By Tom Larson
Baker Tilly recently released a study evaluating the economic impact of Wisconsin’s Historic Rehabilitation Tax Credit (HTC) program over the last two years since the state income tax credit was increased to 20 percent. The study was prepared in response to concerns raised about the $35 million in HTCs awarded over the last two years (which was approximately 5 times higher than the expected demand) and, in response, the proposed changes to the HTC program as part of the 2015-2017 state budget. The key findings from the report include:
- $35M is the amount of HTCs awarded in 2014, not the amount paid out. Because HTCs are paid out AFTER construction is complete and each project is different, the projected payout of HTCs is (projection is based upon size of the project):
- Year 1 (2014/2015) — $4,290,389 (22 projects under $1M)
- Year 2 (2015/2016) — $4,623,000 (3 projects between $1M and $2M)
- Year 3 (2016/2017) — $17,011,058 (5 projects between $2M and $5M)
- Year 4 (2017/2018) — $9,146,810 (1 project over $5M)
- Total = $35,071,257
- $35M in HTCs results in only $21M in initial net costs to the state. The $35M in HTCs generates approximately $14M in direct construction-related sales and income taxes. Because HTCs are paid out only AFTER construction is complete, the $35M in HTCs actually costs the state only $21M. In other words, for every $1 in tax credit awarded, $0.40 is paid back to the state BEFORE the HTCs are paid out.
- Payback begins immediately, with complete payback within 7 years. As indicated above, HTC projects begin to generate state sales and income taxes (approx. $14M) immediately during the construction period BEFORE the HTCs are actually paid out. Once constructed, the HTC projects continue to generate sales and income tax revenues for the state, with direct tax revenues projected to equal approximately $29.0M in year 5 of operations, and complete payback (approx.. $35M by year 7 of operations).
- Year 0 (construction period) = $14M in direct state tax revenues
- Year 5 = $29.0M in direct state tax revenues
- Year 7 = $34.8M in direct state tax revenues
- Year 10 = $46.3M in direct state tax revenues (a 133% return on the state’s original $35M investment in HTCs)
- $35m in HTCs generates approximately $353M in economic development revenues BEFORE the tax credits are paid out. Prior to operations, the construction direct spending output along is projected to generate an estimated $234.4M within Wisconsin’s economy and $353.4M in total spending – more than 10 times the amount of the original tax credits awarded.
NAIOP-WI has shared these findings with members of the legislature’s Joint Finance Committee (JFC) in hopes of making significant modifications to the proposed changes in the state budget. The JFC will likely vote on the HTC program within the next few weeks.