Report

Proposed $40 Million Subsidy to the Corcoran Gallery of Art Is an Inappropriate Use of DC’s Tax Increment Financing Program

PDF of this report

The Corcoran Gallery of Art is seeking a $40 million subsidy under the District’s Tax Increment Financing Program.  It would support construction of a new wing to the museum designed by renowned architect Frank Gehry and renovation of the existing space.  The total project would cost $200 million and would nearly double the Corcoran’s space.

While the expansion would add a significant attraction to the District ‘ it would be the only Gehry-designed space on the East coast ‘ the proposed use of $40 million in TIF funds raises several concerns.  Tax Increment Financing is an economic development program designed to support projects that will generate sufficient new ‘ "incremental" ‘ sales tax and property tax revenues to offset the cost of the subsidy.  The Corcoran TIF proposal, however, does not fit this profile. 

  • The Corcoran subsidy would not pay for itself through new sales and property tax revenues.  The museum is exempt from the property tax and generates only a small amount of sales tax from its restaurant and gift shop.  Corcoran officials acknowledge that an expanded museum will not generate enough new revenue directly to offset the subsidy, ‘ a test all previous TIF projects have met.  Instead, the Corcoran subsidy would be approved under a broad exemption in DC’s TIF law that allows funding for projects with "special merits."
  • The Corcoran claims that the museum’s expansion will have an impact on the broader DC economy, but this relies on optimistic and unrealistic assumptions.  A Corcoran-commissioned analysis concludes that the expansion will generate enough new tourism and related tax revenue to offset the $40 million subsidy.  But this relies on an estimate that tourist-related spending from the museum will increase nearly six-fold following the expansion.  It also assumes that increased attendance at the Corcoran will come from new visitors or tourists taking longer vacations in the city, rather than assuming that many of the visitors would come from the existing tourist base who will choose to see the Corcoran rather than other attractions.  An independent analysis commissioned by the District?" Chief Financial Officer challenged these and other assumptions in the Corcoran’s analysis.
  • A TIF subsidy may not be needed to support the Gehry expansion.  The CFO’s analysis concluded that even without a TIF subsidy, the Corcoran would likely have sufficient funds to pay off loans needed to finance the Gehry expansion.

While the economic benefits of the Corcoran expansion may be debated, it is unlikely that they are sufficient to offset a $40 million subsidy under DC’s TIF program.  This is significant for several reasons.

Average Annual Capital Budget

for Selected DC Agencies

(in millions)

DC Public Library $1.1
Parks and Recreation $16.3
Metropolitan Police $10.7
Health $3.5
* based on capital budget for fiscal years 2005-2010

  • The Corcoran TIF will use tax resources that otherwise would go to other public services.  Because it is likely that the Corcoran TIF won’t pay for itself by generating new tax revenues, the subsidy effectively is an appropriation of the District’s general revenues.
  • The Corcoran subsidy is large when compared with District spending on other capital projects.  The District has budgeted only $1 million for library capital costs per year over the next six years.  The District’s average capital budget for parks over the next six years is $16 million per year. (See table.)
  • The Corcoran TIF limits the amount of funds that can be made available for more meaningful economic development projects.  There is a $300 million cap on total TIF subsidies in the District.  Devoting $40 million of that to the Corcoran Gallery reduces the amount available for other projects (that would generate offsetting tax revenue). 
  • The Corcoran subsidy sets a precedent that TIF funds can be used for projects that will not pay for themselves with increased tax revenues.

For these reasons, support of the Corcoran expansion through the District’s Tax Increment Financing Program does not appear to be warranted.  If policymakers desire to provide a subsidy to the Corcoran, it would be more appropriate to consider such assistance through the District’s traditional budget process in which funding for the Corcoran expansion would be considered among other priorities for use of District revenues.

These issues are discussed in more detail below

 

 Proposed Corcoran TIF Does Not Fit TIF Rules

The District’s Tax Increment Financing program was established in 1998 to spur economic development in the

District of Columbia.  In particular, TIF was designed to support projects that faced barriers to development ‘ and that might not occur without public assistance ‘ but that would be expected to succeed financially if completed.  There is a key principle underlying DC’s TIF program: subsidies are directed to projects that will generate sufficient new sales and property tax revenues to fully offset the subsidy costs.  All existing TIF-funded projects ‘ including the

Spy
Museum,

Gallery Place, and the Mandarin Hotel ‘ were approved on this basis.



Washington Business Journal Editorial Criticizes Corcoran TIF Proposal

         The lead editorial in a recent edition of the Washington Business Journal focuses on the proposed Corcoran TIF subsidy and DC’s TIF program in general.  The editorial concludes that a TIF subsidy for the Corcoran is not warranted on economic development grounds: "It will be a major architectural feather in D.C.’s already robust camp.  And the Corcoran itself will no doubt reap many benefits.  In sheer economic impact terms, however, the project is not enough to justify the city expense." *

The editorial also claims that DC’s TIF program is not being used effectively to promote economic development and that a more pro-active approach to using this tool is needed.  The editorial states “At their best, tax increment financing methods have been an effective way to find funds for worthy projects that might not have happened without the subsidy.  At their worst, the TIF configurations have become so much wishful thinking, a too-relied upon financing method that has become little more than a money grab for projects that sound too good to be true  ‘  and usually are." The editorial argues that “Rather than awarding TIF on a case-by-case basis, the administration should be pursuing an overall strategy aimed at specific districts ‘ such as neighborhoods in need and the so-far sleepy TIF district to attract downtown retail a comprehensive plan that will have a significant impact on specific area"

* “The Snit Over TIF,” Washington Business Journal,  July 2-July 8, 2004, page 46

The Corcoran TIF subsidy, by contrast, is not expected to generate enough new sales tax and property tax revenues to cover the $40 million subsidy and does not meet the TIF program’s fiscal requirements.  Instead, the Corcoran TIF would be approved under a special provision of the TIF law that allows support for projects with "special merits," which are not defined in the legislation.  As noted, this would be the first project approved solely on these grounds.

Because the TIF program requires that project subsidies be tied to "incremental" revenues" ‘ and because the museum itself will not generate much new revenue ‘ the Corcoran subsidy would be repaid with incremental revenues from a broad "TIF district" encompassing a large share of downtown DC.

The downtown "TIF district" already exists.  It is worth noting, however, that the downtown TIF district was not created to fund TIF projects directly.  Instead, it was established as a cushion to ensure that sufficient revenues would be available for downtown TIF projects.  As noted, all existing downtown TIF projects were approved under the assumption that revenues from the project itself would pay off the bond and that revenues from the broader downtown district would not be need to be tapped.

The Corcoran Gallery proposal thus would use as its primary funding source a TIF district that was established solely as a backup guarantee for other TIF projects.  This is a significant break from tradition. 

Moreover, the proposed TIF subsidy for the Corcoran may violate the principle that TIF subsidies should be used to support projects that otherwise would not be completed.  While it is difficult to determine with certainty whether and when the Corcoran could raise $40 million from other sources, an independent analysis commissioned by the District’s Chief Financial Officer concluded that the Gehry expansion could occur without a TIF subsidy.  It concludes that "the Corcoran endowment appears to be solvent ‘ capable of funding future debt service payments" on the bonds it would issue for construction.[1]  In other words, it is likely that financing could be arranged without a TIF subsidy.

 

Claims by the Corcoran Gallery that a TIF Subsidy Is Justified by Broader Economic Benefits Rely on Unrealistic Assumptions

The Corcoran Gallery commissioned an analysis of the impacts of the museum expansion on tourism in DC economy, including impacts on use of hotels, restaurant, parking, and other services.  The analysis uses a detailed set of assumptions on increased visitation to the museum and the amount that visitors would spend while in the District.  This analysis concludes that the Corcoran expansion would enhance tourism greatly and generate a substantial amount of new tax revenue.  For example, it projects the museum will increase DC revenues by more than $100 million over the next 20 years.

The results of economic impact studies such as this one are heavily reliant on the assumptions the authors make and thus are very imprecise.  A review of the Corcoran-funded analysis reveals that its assumptions suffer from two major flaws, which are described in more detail below.  These flaws are highlighted in an independent analysis commissioned by the District’s Chief Financial Officer as part of the TIF certification process.

  • The Corcoran analysis includes several optimistic assumptions regarding the number of additional visitors to the museum and the amount they will spend in DC.
  • The Corcoran analysis assumes that most of the new visitors to the museum will come from people extending their visit to

    Washington or additional people coming to DC as a result of the expansion.  As a result, most of this activity is assumed to add to the DC economy.  The analysis does not take into account that many new visitors will be tourists who would have been in

    Washington anyway and thus would not represent an addition to DC economic activity.

If the Corcoran’s analysis had used more reasonable estimates, it would have derived much smaller impacts of the Gehry expansion.

 Optimistic Assumptions

The Corcoran-commissioned analysis includes several assumptions that appear to be optimistic, leading to a projection that visitor-related economic activity taking place outside the museum will grow from $4.5 million to $30.2 million.  This nearly six-fold increase rests on the following flawed assumptions and analysis:

New Attendance:  The analysis notes that attendance at the Corcoran has ranged from 250,000 to 500,000 in recent years.  It assumes that attendance will rise 140 percent, given that exhibit space will nearly double and the Gehry wing will be a unique architectural attraction.  The percent increase is applied, however, to a base of 500,000, the high end of the range, resulting in a high-end estimate of 700,000 new visitors (for a total of 1.2 million).  If the mid-point of the recent attendance trend ‘ 375,000 ‘ had been used as the base, the 140 percent attendance growth would mean an estimated 525,000 new visitors, which is one-fourth lower than the estimate derived by the Corcoran’s analysis.

Moreover, the Corcoran analysis assumes that the surge in attendance level will be permanent.  The CFO’s analysis, by contrast, assumes that attendance will increase sharply for five years and then subside somewhat.  The difference between the CFO’s estimate and the Corcoran’s appears to be roughly 200,000 visitors a year in the sixth year following the expansion.[2]

New Spending per Attendee:  The CFO-commissioned analysis notes that the Corcoran’s analysis assumes substantial increases in spending by each museum visitor, including:

  • An increase from $1.65 per person to $7.05 per person in retail sales at the museum
  • An increase in food sales at the museum from $1.10 per attendee to $2.15 per attendee
  • An increase in spending off-site from $8.95 per person to $36.84.[3]

These types of increases are not supported by evidence and seem improbable.

Multipliers:  The Corcoran-funded analysis attempts to measure the direct economic impact of the museum’s expansion, but it also assumes there will be substantial secondary effects.  If, for example, the Gehry wing expansion leads the Corcoran to hire more staff, the income received by the staff will be spent and thus indirectly create additional economic activity.  This is known as a "multiplier" effect.  The multiplier used in the Corcoran analysis increased the estimates of economic effects by roughly one-third.

The analysis commissioned by the CFO notes, however, that it is difficult to estimate multiplier effects in

Washington since much of the income earned in DC is spent outside of the city.  The CFO analysis concludes that "secondary impacts are and should be heavily discounted."
[4]

Assumption that Most New Visitors to the Corcoran Will Be Additional Tourists

The Corcoran-funded analysis claims that "the Corcoran Gallery will become a visitor destination enabling it to attract visitors to the District that would not have otherwise come or to extend their stay"  This claim is not backed by evidence, such as research on increased tourism in DC following the opening of new museums.  Yet this assumption is critical to its finding that the Corcoran expansion will result in growth in DC tax revenues.  If, by contrast, most of the new visitors to the Corcoran were tourists already expected to be in

Washington, then the net economic and revenue effects of the Corcoran expansion would be minimal.

The independent analysis commissioned by the CFO finds that the Corcoran study does not take into account this "displacement effect" and that this results in an exaggeration of the expansion’s impact on the DC economy and tax collections.  The CFO’s analysis notes that "no specific marketing study has been done to ascertain the effects of the new addition" and that "the

District of Columbia has a number of cultural centers and museums that provide substantial market alternatives."  The analysis notes that the Corcoran "will be drawing from a base of visitors that would be coming to the District anyway and spending money at another venue were it not being spent on visiting the enhanced Corcoran."  It estimates that one-third of the ostensibly new visitors to the Corcoran would have been in

Washington regardless of the Gehry expansion.
[5]

The CFO-commissioned analysis thus takes into account the fact that the District has a large number of important tourist attractions, with additional attractions developed on regular basis.  It also reflects the fact that visitors have limited amounts of time and money for vacations and cannot easily take new or extended vacations in response to new attractions.

 

Support for the Corcoran under TIF is not warranted

Because the impact of the Corcoran’s expansion cannot be estimated precisely and is likely to be far lower than the figures generated by the Corcoran’s consultant, this project does not appear to be warranted on economic development grounds.  Because the tax benefits of the Corcoran expansion are unlikely to offset the subsidy costs, the proposed $40 million subsidy would consume tax resources that otherwise would be available for other public services.

It should be noted that alternative uses for the $40 million in tax revenue also could expand economic activity in the city.  This could include investments in other economic development projects or in services that improve the quality of life in the District ‘ making it a more attractive place to visit or live.  Spending on public programs and services also creates employment and puts money in the hands of consumers.

For these reasons, it would be more appropriate if support for the Corcoran expansion were proposed as an appropriation in the District’s annual budget.  This would make clear the full costs of the expansion to the District, and it would require policymakers to make a choice about supporting the Gehry expansion in context of other priorities for public funds.  Offering support to the Corcoran through the budget process also would reserve funds set aside for the Tax Increment Finance program to be used for projects with more appropriate and certain economic development benefits.


End Notes:

[1] ARD Government Finance Group, “Preliminary Feasibility Report: Corcoran Gallery of Art TIF Application,”
May 6, 2004, page 32.

[2] ARD report, page 24.  After the five-year spurt in attendance, the ARD report assumes that the number of visitors to the museum will be twice the current level because exhibit space will have doubled.  The ARD report assumes that attendance will rise one percent per year after that, in response to population growth.  It is not clear whether the Corcoran-commissioned analysis includes an assumption of annual attendance growth.  Even f it does not, the ARD assumptions would result in attendance below 1.2 million  ‘  the figure assumed in the Corcoran-commissioned analysis  ‘  for 18 years following the initial surge and decline in attendance.

[3] ARD report, page 26.

[4] ARD analysis, page 24.

[5] ARD analysis, pages 26-27.