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Historic tax credit called 'out of control'

THE BALTIMORE SUN

A year ago, as legislators were deciding whether to improve an obscure tax incentive for historic renovations, the costs of the program had already spiraled upward to as much as $25 million a year, dwarfing all other tax credits in the state combined.

But nobody mentioned that to the General Assembly. So instead of hitting the brakes on the program, they made it more generous.

A year later, tax credit approvals have tripled, reaching $75 million last year. At least $125 million in tax credits could be cashed out in coming years, just from commercial projects finished or under construction, mostly in Baltimore from the west side of downtown to Locust Point.

Today, with the state facing its worst budget crunch in years, legislators will hold a hearing on how to rein in a program they created.

"It's really out of control," said House Speaker Casper R. Taylor Jr., whose bill established the program six years ago. "We did not realize how universally it was going to be used and how severely it would drain the treasury."

The story of how a modest tax incentive got on the books and became by far the most expensive in the state's history is one filled with incomplete information, misunderstandings and, in the end, a failure of oversight. State officials weren't asked precisely the right questions, and they didn't volunteer the right answers.

It's also a story typical of any State House in the country: With the urging of influential backers in public and behind the scenes, legislators voted to create and repeatedly expand a program that many of them knew little about.

Some state officials had an idea of how costly the program was becoming a year ago: those at the Maryland Historical Trust, which processes applications for the tax credit. But some in Annapolis say the director of the agency, J. Rodney Little, and his staff were not forthcoming.

"Rodney had to know this. Didn't tell us," said Sen. Barbara A. Hoffman, a Baltimore Democrat who chairs the Senate Budget and Taxation Committee. "If you didn't ask the right question, you didn't get an answer. ... I don't feel like I should have to be a cross-examiner when I'm talking to a government official. We're supposed to be on the same side here."

Little said, "We answered in good faith every question we were ever asked. ... We didn't withhold any information."

So the tax credit program has grown so costly that officials are pointing fingers in Annapolis. But when it was created in 1996, the credit was barely noticed.

That year, the proposed tax credit - equal to 25 percent of the rehabilitation cost of a building - was an almost overlooked element of a sweeping historic preservation bill that was Taylor's top priority.

House Bill 1 was designed to promote Maryland's heritage and historic tourism, and specifically benefited Canal Place in Cumberland, in Taylor's Western Maryland district.

The tax credit, modeled after a similar federal credit, was hardly ever mentioned specifically in public testimony as the bill passed and became law, though legislators did scale back the credit to 10 percent of rehabilitation costs. More generous than tax deductions, such credits allow taxpayers to cut their tax bill by the amount of the credit.

The tax incentive program began Jan. 1, 1997, and preservationists and developers immediately pushed for an increase in the credit to 25 percent. They told legislators early in 1997 that a larger credit was necessary because it wasn't being used enough.

Because the tax credit program had begun recently, there was no worthwhile information on how the credit was being used and no reliable estimate of how much it would cost. For that reason, state budget officials and even state historic officials who oversaw the program opposed the 1997 increase as "premature."

Fiscal estimates didn't shed much light, either: Relying on 5-year-old data, analysts estimated that a 25 percent credit would cost $1.9 million a year.

Legislators scaled back the proposed 25 percent credit to 15 percent and passed it almost unanimously. In 1998, preservationists and developers again told legislators the credit wasn't being used enough and should be increased to 25 percent.

At the same time, officials with the Maryland Historical Trust were quietly seeing a growing interest in the credit. Legislators didn't know that in 1997 - the first year the credit was in effect - the state had approved applications for at least $2.4 million in credits, which would have made it even then the state's costliest tax credit, except that it can take several years to cash out historic credits. If the credit had been 25 percent at the time, the projects approved in that first year would have cost the state at least $6 million. Nobody told the Assembly's fiscal analysts. Without any new information, their cost estimate was still $1.9 million.

The 1998 legislation also had powerful backers: Taylor was a co-sponsor, and Hoffman had become a strong supporter of the tax credit program. The increase to 25 percent passed easily.

Last year, legislators agreed to make the tax credit "refundable." That meant that if a bank held a tax credit for $10 million and owed $1 million in state taxes, it could get a check for $9 million, which would be tax-free from the state, though subject to federal income taxes.

Legislators were told the cost of the program would not increase. Developers knew differently: They typically sell the credits to banks to finance projects, and the credits are easier to sell - and worth more - when they're refundable.

Legislators were also unaware of the program's rising costs. Based on incomplete data, fiscal analysts informed legislators that $1.9 million in credits had been claimed for tax year 1999. That total turned out to be $7.8 million.

The real cost of the program was even more substantial, in effect hidden because the tax credits aren't cashed in for years after they're initially approved. Also hidden was Baltimore's tremendous benefit from the program, a detail that's critical in Annapolis, where the interests of the city and the rest of the state inevitably compete.

The city and developers hope to convince legislators that the hidden benefits of the tax credit are also substantial and that projects from the Hippodrome Theater renovation on the west side of downtown to the American Can Company in Canton attract jobs and increase neighborhood property values.

"That should really be the determing factor: 'Is the state investment getting the public benefit result that we're looking for?'" said C. William Struever of Struever Bros., Eccles & Rouse, Inc., the largest beneficiary of the tax credits.

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