DCFPI Testimony on Tax Increment Revenue Bonds Corcoran Gallery of Art Project Approval Resolution of 2004

Chairman Evans and members of the Committee, thank you for the opportunity to speak today.  My name is Ed Lazere, and I am the executive director of the DC Fiscal Policy Institute.   DCFPI engages in research and public education on the fiscal and economic health of the District of Columbia, with a particular emphasis on policies that affect low? and moderate?income residents.

I am here today because I believe the proposed Corcoran TIF subsidy is an inappropriate use of the District’s Tax Increment Finance program.  Across the nation, TIF is used to target investment in blighted neighborhoods.  In DC’s TIF program, TIF bonds have been issued for projects that would result in a significant increase in sales and property tax revenues.  All of DC’s TIF projects approved to date are expected to repay their bonds with new revenue generated directly from the project.

The Corcoran Gallery project would not serve to revitalize a blighted neighborhood.  More important, there is no expectation that the museum itself will generate enough new sales tax and property tax revenues to pay off the bond.  Instead, the Corcoran TIF bond would be repaid with incremental revenues from the entire downtown TIF district. The downtown TIF district was created as a way of assuring potential investors that TIF bonds would be repaid.  As noted, all existing downtown TIF projects were approved under the assumption that revenues from the project itself would pay off the bond, which means that revenues from the broader downtown district were not expected to be tapped.

The Corcoran Gallery proposal thus would use as its primary funding source a TIF district that was established solely as a guarantee for other TIF projects.  This is a significant break from tradition.  TIF is an economic development program, and a key measure of that in the District has been its ability to generate new sales tax and property tax revenue.

To address this concern, Corcoran officials commissioned an analysis of the impacts of the museum expansion on the broader DC economy.  That analysis found that the Gehry addition would lead to a substantial increase in tourism in DC, with increased use of hotels, restaurant, parking, and other services.  The analysis concludes that the project would generate a substantial amount of new tax revenue.

Like most other commissioned economic impact analyses, the Corcoran analysis is not a scientific study.  It is instead an estimate based on a large number of assumptions, such as the expected increase in museum visitors from area residents and our-of-town tourists, as well as the amounts these visitors will spend at restaurants and hotels.  In general, the results of these kinds of analyses are highly reliant on the assumptions used and by definition are very imprecise.

A review of the Corcoran Gallery analysis suggests that it relies on optimistic assumptions.  Take, for example, its estimate of the increased museum attendance following the Gehry expansion. 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, which may be reasonable given that exhibit space will nearly double.  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.   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, or one-fourth lower than the estimate derived by the Corcoran’s analysis.

Perhaps more important, the Corcoran-funded analysis concludes 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”¦”  Its findings of economic and fiscal benefits are based on an assumption that a substantial share of the increased attendance at the museum will come from such visitors.  For example, the analysis estimates that the expected average stay at the museum would grow from 1.4 to 2.5 hours, and it assumes a proportionate increase in Corcoran-related tourist spending in the DC economy.

Yet the analysis provides no empirical basis for assuming that increased attendance at the Corcoran will come from new visitors or tourists taking longer vacations in the city.  It is more reasonable to assume that many of the people visiting the Corcoran following the Gehry expansion would have visited Washington and would have stayed the same amount of time in the absence of the expansion.  These tourists will choose to see the Corcoran’s new wing but will forgo another attraction ‘ or perhaps have less down time ‘ as a result.

The Corcoran’s analysis fails to take into account several key factors:

First, Washington is rich with cultural and other tourist attractions, and new attractions are developed regularly.   Recent new attractions include the FDR memorial, the renovation of the Botanical Gardens, the World War II memorial, and the museum of the American Indian.  In such an environment, it is unlikely that one new attraction ‘ no matter how significant ‘ would lead to a substantial long-term increase in tourists or on the average length of stay.

Second, tourists have limited resources in terms of both time and money.  A suburban resident who comes into the city to visit the Gehry wing may not have the time to come on another occasion to visit another museum or to meet a friend at a restaurant.  Out-of-town tourists have limited time and budgets for vacations.

Third, I imagine that many tourists plan to come to Washington and decide how long they can afford to stay ‘ and only after they make this decision do they pick the attractions they want to see while in town.

In short, there are several reasons why a new Gehry wing would increase visits to the Corcoran ‘ and thus increase the gallery’s share of DC’s tourism industry ‘ without having a significant effect on the DC economy.  The Gehry wing undoubtedly would lead some people to visit DC who otherwise would not come, but this number cannot be determined with any precision and is likely to be a fraction of the wing’s visitors.

I am not alone in questioning the magnitude of the Corcoran Gallery’s expansion on the DC economy.  Both the CFO and the Deputy Mayor for Planning and Economic Development have indicated that the Corcoran’s conclusions ‘ which include a 575 percent increase in visitor-related spending in the DC economy ‘ are optimistic.

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 should not be justified on economic development grounds.  It is cultural development, not economic development.  Moreover, because the $40 million subsidy would not pay for itself with additional tax revenues, it amounts to an appropriation of DC tax dollars, and it would use revenues that otherwise would be available to support other public services.  For this reason, any effort to support the Gehry wing should not be funded under TIF.  Instead, the Corcoran Gallery should compete for funds as part of DC’s annual budget process.  In that way, the DC Council and Mayor would make a fully informed decision and express its priority for supporting the Gehry wing among other priorities for public funds.

Thank you for this opportunity.  I am happy to answer any questions you may have.