The following editorial appeared in the February 2015 print edition of Carolina Journal:
Gov. Pat McCrory has become a dogged champion for resuming state tax credits to developers that restore and renovate historic buildings. But his energy and zeal would be better invested in other concerns, for at least two reasons: The tax credits undermine the principled foundation beneath the tax reforms passed in recent legislative sessions; and legislative leaders have shown scant interest in reviving this carve-out in the tax code.
For the record, we see no justification for compelling state taxpayers to subsidize the preservation of historic properties in particular cities. If some of these buildings need to be renovated to guarantee the structural integrity of nearby properties or to prevent threats to public health and safety, then local taxpayers (or even better, private investors) should assume those costs.
In last year’s legislative session, the General Assembly wisely allowed the state tax credit for historic preservation (and a separate credit for movie production costs) to expire. These credits “sunset” as part of a significant tax reform package, highlighted by single rates for personal and corporate income taxes — replacing the previous tiered, “progressive” code — and elimination of the historic preservation credit, the film production credit, and a host of other exemptions.
The idea is to treat income similarly, no matter how it’s generated, and wean state policymakers from using the tax code to pick winners and losers.
As a recent John Locke Foundation Spotlight report defending the end of the tax credit argues, the purpose of the tax code should be to raise revenue for government services — period. Its function shouldn’t be to redistribute income, favor certain personal behaviors over others, or force taxpayers to become venture capitalists or industry financiers.
To the extent that lawmakers stick targeted tax incentives into the personal or corporate income tax, that raises the marginal tax rates necessary to raise roughly the same amount of revenue. That’s true even if you assume some feedback loop of revenues from business attracted to the state by the incentives. Higher tax rates discourage work, savings, investment, and entrepreneurship across the economy.
Moreover, tax credits are less transparent than on-budget grant programs. The public is better served when spending is clearly spelled out in annual budget documents, where it can be evaluated against alternative uses of the dollar.
Our preference would be to eliminate such tax-funded incentives entirely. But if political pressures make that impossible, local governments could create discretionary grant programs for those projects. Virtually all of the potential benefits of a renovation project accrue to those who live, work, or sell goods and services in the community, so it makes sense for any subsidies to derive from local property and sales taxes.
It’s best to keep the tax code clean, even at the expense of cluttering up the budget with grant programs. Paying taxes should be as easy as possible. Obtaining government grants, on the other hand, should be challenging enough to separate the wheat from the chaff — and fully disclosed from application to final report.