Taxing the City Bland
Former Editor-in-Chief Ryan Avent writes a weekly column about neighborhood and development issues. He'll be on vacation for the next two weeks; this column will return on August 19th.
It’s been a hard summer for many loved and local businesses, some of which have been a part of the city’s life for decades. This week, long lines trailed down New York Avenue as customers waited to get a last meal at A.V. Ristorante. In June, downtown diners mourned as the storied Reeves Bakery closed, after failing to negotiate workable lease terms. Before that, Washingtonians seethed at the news that skyrocketing tax assessments would force the Warehouse Theater to close the doors of its music venue and cafe and start looking for a new location. And ten days ago, the Washington Post reported that a handful of other businesses, from Brookland’s Colonel Brooks’ Tavern to Georgetown’s Blues Alley, are under serious pressure from rising property tax bills.
The proximate cause of the heat on businesses is a scorching hot office market in the Washington area and especially inside the District. Strikingly low office vacancy rates have led to a boom in office construction. Even with millions of new square feet in office space expected to come online over the next two years, it’s expected that vacancy rates will tick up only minimally and temporarily, and to levels most other center cities would die for. The hot market radiates outward. Space everywhere in the city has grown more valuable, and commercial space, which could conceivably be turned into lucrative offices, has risen the most and the fastest.
It’s important to realize that rising assessments and property tax bills do play an important role in shaping land use patterns. Such increases force landowners to develop their properties more quickly and more densely. That means that less District land is sitting un- or underused, and it means that lots which are developed are done so in ways that boost transit use and the city’s revenue base, contributing to a more robust city budget. When values and tax bills are rising, surface parking lots and vacant buildings rapidly disappear, and that’s undeniably a good thing for the city.
That, however, is not the entire story. It would be wrong to declare that changes in the city are only due to the workings of the market, and that we should be glad to accept the office boom as it has occurred. Growth in the central business district has taken place within the institutional framework the city provides, and as it turns out, that framework has real and unfortunate effects on the kinds of businesses the city gets--and loses.
Photo by dl004d.
Take the central business district. There, strict height limits and the city’s tax policy interact to shape the look and feel of downtown neighborhoods in significant ways. Height limits constrain supply and push up rents, limiting the kinds of businesses that can afford to locate downtown. This problem will only become more acute as construction north and south of Capitol Hill leads to a build out of potential office space in the city. Meanwhile, rising tax assessments force building owners to construct and choose tenants in such a way as to maximize the revenue they receive. The result is an office core built to squeeze as much space as possible out of lots limited in three dimensions, and buildings which contain little ground floor retail. The hulking office blocks pay the bills, but they also deaden street life and the overall aesthetics of the central core.
The outcome is hardly an optimal one for the District. The city and office tenants would be better off with a mix of uses downtown. Residential units in the core would help to reduce congestion, and a better mix of local businesses would enliven office life, increasing the array of shops, restaurants, and entertainment options available to those working in the city. It’s likely that a better mix of retail would increase the value of office space downtown, but while that mix might be good for the city, individual land-owners are forced to consider only their own balance sheets. Each landowner makes building and tenant decisions to individually maximize revenue, and the result is disheartening blandness.
A mix of uses displays what economists call positive externalities. That is, it has benefits for a community that can’t be captured by those providing the mix. Opening a new shop or restaurant downtown might increase the value of surrounding office space without the owners of the office buildings having to contribute a thing. In such a situation, the positive-externality good is underprovided by the market, and economists therefore recommend that it be subsidized. The city should be making it easier and cheaper for varied businesses to operate in office cores. But is it?
In fact, the city does fairly near the opposite. As local urban revitalization consultant Richard Layman has meticulously documented, the city treats all commercial property in the city as if it could be converted into high-end office or retail space. Whatever the size and location of a piece of commercial square footage, it is treated as if it could be turned into the downtown headquarters of a multinational consulting firm or the primary District space for a national chain retailer. This is patently ridiculous. Older buildings, regardless of their size and density, cannot possibly expect to attract the tenants necessary to support tax bills computed in such a way. Smaller and quirkier spaces, in many ways the loveliest parts of commercial districts, are just not configured for use by offices or larger retailers. The city’s tax rules penalize such spaces for being older and odder, and they dictate the replacement of such buildings by new, large offices and retail spaces.
Even if the city’s policies treated different kinds of buildings in different locations differently, its inattention to use would hamstring businesses with smaller margins, pushing all commercial spaces everywhere toward the most profitable types of activity. The question is, do we believe the city is better off with a mix of activities in commercial areas? Do we feel that the city is a better place to live—and perhaps even a more desirable business location—if commercial strips are home not just to bars and drug stores, but also to theaters and galleries, specialty retailers and independent restaurants?
If we do, then it is important that our tax code reflect this. The city should arrive at general classifications for the kinds of uses any given street ought to have, and it should tax those classifications based on what they are able to pay, and not on what a K Street lobbying firm could afford to pay. Do note: this doesn’t prevent market mechanisms from acting; rents across the city can and should vary based on neighborhood demand. But there is a difference in allowing demand to shape uses and in allowing shoddy tax policy to strip every last bit of variety out of an area.
It is a terrible shame that growth in the District has led to the loss of some of the great and distinctive small businesses in the city. It’s still worse to see that anger about such losses has led to bitterness in the city over the economic resurgence. Some residents wonder aloud whether it was worth the growth to sacrifice such key facets of the city’s character. But it’s important to note that the market didn’t make those losses happen; growth didn’t doom these places that we love. Poor public policy doomed those businesses, and unless the city’s government acts to fix the way that businesses are valued and taxed, it will doom others still.