Chairman Evans, Chairman Brown, and members of the Committees, thank you for the opportunity to speak today. My name is Katie Kerstetter, and I am a Research Associate with 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 Neighborhood Restaurant and Retail Tax Incentive Act of 2007 would extend a variety of tax incentives to qualified restaurant, hotel, and retail businesses located in under-served areas. These tax incentives include 10-year exemptions on license fees, real property taxes, and personal property taxes as well as a sales and use tax exemption on the purchase of building materials or equipment related to the development or substantial rehabilitation of a qualified business. This package of tax incentives is already offered to supermarkets that locate in under-served areas.
DCFPI supports the legislation’s goal to increase economic development in under-served areas. However, we are concerned about the methods the Act uses to encourage economic development and believe that these methods warrant further study before enacting this new array of tax breaks.
- The existing package of tax incentives offered to supermarkets has not been evaluated for effectiveness. No reports have been published that analyze the effect of existing tax incentives on new supermarkets locating in under-served areas. In particular, these long-standing tax incentives have not done much to address the serious lack of full-service grocery stores east of the Anacostia River. Additionally, we do not know whether these supermarkets were responding mainly to the tax incentives or to other factors in their decision to locate in an under-served area.
- There is no evidence that expanding these tax incentives to hotels, restaurants, and retail businesses would attract and keep more of these businesses in under-served areas. Without evidence as to the effectiveness of the supermarket tax incentives, it is difficult to justify expanding the incentives to additional businesses. If this bill gives tax cuts to businesses that would be expected to open anyway, it could drain District revenues substantially without necessarily helping to attract businesses that otherwise would not open.
- Existing businesses located in under-served areas would not be helped by this legislation, unless they plan to make substantial renovations. Existing businesses in under-served areas thus may be placed at a competitive disadvantage as new businesses take advantage of the 10-year property tax exemptions.
- Research has shown that public investments matter just as much — if not more — than tax incentives in determining where a business will locate. A review of research relating to local economic development strategies suggests that tax incentives generally do not play a large role in businesses’ decisions to locate in a specific area. Rather, the cost and quality of labor, the quantity and quality of public services, the proximity to business markets, and the access to raw materials and supplies “tend to be more important than taxes in business location decisions.”[1]
For these reasons, we recommend that the Committees on Finance and Revenue and Economic Development take this opportunity to study the impact of existing supermarket tax incentives before extending this policy to hotels, restaurants, and retail businesses. To meet the goal of supporting neighborhood-level businesses in under-served areas, we recommend more targeted aid to small businesses, both new and existing; more promotion of neighborhoods’ purchasing power; and the maintenance and enhancement of services that improve neighborhood stability and market power. The Council’s proposed appropriation of $1 million in the Supplemental Appropriations Act for a small business microloan program is a great step towards more targeted aid to small businesses.
Thank you again for the opportunity to offer testimony. I am happy to answer any questions that you may have.
End Notes:
[1] Robert G. Lynch, “Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development,” Economic Policy Institute, 2004, http://www.epinet.org/books/rethinking_growth_(full).pdf.