Downtown office conversion
Taxes on property sales are meant to capture revenue from projects like this one, an office-to-residential conversion downtown. Credit: Alex Koma

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If D.C.’s fiscal picture is as dreary as the city’s gloomiest critics warn, does it really make sense to give a $104 million tax break to big commercial property owners? That is precisely the question that the District’s left flank is asking as the Council comes down to the wire on the 2024 budget.

Loose Lips hears that the Fair Budget Coalition and other progressive groups have begun circulating a proposal to freeze a planned sunset of a 2019 tax hike on large land deals as a means of raising revenue and reversing some of Mayor Muriel Bowser’s steepest planned cuts. And the idea seems to be gaining steam. Ward 5 Councilmember Zachary Parker tells LL he is “seriously considering” pitching the idea to his colleagues during the Council’s first vote on the budget on May 16. Ward 1 Councilmember Brianne Nadeau adds that she’s also heard about the idea and finds it “interesting and worth considering.”

“I see it as a tradeoff of sorts with the investments we’re making downtown,” Parker says. “At the same time that we do that, we have to make sure our residents have more money in their pockets…and I think the developer class and investors need to pitch in to help with that.”

The push will likely need to survive opposition from both Bowser and Council Chairman Phil Mendelson, who will release his final budget proposal in the next few days and calls the proposal “a very bad idea” that will harm downtown’s recovery. But D.C. lefties see this effort as a rerun of their successful push to raise income taxes on the wealthy in 2021, where eight lawmakers overrode the wishes of Mendelson and other moderates to add the measure into the budget.

Just as they did two years ago, progressives plan to frame the fight as a clear choice between benefits for the wealthy and badly needed aid for the working class; the “deed and recordation tax” at issue only affects property sales valued at $2 million or more, while the $104 million in proceeds could fund things like checks for workers excluded from federal pandemic relief, emergency rental assistance, food stamps, or other anti-poverty measures.

“When the city has these big-ticket deals moving forward, there’s an opportunity to fund people who are not able to benefit from that value,” says Elizabeth Falcon, executive director of DC Jobs with Justice and one of the lead backers of the plan.

Falcon and her allies believe this pitch can succeed because it’s not so much a tax increase as a decision not to cut taxes just yet.

The Council first passed the tax hike four years ago at Bowser’s behest (as she searched for funding to launch her new push at addressing the region’s affordable housing crisis) with the understanding that the increase would phase out at the end of the 2023 fiscal year on Sept. 30. Progressives’ proposal would simply leave the higher tax rate in place through fiscal year 2024 and punt a decision on its future until next budget season. For any lawmaker that has committed to, say, delaying any major revenue decisions until the vaunted Tax Revision Commission can finish its work and deliver recommendations to the Council, this plan is designed to be more of a continuation of the status quo than a dramatic change.

Mat Hanson, chief of staff for the advocacy group DC Action and one of the architects of the plan, believes this move would raise about $78.3 million in revenue next year and could add another $25.8 million this year. The city’s economists expect that many property owners are delaying the completion of major deals until the tax hike sunsets, and delaying that expiration cut could speed up their timelines if the don’t want to wait around for another year.

Parker says he is still working out the details of where to potentially direct that money, but Hanson expects the move could help restore the $20 million in aid payments for excluded workers that Bowser redirected elsewhere, a change that undocumented workers, street vendors, and others have been fighting to reverse in recent weeks. The money could also replenish some of the $34.8 million Bowser slashed from the Emergency Rental Assistance Program (or ERAP), a top priority for most of the Council, and fund new vouchers for people experiencing homelessness, which Bowser declined to fund for the first time in her tenure as mayor. Parker is also particularly interested in seeding new ideas such as his proposal for a D.C.-based child tax credit or At-Large Councilmember Christina Henderson‘s legislation to increase SNAP benefits to keep pace with the rising cost of groceries.

“This is a tax that will be hardly noticed or felt by people affected, but it will allow us to continue to collect tens of millions in revenue to dedicate to a specific set of vital programs,” Hanson says. “It seems like a genuinely easy call.”

By their own estimates, big property owners say this higher deed and recordation tax rate adds about $42,000 in costs for a deal valued at $2 million, split evenly between buyers and sellers. That might sound like a lot for anyone that doesn’t plan to buy a hulking downtown office building, but Hanson notes that these sorts of transactions are often debt financed and paid for over the course of two decades, making it a much more manageable sum to handle.

This will surely not stop business interests from howling, however. LL remembers the debate over the deed tax in 2019 quite well, considering he worked at the Washington Business Journal at the time and heard frequently from the real estate sector about just how awful this tax hike would be. (Their opposition was particularly notable, considering how unusual it is to see that group opposing an idea coming from Bowser.) Many of those same lobbying groups are already gearing up to fight this latest pitch.

“Reverting the sunset would do the opposite of what people think it would,” says Liz DeBarros, CEO of the D.C. Building Industry Association, noting that Chief Financial Officer Glen Lee is already projecting drops of roughly $111 million in annual deed tax revenue under the assumption that the tax will sunset. “It wouldn’t raise more tax revenue. Sunsetting the tax would actually allow more transactions to take place…If we want to continue to incentivize office-to-residential conversions, we need to see predictability in our tax regime.”

Indeed, Mendelson argues that “we get a bad reputation when we say this tax is going to sunset, and then we repeal it,” with a “ripple effect” hurting the city in the eyes of investors for years. He believes arguments that progressives’ proposal represents the maintenance of the status quo are simply “B.S.” because “this is a tax increase, it is revenue that we are currently not getting.” And, like DeBarros, Mendelson frets that this will have the gravest consequences for projects downtown, as the commercial market there has already slowed.

“The folks who’ve been pitching this don’t get that, or it’s that they don’t see the need for ensuring that the golden goose continues to lay golden eggs,” Mendelson says. “We can sacrifice downtown, but we will not be getting the revenue growth that we need.”

Hanson notes, however, that downtown buildings account for just 10 percent of all D.C. properties valued at $2 million or more (and many of those are government-owned) so it’s not as if the neighborhood would be disproportionately affected by deed taxes. Plus, many high value properties are owned by foreign investors or big, out-of-state corporations, making them easy targets for taxation compared to D.C. residents and businesses.

“We’re just saying: This is not the year to deliver a tax cut to multimillionaire property owners,” Hanson says.

It remains to be seen whether the Council will agree. Recent elections have empowered more economically progressive lawmakers in recent years, including Parker, but that is no guarantee this particular proposal will fly. LL contacted three other councilmembers viewed as potential co-sponsors of the deed tax plan; they either didn’t respond or said they were still considering the proposal.

“I’m hopeful my colleagues will stand with me on this,” Parker says. “And if we’re not going to raise revenues, then we need to reevaluate significant priorities in this budget…We’ve heard a lot of talk about things like baby bonds or Metro for D.C., but there needs to be more discussions about giving SNAP a raise and ERAP.”

Mendelson may be able to placate councilmembers eager to see more money flow to programs like emergency rental assistance if he chooses to follow through on plans to defund the K Street Transitway.

The Council’s original intent was to use the K Street money to fund the free Metrobus program created by Mendelson and Ward 6 Councilmember Charles Allen, but the Metro board of directors seems to have successfully pushed lawmakers to hold off on that effort for at least a year. The chairman says he’s still undecided whether to return that $115 million to the K Street project, but he sounds generally inclined to leave some money for overhauling the project’s design considering intense criticisms from transit advocates about Bowser’s recent car-centric redesign.

“I will say that I have seen over and over again in this government where we have important projects…they started with far less than what we knew was needed to complete the project and we found the funding,” Mendelson says. “So if I follow the transportation committee’s recommendation and significantly reduce the budget for K Street, that doesn’t mean we can’t find the money in later years.”

After all, Mendelson has his own priorities to fund, such as additional pay for charter school teachers. They claim they’re owed more money to match raises won by the Washington Teachers’ Union for public school educators, and Mendelson said at a charter-backed rally in front of the Wilson Building Wednesday that he’d fight for some additional cash for the sector. He says he would only seek to use money from elsewhere in the education agencies for this purpose, but that’s a tall order when the charters are asking for another $187 million in funding.

The mere possibility that transit funding might be moved to cover other priorities (be they education, rental assistance, or housing vouchers) has already incensed some advocates, who believe the K Street money deserves to be reallocated to other transportation projects. And this is part of what makes advocates like Hanson more attracted to the deed tax idea—it’s a tax on the real estate sector that will help address issues directly related to that sector, like the rising cost of rent. Bowser’s purpose in proposing the extra tax was to send more money to affordable housing loan programs, after all.

Eric Jones, a lobbyist with the Apartment and Office Building Association of Metropolitan Washington, says his group has been bracing for lawmakers to turn their attention to the deed tax for some time. He compares the situation to the ballpark fund, which is seeded with taxes on tickets, concessions, and large companies, and is meant to help the city pay down debt it accrued building Nationals Park—in practice, officials often pull money away from it when there are gaps in the budget to close, kicking the debt payments down the road for another few years.

“As the city gets used to the revenue, the idea of cutting off that revenue gets a little scary,” Jones says.