Testimony of Ed Lazere, Executive Director, at the Public Hearing on Bill 18-827, the Popular Point Business District Incentive Act of 2010, Before the Committee on Finance and Revenue

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. 

The DC Fiscal Policy Institute has several concerns with the Poplar Point Business District Incentive Act.  While the goal of promoting commercial and retail development in Ward 8 is laudable, there is little evidence to suggest that this extensive set of tax incentives will do much more than weaken the city’s future tax base. 

Bill 18-827 would provide a rich set of tax breaks to businesses in the Poplar Point Business District including:

  • A 3 percent cap on annual property tax increases
  • A 25 percent corporate income tax break
  • Exemption on sales tax for construction materials
  • A 50 percent break in the restaurant sales tax for sit-down restaurants

These incentives would last for 20 years for any eligible business.

Our concerns about these proposed tax incentives are that they could be very costly while having a very limited impact.  There is a good amount of research showing that tax incentives generally don’t play a large role in business location decisions because other factors matter a lot more ‘ like the quality and costs of labor, the quality of public services, and the proximity to business markets.[1]  A recent report from Good Jobs First concludes that tax incentives are “crude tools” that “exert a very small marginal influence on corporate investment decisions.”[2] 

The Poplar Point Business District Incentive Act would create something like an enterprise zone, a targeted geographic area with incentives for business development.  Yet most academic research suggests that these zones do not meet these goals.  According to the National Conference of State Legislatures:

“Academic reviews of enterprise zones, often prepared using econometric models, have found little evidence that zone programs would actually result in net job creation and increased community investment. Some economists hold that, as a rule, fiscal variables have very little effect on economic development, thus undercutting the fundamental rationale for enterprise zone programs.”[3]

The District’s grocery store tax incentives provide a useful example of tax incentives that are not enough to promote development in underserved areas.  Despite being in existence for a decade, only one major grocery store opened east of the Anacostia River, and this required significant involvement from DC government, while grocery stores flourished in other parts of the city.  More recently, Yes Organic Market will open east of the River, but this is probably due to recognition that the market has improved.  In the end, businesses open when they think they can make enough money to succeed.

This means that most businesses that would claim tax breaks under bill 18-827 are those that would choose to locate in the Poplar Point area, anyway.  As a result, the city could lose substantial future tax revenues, jeopardizing its ability to meet future service needs, while seeing little benefit.  This is especially concerning now, given DC’s ongoing fiscal crisis and projections the revenue collections will grow slower than the rate of inflation in the next four years.

Offering such a large set of incentives that last for 20 years to any business that locates in this business district is a very blunt economic development tool.  The fact that 20 years of tax breaks would go both to businesses that would have located there and succeeded without subsidy and to businesses that need help suggests that a more targeted approach may be more effective and a more efficient use of city resources.  A more targeted approach would include a process to assess which businesses need assistance and how much assistance is needed, and the aid would likely last less than 20 years.  

Finally, offering tremendous incentives in one area that needs development assistance but none to others creates a competitive disadvantage for other commercial areas that could use assistance.  This is yet another reason to provide more targeted economic development that is spread more broadly across the city and part of a comprehensive economic development plan.

Thanks again for the opportunity to testify. I am happy to answer your questions.

[1] Economic Policy Institute, Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Developmenthttp://epi.3cdn.net/f82246f98a3e3421fd_o4m6iiklp.pdf, 2004.

[2] Good Jobs First, Growing Pennsylvania’s High-Tech Economy: Choosing Effective Investments, 2010.

[3] National Conference of State Legislatures, “Evaluating Enterprise Zones,” 2008