Chairman Evans and other members of the Committee, thank you for the opportunity to testify 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 appreciate the opportunity to testify on this important issue.
I am here to testify in support of Bill 18-400. This bill would improve the information available to policymakers and to the public when a tax abatement and exemption is being considered. It also would be consistent with best practices in other jurisdictions and with the steps the District already takes to analyze other kinds of economic development subsidies.
In recent years, the District has subsidized a number of development projects through tax exemptions and abatements, yet the District currently does not have a process to evaluate the merits of one tax abatement versus another. Bill 18-400 would help answer the two most critical questions that arise when an abatement is being considered — namely, “Is this level of subsidy needed for this development to occur?” and “What benefits would the District get from the development?”
It is important to note that the District has a process for evaluating the subsidy needs of economic development projects when they are funded under the Tax Increment Financing program. For TIF projects, the Chief Financial Officer is required to conduct a “gap analysis” to determine whether the developer would be unlikely to undertake the project without assistance from the city. If a project is not viable on its own, the gap analysis also determines the level of subsidy that is needed.
The gap analyses tend to include important information, such as the total development cost, the equity contributions of the developer, and other sources of private financing secured by the developer. This kind of information helps the public and the Council understand how the city’s financial support fits within a project’s overall financing.
There is no such requirement for a gap analysis, however, when a project’s subsidy comes through tax abatements and exemptions. Because tax exemptions and abatements represent a financial subsidy for development projects just as TIF subsidies do ‘ the only difference is the way the subsidy is delivered ‘ it would make sense to require a gap analysis for projects that receive tax exemptions or abatements as part of their development financing.
The second critical element in evaluating a proposed economic development subsidy is an assessment of the benefits that would be derived. Bill 18-400 would require a listing of benefits required under current law and other community benefits that would be derived. The DC Fiscal Policy Institute strongly supports this provision and hopes it can be strengthened even further.
There are likely to be cases where one tax subsidy makes more sense than another. For example, a tax break to bring a retail outlet to an underserved neighborhood would be better than a tax subsidy to bring a retail outlet to a neighborhood that is already thriving. In another example, a $100,000 tax subsidy that supports creation of 10 living wage jobs would be better than a $1 million subsidy that results in 5 minimum wage jobs. Currently, there is no organized way to assess the benefits of a proposed tax subsidy
I believe that this bill could be strengthened by being more specific about the kinds of benefits that should be listed, particularly the number of jobs that would be created and the wages and benefits of those jobs. The District currently suffers from record high unemployment even though the number of jobs in the city is growing, which highlights the importance of focusing economic development efforts on job creation.
Adopting a process to evaluate proposed tax abatements should lead the District towards tax abatements that help the city get the most out of its economic development investments. It also would make it easier to incorporate tax abatements into a broader economic development plan for the city because we could assess whether the benefits of an abatement are consistent with such a plan. Finally, the process that would be established under this bill may help address the concerns that tax abatements result in substantial benefits to a select few businesses, usually large ones. I am sympathetic to the concerns raised by small businesses that tax abatements for large businesses result in less revenue that could be used to support small businesses in the city. To that end, it would make sense for the District to track the aggregate amount of tax abatements awarded each year, although that is not the subject of this bill.
I would like to end with a general comment on the role of tax abatements in economic development. In prior testimony on tax abatement legislation, the DC Fiscal Policy Institute has highlighted research showing that tax abatements generally do not have an effect on business location decisions, and that such decisions largely based on the competitive advantages of a particular location. We continue to believe that tax abatements generally should not be pursued in an effort to lure particular companies into the District.
That does not mean, however, that there is no room for tax abatements as an economic development tool. Instead, tax abatements should be used when a given outcome is desired — such as bringing development to underdeveloped neighborhoods ‘ but private market factors do not make such developments viable. Bill-18-400 will help identify these kinds of projects by requiring a financial analysis of a project’s need for subsidy to move forward.
Thanks again for the opportunity to testify. I am happy to answer your questions.