Some Government Waste Doesn't Seem to Count

Some Government Waste Doesn't Seem to Count

Two important housing programs are under consideration at the Statehouse. Both of them represent investments our state should be making, but both also represent a kind of spending waste that never seems to get much attention.

To begin, last week there was a House Finance hearing about restoring the Historic Structures tax credit. This program would allow commercial developers interested in revamping historic buildings to get up to 25% of the cost of their project returned to them in the form of tax credits. Just to recap, we ran this program already, and ended it in 2008, when it became clear it was way more expensive than anyone had expected it to be. Over the life of the program, the state spent $296 million in these credits. The good news is that we got about $1.3 billion in investment for them on over 200 projects, which isn't terrible. The bad news is that it was hard to budget for, and worse, around $90 million was pure waste, money simply given away to rich people and corporations who had nothing to do with any of the projects.

The tax credit dodge works this way: a developer comes up with a project the state deems eligible, and so is able to claim a credit of 25% of the project on their taxes. But a $10 million project would produce $2.5 million in tax credits, and there aren't many people who owe that much tax. So the credit is tradable, meaning the developer can sell their tax credits to someone else. The problem is in the price.

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Tax credit wastes money on the rich

Whatever you may hear on talk radio, Rhode Island's income taxes just aren't very high. Credits against high taxes get high prices, but a dollar's worth of tradable tax credits against Rhode Island taxes usually only sells for about 70 cents, according to tax credit brokers I've spoken to. Federal tax credits, by contrast, often sell for more than 92 cents. The brokers take a commission from the remainder, and the buyer of the credit gets the rest. In other words, of that dollar, only 70 cents goes to restoring the historic structure, a nickel goes to some broker, and the rest is little more than a gift to some rich person the broker found. In a climate where we're supposed to be squeezing every penny, this is, well, nuts.

What's worse, the hearing seemed to show there is dispute about whether there should be a requirement to pay decent ("prevailing") wages on a construction project getting credits. The bills do not require this. It would seem as if wasting money on payments to rich people is ok, but paying construction workers better isn't.

Tax credits can be a good thing, sometimes. For example, Rhode Island also has a smaller residential tax credit, for renovations to historic homes. Structuring this program as a tax credit saves the state a lot of the overhead of dispensing funds to eligible projects. But tradable credits like the Historic Structures credit (and the Film tax credit, too) represent little more than a 30% waste of your tax dollars. We spend money like this only because lots of people apparently find it more politically palatable to be obscenely wasteful this way than to just cut a check to qualifying projects and skip subsidizing the rich people.

Borrowing to help the homeless

Turn now to affordable housing and the nearly-moribund Neighborhood Opportunities Program (NOP). This was mostly money from a $50 million bond issue from 2006, and was used to develop low-cost housing and to subsidize its operation, as well. (Some NOP projects also benefited from the Historic Structures credit.) Like the Historic credits, this money was also highly leveraged and used for an important public purpose. It's also pretty much all gone, and there isn't a state appropriation in the Governor's proposed budget to take its place, or another bond on the horizon.

The problem here is that there was really very little besides political justification for funding the program by borrowing. Affordable housing isn't a one-time need. We're not going to solve the ills of our housing market with a burst of borrowed dollars. Given the state of our housing market, this is an ongoing need, and should be funded with ongoing dollars. The NOP money seems to have been very well spent, but borrowing made it much more expensive than it needed to be.

Why did we borrow it? Simple: It was a way for Governor Carcieri to make Governor Chafee pick up some of his expenses. Carcieri could take credit for keeping taxes down while still helping homeless people, and Chafee gets the pain of paying for it. "Win-win," right? Tax credits only appear to be low cost because the rules of the budget game make it hard to estimate their true cost accurately. Borrowing can hide costs by moving them into future years. Both are important tools, but both can be abused to provide politically convenient cover for people who don't want to talk about how much is really being spent.

Let's be completely clear. The goals of the Historic Structures tax credit and Neighborhood Opportunities programs are very good. Restoring the historic structures we have, and helping increase the stock of affordable housing is important work, good for our economy, good for our cities, and good for our state. These are investments worth making and creating an environment where these projects can get done is crucial. But delivering these funds as tax credits or securing them through borrowing is wasteful. The better way—not just more honest, but cheaper, too—is simply to appropriate some money for the purpose and spend it. We'll spend less and get more that way. Radical, isn't it?

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Tom Sgouros is the editor of the Rhode Island Policy Reporter, and the author of Ten Things You Don't Know About Rhode Island. Contact him at [email protected].