Now that the 2016 Legislative Session has officially come to a close, and with no prospect of a special session in sight, it is now appropriate to mourn the loss of the Alabama Historic Rehabilitation Tax Credit – one of the most popular and effective economic development tools the State of Alabama has known – and examine the failure of one of the most widely supported pieces of legislation this session.
First, however, we would like to express gratitude to the non-profits, individuals, colleagues, mayors, members of the media, business and industry leaders, and economic development professionals who came together and championed the cause. The reporters and journalists who covered this legislation (too many to name here, which says a lot for the widespread support), in particular the Birmingham Business Journal and Birmingham News, were surprisingly aggressive in holding politicians accountable for their unsupportable positions by challenging their unsound arguments.
Unfortunately, we were not successful, but the last two weeks have helped us better understand (even if vaguely) why. It seems that the death of the Historic Tax Credit may have been a sacrificial lamb for another tax break that presents the real budgetary challenge, made possible by secretive political deals surrounded by intrigue.
Until the public understands the Alabama Jobs Act – and the confidential deals being made with industrial recruits – it will be hard to connect the dots between the HTC death and the real (and much larger) black hole budget issue our legislative budget teams face, at least on the record anyway. Senator Marsh asserted in the closing weeks of the session that a program with a maximum of $20 million in non-refundable credits per year is a problem, yet made no mention of a maximum $850 million in credits (a portion of which are fully refundable) that are not restricted to being awarded in any particular year! Enter the Alabama Jobs Act.
For context, the maximum exposure from the Alabama Jobs Act dwarfs this year’s $100 million Medicaid shortfall by more than 8 times.
Yet, the public heard little if anything about the Alabama Jobs Act when it was passed last year (Alabama Act 2015-27) with broad support, including Marsh’s, in the legislature. It wasn’t up for debate this year so little to no coverage was given during this year’s legislative session.
To be clear, I am not suggesting there is anything at all nefarious about the Alabama Jobs Act or the incentives it authorizes. Quite the contrary. In fact, Fusion supports the type of incentives in the Alabama Jobs Act, namely that each deal must demonstrate “that the amount of tax incentives sought are exceeded by anticipated revenues for the state.” Fusion actively supports such pay-as-you-go, revenue-positive incentives as a vital part of economic development, and we work hard when we have the opportunity to help clients avail themselves of such programs when they are trying to decide between states.
Multiple sources inside and outside the government have suggested that it was not the amount of HTCs outstanding, but rather angst about potential claims of credit under the Alabama Jobs Act that’s indirectly led to the death of the HTC. I’m not sure what single deal or recruitment effort might have made the budget teams sweat in the closing weeks of the session. Even if I knew, (and even if they know), what the deal is, the negotiations of such incentives are confidential, with projects referred to by code names. This is as it should be in order to protect the interests of states and companies due to the sensitive nature of the site selection process. (Even once site selection announcements are made, the terms of the incentive agreements are often still closely guarded). The point is not to disparage the positive aspects of the Jobs Act but to point out that the HTC accomplishes the same positive goals.
Specifically, the Historic Tax Credit provides the same kind of net-benefit-to-the-state payback. It’s just that the quantification of such payback on a project level is simply not explicitly required on a deal by deal basis in the authorizing legislation, as it is in the Alabama Jobs Act. Even so, the HTC law required an economic impact study, which was performed, that showed a benefit to the state of $3.90 per dollar of credit. These sorts of studies in various states, while varying in the types of data and assumptions used, and in the amount of return, have always shown positive returns for credits like Alabama’s. It is for this reason that many, including our firm, have generally thought of the HTC as yet another great arrow in the quiver of the Department of Commerce for economic development in the State of Alabama. As such, it comes as quite a surprise to learn that the Jobs Credit and Investment Credit were somehow set up as competing with the HTC in 2016.
Until this unnatural conflict is resolved in a future legislative session, it seems the legislature has – intentionally or not – sent a message to the State of Alabama that mega corporate tax breaks are more important than community-level incentives for economic development. Further, by virtue of the outcome of the session, clearly Sens. Marsh, Pittman, and Orr, felt they needed to allow (as John Archibald so interestingly put it) “a tax increase on any cities with historic buildings that need repair, and on the communities and businesses that would benefit from their restoration” in order to provide tax credits (the refundable portion of which are tantamount to cash subsidies) to large corporations as incentive to locate in Alabama. In a rational world, these programs would be on the same team pulling in the same direction for the good of the state. Apparently by setting them apart, the legislature is telling us that there is a difference and that it has chosen to sit on the opposite side of the table from Main Street Alabama, Tourism, local residents, and companies already here in Alabama.
Maybe there is another message though. Could it be that we local leaders underestimate ourselves? Perhaps every county, no matter how large or small, urban or rural, should just look forward to landing its own Remington, Airbus, or Google. After all, there are only about 60-odd counties left who don’t have one or two. Manufacturing jobs do pay more and are harder to relocate than service jobs, right? The downside is not too bad, either, as long as we don’t want to be unique as Alabamians. Sure, by the time all those companies get here, their management and employees may have to live and do business in brand-new construction since the buildings that long gave each community character may well have fallen apart or been demolished.
But hey, we’re trying to be global and 21st century, so shouldn’t our places look and feel the same as anywhere else in the world? Who needs a sense of place as long as we’re in the factory? Creative and service industries, not to mention cultural/heritage tourism, don’t quantify their economic impact like the manufacturers do (or do they?) so it makes sense that no real argument is advanced for them. We’ll all be fine…at least until the robots take over and access to technology is ubiquitous. Can’t be anytime soon, right? Perhaps nine years is long enough that the legislature feels we (or at least they) shouldn’t worry about it right now. They had lotteries to create, cities to overrule, and a governor to impeach in 2016.
While the legislature has passed the buck to just let whoever is in office later worry about where people will want to live, travel, and spend their money (and who will be able to do it) when 2025 rolls around, we will continue to advocate for the use of cost-benefit analysis in policymaking, and for sensible local-level economic development tools like the Historic Rehabilitation Tax Credit at every opportunity. We hope that you will, too. On to 2017.