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Posted at 06:21 PM ET, 09/06/2011

Is D.C.’s ‘golden goose’ going to keep laying eggs?


The canyon of real estate along Pennsylvania Avenue NW is a cash cow for city coffers. (TIMOTHY WILSON/THE WASHINGTON POST)
The District of Columbia has a novel if not uncommon way of filling the municipal coffers. While the city’s residential property tax rates are relatively low for the region ($0.85 cents per $100 assessed, with a plethora of exemptions), commercial property owners are soaked by comparison. Owners of the least valuable commercial properties pay $1.65 per $100 assessed, while those worth more than $3 million pay $1.85. Vacant and “blighted” properties of any type are taxed at even higher rates.

Needless to say, downtown property owners and the lawyers and consultants who represent them think they pay too much. “[P]roperty taxes are volatile, chaotic and often quixotic,” writes Stanley J. Fineman, a Wilkes Artis partner who specializes in property tax appeals. “Above all else, in the District of Columbia, they are high.”

In a piece for National Real Estate Investor, Fineman offers data, attributed to his own law firm, showing that taxes now represent more than 40 percent of expenses for property owners, rising from 24 percent in the early 1990s.

Notably, Fineman writes that it’s not the rates that are responsible for ballooning property tax costs. Rather, “The increase was the product of assessment legerdemain, and would have been much higher had property owners failed to wage relentless and successful administrative and judicial tax appeals.”

“This pumping up of assessments allowed politicians the luxury of claiming that they did not raise the tax rate during the entire period,” he continues. “Never mind that the tax rate might have been significantly reduced, softening the blow of the assessment spikes, but it was not. After all, there were pet projects that needed feeding.”

This is not news. It has essentially been the policy of the District government for three decades to partially make up for its inability to tax the income of non-District residents by extracting as much revenue as possible from them in other ways — including taxes on the coveted and scarce buildings they work in, which are passed on through the rents and prices paid by the businesses inside those buildings and their customers.

Still, Fineman argues that the city’s property taxation policy amounts to “a massive shift of the tax burden heaped quietly onto the shoulders of commercial owners.” He continues:

The D.C. government, always a minority partner in real estate enterprises, has been biting off heftier chunks of the commercial pie through taxation as the years roll by. This has allowed it to subsidize homeowners (i.e. voters) through reduced tax rates and capped increases. And everybody’s happy. Oh, except commercial owners and their tenants, the geese that lay the golden eggs. And we all remember what happened to them.

Fineman’s modest proposal is to index commercial property tax receipts to rent increases, which strikes me as awfully close to unworkable. (For instance, how do you isolate tax costs from the other economic pressures that bear on rents?) And, for a tax appeals lawyer to complain about high assessments that can be alleviated only through “relentless” appeals, is, of course, breathtakingly self-serving.

But he raises a crucial question: Has the District pumped its “golden goose” for all the eggs it can bear? Or will the reliance on downtown real estate for tax revenue soon prove counterproductive? At this point, it appears not. The downtown office market is among the nation’s healthiest, with record-high rents and record-low vacancy rates, even amid a recession. As other slices of the city’s revenue pie shrink, downtown real estate has kept the city budget from further crisis.

Unmentioned by Fineman is that the District has overhauled its assessment appeals process; the old Board of Real Property Assessment Appeals is dead as of Oct. 1, replaced by a new, supposedly professionalized Real Property Tax Appeals Commission. It’s worth noting that in the eyes of Chief Financial Officer Natwar M. Gandhi, the change was necessary to reduce assessment reductions on appeal, the source of “major leakage” in city revenue thanks to the “battery of high-priced lawyers” of which Fineman is a member.

For the record, David Umansky, a spokesman for Gandhi, soundly rejects any claims of “assessment legerdemain.”

“They always say that,” he said. “You ever meet a lawyer who says my client isn’t being taxed enough?”

By  |  06:21 PM ET, 09/06/2011

 
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