Scott Wolf with Grow Smart Rhode Island, center, talks with Edward Sanderson, executive director of the Rhode Island Historical Preservation and Heritage Commission, right, and Sen. Paul Moura, D-East Providence, left, before they testify before the House Finance Committee yesterday.

The Providence Journal / Connie Grosch

PROVIDENCE — Colin Kane has already spent $15 million to bring Rumford Chemical Works back to life.

The dilapidated industrial complex that gave the East Providence neighborhood its name is being transformed into a $40-million development featuring 90 apartments and 70,000 square feet of office space.

But a year after construction began, Kane, the head of the East Providence-based Peregrine Group, fears he may have to abandon the project.

Governor Carcieri’s cost-cutting proposal to retroactively cap Rhode Island’s popular historic tax-credit program would effectively kill the Rumford development and dozens of other major projects from Providence to Tiverton, according to developers and business leaders who gathered at the State House yesterday to testify before the House Finance Committee.

“Without those tax credits, I default on my mortgage,” Kane said. “I shut the project down; 100 guys a day on site, they all go away…. I’m going to be paying $500,000 to $600,000 on property taxes when the project is complete. That goes away. Basically, it will be left as a half-finished empty shell.”

The recent boom in efforts to transform crumbling buildings and decaying mills across the state largely depends on the tax-credit program, which allows developers to secure construction loans by using the credits as collateral.

The plan announced by the governor last month would jeopardize the financing of more than 130 projects, ranging from private homes to $80-million developments, many of which are already under construction, according to Historical Preservation and Heritage Commission executive director Edward F. Sanderson.

Those who testified yesterday also said the governor’s plan sends a bad message to the investment community and opens the state to lawsuits.

“Basically I’ll be in default of my loans. I’ll be litigated against, and then I, in turn, will litigate against the state,” Kane said. “Not what we want to do. No reason to make the lawyers rich on this ... . The state, to me, has a moral obligation and a legal obligation to fulfill what it told me I should expect.”

The governor’s spokesman, Jeff Neal, said, “Any suits against the state on this issue will be meritless.”

Carcieri’s plan would help close the state’s $150-million current-year deficit and next year’s $384-million hole by capping the value of credits redeemed this year at $20 million, and $40 million in subsequent years through 2017, when the program is slated to expire. By making the plan retroactive, the proposal is expected to save nearly $25 million this year and $21 million next year, according to House fiscal adviser Michael O’Keefe.

The tax credit works this way: Developers receive a credit for up to 30 percent of their qualifying historical rehabilitation construction costs. But developers usually don’t have much need for the credits because they typically don’t have large state tax liabilities. Instead, they sell their credits at a discount — currently at about 78 cents on the dollar — to wealthy individuals who use them to reduce their state income taxes.

“The tax credits are a critical part of the financing. If you take that away, you can’t pay for the project,” Sanderson said.

A $100,000 credit might be sold to a taxpayer for $78,000. The taxpayer can then redeem the credit to take $100,000 off his or her tax bill. The developer gets cash for a credit he might not otherwise use, and the taxpayer saves $22,000.

The cap is the only item among a host of cost-cutting measures proposed by the Republican governor to draw criticism from the business community, which generally applauded Carcieri’s decision not to propose tax increases.

“Unfortunately, the tax credit imposes serious up-front costs to the state and to taxpayers, while the benefits are spread out over years. Those costs have greatly exacerbated the state’s budget problems,” Neal said. “The governor certainly believes that this option is preferable to raising broad-based taxes.”

That argument didn’t convince Richard Licht, the former elected official turned real estate attorney.

“Sovereign Bank, Bank of America, many other national institutions, have lent money against the promise that the Rhode Island legislature has made. Now suddenly, the governor is going to say Rhode Island’s word is no good?” Licht said. “You talk about business climate? Why would I do business in the state of Rhode Island if the word of the state of Rhode Island isn’t good?”

Ultimately, the General Assembly must accept the governor’s proposal or find another way to generate savings.

House Finance Committee Chairman Steven M. Costantino said the program has “done wonderful things” for certain parts of the state. The advocacy group Grow Smart Rhode Island released a study in September that attributes $1.53 billion in construction costs and 17,725 jobs across 23 municipalities to the credit.

The governor’s office couldn’t immediately say how many projects were single-family homes versus large developments.

Developers at yesterday’s hearing listed several threatened projects, including the $150-million Dynamo House development in Providence that includes a hotel, museum and office space, and the $80-million Bourne Mills development in North Tiverton, which would create 166 apartments (including 65 affordable-housing units).

“The issue is, from a budget point of view, how do you get immediate savings in this program this year and next year? That’s the challenge we have,” Costantino said. “We’re open to alternate ideas, but I have to leave the discussion open.”

speoples@projo.com