholder. But taxpayers have ample reason to question whether the state should be granting tax credits to country clubs, not only on grounds of whether an economic development objective is really being advanced, but also whether society is really getting a “positive externality” when it subsidizes an operational private club and golf course. And certainly, sometimes buildings are properly considered “historic” by virtue of their age alone, but if the “age” of a building is enough to get an HPTC, what should be the cut-off year? 1800? 1900? 1950? 1980? The later that date gets, the more important it is that the reverse of the question is asked: how many buildings would not be considered historic under the tax credit system?

Moreover, the proximity in time between historic designation and tax credit issuance is troubling. Did Missouri issue a tax credit to preserve an historic landmark, or was an historic landmark created to access Missouri tax credits?

Lastly and more generally, what has the state foregone – what “unseen” projects and tax cuts have gone by the wayside – because the state has been putting money into projects like Norwood Hills?

The post Is This The Sort Of Development Missourians Expected? appeared first on Show-Me Institute.

The Facebook page for Save The Historic Pevely Complex references numerous prior plans to rehab the complex using historic tax credits (emphasis mine):

The Pevely Dairy complex is on the National Register of Historic Places. Under our city’s preservation ordinance, such buildings should not be demolished if they are structurally stable and have rehabilitation potential. The Pevely buildings are both, as evidenced by the numerous plans to rehab them using historic tax credits prior to SLU’s purchasing the site in August 2011.

A search of the Missouri Accountability Portal and the Show-Me Living tax credit tool, however, indicates that no development tax credits have been issued to SLU for this project. Imagine that. A new development project in Saint Louis apparently not in need of state tax credits!

As discussed in my previous post on this topic, the goals of social progress and economic growth direct our attention to the future. While a healthy respect for the past is not a bad thing, given the current state of the city’s economy, a new ambulatory care center is more important than a brick smokestack and a declining building. The sentimental value of the Pevely site and its smokestack, while endearing, pales in comparison to the value of a modern medical facility to the Saint Louis community.

So let’s continue to train our sights on the future, and leave the image of the Pevely site to scrapbook photo montages and warm reminisces.

The post Putting Land To Productive Use appeared first on Show-Me Institute.

The St. Louis Post-Dispatch recently reported the St. Louis Preservation Board’s denial of a demolition permit to Saint Louis University (SLU) to raze the vacant Pevely Dairy headquarters building at the corner of Chouteau Ave. and South Grand Blvd. (you probably recall the Pevely smokestack). SLU officials intend to build a surgical center at the site, but now claim that the historic building may scuttle their plans if the building is not leveled and removed.

Before moving on to more pressing matters, perhaps a brief review of the tax implications is in order. Saint Louis public records indicate that the two parcels in question (1001 South Grand Blvd. and 3626 Chouteau Ave.) generate approximately $93,000 in annual property tax revenues for the city. See here and here. The future tax status of the properties, however, is uncertain (I called SLU’s controller, Gregory Haney, but he declined to express his opinion or share his knowledge on the subject). If the properties fall under SLU’s non-profit status, then SLU may be tax-exempt (similar to SLU’s 200 North Grand property). On the other hand, if property ownership vests in a for-profit entity, similar to Tenet Health System’s ownership of property underlying Saint Louis University Hospital, then taxes will likely be assessed and collected.

In either case, the city still stands to gain revenues if the surgical center is developed. This would arise from earnings taxes on new jobs created at the facility (although we have advocated for the elimination of the earnings tax and for alternative payments in lieu of taxes from tax-exempt non-profits, this blog post deals with the facts and law as they currently exist). For the sake of example, at 1 percent on taxable earnings, 124 jobs at $75,000 annual salary generates $93,000 in revenues, which compensates for the loss of property tax revenues under the tax-exempt scenario, but provides additional incremental revenues to the city under the alternative scenario. In either case, both the economy and the tax base are increased, which is a good thing.

While the tax implications are interesting, perhaps the more fundamental question is why are preservationists so insistent on saving the aging Pevely headquarters building? The history of progress is replete with tear-downs and rebuilds. Progress necessarily implies creative destruction, replacing old with new. Sometimes you have to let go of the past if you are to embrace the future. The past is but a distant memory. Happiness, prosperity, and success are forward-looking concepts that reside, if at all, in the future. Saint Louis, embrace the future, not the past. The Preservation Board should reconsider its decision.

The post When Progress and Preservation Collide appeared first on Show-Me Institute.

The two high-rises pictured above both entered the LRA’s inventory in the 1990s, vacant, awaiting redevelopment. Only one stands today.

At left is a picture of the Continental Building, located at 3615 Olive St. in the city’s Grand Center neighborhood. A 1978 National Register nomination notes, “Built in 1929 with William B. Ittner as architect, the Continental is the most sophisticated statement of art deco in St. Louis.” At right is a picture of the Regency Nursing Inn, which stood at 4560 West Pine Blvd. Built between 1964 and 1966 at a cost of $2.3 million, the convalescent home and medical office building opened for business in 1966. A leasing guide for the 15-story reinforced concrete building stated, “Because of the imposing character and dignity of the REGENCY, pride of tenancy as well as functional interior design will delight the most discerning.”

Although the Continental Building was “sophisticated” and the Regency Building merely “functional,” both ultimately fell into disuse and were subject to vandalism. The LRA assumed ownership of both buildings in the mid-1990s through the tax foreclosure process authorized by the 1971 Municipal Land Reutilization Law. Today, both properties are back in private hands after sales by the LRA, but only the Continental Building still stands. The Regency Building was demolished in 1998 at the behest of the LRA, at a cost of $263,940.

So, what gives? Does the LRA have a preference for art deco over mid-century modern? Or is there another explanation for the LRA’s decision to save one high-rise and demolish the other?

During the June 25, 1997, meeting of the LRA, the agency rejected a $10,000 offer by Roberts West Pine Development and Associates to purchase the Regency Building for rehabilitation as condominiums, deciding instead — in an executive session — to sell the property for $1 to West Pine Court LLC. Minutes from the meeting indicate that West Pine Court LLC had the support of the alderman, whereas Roberts West Pine Development did not.

Today, the site is home to low-rise, brick-faced townhouse condominiums, funded in part by the city’s first residential tax increment financing (TIF) project. To date, the developer has received more than $400,000 from this subsidy.

The Continental Building, too, stood vacant prior to its rehabilitation in 2001 by Owen Development. The residential conversion project received $5.8 million in state historic preservation tax credits and additional funds from the federal historic preservation tax credit. Minutes of the Jan. 26, 2000, meeting of the LRA reveal that the developer had “the enthusiastic support of the alderman” for the proposed rehabilitation of the building as apartments.

The LRA has wide statutory latitude to do anything it pleases, including rejecting high bidders and accepting low bids from the politically favored. As former Commissioner Howard Hayes said during the Oct. 25, 2000, LRA meeting, the agency has “an unspoken bond with 28 aldermen, because they speak for the people of St. Louis, they have been duly elected.”

Does the LRA’s “unspoken bond” entail listening to aldermen while harming taxpayers?

Consider the timeline of what happened here:

• The LRA rejects a $10,000 bid for the Regency Building, a mid-century modern skyscraper.
• The LRA accepts a $1 bid from a developer who simultaneously requested a TIF from the city.
• The LRA demolishes the building at a cost of $263,940.
• The LRA retains the art deco Continental Building in its inventory, pending its transfer to a developer for rehabilitation.
• As of 2010, taxpayers are out at least $400,000 on the West Pine townhouses and more than $5 million on the Continental Building.

At a bare minimum, the LRA should subject its parcels to competitive bidding. The fact that the LRA can raise costs to taxpayers with zero oversight and no accountability is reason enough for today’s Missouri policymakers to revisit and rethink the powers of this ill-conceived agency. In the 21st century, aldermen should not have the powers of land patronage.

The post “An Unspoken Bond”? City Aldermen and Land Patronage appeared first on Show-Me Institute.

When I was driving into work today, I heard a story on NPR about how a private company is turning a dilapidated part of the French Palace of Versailles, the Hôtel du Grand Contrôle, into a luxury hotel. According to the story:

[Deputy Administrator for the Palace of Versailles] Hautchamp says Versailles doesn’t have the $7 million it will take to restore the building, which is why it turned to Belgian hotel company Ivy International. The company will renovate the mansion and turn its 23 bedrooms into a luxury hotel.

A percentage of the profits will be paid back to the Palace of Versailles in rent. The restoration is the first in a series of commercial projects aimed at saving French monuments.

Not only is this a rare opportunity to apply knowledge from my French major in a professional capacity (it’s the plight of the liberal arts major, n’est-ce pas?), this story illustrates how practical solutions to public policy problems exist in the private sector.

Turning Versailles into a hotel will have many positive consequences. More people will be able to enjoy the building than they do in the status quo, or if it were in ruins. Additionally, taxpayers won’t be forced to pay for the restoration, nor will the restoration compete with other government programs for funds. Another positive consequence is that the building and its history will be preserved. The following quote in the article particularly illustrates this point:

“It surprised me at first,” Denise Mosset says. “But if we don’t have the money to restore it, this is better than letting it fall into ruin.”

This story is particularly relevant to Saint Louis, which has beautiful architecture, limited financial resources, and competing needs for these resources. The city of Versailles found a free-market solution to historic preservation, and the city of Saint Louis would be wise to investigate the same. Policymakers in Missouri could learn a lot from the French.

Additionally, and parenthetically, this story represents how, in free economies, individuals can improve their quality of consumption over time. In the past, Versailles was a building that could only be enjoyed by the super elite (the French monarchy). In the present, it will be enjoyed by non-elite guests every day.

The post The French Find a Free-Market Solution to Historic Preservation appeared first on Show-Me Institute.

According to a Nov. 18, 2010, St. Louis Post-Dispatch article, “Historic tax credit could face big cut,” the Tax Credit Review Commission has proposed the following changes to the historic tax credit:

• Reduce the program’s annual cap of $140 million, imposed in 2009, to $75 million.
• Eliminate “stacking” of the Historic Preservation Tax Credit and the Low Income Housing Tax Credit on the same project.
• Cap the amount that an owner-occupied home could receive in credits at $50,000 per project, and only for homes purchased for less than $350,000.

Using data from the Show-Me Living tax credit tool, we see that the state of Missouri expended $973 million on historic preservation from 2000 to the present, the highest expenditure for any tax credit program after the low-income housing tax credit. Historic preservation represents 28 percent of the $3.4 billion in total tax credit spending by the state during this period.

Click to enlarge

Of this historic preservation spending, $530 million — or 54 percent of the state’s total expenditure under this program — went to projects located in the Fifth Senate District, which includes downtown St. Louis.

Since the year 2000, 1,734 projects received the state historic preservation tax credit. The median amount received per project was $78,400. Of these projects, 761 — or 44 percent — also received the federal historic preservation tax credit. For these projects, the median Missouri expenditure per project was $157,607. For projects receiving only the Missouri state historic preservation tax credit and no federal historic preservation tax credit, the median Missouri expenditure was $55,690.

Projects in the top 25 percent by cost accounted for $780 million of the $970 million spent by the state on historic preservation. The bottom 75 percent of projects received 20 percent of the funding.

Click to enlarge

A proposed cap of $50,000 per owner-occupied residence would impact fewer than 500 of the projects represented in the data above, because projects that receive the federal historic preservation tax credit are not owner-occupied.

The following chart considers the impact of a proposed $75 million annual cap on historic preservation spending:

Click to enlarge

We see that for the years 2002 through 2007, the cap would have limited the amount of Missouri taxpayer money expended. Over time, we see that the cap could have reduced total Missouri spending by $220 million.

The Tax Credit Review Commission is right to draw attention to tax credit “stacking,” with its recommendation that the historic preservation tax credit should not be combined with the low-income housing tax credit for the same project.

Consider this: Missouri’s various tax credit programs, despite their many names, perform very similar activities. Low income housing tax credits reimburse project costs incurred by “housing professionals, such as architects, appraisers, attorneys, accountants, contractors and property managers.” Historic preservation tax credits reimburse “costs associated with work undertaken on the historic building, as well as architectural and engineering fees, legal expenses, development fees, and other construction-related costs.” In both programs, expenditures of taxpayer dollars accrue to the exact same activities and individuals. Thus, “stacking” of tax credits on a project may yield the holy grail of public subsidy: “zero dollars” in private equity development.

In such a scenario, the stacking of tax credits is likely “crowding out” private investment, while potentially distorting the stated function of the tax expenditures. (Is the “historic credit” building low-income housing, or is the “low-income credit” building historic?)

The Tax Credit Review Commission’s report is only a start. Missouri has much to debate.

To add my two cents, I think that the most efficient way to reduce state expenditures on historic preservation would be to discount the state’s spending on projects that also receive federal reimbursement for the same costs.

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This amounts to a total of $171.28 for each Missouri resident spent on tax credit projects in just one of the state’s 34 Senate districts.

If we look in greater detail at the more than $600 million expended by the state for “Redevelopment” in the Fifth Senate District, we see that  $530 million was devoted to historic preservation.

Of the state historic preservation spending in the Fifth Senate District, $375 million went to projects that also received the Federal Historic Preservation Tax Credit. Missouri’s preservation tax credit reimburses 25 percent of project costs, and the federal tax credit reimburses 20 percent of project costs, so we can estimate total Federal Historic Preservation Tax Credit spending in Missouri’s Fifth Senate District at $300 million.

This amounts to $0.98 in federal funds spent on historic preservation in Missouri’s Fifth Senate District for every resident of the United States.

When we consider local tax increment financing (TIF), using data from the Missouri Department of Economic Development’s 2009 TIF Annual Report, we can account for an additional $600 million in taxpayer funding for development in St. Louis city. As we can see in the chart below, as of 2009, less than $100 million of this spending has been paid for.

Given current estimates of St. Louis city’s population from the American Community Survey, TIF expenditures amount to $1,768.61 for each city resident.

The total amount of public funding for real estate development in St. Louis city may be unknowable, given the complex interplay between various modes of taxpayer financing. Data exists for Community Improvement Districts, federal grants, state and local industrial development bond financing, local real property tax abatement, and other public programs, but is much harder to aggregate.

A person almost has to go to law school to appreciate how development in St. Louis works. For those of us living here without the benefit of a legal education, though, it is readily apparent that, although state and local governments spend lots of taxpayer monies on real estate development, no one is providing quantitative evidence that the benefits of these expenditures exceed the costs.

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The following passage from Economics In One Lesson, by Henry Hazlitt, seems particularly relevant:

The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buy-able minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.

The editorial includes the following pie chart:

Source: St. Louis Business Journal

According to the explanation in the text:

The chart above shows where the money went in the $34 million Crown Village Redevelopment project using LIHTC and historic preservation tax credits.

The chart raises more questions than it provides answers. Does it indicate the actual amount or the projected amount of economic activity resulting from the specified project? Does it include direct expenditure by the state, or does it account for an economic multiplier? (And, if so, at what assumed rate?) How is it similar to or different from the breakdown of other projects, and of other tax credit programs? What was the duration of the project? Where did these jobs go when the project was completed and the subsidy ended?

Furthermore, were the workers in question unemployed before they were hired to work on the Crown Village Redevelopment project? If not, then the subsidy displaces economic activity that already existed in the private sector. If so, then the subsidy is another form of unemployment. Economist Russ Roberts discussed this in a recent post on Cafe Hayek:

Having them do nothing–either because the task is unproductive or because you simply give them a check with no strings attached–does not in and of itself create prosperity for anyone other than the people who get the check.

I have argued repeatedly that targeted development tax credits are a poor strategy for economic development, and that they have negative consequences in Missouri. For evidence, I encourage our readers to read an editorial, which recently ran in the St. Louis Beacon, in which I argued that targeted tax credit programs create an uneven playing field in Missouri.

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The Tax Credit Review Commission held its regional meeting in a veritable monument to the tax credit programs they review: the Old Post Office building in downtown Saint Louis. It’s borderline poetic. From an article by Brian Hook in the Missouri Watchdog:

The DESCO Group and DFC Group developed a plan, using tax credits, to restore the [Old Post Office] building in 2000. The Missouri Court of Appeals, Eastern District, moved into the building in 2006.

Steve Stogel, co-chair of the Tax Credit Review Commission, is president of DFC Group in St. Louis.

Additionally, some individuals cited in their testimonies a recent study from Saint Louis University that evaluates the historic preservation tax credit program. After I delivered my testimony, co-chair Chuck Gross even handed me a paper copy.

The SLU study has a peculiar list of financial supporters:

DFC Group
Downtown Council of Kansas City
Kansas City Port Authority
Missouri Growth Association
Missouri Municipal League
Partnership for Downtown St. Louis
Urban District Alliance of Springfield

Listed first is DFC Group, which is co-chair Stogel’s company. The other organizations are groups that receive direct, concentrated benefits from tax credit programs. The Missouri Growth Association, for instance, is a trade association of commercial property owners, managers and developers. Also well represented in this list are city bureaucrats, a group with incentives to grow the size of government.

Isn’t this the very definition of a conflict of interest? How can the Tax Credit Commission evaluate the effectiveness of these programs objectively and fairly if its leadership uses tax credits to earn a living? How can the commission have sound judgment if it bases its decisions on studies for which the leadership paid?

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