Why Mayor Bowser is right to be leery of systematic lowering of taxes
DC is about to significantly lower its income tax rates ("Meet the Democrat in D.C. who is cutting taxes for the rich" and "DC takes final step toward sweeping tax reforms, accelerates cuts," Post) out of a belief that DC's tax structure could work better, needs to be more competitive with the suburbs, and most residents need a tax reduction.
The Mayor isn't behind the change, while by contrast the Washington Post editorial board is all in ("By not lowering tax rates, D.C. is shortchanging its residents").
But the reality is that it is mostly "urban myth," that DC's taxes are significantly higher than the suburbs, although Maryland's taxes being higher than Virginia's, there are some differences.
It's not that I don't think it's great to lower taxes, but I know that the city is hard pressed financially despite the comparatively great economic times ("Wall Street's opinion of D.C. is at all-time high," Wall Street Journal).
Despite the city's "huge" budget (about $12 billion annually, 40%+ comprised of funding for and from federal programs, like health care), most every dollar is called for, and it is difficult to come up with money to improve roads ("U.S. roads, bridges are decaying despite stimulus influx," USA Today), to fund much in the way of small cost innovative efforts and other needs ("Boom or bust? D.C. lawmakers try to make sense of budget," Washington Post).
The bonding debt cap (bonds are used to finance capital improvements) is close to being reached ("D.C. in debt: Never before has the city owed so much" and "D.C. Council report suggests District may need to raise its debt cap," Washington Business Journal) which means that it will have to increase its debt cap. In the meantime, the city is driven to financial engineering stratagems, such as trading land for a new soccer stadium ("A Safe Bet?," Washington City Paper) to reduce the need for capital funding,
(Although I argue for increasing the building height limit downtown as a way to increase property tax revenues and to pay for necessary infrastructure, such as Metrorail improvement and expansion.)
Plus, some of the long term trends for the city's economy, if not unfavorable, at the very least, should raise serious concerns and reflection:
1. DC's economy is not very diversified. It is dependent on the federal government. And the federal government is shrinking. Concomitantly, the DC (and metropolitan) economy is shrinking too ("Washington's Boom Goes Bust," New York Magazine; "Federal Government Downsizing Sends D.C. Region Tailspinning," Falls Church News-Press).
- First, the Republican-controlled Congress has been cutting back on government spending. Since a disproportionate amount of these expenditures are in the Washington region, this slows down and shrinks the metropolitan economy.
- Second, the Republican-controlled Congress is dialing back regulation, actively thwarting the expansion of various government agencies, such as the Consumer Financial Regulation Board. This affects the DC and metropolitan real estate market.
- Third, the Republican-controlled Congress is less willing to invest in government and therefore government agencies are shrinking, not growing, and they are moving out of more expensive real estate submarkets like DC proper to more distant locations. This affects the DC and metropolitan real estate market and DC especially.
- And the Republican-controlled Congress isn't very interested in investing in the creation of a Department of Homeland Security campus on the St. Elizabeths west campus--which DC touts as the anchor of investment and revitalization East of the River, and the reuse of the St. Elizabeths east campus. ("Will Congress Pull the Plug on Homeland Security's Move to St. Elizabeths," Government Executive). This has a huge impact on the DC commercial real estate market.
- Plus, fewer government workers and use of less well connected locations for federal activities means less demand for transit, dropping WMATA revenues, and increasing financial exposure of local governments for supplemental appropriations to the transit authority.
2. A shrinking metropolitan economy reduces the attractiveness of DC as a place to live. Residential population growth is slowing down. Recent trends favor urban living, which has stoked demand for in-city housing. But it has also been driven by large population growth associated with the post-9/11 growth in the federal government sector.
For a couple years during the Gray Administration, DC was adding more than 1,000 new residents each month. That number is now about one-third lower ("Washington-area population increase slowing down," Washington Post).
- This reduces the demand for DC residential real estate. Some people might say that's a good thing, that it will reduce velocity within the market, which thus far has led to a rapid run up in housing prices. On the other hand, it means that some areas where the city is trying to add population will not grow as fast or grow at all, and the ability to revitalize those communities declines.
- Reduced numbers of high wage earning residents reduces city property, income, and sales tax revenues. and has negative impact on the city's quality of life also.
- Right now, a $1 million mortgage on a house worth $1.25 million--houses in Capitol Hill, Columbia Heights, Dupont Circle, Georgetown, Logan Circle cost this much or more--costs between $6,000 and $7,000/month, including taxes and insurance. That requires a household income of approximately $250,000.
- If interest rates increase by 50% -- approximately 6% -- or 100% -- approximately 8%, the monthly payments would be $10,500 to $14,000/month, requiring household income of $375,000 to $500,000 respectively.
- but it would increase interest in multiunit housing in both the rental and owner markets.
This will lead to more support for accessory dwelling units, because more people will need additional income from their property in order to make the mortgage payment.
4. Organizations of all types: business; nonprofit; government; are using less office space per employee. ("Changing Office Trends Hold Major Implications for Future Office Demand," CoStar Group).
Yes, it's true that there is a rise in demand for in-city and in-edge city locations, which will help the city somewhat vis-a-vis the suburbs ("The suburban office park is a relic. Here's the damage it's done to one D.C.-area county," Washington Business Journal) but the general reduction in s.f./worker eliminates a fair amount of demand that is unrecoverable except through growth..
- The old metric was that it took 250 square feet (s.f.) to support one employee. Now the number is 200 s.f./worker, trending further downward to 160 s.f to 180 s.f. per worker.
- That is a reduction in demand of 50,000 s.f to 90,000 s.f. per 1,000 workers. That opportunity cost in the loss of leasing activity gets big fast and is why area vacancy rates are climbing, from 10% in DC to higher in the suburbs.
- This could reduce DC's demand for office space by many millions of square feet.
- This is also why there is increased interest in converting older office buildings to housing ("Will D.C. area developers turn more office buildings into apartments," Washington Post) to repurpose otherwise unwanted space.
- Law firms are a major component of the city's commercial real estate market.
- As firms go out of business, merge, or contract ("Law firms in D.C. are shrinking, leaving behind vacancies," Washington Post), much less space is required to support this business sector, reducing demand for office space significantly.
- And these firms are shrinking in the amount of space they lease anyway ("End of the corner office: D.C. law firm designs its new space for millennials" and "Covington relocation shows how law firms' push for efficiency affects D.C. real estate," Washington Post), in concert with previously identified trends.
Lower rates reduces the city's financial flexibility in potentially turbulent economic circumstances, which I don't think can be ruled out.
In this matter, I am firmly in Mayor Bowser's court.