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.
Thank you for the opportunity to testify on these bills. Because my comments and concerns are common among these bills, I will submit one testimony that covers all three bills.
Bill 18-221 would provide a seven-year tax exemption to a planned luxury hotel at 22nd and M Streets, NW. Bill 18-222 would provide a tax abatement to a mixed-income development in Shaw, which will preserve 54 units of existing affordable housing. And Bill 18-231 would provide a tax abatement to mixed use developments at the Columbia Heights and Petworth Metro stations.
DCFPI has several concerns over these bills.
First, there is little information provided on the need for assistance for these projects, most of which are in very strong real estate locations. All projects were planned without tax abatement financing. Two of the projects are completely or nearly completed already. They are now seeking financial assistance in the middle of the project, for reasons that are unclear. And unlike other financial assistance programs in DC, like TIF, there is no application process for tax abatements that would allow the reasons for seeking assistance to be explained. Tax abatements also are not subject to financial analysis by the CFO, as TIF subsidy requests are.
Second, the full costs of tax abatements are not accounted for and the total cost of tax abatements in the District is not being monitored well. Under current rules, the fiscal impact of a bill is measured over four years. If the full cost of an abatement occurs towards the end of the four-year period – such as a tax abatement for a building that will not be completed for three years – the fiscal impact statement does not reflect the true costs. The FY 2010 budget, for example, includes tax abatements that have a cost of $1 million in FY 2010 but will rise to $13 million per year starting in FY 2013. Each of the bills before us today includes tax abatements for projects that are not completed, so we believe their fiscal impact is understated. This is especially important as the city deals with significant budget problems.
Third, the use of ad hoc tax abatements without clear criteria is not effective or coordinated economic development policy. The city should have an economic development plan and an economic development budget, and then allocate funds within those plans and budget.
Fourth, we do not believe that a changed economic climate or the fact of the presence of community benefits are sufficient reasons for tax abatement subsidies. It seems likely that the reason these tax abatements are being sought is that changing market conditions have made these projects less viable. Yet the projects were viable when approved and planned, and the costs of amenities such as affordable housing requirements presumably were factored in. Changing market conditions is a risk that developers take – and until recently developers were likely benefiting from markets that turned out to be stronger than when their projects were planned. Changing market conditions does not seem justification for seeking a subsidy. In that case, a vast array of businesses could seek assistance from the city
Finally, these bills would take resources that could be used for other purposes. Many affordable housing projects in the District have been put on hold in recent years due to declining funds in the Housing Production Trust Fund, which has lost two-third of its revenue since 2007. The funds being considered for these tax abatements could be used to support these stalled projects.
To address these issues we recommend the following
- Businesses seeking tax abatements should be required to complete applications that explain the need for assistance, and they should be subject to financial analysis from the CFO. The three bills before us today should undergo a CFO financial analysis before they are allowed to move forward.
- The District should better monitor the accumulated costs of tax abatements, and it should consider setting a cap on annual abatements.
- The fiscal impact rules should be changed so that the full implementation cost of any legislation is reflected in the first – or perhaps second year – of the financial plan.
Finally, I encourage the Council to hold off adopting this bill until it identifies a funding source. The DC Council has rightly focused in the past year on eliminating laws that have been passed without a funding source. DCFPI believes that requiring a bill to be paid for when it is adopted is an important part of making sure that the bill in question is a real priority for the Council. It is simply too easy to vote for a bill that is unfunded and subject to inclusion in a future budget. Voting for such measures is cost-free, and Council members can say that they are not really voting for the bill because it won’t be implemented based on that vote. Yet passing any bill – even an unfunded one – may give the bill’s beneficiaries an expectation that the bill will ultimately be funded, particularly when there is a targeted beneficiary such as in the case of these bills. It would be far better to require a funding source to be identified before a bill is adopted, both to ensure that the Council really is expressing a priority for it and so beneficiaries will clearly understand that adopting the bill means it will be implemented.
Thank you for the opportunity to testify. I am happy to take any questions you may have.