The positive fiscal impact of historic tax credits

For economic development spending, the Holy Grail is a program that pays for itself. This can happen when a state outlay generates economic activity leading to increased tax collections. In a recent analysis of the state historic tax credit for the Urban Land Institute, Ted Carmen shows that there’s a good shot that the state’s historic tax credit achieves this difficult feat. His calculations suggest that, for every dollar that the state puts out, it reaps a $1.20 in new tax revenues.

Compared to other economic development expenditures, the historic tax credit has a significant head start because it is matched by a federal credit. Assuming the projects it supports are only financially feasible with the state tax credit, which is certainly true in many instances, the federal funds follow into the Commonwealth and create economic activity that would not have occurred “but for” the state investment.

Another key feature of the state historic tax credit is that it leads to the production of new housing that would not otherwise be created by the private market. Carmen uses the conservative assumption that each new unit of housing above the state’s baseline production leads to the creation of 0.2 new jobs. This is reflective of the widely held belief among economists that constraints on the state’s housing supply are a drag on job creation. Attributing income taxes paid by workers holding jobs created by the state historic tax credit is critical to appropriately estimating its true fiscal impact.

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