Economic Analysis of a Rehabilitation Incentive Program for Historic Homes in Kentucky

Introduction Physical infrastructures such as buildings are an important part of the productivity of a local economy along with other inputs to production such as the quality of the local workforce. A high quality of housing can contribute to productivity in this way. In particular, the presence of older or historic neighborhoods which have been up kept can be a benefit to a community relative to the alternative in terms of ensuring that a larger share of the areas housing stock is well-conditioned, improving the amenity value of an area, and perhaps, reducing the need for development at the periphery of a community. Given potential benefits of this type, public policies have been proposed to encourage investment in older, historic properties in communities. These programs have typically worked by subsidizing improvement projects through providing tax credits for state and/or local tax obligations. Thus, these are essentially subsidies for capital construction projects. The hoped for result, as with all capital gains tax reductions or subsidies, is to encourage capital investment. With this background, the Kentucky League of Cities contacted the University of Kentucky Center for Business and Economic Research (CBER) about preparing a study regarding the potential usage of such an historic preservation tax credit in Kentucky. This proposal outlines how CBER would conduct such a study, and provides a cost estimate for the study. Please note that the study would address only an historic rehabilitation incentive program for single-family residential households. The study would not address the effects of a tax credit on commercial buildings or other income generating properties. Approach The outcome of the study will be to estimate the number of Kentucky households that would be expected to participate in the program over time, and their anticipated spending on renovations. CBER will estimate a participation rate based on the experiences of other states that have adopted historic rehabilitation tax credit programs over the last decade (or in many cases, in recent years). Participation rates for programs naturally would vary based on the types of tax incentives offered so CBER will identify take-up rates for the most common types of program designs. CBER will combine take-up rate information with data we will gather on the inventory of eligible historic properties that exist in Kentucky (and the likely expansion that would occur in eligible properties should an incentive be adopted in the state). This data will be gathered from the state historic preservation program and other sources. Once the number of likely participants is estimated for any given year, CBER will combine that information with data on the typical project eligible costs (which might be capped or otherwise affected by the program type). This project cost information also will be available from existing programs in other states. Data on the number of participants and average eligible project costs will be combined to estimate the total tax credit granted from the project in any given year. For comparison purposes, CBER also will consider the impacts caused by the project including the additional property taxes resulting from increased property values, sales taxes collected on project building materials and income taxes collected from construction workers. CBER also will note the employment and spending directly supported by the project based on program participation estimates. CBER also will mention the existence of other, indirect impacts from the program such as the multiplier effect from the project, and the likely increase in the property values of nearby properties due to the improvement of the historic property. However, CBER will not calculate the magnitude of these additional impacts, given constraints on project cost and project time frame. Summary and Project Time Frame and Cost As described above, the UK Center for Business and Economic Research will conduct a study on the likely level of participation by Kentucky households in an historic rehabilitation tax credit program. The cost of the project, as described in the attached budget, would be $5,000 and the project would run from November 1, 2003 through March 30, 2004. CBER would deliver a completed version ofthe report electronically and would be available for two presentations of project results as proposed by the Kentucky League of Cities.