Downtown Conversion Tax Abatement is an Ineffective Use of Public Dollars

Chairperson McDuffie and members of the Committee, thank you for the opportunity to submit written testimony. My name is Erica Williams, and I am the executive director at the DC Fiscal Policy Institute (DCFPI). DCFPI is a nonprofit organization that shapes racially-just tax, budget, and policy decisions by centering Black and brown communities in our research and analysis, community partnerships, and advocacy efforts to advance an antiracist, equitable future.

My testimony today will focus on four recommendations regarding the Housing in Downtown (HID) Abatement. They are to:

• Reject exemptions from key equity provisions of the abatement as adopted in the fiscal year (FY) 2023 budget. These include the First Source requirements in hiring; the Tenant Opportunity to Purchase Act (TOPA) requirements for residential properties; and the original affordable housing requirements;
• Reject the proposed, costly increase to the abatement cap in FY 2028, which could cost over $900 million in the next 20 years;
• Add safeguards to this program, including a “clawback” provision for developers that fail to comply with equity provisions, a phase down and time limit on abatement receipt, and a sunset on the program overall; and,
• Consider converting the abatement into a capital loan or grant program funded through a dedicated tax, along the lines of the Housing Production Trust Fund (HPTF), to target any support to the upfront capital costs of conversions and preserve critical local fund dollars for urgent human needs.

Reject Changes to Housing in Downtown Tax Abatement Program and Consider Changes to Safeguard Public Dollars

Parameters of the Existing Abatement

The “Tax Abatements for Housing in Downtown Act of 2022” adopted by the Council in the FY 2023 budget provides for a property tax abatement to subsidize the conversion or rebuild of commercial properties into residential units. This subsidy would go to qualifying property conversions in a specific area of downtown DC that add at least 10 housing units; property owners would receive the abatement for a period of 20 years. The total cap on the abatement program is $2.5 million in FYs 2024-2026 and $6.8 million in FY 2027, after which time the cap raises by 4 percent each year. Properties must set aside 15 percent of housing units at rents affordable to households earning 60 percent or less of median family income (MFI). Mayor Bowser’s FY 2024 budget proposal would remove key equity provisions built into the abatement program and vastly grow its size in FY 2028, outside of the current financial plan.

Abatements are an Ineffective Approach and the Future of Downtown Remains Uncertain

Tax abatements often go to companies that already are prepared to engage in a particular business activity, subsidizing activity that would have happened anyway and thus wasting public funds. This has been borne out by national research. A comprehensive analysis of business incentives for economic development offered by state and local governments found they are often costly yet not highly correlated with unemployment or income levels, or with future economic growth.^[1]

Some have pointed to the NoMa housing abatements made available in 2008 as a shining success story of the efficacy of tax abatements for this purpose, but the District government has not conducted an analysis to determine a causal relationship between the abatements and housing production in the neighborhood. In fact, it is far more likely that the development of the then New York Avenue Metro Station just a few years prior served as the major catalyst for development in the area, accompanied by the federal government’s efforts to bring thousands of federal employees to new headquarters near the stop.^[2] Indeed, the District created the Metro stop specifically because of the untapped economic potential of that area, and private interests were willing to pay a substantial share of the costs to build it for that very reason. Broader research confirms the catalytic economic development effects of public investment in transit—rail in particular—which often also predicts future gentrification.^[3]

The shock of the pandemic created an incredible level of uncertainty and DC, like so many places across the country, is arguably only just starting to emerge from that crisis, with many residents still facing hardship and insecurity and many employers now considering the right balance of remote versus in person work. It is not at all a foregone conclusion that the extreme, necessary shift to remote work is permanent.

If the demand for commercial property remains low or worsens, and developers conclude that it benefits their bottom line, then conversions to residential or mixed-use properties will happen without public subsidy. Some have already happened.^[4] In fact, one analysis shows that DC led cities across the nation in office to residential conversions between 2020 and 2021.^[5]

Policy Recommendations

The Committee should reconsider the program altogether, particularly at a time where we have limited resources and stark trade-offs in our spending decisions. Short of that, Council should reject the Mayor’s proposed changes to the abatement and consider potential changes that safeguard the use of public dollars to subsidize conversions:

• Reject exemptions from key equity provisions of the abatement as adopted in the FY 2023 budget. Affordable housing requirements for the current HID abatement are already low. The Mayor’s proposal brings the abatement further out of line with the District’s affordable housing goals by allowing developers to choose between ensuring that at least 8 percent of units are affordable to households at 60 percent of MFI or that 15 percent are affordable at 80 percent MFI. DC also should keep in place its first source in hiring requirements for businesses receiving public subsidy. DC residents should get first consideration for jobs created with public dollars. Furthermore, exempting developers from TOPA requirements deprives potential tenants in converted buildings of the rights that other tenants have. It sets a dangerous precedent to eliminate for a small and powerful interest group key equity provisions required by others to receive public subsidies. Some might argue that this is a crisis and calls for a different set of rules, but in reality, we apply these rules even when addressing one of DC’s biggest crises—the lack of affordable housing. Commercial developers should not get a pass.
• Reject the proposed, costly increase to the abatement cap in FY 2028. This expansion increases the cap on the abatement by 600 percent in a year that falls outside of the current four-year financial plan. This amounts to budget gimmick that locks in a high level of spending in a future year, when we have no idea what the revenue landscape will look like or what the trade-offs will be. It also leaves in place—for the foreseeable future—the annual 4 percent increase on the abatement cap starting in FY 2029. If the District made full use of the program, the cost would add up quickly. DCFPI estimates that the District would spend roughly $286 million in 10 years, $567 million in 15 years, and $909 million in 20 years, not adjusted for inflation. This is an enormous amount of public funds that would go to wealthy developers and would no longer be available to help meet the vast needs across DC’s communities.
• Add safeguards that ensure appropriate use of public funds. Council should require a “clawback” provision for developers that fail to comply with equity provisions and a sunset for the program. Developers who are unable to meet DC’s requirements to ensure affordable housing units at the level mandated or to ensure first source hiring agreements should be required to pay back the abatement. Developers should receive the abatement for no more than five years and the amount of the abatement they receive should phase down over time. Additionally, the program overall should include a five-year sunset. That would set it up to expire in FY 2028, one year after the Office of Chief Financial Officer will publish its next Tax Expenditure Report, which should document how effective the abatement program is at meeting its purported goals. The need for conversions is not permanent, neither should be the abatement. In the meantime, Council should request details from the Office of the Deputy Mayor for Planning and Economic Development on 1) the number of conversions happening already, without subsidy, 2) the number of applications that have been submitted or that it expects will be submitted for such projects in downtown, 3) and the full application and vetting process for the HID abatement.
• Finally, consider converting the abatement into a capital loan program. The District has experience with this through its HPTF, which has a dedicated revenue source that allows DC to subsidize the production of affordable housing with low interest loans and grants, including to cover capital construction costs. DC could create a special, temporary fund for expanding residential units downtown that operates like the HPTF. This would be a more transparent process, force developers to compete, and better ensure that the loan awarded matches what is needed to make the project work. It could be funded through a special tax or fee, perhaps even modeled after a hospital provider tax that levies a fee on providers to help cover the costs of industry-related services. This model would reduce trade-offs with other spending priorities in the budget.

Thank you for the opportunity to testify. I am happy to answer questions that members of the Committee may have.