DCBIA Viewpoint on Proposed Commercial Property Tax Hikes

March 27, 2019

Viewpoint: Bowser's proposed tax hikes wrong for D.C.

Published in the Washington Business Journal March 27, 2019, 3:30pm EDT

In Mayor Muriel Bowser’s second inaugural address in January, she announced an ambitious goal: create 36,000 new housing units in the District of Columbia by 2025. She is the first government official in our region to commit to an ambitious housing affordability goal for all income levels so D.C. can be a truly inclusive city.

As we all know, the District cannot achieve this objective alone, and the mayor has rightly ignited a call-to-action for the region. It’s also going to require a multifaceted, public and private sector approach that addresses one of the top reasons that affordable housing has been suppressed in the District: a zoning, regulatory and permitting environment that makes building housing unnecessarily expensive.

While the mayor recognizes this, the budget proposal she released on March 20 includes two tax increases on commercial real estate that do nothing to improve our zoning requirements or reduce the regulatory burden imposed on constructing housing. With the commercial property tax already amounting to 65 percent of the total amount of real property tax collection by the District, and the District seeing increases, not decreases, year over year in tax revenues, asking for even more revenue without parallel actions to reduce the regulatory burden to ensure the development of affordable housing is unseemly.

First, the plan would increase the deed transfer and deed recordation tax rates for mixed-use and commercial real estate transactions worth $2 million or more from 1.45 percent to 2.5 percent. Since these are two separate taxes, in reality, this is a tax increase from 2.9 percent to 5 percent per transaction. The plan would also increase the recordation tax on any deed that evidences a transfer of interest in a commercial property worth $2 million or more from 2.9 percent to 5 percent. These amount to an additional cost of $42,000 per transaction, at a minimum.

Second, the budget proposes to increase the commercial property tax rate on properties over $10 million from $1.86 per $100 of assessed value to $1.89 per $100 of assessed value. It would do this by repealing the commercial property tax reduction the D.C. Council passed last year as part of the internet sales tax.

Imposing additional barriers to build housing through increased taxes is not the way to expand the housing supply across income levels. This is particularly true at a time when zoning rules need immediate change, and regulatory costs are growing, and building permitting is unpredictable.

For example, more than 4,000 affordable housing units have been stalled due to zoning challenges in the D.C. Court of Appeals. The threat of litigation has chilled the use of the planned unit development process, which was once a valuable tool for maximizing affordable units beyond inclusionary zoning requirements. We’ve asked the mayor and the Council to use the Comprehensive Plan and other tools to give the court clear guidance so that it does not unintentionally continue to discourage affordable housing production. However, there has been little action taken by the Council on a document the mayor submitted more than a year ago.

Further, the new Clean Energy D.C. Omnibus Amendment Act passed by the Council in 2018 will make the District a leader in combating climate change, but its building efficiency standards will significantly increase development costs. While DCBIA is working with the Department of Energy and Environment to educate our industry on compliance, there has been common agreement that there will be many new upfront costs on development, both residential and commercial, to meet these standards.

The District’s financial position is the envy of virtually all U.S. municipalities, thanks to the strong fiscal stewardship of the mayor and the Council and many other city leaders. As the mayor said in her State of the District Address, the city has moved from the Control Board to Aaa status in fewer than 20 years. The city achieved this important designation by ensuring a stable tax structure and a balanced debt cap, which continues to attract investors.

Raising the District’s commercial real estate property and transaction taxes, which are some of the highest in the region already, won’t get us the housing the District needs. It will only detract private investment. Instead, the public and private sectors should laser-focus our efforts on cutting through the city’s challenging zoning, regulatory and permitting environment. Now is a decisive moment for the District to lead our neighboring jurisdictions in meeting this housing demand.

Let’s build together.

Lisa Maria Mallory is CEO of the District of Columbia Building Industry Association.