Revisiting the issue of neighborhood commercial district property tax methodologies

According to a post on the Chevy Chase listserv (I don't subscribe but it was re-posted to the Takoma listserv--the entry is reprinted at the end of this post), Councilmember Tommy Wells testified to the City Tax Revision Commission, suggesting that a commercial property tax discount be offered to long time "independent" retailers.

It's a worthwhile gesture and good and populist to suggest providing tax discounts to "long time" "independent" retailers, but such an initiative misses the most important point, which is that the commercial property tax assessment methodology that the city employs "overprices" neighborhood commercial real estate more generally.

This matters to new businesses as much as it does old ones, and is why for decades neighborhood commercial districts have lagged in comparison to Downtown and regional districts like Georgetown and Dupont Circle.

Had the proposal been outlined in this manner, likely Commission members wouldn't have been able to express as much skepticism, and pointed commentary about some of the more arbitrary elements of the proposal.

It happens that I used to testify about commercial property tax assessment methodologies in the city and the negative impact on neighborhood commercial districts quite regularly from say 2005-2007 (and was quoted in an article by Post writer Paul Schwartzman on the subject, "Feeling the Pinch Of D.C.'s Prosperity," and had a letter to the editor in response to the article, "Tax Policy Hurts D.C.'s Local Businesses") but given that the points I made were systematically ignored by CM Evans and then Chairman Cropp, I stopped. These entries are representative of the argument:

- Avoiding the real problem with DC's property tax assessment methodologies
- Testimony -- Historic Neighborhood Retail Business Property Tax Relief Act
- Forcing Displacement by the disconnection of tax assessment models from public policy goals
- Displacement of retail businesses through increasing property tax assessments

The basic problem (speaking of "Growth Machine" theory) is that the real estate market in the Central Business District is not a local market, but a market comprised of national and international actors as developers, financiers, and owners. This tends to shape the method for how commercial property is valued and assessed across the entire city, not just downtown.

Some national actors get involved in other submarkets where they might not ordinarily (e.g., Federal Realty owns property in Dupont Circle and Cleveland Park, among other places) which raises prices, but generally, all of the commercial property tends to be valued as if it could be a downtown office building owned by a German pension fund. This makes the property more pricey.

So in DC, even in lagging areas, the minimum asking price for retail space in a neighborhood commercial district is at least $35/s.f., and often for a building that needs lots of rehab, which the tenant is expected to pay for as well.

 By comparison, rents in thriving traditional commercial districts in places like Carytown in Richmond, Downtown Frederick, or Hampden in Baltimore is $25/s.f. or less. (In lagging commercial districts in other cities, including Richmond and Philadelphia, rent can be closer to $15/s.f., which is what touches off innovation in those places.)

In short, it's all about the rents, which are set in large part by the carrying costs of the building. The rents metric is explained in this entry about Cleveland Park:

- Commercial retail rents #2, which was a follow up to this post, Cleveland Park Retail: My off-hand evaluation, the rents are too high.

But politics is more about helping individuals and using individual stories to justify a particular policy, rather than to systematically assess a problem and figure out how to address it systemically. I guess I will submit some testimony to the Tax Revision Commission...

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My letter in the Post from July 25, 2007

Tax Policy Hurts D.C.'s Local Businesses, Richard Layman

A July 20 Metro Article ["Feeling the Pinch of D.C.'s Prosperity: Small Businesses Cry Out for Relief From Rapid Rise in Property Taxes"] inadequately explained why tax assessments are rising for small commercial property owners in the District.

Regardless of buildings' locations and use, the D.C. Office of Tax and Revenue values commercial buildings as if they could be converted into downtown office buildings. If the purpose is to turn the entire city over to office buildings and retail chains, then this property tax assessment methodology is working.

The market for downtown property is not local; it involves national and international developers, lenders, and portfolio investors. The market for small-footprint buildings in neighborhood commercial districts is local--in terms of property owners, investors, tenants, sales potential and rents. The solution is simple: differentiated tax assessment methods.

The legislative focus on property tax abatements or tax caps fails to address this fact.

As a result, locally owned businesses will continue to close or relocate to the suburbs, while more and more of the retail identity and uniqueness of the District is lost and the city's retail landscape becomes reshaped into yet another mall, albeit outdoors, featuring national brands.

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The Chevy Chase listserv piece

From: Edward Cowan
To: chevychasecommunity listserv@ yahoogroups. com
Sent: Tuesday, May 21, 2013 9:12 PM
Subject: [ChevyChase] Neigborhood Tax Incentives Pose Issues

Council member Tommy Wells (Ward 6) encouraged the Tax Revision Commission on Monday to recommend the adoption of reduced real property taxes for independent, neighborhood businesses, especially in turnaround neighborhoods.

Wells announced last weekend that he will run for mayor in the 2014 Democratic primary. That made him the second declared candidate from the council' s ranks, in addition to Muriel Bowser (Ward 4).

Arguing for tax discrimination in favor of locally owned, nonchain businesses, Wells put this rhetorical question to the 11-member commission: should a smaller neighborhood- based business pay the same tax rate as retail on K Street downtown?

Acknowledging that DC law now levies a lower rate on the >first $3 million of assessed value of commercial properties, Wells urged the commission to favor an even lower tax for "neighborhood- based retail business and job creators."Wells said that commercial renters, not the property owners, effectively pay the property tax under standard lease terms.

This populist tilt sounded like a harbinger of a campaign theme.

Real Property Taxes Now

Nonresidential property is taxed now at $1.65 per $100 of assessed valuation (1.65%) up to $3 million of assessed value, and at $1.85 (1.85%) on value above $3 million.

Residential property is taxed at $0.85 (less than 1 percent) for each $100 of assessed value after the homestead exemption, 69,350 in 2013, has been subtracted from assessed value.

The effect of the exemption is to make effective tax rates (taxes divided by assessed value) vary inversely with the value of the property--a form of "progressive" taxation.

Whether such classification distinction between categories of property is a good idea was the topic of expert testimony given later in Monday's session. "I'm not wild about classification," said Daphne A. Kenyon, an expert witness from Windham, NH.

She observed that taxing commercial property at a higher >rate "can drive business away."That elicited a rebuttal from Ed Lazere, who heads the DC Fiscal Policy Institute. He argued that DC business has thrived. Lazere generally opposes tax relief for business and upper-income people.

Commissioners Question Disparate Treatment

Wells ran into resistance from economists on the commission, notably David Brunori, a research professor at George Washington University. He invoked the bedrock principle of public finance that the primary purpose of taxes is to raise necessary revenue--and to raise it as efficiently as possible, causing the fewest distortions in the economy.

Fitzroy Lee, who heads the District' s Office of Revenue Analysis, also asked Wells about inequities that arise from tax preferences, that is taxing similarly valued properties, sometimes side-by-side, differently. Taxing them roughly equally is called "horizontal equity," and it is deemed a virtue among public finance experts.

When Brunori asked Wells whether his strategy was to have government "pick winners and losers,"� Wells avoided a direct yes-no answer.

Later, as Brunori pressed him on a technical tax question, he replied--dismissively, it seemed, "As I said, I'm a social worker, not an economist."

Cites NoMa as Success

In arguing for the efficacy of tax incentives, Wells cited tax concessions offered under former mayor Anthony Williams (who heads the Tax Revision Commission and presided on Monday) for the development of the bustling NoMa neighborhood north of Union Station.

He said tax concessions might be time limited, and he acknowledged that sometimes tough choices presented themselves, such as denying a break to a liquor store and awarding one to a grocery, when both are locally owned. Wells said that he thought incentives might be offered not only in recovering neighborhoods, such as H Street NE, but even in "built- out" neighborhoods, such as Ward 3." He did not address the fairness of giving a tax concession to a new enterprise which is challenging one that is well established and doesn't qualify for preferential treatment.

Wells opened his presentation by recounting in glowing terms the commercial renaissance of H Street NE in the past few years. He did not mention that the new "corner markets, fitness studios, pharmacies, restaurants and hardware and furniture stores" that have "created nearly 1,000 jobs" and made the neighborhood "walkable" had sprung up without the tax incentive he advocated.

However, his staff later pointed out that the District government had given "grants and loans" to H Street enterprises, assessment reductions and extensions of time to pay taxes.

Two Points of View

Wells argued that even in "built- out neighborhoods, ">encouraging local retail of necessary goods and services--groceries , hardware, dry cleaning, pharmacies-- serves the whole city by diminishing the need for residents to use their cars to do their shopping. In this he aligned himself with the Administration, which has stressed walking and bicycles over cars--and whose leader, Mayor Vincent Gray, may run against Wells and Bowser in the 2014 primary.

As several questions by commission members indicated, economists who specialize in public finance shy away from using the tax code for "targeted"; social and economic purposes, what conservatives disapprovingly call "social engineering. "One reason is the desirability of simplicity. Keeping the tax code relatively simple makes it easier for people to pay their taxes without hiring an expert, and reduces friction between taxpayers and the tax collection authority.

Other reasons include treating similarly situated taxpayers equally, avoiding situations-- such as applications for preferences and extensions of them--that invite corruption. A third argument against "targeted" preferences is that they may outlive the facts that justified awarding them.

In addition to avoiding tax complexity, some economists favor subsidies that the legislature must vote for annually, which keeps debate alive and audible. Conversely, beneficiaries favor tax breaks that are embedded in the law.

This is one of the issues the commission is expected to address in its report, due by the end of the year: whether the District's present taxes are tilted against business and discourage new enterprises from coming to the District.

Edward Cowan
Editor, Reports to DC Voters