Local grants better than N.C. tax credits for historic preservation

January 28, 2015

Click here to view and here to listen to Sarah Curry discussing this Spotlight report.

RALEIGH — North Carolina lawmakers made the right decision when they ended state historic preservation tax credits. Those who support government involvement in preservation efforts should look at local grant programs instead. A new John Locke Foundation Spotlight report features those two findings.

“There is no justification for compelling state taxpayers to subsidize the preservation of historic properties in particular cities or towns,” said report author Sarah Curry, JLF Director of Fiscal Policy Studies. “The purpose of the tax code should be to raise revenue for core government services. It should not be used as a means to redistribute income, favor certain personal behaviors or discourage others, or force taxpayers to be in the economic development game.”

Jan. 1, 2015, marked the last day property owners in North Carolina could claim the state’s historic preservation tax credit. That credit disappeared, or “sunset,” as part of the 2013 state tax reform package that led to lower state tax burdens for the average family in every income group. Gov. Pat McCrory’s administration and some members of the N.C. General Assembly have said they want to revisit the tax credit’s sunset.

Curry dispels a myth about the end of the state tax credit. “The sunset of state tax credits has no impact on the federal tax credit, which had been in place for more than two decades before the state got into the historic preservation tax-credit business,” she said. “The 20 percent federal tax credit still exists today, and taxpayers continue to take advantage of it.”

The report also highlights a key issue that’s often left out of the tax credit debate. “The question of whether state government ought to subsidize historic preservation is distinguishable from the question of how government should deliver those subsidies,” Curry said. “Unfortunately, the two issues have been lumped together by lawmakers when discussing the recent sunset of state tax credits.”

No government at any level should intervene in the historic-property business for economic reasons, but that does not mean the end of the discussion, Curry said. “There is justification for local taxpayers to chip in for renovating historic buildings that may, if left abandoned, endanger the structural integrity of neighboring properties or threaten public health and safety,” she said. “That still doesn’t mean that North Carolina ought to deliver these subsidies in the form of state tax credits.”

Curry does not call for new local historic preservation grant programs, but her report explains why local grants would work better than state tax credits to achieve the goal of preventing blight.

“To the extent that lawmakers include targeted tax incentives in the personal or corporate income tax code, they have to raise marginal tax rates to raise roughly the same amount of revenue,” she said. “In other words, everyone else pays more. In addition, tax credits are less transparent than on-budget grant programs.”

Grant programs serve the public better, Curry said. “Stakeholders compete for funding, and objective evaluators can assess the relative merits of proposed historic preservation projects,” she said. “While cost is the major consideration, they are also able to evaluate the project’s historical significance and the applicant’s willingness to seek matching funds or other grants.”

On-budget grant programs increase transparency and accountability, Curry added. “The selection process is open,” she said. “Spending is clearly spelled out in annual budget documents. It can be evaluated against alternative uses of tax dollars, such as supporting public schools or building roads.”

If elected officials want a government program to replace the state’s historic preservation tax credits, then local governments should set up grant programs at their discretion, Curry said. Those programs could include cooperation with nonprofit organizations, the private sector, and other community-based stakeholders.

“Because virtually all of the potential benefits of a renovation project accrue to those who live, work, or sell goods and services in the community, it makes sense for subsidies to flow from local property and sales taxes,” Curry said.

State government should strive to keep the tax code clean, Curry said. “That’s true as a general principle, even at the expense of cluttering up the budget with grant programs,” she said. “Policymakers should ensure that the process of filing and paying taxes is as easy as possible.”

“Obtaining government grants, on the other hand, should be challenging enough to separate the wheat from the chaff — and fully transparent from application to final report,” Curry added.

Sarah Curry’s Spotlight report, “Historic Preservation Tax Credits: Government should not intervene in the historic-property business on economic grounds,” is available at the JLF website. For more information, please contact Curry at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].