Chairman Evans and members of the Committees, 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. I appreciate the opportunity to testify on this important issue.
I appreciate the Committee’s interest in exploring the effectiveness of the District’s possessory tax, particularly if there are signs that it is not working well. I support the portions of this bill that would require an analysis of how this tax is applied. Nevertheless, I have serious concerns with the other element of this bill that would effectively freeze the property taxes for three years for all entities currently paying the tax.
We all know that the presence of the federal government, while providing the critical core to our economy, creates substantial adverse constraints on the District’s tax system. The largest factor is the federal prohibition on taxing the income earned in the city by non-residents, but a second important factor is the large share of DC property that is exempt from the property tax.
The possessory tax is an attempt by the District to address the large volume of tax-exempt properties, by levying a property tax on profit-making enterprises located in otherwise tax-exempt buildings. This is both creative and common sense. If there is a Starbucks in a federal building, why shouldn’t it pay property taxes just as a Starbucks in any commercial building would? The logic of not taxing government properties does not apply to for-profit enterprises that are located in them.
The proponents of this bill assert that many potentially liable entities are not paying this tax and that only a small handful of entities actually pay the tax. It is unfortunate, of course, if various factors are preventing the District from applying the possessory tax as widely as possible. I applaud bill 17-549’s requirement that the CFO analyze the extent to which potentially liable entities have not been identified, assuming that such an analysis is feasible.
I have concerns, however, with Bill 17-549’s other proposed remedy. The bill would freeze assessments at 2007 levels through fiscal year 2010 for all entities currently paying the tax. This is effectively a tax cut, since it is likely that assessments and tax payments would increase without it. The cost of this provision in foregone revenue is unknown.
My concerns fall into the following areas:
The fact that the possessory tax cannot be applied to all for-profit entities in federal buildings does not mean it should be reduced for those that are taxed. The District has struggled for years to tax economic activity in federal buildings, such as in Smithsonian museums, and there have been some successes. Restaurants in many museums now collect DC sales tax, although their gift shops generally do not. Just because we can tax some, but not all, activities within the museums should not be considered a failure. And I can’t imagine anyone arguing that we should stop collecting the restaurant sales tax at the Smithsonian museums just because we can’t collect sales tax on gift shop sales.
In short, bill 17-549 would represent a retreat from important efforts to fully tax economic activity in federal buildings.
The logic of treating businesses that operate in federal and other tax-exempt buildings like all other businesses makes sense. Why should the McDonalds in Union Station be treated differently from any other McDonalds in DC?
Bill 17-549 arbitrarily provides preferential property tax treatment to a select number of businesses at a time when many businesses are concerned about rising assessments. The notion that businesses paying the possessory tax are being treated unfairly because other potentially liable entities don’t pay the tax does not make sense. Those paying the possessory tax are not being treated unfairly when compared with the much larger group of businesses in privately owned buildings that pay the property tax. Indeed, the goal of the possessory tax is to create equity between businesses in public buildings and those it privately owned buildings. It therefore would be unfair to freeze assessments for businesses paying the possessory tax while not freezing assessments for businesses paying the standard commercial property tax, many of whom also are concerned about rising assessments.
There is no evidence that businesses subject to the possessory tax are being over-assessed. If they are, the remedy should be to appeal their assessment, not to arbitrarily freeze their assessments for three years. If there is a problem with the current system of assessing these properties, the system should be changed. If a new system results in downward revisions to assessments, bill 17-549 could require the District to make retroactive refunds to reflect lower assessments.
The DC Fiscal Policy Institute thus opposes the assessment freeze proposed in bill 17-549, both because it limits our ability to tax economic activity in federal buildings and because it creates new horizontal inequities among businesses in the city.
We also are concerned, however, because resources available for tax relief are always limited and thus must be used judiciously. The looming national economic slowdown is likely to affect DC’s revenue collections negatively, limiting even further the opportunities for tax reductions.
If the District is able to consider tax relief, we hope efforts will be focused on addressing a problem recently identified by the CFO. A recent analysis from them shows that taxes paid by low-income households in DC are the highest in the Washington region. This is true despite the efforts of this committee and the full Council to create a substantial Earned Income Tax Credit. With high and rising costs of living, a major priority for tax relief in the city should be to eliminate as much as possible taxes on our lowest-income residents.
The DC Fiscal Policy Institute recommends several steps to accomplish this goal, including updating the Schedule H property tax credit for low-income residents. That credit was created in the 1970s, and the maximum credit and income eligibility limit have not been adjusted even once since then. Another option is to increase DC’s standard deduction. While this deduction was increased for tax year 2007, the current level of 4,000 remains far lower than the federal standard deduction and than similar deductions in many other states.
Thank you for the opportunity to testify. I am happy to take any questions you may have.