D.C. Councilman Jack Evans, D-Ward 2, would like to provide tax breaks to property owners who convert unused office space to residential rental units. Evans introduced the Mixed-Use Neighborhood Conversion Act of 2017 to spur such conversions. If a commercial property owner converts the site to residential use, the mayor’s office could approve a $20-per-rentable-square-foot property tax abatement.
Is this a good proposal? Policy purists will never like incentives. Of course, policy purists rarely have to run governments. Lowering the tax costs of providing residential rental property will inevitably lead to more such property. But it is unclear how much more. The District’s property tax burden is relatively low to start. The tax break will help but won’t be a game-changer. But to be honest, Evans is not promising a panacea.
The affordable housing shortage nagging the city has many causes, chiefly a supply shortage. That shortage, in turn, has many causes — some self-inflicted by over-regulation. Evans’ proposal would help the supply side of things.
But the plan is not perfect. First, it would be limited to the Golden Triangle and Downtown business improvement districts. Picking winners and losers by geography rarely works well. Why these two areas rather than other places in the city? And what do you say to the property owner who has underused commercial space a block outside the BID who might want to convert? Evans’ plan would be better, albeit potentially more expensive, if he opened it up citywide. The city should encourage anyone who has underused commercial property to convert it to residential use.
Just as troubling is the requirement that the mayor approve all of the incentives. Mayor Muriel Bowser has a good track record on such issues, but giving politicians discretion to grant incentives creates all kinds of bad perceptions. If Evans and the D.C. Council were serious about using the tax laws to spur housing, it would make the incentives automatic upon conversion. The government’s role should be merely to ensure that the conversion took place. I suspect Evans’ proposal gives the mayor discretion to contain costs; there is a limit to the overall amount.
There is another way to use the tax laws to foster housing supply. Currently, the city imposes a property tax on blighted property that’s over 10 times as high as for residential property and over five times as high for commercial. It imposes a tax on vacant property over five times as high as residential and over two times as high for commercial. I am generally an antitax guy, but these differentials are good. They should be increased.
The city also should consider increasing the tax rate on vacant and blighted land, a source of supply for housing stock. The increased tax burden will make owners think about putting their properties to better use — like, say, apartment buildings. Speculators won’t like it, but that’s a small price to pay.
Originally published in Washington Business Journal, August 3, 2017