Why DC Should Raise Taxes on Commercial Real Estate

Why increased taxes would be a boon for the city—and for small businesses.

By: Harry Jaffe

Why has DC’s tax office reduced appraisals on commercial property by $2.6 billion, thus reducing tax revenues by $48 million?

The question, raised by an investigative article in the Washington Post, raises some important matters going back decades. Developers and tax assessors have had cozy relationships since the 1980s, when downtown DC first became a Monopoly board for foreign investors. The relationships between real estate lawyers and members of the boards that ruled on assessments were incestuous, if not slightly corrupt. Mayor Vince Gray and the city council have tried to reform and professionalize the process of appeals, but it’s clearly not working well and still favors property owners.

Council chair Phil Mendelson has called for a hearing to sort out the messy situation.

Examining the assessment appeal process has value, but it runs the risk of missing the more important, and valuable, point: Commercial real estate tax revenue is a primary source of local income for the nation’s capital. It accounts for about 20 percent of local tax revenues, according to the tax office.

Commercial office buildings in downtown DC are one of the safest, most lucrative investments anywhere on the globe. That’s why Dutch retirement funds and Arabian sheiks want DC real estate in their portfolios. For the value and safety, they should pay more, not less, in taxes.

Every major US city can rely on a foundation industry for tax revenues and jobs. Atlanta has Coke. New York has the financial industry. Houston has oil and energy. Granted, DC has the federal government, but we can’t tax federal offices, parkland, embassies, or nonprofits, such as Fannie Mae. Nor can DC tax the commuters who pile into the city every day to work in the federal agencies and then commute back to Maryland or Virginia, which can tax their income for work done in DC.

Commercial real estate property owners have to be here; they should pay more, not less, for the opportunity.

Our downtown office buildings are piles of gold. Because of the height limit, office space is compressed, which makes it more rare—and valuable. We have the lowest commercial office space vacancy rate in the country, at just over 8 percent.

Why not use this opportunity to examine the assessment process to raise rates for commercial property in prime locations, such as the Golden Triangle, the West End, and Gallery Place, for starters?

Council member Jack Evans, who represents downtown, will disagree. He and others will argue that DC taxes commercial property at high rates, now $1.85 per $100 of value. Property owners will pass through higher rates in rent, and they will flee to the suburbs, where taxes are lower. I doubt it.

What I don’t doubt is that DC politicians would know how to handle increased tax revenues. They would want to increase the budget, which is already the highest in history, at more than $10 billion. Any increase in commercial property taxes would have to be accompanies by tax relief for small businesses, for example, rather than more spending.

Either way, commercial property owners should spend more for the privilege of owning property here.