County Executive Marc Elrich’s renewed push for more taxing authority is not surprising, given the county’s lagging economy. However, his desire to finance major transportation projects by taxing the commercial building industry is misguided at best. The county has had the authority to create special taxing districts to finance capital improvements for more than 10 years. Its lone special taxing district in White Flint has largely failed to live up to its goals, producing only one-third of expected tax revenues over that period.
Now the county executive is asking for differential taxing authority to be able to levy higher taxes on commercial properties countywide, citing a similar authority of his Northern Virginia peers. What he fails to mention is that Northern Virginia has lower income and fuel energy taxes and a more favorable regulatory environment that lacks rent control and building energy performance standards. The latter requires building owners to invest millions in energy efficiency improvements.
The county executive is correct in noting that Northern Virginia’s business community lobbied for more taxing authority, but this same type of clamor is notably absent in Montgomery County. Moreover, this real estate tax structure in Virginia was initially part of a broad package of regional funding sources that spread out the tax burden. The county executive is proposing the exact opposite by singling out one sector, without its support, to bear the full burden of the county’s budget challenges.
Implementing differential taxation won’t change the county’s economic development prospects or produce excess tax revenue necessary to fund additional transportation infrastructure. This is primarily due to the county’s languishing office sector, which is struggling with record-breaking office vacancy rates and persistently low utilization.
The result has been plummeting building values and rising distress. According to CoStar, some 17 properties in Montgomery County, representing about 1.6 million square feet of commercial office space, are experiencing delinquency or nonpayment of their financial obligations. Another 10 properties representing 1 million square feet of commercial office space are directly in default and in special servicing. Expiring long-term leases and employers looking to downsize in the coming years will exacerbate this situation further.
Meanwhile, properties fortunate enough to sell are being purchased below their pre-pandemic values at huge discounts. Examples include properties in Bethesda, Rockville, and Gaithersburg, which sold at 78%, 49%, and 34% discounts, respectively. The impact of these declining values and distressed sales on county tax revenues will be in the tens of millions of dollars. A 2023 analysis by real estate consulting firm RCLCO found that a 30% decline in office values could reduce county tax revenues by $47 million a year.
Even if additional revenues were achievable through targeted taxation, the availability of public infrastructure is not a priority for businesses when making location decisions. According to DC Policy Center’s Q2 Business Sentiments Survey, businesses care far more about a jurisdiction’s regulatory climate when deciding where to locate, specifically the ease of obtaining permits and licenses, ease of business registration, and local tax rates.
The county executive’s desire to fund the county’s ambitious transportation plans is laudable, but it will fail to solve the county’s economic development goals. One only needs to look at the inequitable development of the eastern side of the Red Line versus the western side as proof. And, while bus ridership is picking up, it’s still nearly 50% below its pre-pandemic peak, which suggests the county should rework its bus rapid transit plans.
If the county desires to become more economically competitive in the region, the answer lies in reassessing its regulatory environment, not making it more burdensome and costly to do business in the county.
Silver Spring resident Brian Anleu is vice president of government affairs for the Apartment and Office Building Association of Metropolitan Washington.
