Testimony of Anthony Williams, CEO and Executive Director, Federal City Council. Submitted on April 26, 2019 for the record at the Budget Oversight Hearing on the FY20 Budget Support Act before the Committee of the Whole.
Good morning, members of the Committee of the Whole. My name is Anthony Williams and I am the CEO and Executive Director of the Federal City Council, a nonprofit civic organization that works to make our city a better place.
I’m testifying before you today to express my concern about the Mayor’s proposed FY20 budget—both in how it puts too much of a tax burden on the commercial property sector and also its adherence to best-in-class fiscal principles.
The health and vitality of the commercial property sector is intertwined with that of the city. Over the past twenty years, the downtown commercial district has been brought back to life. It has created thousands of new jobs and contributed a huge amount to the city’s coffers. Already the commercial property sector pays 65 percent of the city’s real property tax collection.032
But the city is threatening to slay the goose that lays the golden egg. These past few years have seen an onslaught of tax hikes and costs saddled onto the business and commercial sector. Businesses will begin paying into the generous universal paid leave system on July 1. Water fees and CRIAC fees have more than doubled in ten years, and are scheduled to continue to rise. Between 2016 and 2020, the minimum wage will have increased by 30 percent. Now property costs are going up too.
It is the cumulative effect of all of these costs—which have been piled on in a short period of time—that should give pause to DC Councilmembers as they cast their vote. Suddenly annual costs to businesses could be up 4 percent in a single year.
Ultimately it is the little guy who pays. Corporate tenants can stomach the higher rents. But that may not be the case for local nonprofits, dry cleaners or mom-and-pop retailers. When their rent goes up, they have to cut costs elsewhere—forgoing pay raises for their low-income workers or closing up shop entirely. The popular restaurant Proof closed down because their rent was going up, as did the long-time downtown neighborhood staple Acadiana. Their 50 to 90 hardworking tip-earning staff are out of work.
The city’s competitiveness as a location for business is also at stake. Developers and investors are highly mobile. Today DC has some of the highest commercial real estate taxes and transaction costs in the region. The proposed FY20 budget would make the city’s deed taxes the highest in the country. Investors could easily choose to move their money and real estate projects elsewhere. Plus all of the last-minute tax increases reflect an unpredictable tax environment, which makes DC a less competitive place to run a business. There have been five changes to the commercial property tax in the last two years. DC Policy Center analysis has found that the District is already losing out to Fairfax County in regional competition for large business establishments.
The Washington Post editorial board agrees. Their headline says it all: “Businesses need predictability to thrive. That’s not happening in D.C.”
These additional tax hikes are coming at a time when DC’s commercial property sector is showing signs of weakness. Downtown office vacancy rates are higher than they should be. Remember that when the commercial property sector loses money, the city loses tax revenue.
The commercial tax hike reflects a larger structural problem within the city’s budget planning. The proposed FY20 tax increases were enacted to pay for one-time investments in affordable housing and other needs, but what are these revenues funding in the future? It is poor practice to go back to the commercial sector every year whenever expenditures inch higher than the revenues coming in.
It is even worse practice for expenditures to expand year-after-year without a long-term plan to pay for it. The FY20 budget proposal has expenditures expanding at close to 8 percent, while the economy is growing at 3 percent. Such an imbalance cannot continue. As Yesim Taylor from the DC Policy Center so eloquently lays out in her piece on the FY20 budget, a reckoning is coming in FY21-FY23 when there will be more budget gaps that must be filled. Arbitrary and last-minute tax hikes should not be an option.
Spending creep is something that elected officials are all too familiar with. Everyone wants more money for their programs and priorities, not less. It’s hard to pair back spending once it’s been promised and when stakeholders involved become accustomed to more money every year. Maybe we have forgotten what it was like in the late 1990s and early 2000s when times were lean, difficult decisions had to be made and budgets had to be cut.
But I hope Chairmen Mendelson and other DC Councilmembers will think hard about where spending growth can be constrained or even cut. The persistent budget imbalance is about two percent of total expenditures. We have, in other words, a two percent problem.
I end by reminding the Chairman that we are all on the same side here. We all want our city to prosper and for everyone to have their basic needs met. We want a positive-sum game where the city’s economic engines churn and create wealth that is shared broadly with employers, workers and residents. But we run the risk of turning off those engines with taxes and fiscal imbalances that get out of hand. In the end, the city and its residents will suffer.