It's Time for Subsidies To Subside in D.C.

One of the important tests of any new big-city mayor is the stance he takes with the development community.

Tony Williams came into office just as the District was recovering from financial distress. It was still a risky place to live, build and invest. To prime the fiscal pump, Williams used various subsidies to entice developers into the city and engineer a downtown renaissance.

By the end of Williams's tenure, however, one had the sense that the city was still handing out subsidies where they weren't really needed. The economy was so hot, and borrowed money was so cheap and plentiful, that developers would probably have done some of these projects even without the District's financial help. The harm from that wasn't just that the city might have saved its goodies for projects in more challenged neighborhoods. It was also that politically well-connected developers had gotten into the bad habit of thinking of public subsidies as part of the standard toolbox of project finance.

Adrian Fenty managed to win election as Williams's successor without the support of developers, having locked horns with them on rent control, affordable housing and mandates to use union contractors. On taking office, however, Fenty was wise enough not to try to undo any of the deals negotiated by his predecessor. That would have immediately plunged him into a costly fight with business leaders just when he needed their help on his top priority, school reform. It also would have given the city a reputation in the development world for not living up to its commitments.

But Fenty is also trying to close the downtown subsidy window. When the city and Nationals owner Ted Lerner nearly came to legal blows over development around the new baseball stadium, Fenty balked at various solutions that would have required yet another slug of city cash or risk-taking, even if it meant forgoing some added development. And he has refused to agree to costly design changes at the stadium demanded by the Nationals, forcing Lerner to pay for many of them himself.

Fenty's team has also drawn the line with Marriott, Bob Johnson and Quadrangle Development over the new $600 million convention center hotel. Williams not only committed $135 million in tax breaks, but also arranged for the convention center to throw in an additional $100 million to the hotel project to build more meeting space that should have been included in the convention center, but wasn't. Convention center boosters argue that the monster 1,434-room hotel will finally attract all those promised medical and legal gatherings. And the hotel developers argue that the project won't work without the tax breaks.

It turned out, however, that when it came time to negotiate the final hotel deal, the developers balked at committing to the number of rooms they would provide for lower-rate convention business. Because the size and complexity of the project had increased, they also hinted that maybe $135 million in "tax-increment financing" would not be enough.

The Fenty team took a hard line, sending a letter to the developers a few weeks back with a take-it-or-leave-it counteroffer. Now the developers are ready to agree to reserve substantial blocks of rooms for convention business if they are booked three or more years in advance -- the time frame that really matters in the convention biz. Additional tax increment financing is also off the table.

One wishes the mayor would take the same stance toward Abe Pollin's request for about $42 million in city funding to upgrade the scoreboard and luxury boxes at Verizon Center, to be paid for by raising the city tax on Verizon Center tickets to 10 percent from 5.75 percent.

The rationale for this largesse is that the city owes Pollin big time for single-handedly sparking the revival of the East End after he built arena a decade ago with his own money. Abe is a wonderful and generous man, and this is a wonderful story. Unfortunately, it's only half true.

Verizon (n?e MCI) Center is not without its public subsidies. There's the forgiveness of property taxes over the past decade, which last year was worth a cool $7 million, according to the city's chief financial officer. There's the discount on the lease of city-owned land of about $4 million to $5 million, a waiver of $1 million in construction fees, and $2 million in sales tax exemptions for certain events. Add it up, and it's not hard to get to $100 million so far, and counting.

It's also a stretch to say that, but for Verizon Center, the East End would still be collection of parking lots, boarded-up buildings and liquor stores. The downtown revival might have happened later, or more slowly, but it would have happened.

That said, there's no arguing that Verizon Center could use a freshening up. (It could also use some decent food and beer, but that's another column.) The way most businesses pay for that is to raise their prices. Abe is certainly free to do so with Wizard tickets, which would rise more than 4 percent because of a city tax increase. Ted Leonsis, owner of the Mystics and the Capitals, is apparently willing to raise his ticket prices to pay for the renovations -- we know this because he also supports the tax increase. So, in fact, this whole thing could be handled without city involvement, just by raising ticket prices.

But Pollin isn't concerned only about the money. He also demands fairness and respect. He's upset that, as part of the baseball stadium deal, the city had given a 10 percent tax-and-subsidy deal to his real estate rival, Ted Lerner. It's as much the principle as anything else.

And therein lies the problem -- the misguided principle that if you build an arena or a hotel or a downtown mall, you are entitled not only to a share of the incremental tax revenue you create, but the spillover to other neighborhood projects. And if parity is the rule, how will the city be able to say no to a 10 percent tax deal for the new D.C. United soccer stadium or tax-increment financing for a new Hyatt hotel on the Anacostia or a sweetheart land deal for a Costco in Brookland?

There is a time and a place for development subsidies. But this is not the time, downtown Washington is not the place, and the new mayor needs to make that perfectly clear.

Steven Pearlstein can be reached at pearlsteins@washpost.com.