Wednesday, May 15, 2013

The Minnesota Historic Preservation Tax Credit

On April 2, 2010, the Minnesota Credit for Historic Structure Rehabilitation (MHTC) was signed into law by Governor Tim Pawlenty, breathing life into a multitude of redevelopment efforts and preservation projects throughout the state. Since its adoption, 16 projects (11 in the Twin Cities) have been approved tax credit funding in Minnesota. The MHTC matches the Federal Historic Preservation Tax Credit, which is a 20% income tax credit managed by the National Park Service.This post will serve as an analysis of the MHTC, which is based on the framework for expenditure analysis presented in class. 
The price elasticity of the historic preservation of buildings has a large influence on the demand for the MHTC. Even in a development context, the preservation of a historic building is a pricy endeavor. It often costs more to purchase and renovate an older building than to construct a new building.  Because of this fact, the historic preservation construction is considered to have an elastic demand. Also associated with the high costs of redevelopment, historic preservation would be considered a superior good; one that sees its demand increase with an increase in income.

A tax credit is not a traditional expenditure in terms of government spending, such as programs like Medicare and Social Security, where money is given from the government budget to qualifying parties. For all practical purposes, the tax credit is just money withheld from the government; reducing tax revenue, as opposed to increasing expenditures. Since the money is withheld by the approved applicant, rather than collected and redistributed, the MHTC is efficient to implement.

 There are some nuances to the tax credit, apart from meeting the criteria explained above. It should be noted that the MHTC has a sunset in Fiscal Year 2015 and that the program is an uncapped appropriation.  The purpose of leaving it uncapped is to ensure, “that a project meeting the criteria for award of a tax credit / grant is eligible to receive the full incentive available to them under the federal and state programs regardless of the number of applications received in a single year.” The credit may also be received as a “cash grant option,” which means that the developer can elect to take $.90 in a cash grant instead of $1.00 in credit.

The effects from the program have been fairly positive since the adoption of the credit.  One report estimates that for every one dollar of credit received from this program, the economy sees about $9 of investment from the private market. In order to accurately measure the effects of the credit, the MHTC program is being closely monitored by the University of Minnesota (in partnership with the MN Historical Society).

The state of Wisconsin has two separate tax credits available for historic preservation.  The first is for “income-producing historic buildings,” and features an additional five percent kicker to the Federal program  and is automatically qualified for if the project meets federal standards. Due to the low amount of matching funds set forth by the state of Wisconsin, the program is less adequate than Minnesota’s program. The second Wisconsin program was established to aid historic homeowners, which drastically improves the equity of the Wisconsin program.  Considering the differing conditions of the two programs, the effects of the MHTC will be much more apparent and impactful, both from an investment perspective and from a physical structures perspective.  Because there is no cap on the program, large historic buildings can be saved much more easily, which preserves downtown landscapes and promotes investment.  

Thus far, the MHTC is considered by national observers, local developers, and local media to be a success. .  However, the program sunset in the year 2015 looms in the future, which may spell trouble for the future of historic preservation funding in Minnesota.

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