Category Archives: Corporate Welfare

Elrich’s First Veto: The Politics

By Adam Pagnucco.

County Executive Marc Elrich has a soft and raspy voice. Close your eyes and imagine that voice saying:

I just think that developers should pay their fair share.

Last week was a terrible one for Elrich. His chief administrative officer and emergency management director were blown to smithereens by the county council over the pace of the executive branch’s distribution of federal assistance funds. The story dominated the local press for days. Elrich responded to the council with this saucy comeback: “I used to be a legislator, and it’s the best job in the world because you can just say, ‘I want to spend this money,’ and tell someone to go spend it. And you don’t actually figure out how to do it.” There is more than a bit of truth to this, but the observation won’t improve Elrich’s relations with an irate council.

That came on top of numerous other headaches, including the ethics problems that forced the resignation of Elrich’s first chief administrative officer, criticism of Elrich’s mushrooming COVID pay liability, the beatdown the administration took from Governor Larry Hogan over reopening private schools, pushback over Elrich’s joking that the council was “fact proof” and the general drudgery of having to deal with the crises in public health, the economy and the budget spawned by the coronavirus. Whether one is sympathetic to Elrich or not, the stories about his administration of late have nearly all been bad. (One exception: the opening of the county’s first bus rapid transit route on Route 29, an event that would never have happened without Elrich.)

But all of that bad news is wiped away, at least for the moment. That’s because Elrich changed the subject by vetoing legislation providing 15-year property tax breaks for Metro station high-rise developers. What’s the new subject?

I just think that developers should pay their fair share.

Supporters of the vetoed bill argue that it was necessary to enable development of high rises at the pending Grosvenor-Strathmore Metro station project. They feared that failure to act would doom or shrink the project. That urgency prevented them from examining other, more time-consuming, paths to a deal including an appropriation from the economic development fund (in which Elrich would get to play) or providing financing through the county’s economic development corporation or the Housing Opportunities Commission. But unlike those mechanisms, legislation is a highly public thing. By giving Elrich an opportunity to veto the bill, his critics on the council gave him an opportunity to go on offense.

But wait a minute, you say. The bill passed on a 7-2 vote, one more than necessary to override a veto. When the council overrides Elrich, doesn’t that make him a loser?

Those who think that do not understand how Elrich got elected executive. During his twelve years on the county council, Elrich was the sole no vote on a host of master plans, all increasing density. Yes, he “lost” those votes again and again. But he also picked up support in those communities from skeptics of the plans who came to see Elrich as their only champion. Those folks became a critical and expanding part of Elrich’s base. Few if any politicians in the county have ever won more from “losing” than Marc Elrich.

Elrich’s opposition to many new development policies have prompted his critics to brand him as a NIMBY. But there is more to his political success than pure NIMBYism. When you listen to him discuss development closely, he is making an equity argument as much as a land use argument. Here is what he said about development in 2002:

Our beleaguered middle-class is told that the County can no longer afford to provide the quality of life that made this place so attractive at the same time it throws millions in subsidies into the pockets of millionaires. We make great claims about ending welfare, but we’re really only changing the beneficiaries. What we’ve done is to recast developers as the new poster children of the Nineties. This blind devotion to growth is great – if you’re a developer or a tumor – but it doesn’t work so well for the rest of us who are better served by priorities that strengthen our communities and our schools.

In other words, throwing public money at developers reduces the money available for schools, public safety, health and human services, libraries, parks and more. Here is a more refined version of this argument from his 2018 campaign kickoff.

Elrich’s quarrels with developers resonated more when the economy was better, such as in 2006, when he was first elected to the council. As executive, such arguments come up less often, first because his office does not often deal directly with land use and second because the economy is in such wretched shape. MoCo has much bigger problems at the moment than “predatory” developers. But in a dark blue county in which Democratic primaries are the real elections for office, Elrich’s equity argument still has purchase when occasion calls for it.

Supporters of the bill that Elrich vetoed have good arguments on their behalf. It’s true that Metro sites have extra development costs. It’s true that, for the most part, high-rises are not being built on these sites. It’s true that transit-oriented development is superior to sprawl or no growth. So it’s not a crazy position that public investment should be used to make these projects happen.

But the bill’s supporters have two problems. First, they are making complicated arguments and Elrich is making a simple one. In politics, simple arguments usually beat complicated ones. Second, the supporters are making economic arguments while Elrich is making a value judgment. Most MoCo Democratic primary voters are not accountants or economists, but they do have progressive values. Broadly speaking, they agree with the notion that everyone with means – not just developers – should pay towards the cost of funding government.

On top of all that, consider the times we are in. The county’s unemployment rate is the highest it has been in anyone’s memory. Small businesses are shutting down left and right. Tenants are missing rent and will be, eventually, at risk of eviction. So what are we doing? Giving developers 15 year tax breaks. That’s how Team Elrich is going to frame this.

I just think that developers should pay their fair share.

Unless something strange happens, the council will override the executive’s veto. The bill’s supporters will get the policy win. But the political win? Overall, that belongs to Marc Elrich.


Elrich’s First Veto: The Policy Debate

By Adam Pagnucco.

On Friday, County Executive Marc Elrich issued the first veto of his administration against a bill by the county council offering 15-year property tax breaks for high-rise developments at Metro stations.

Vetoes are uncommon events in MoCo politics. Elrich’s predecessor, Ike Leggett, vetoed three measures: a county property disposition bill in 2012 (which was overridden), a minimum wage bill in 2017 (which was subsequently replaced by a similar bill that he signed) and a 2018 line item in the capital budget covering stormwater contracting (which resulted in passage of a compromise). Vetoes are typically prevented by one of two things: deal-making between the executive and the council or passage of a measure by more than the six votes required to override. But there was no deal in this case: Elrich opposes the property tax bill and wrote his rationale in a lengthy veto message.

This post examines the policy debate around the bill, about which I wrote a three-part series. (Here are links to Part One, Part Two and Part Three.) Tomorrow, we will discuss the politics.

Bill 29-20, the target of Elrich’s veto, originated from three related events. First, Montgomery County, like the rest of the region, has a shortage of housing when compared to projections of population growth. This was chronicled in a report by the Metropolitan Washington Council of Governments (MWCOG), resulting in passage of a resolution by the county council to meet the county’s share of regional housing growth. (Elrich was notably skeptical of this.) Second, for at least the past fifteen years, the county has chosen to concentrate new density around Metro stations through its master plans for a combination of reasons related to transportation, environmental concerns, placemaking and preservation of the Agricultural Reserve. (Elrich voted against many of these master plans when he was on the council.) Third, Fivesquares Development, which was selected by WMATA as its ground lease development partner at the Grosvenor-Strathmore Metro Station, has proposed a housing development including high rises at the station. However, Fivesquares has since said that the economics of the site won’t allow anything more than low density development unless they obtain a subsidy.

These events gave rise to Bill 29-20, which offers developers at Metro stations 15-year property tax breaks if they build high rises. The bill’s supporters claim that without the tax breaks, the sites will either remain undeveloped or will contain low- or mid-rise projects that waste the stations’ potential for generating transit-oriented development. Elrich disagrees, offering several key reasons that I will evaluate.

Elrich: The bill “harms the budget.”

Elrich wrote:

At a time when the County is struggling to fund critical services, where the outlook for the next couple of years is uncertain at best, and where full economic recovery from this pandemic may take as much as ten years, it is certainly not prudent to reduce revenues coming into the County coffers.

The bill’s supporters argue that the tax break would only apply to projects that would otherwise not happen without the bill, thus not creating a real marginal cost to the county. They also say that without the bill, the Metro stations would remain undeveloped and therefore pay nothing to the county. However, according to Fivesquares, a low density project would be viable at Grosvenor-Strathmore without a subsidy and would therefore generate actual property taxes for the county. So even without the bill, it’s possible to get taxpaying low- or mid-rise development at Metro stations. The real question is not so much about the budget but whether the public benefit of high-rise housing infrastructure at Metro stations is worth an investment of public dollars. Elrich says no, the bill’s supporters say yes.

Elrich: The public benefit isn’t worth it.

Right now, developments at Metro stations are required to ensure that 12.5-15% of constructed units are moderately priced dwelling units affordable to moderate income people. Council Member Will Jawando amended the bill to require that 25% of a qualifying project’s units be moderately priced to get the tax break. Elrich says there should be a higher percentage of moderately priced units and he argues that they should be mandated rather than included in a tax incentive. (If he believes that, he should send over legislation to accomplish it.) Bill supporters argue that a higher percentage of affordable units would kill a project’s economics. The record of the bill does not conclusively prove either side right.

Elrich: Public funds should be used for affordable housing, not market rate housing.

Elrich argues that MoCo’s real housing shortage is in affordable units, not so much in market rate units, and that because the bill allows projects with 75% market rate units to get tax breaks, it contributes little to solving the county’s housing problems. He is right that MWCOG’s report recommends that “at least 75% of new housing should be affordable to low- and middle- income households.” But with all due respect to MWCOG, the difference between the county’s requirement that 12.5-15% of new units be moderately priced and the report’s recommendation that 75% of them be affordable is VAST. The county’s housing target is 10,000 units above forecasts. No one – not Elrich, not the council, not the planning board – has a credible financing plan for plowing (at least) hundreds of millions of dollars of public money into building 7,500 or more affordable units. Holding this bill or any other plan to that standard is unrealistic.

Elrich: The bill sets a difficult precedent.

Here, Elrich makes the same slippery slope argument that I made. If developers at Metro stations get these tax breaks, developers of properties next to Metro stations will want them too. The bill’s supporters argue that Metro sites have extra costs that require subsidies to offset. Those extra costs are probably responsible for the dearth of new high-rise projects at Metro stations all around the region. But the bill does change how the county does incentives. In the past, incentives have been granted on a case-by-case basis (including the Marriott headquarters development project). The bill establishes its subsidy in law, giving it to developers by right. The bill’s supporters don’t say this publicly, but they argue privately that legislation is necessary because Elrich can’t be trusted to constructively negotiate with developers. Even if that were true, Elrich won’t be executive forever, and case-by-case negotiations have advantages that a one-size-fits-all approach can’t replicate.

Elrich: Construction workers deserve prevailing wages.

Council Member Will Jawando offered an amendment to require that Metro station development projects should pay construction workers the same prevailing wage they receive on county construction projects to get tax breaks. The amendment failed on a 4-5 vote, with Jawando and Council Members Evan Glass, Tom Hucker and Sidney Katz voting in favor. Elrich cites the bill’s failure to require prevailing wage as a reason to veto it.

When I was employed by the carpenters union, I lobbied the council to pass what is now the county’s prevailing wage law. In doing so, I provided them with a mountain of evidence that prevailing wage laws do not inflate construction costs because higher wages tend to be offset by higher productivity. As Nooshin Mahalia of the Economic Policy Institute wrote just before the bill was passed:

An overwhelming preponderance of the literature shows that prevailing wage regulations have no effect one way or the other on the cost to government of contracted public works projects. And as studies of the question become more and more sophisticated, this finding becomes stronger, and is reinforced with evidence that prevailing wage laws also help to reduce occupational injuries and fatalities, increase the pool of skilled construction workers, and actually enhance state tax revenues.

Council Member Marc Elrich was a co-sponsor of the prevailing wage bill. No current council member was in office when it passed in 2008.

The county has a prevailing wage law for its construction projects. WMATA uses the federal prevailing wage law (the Davis-Bacon Act) for its construction projects. And yet a developer with a county subsidy building at a WMATA Metro station is not required to pay prevailing wage. That just does not make a lot of sense.

Those who voted against prevailing wage coverage argue (against the evidence linked above) that it would inflate project costs and offset the value of the 15-year property tax break. If they truly believe that prevailing wages increase costs, then to be intellectually honest, they should repeal the county’s prevailing wage law to save money for the capital budget. Unless they do that, the arguments against prevailing wage ring hollow. On this one, Elrich is right.

The best point that Elrich’s critics make against him is that if he opposes this bill, then what is his plan to build more affordable housing? The county’s current total of $62 million in operating and capital money for preserving and building affordable units is woefully inadequate when compared to the needs. Elrich has been discussing this issue while in elected office for 14 years. What is the Elrich Plan to Build Affordable Housing?

Tomorrow, we will get into the politics of the veto.


That Day When Our County Exec Had to Explain Economics to the Council in a Veto Message

Yesterday, Montgomery County Executive issued the first veto of his administration. It was of a major tax giveaway bill to developers — the county would likely lose over $400 million in revenue according to Elrich — passed in the name of sparking additional housing development around Metro.

My favorite part of the veto message in where Elrich, a progressive often accused of being an impractical lefty by opponents, explained the economics of these sorts of tax subsidies:

Under Federal law, WMATA must seek the highest and best price for their land. Land that is exempted from all property taxes for 15 years is more valuable because the calculation of its value includes the costs to acquire and develop, including taxes, weighed against market rents. If two properties are side by side, one exempt from taxes and the other not, and they were producing the same value of unit, the land value of the exempt property would be greater because its cost of development would be less than the cost to develop the tax-paying property. This would, in turn, likely raise the parcel’s appraised value. The Bill could potentially be counterproductive by raising the value of WMATA’s land.

Put another way, by reducing the tax burden, all the county has done is make WMATA’s land more valuable and increased the amount that they can charge for it. They will capture that value in the sale price of the land with Montgomery County taxpayers, who already heavily subsidize WMATA, having footed the bill.

They say you can’t get something for nothing. But if you’re not careful, you can get nothing for something. Or, at P.T. Barnum put it, “there’s a sucker born every minute.”


Elrich Vetoes WMATA Property Tax Bill

By Adam Pagnucco.

County Executive Marc Elrich has vetoed Bill 29-20, which would grant high-rise developers on Metro station projects payments in lieu of taxes in return for 15-year exemptions from property taxes. I wrote a three-part series on this legislation quoting the bill’s supporters in Part One, evaluating their arguments in Part Two and raising concerns in Part Three. The bill passed the council with amendments on a 7-2 vote, with Council Members Tom Hucker and Will Jawando voting no. Under the charter, the council may override a veto with 6 votes.

The executive’s veto message is printed below.


October 16, 2020

TO: Sidney Katz, Council President

FROM: Marc Elrich, County Executive

RE: Veto explanation of Bill 29-20, Taxation – Payment in Lieu of Taxes – WMATA Property – Established, Enacted with amendments

I share the Council’s desire to find ways to spur smart growth and to broaden our tax base. However, I strongly oppose the approach used by the Council in this legislation. It is too costly and does not achieve my goal of increased affordable housing. Therefore, I am vetoing Bill 29-20, Taxation – Payment in Lieu of Taxes – WMATA Property.

Below is a description of the bill and my explanation of the veto.

Description of Bill 29-20

Bill 29-20 requires 100% exemption of the real property tax for 15 years. This exemption is known as a Payment in Lieu of Taxes (PILOT). The requirement applies to development that is higher than 8 stories on property owned by WMATA at a Metro station. The development must include at least 50% residential rental housing, and one-quarter of the moderately priced dwelling units (MPDUs) must be affordable for residents at 50% of area median income (AMI). The PILOT would begin no later than the second year after the property tax is levied. The law would sunset in 2032, but any existing PILOT would continue until the end of its 15-year period. To be eligible for a PILOT, a developer would be required to use contractors and subcontractors who have no more than two final penalties of $5,000 or more in the three prior years for violations of applicable wage and hour laws. At least 25% of the workers constructing the project must be County residents. Special taxing district taxes are exempt from the PILOT.

This Bill harms the budget without providing a meaningful public benefit.

At a time when the County is struggling to fund critical services, where the outlook for the next couple of years is uncertain at best, and where full economic recovery from this pandemic may take as much as ten years, it is certainly not prudent to reduce revenues coming into the County coffers.

During the Council’s deliberations on the Bill, supporters could only cite one potential development as being eligible for this 15-year, 100% tax break – the proposed Strathmore Square at the Grosvenor/Strathmore Station. Under the provisions of this legislation, Strathmore Square’s owners would receive a tax break of more than $100 million. As a member of the County Council, I supported the zoning changes that made this proposed development possible, but I simply do not believe it is a responsible use of County resources to supplement a market-rate housing complex at this level of expense.

Should similar developments occur at the other potential WMATA sites across the County, lost revenue would likely exceed $400 million. To be clear, I want more housing constructed in our County, and I see the significant benefit of housing that makes transit usage extremely convenient. However, I do not believe providing developers with $400 million in incentives is worth the 8,000 new housing units. Put another way, this Bill would provide a developer with a $50,000 per unit subsidy regardless of cost of rent. We simply cannot afford this cost.

Public benefit

Generally, PILOTs are used to incentivize production of more affordable housing that we would not otherwise get. Under current law, new residential development must include between 12.5% and 15% MPDUs (the minimum percentage requirement depends on the location of the project). Enactment of an entirely new program with such a substantial subsidy must do more than require one quarter minimum required number of MPDUs be affordable to those earning 50% AMI. In fact, we need more of these deeply affordable units, and I would support turning that provision into a requirement, rather than simply using it as part of an incentive package. Again, the public benefit proposed by this Bill does not warrant the expenditure.

Authority already exists to provide PILOTs

As you know, the County already has the authority to offer PILOTs. It makes sense to continue to allow them on a project-by-project basis – not all projects need the same PILOT term or value. Flexibility should be maintained to enable negotiation of the best possible agreement in the public interest.

Additionally, if we want to provide tax incentives that support commercial development to bring new businesses here, those incentives should go to the occupant of the building, not to the developer of the building. This legislation gives public funds to help build buildings not to incentivize businesses that would be tenants in those buildings.

Use of limited public funds should be targeted for affordable housing production and meeting affordable housing goals, which is not the focus of this Bill

By the estimates developed by WMATA and some Councilmembers, about 8,600 units can be built on the properties covered by this Bill. Approximately 1,300 of those units would be the required MPDUs; approximately 7,300 would be market rate units. The recent regional housing study and the related housing goals were clear that our housing need was not simply about the total number of housing units. The report and the related goals specify income-based targets: three-quarters of the future projected 40,000 units need to be below 70-80% of area median income. Therefore, only one-quarter or 10,000 of the projected 40,000 units, are needed to be at market rate. If this legislation succeeded in producing the number of units estimated by WMATA, then about 7,000 (those on WMATA property) of the 10,000 market rate units needed would not produce property tax revenue for 15 years. The legislation would shift property taxes almost entirely onto below market rate units.

The remaining 3,000 market rate units are likely to be spread out at the 23 “activity centers” along with the more than 25,000 affordable housing units. It does not make sense to focus the market rate housing at Metro stations and push the other affordable housing elsewhere. As the recent Housing Preservation study points out, affordable housing units near transit are at greatest risk of being lost and are being lost.

Given the projected number of market units needed, there is no lack of zoning in the Metro Station areas in order to accommodate the needed units; while they may not be built on top of Metro property, they may be built nearby within easy walking distance of the Metro.

High rise housing is expensive to build and expensive to rent

Furthermore, a focus on high rise buildings ignores the fact that by its very nature, high rise development is the most expensive that can be built. Advocates want to maximize use of land but if density is used to build high rises, it will be unaffordable to most of the people identified as needing housing. Seventy-five percent of projected need is affordable housing – why would the focus be on subsidizing market rate housing? Zoning in central business districts for high rises far exceeds the zoning for types of housing that are generally affordable and more family friendly – including garden style and mid-rise apartments.

The Bill could increase the cost of WMATA land.

Under Federal law, WMATA must seek the highest and best price for their land. Land that is exempted from all property taxes for 15 years is more valuable because the calculation of its value includes the costs to acquire and develop, including taxes, weighed against market rents. If two properties are side by side, one exempt from taxes and the other not, and they were producing the same value of unit, the land value of the exempt property would be greater because its cost of development would be less than the cost to develop the tax-paying property. This would, in turn, likely raise the parcel’s appraised value. The Bill could potentially be counterproductive by raising the value of WMATA’s land.

The Bill sets a difficult precedent

It is not clear why there is a public need to specifically incentivize development on WMATA owned property. It is likely that other properties near Metro will ask for the same PILOT. Those properties offer similar value in providing transit proximate development – a residential walkshed is a radius of ½ mile from Metro; a walkshed is the area around a station that is reachable on foot for the average person – how far someone is willing to walk to their home or business from transit. Additionally, a commercial walkshed is ¼ mile from heavy transit, which would raise the question of whether commercial development should be favored closer to Metro. There does not seem to be a logic to the approach of this Bill.

The impetus for this Bill seems to be based on one project at one Metro site as evidenced by testimony and the Council packets. One project should not drive countywide policy.

The specific project was discussed during Council deliberations – at the Grosvenor Metro Station by FiveSquares Development which had been working with WMATA for about five years either directly or through their affiliate, Streetscape Partners.

The Bill is particularly focused on one project at the Grosvenor Metro. In December 2017, as a member of the County Council, I voted in favor of the Grosvenor-Strathmore Metro Area Minor Master Plan which allows for this development to proceed. WMATA documents that we reviewed show that the original assumption for their property was that about 500 units could be built. This Minor Master Plan up-zoned portions of the Plan Area to allow for greater density, particularly on the Metro site both to take advantage of the Metro location and to provide density to make the project feasible. This up zoning resulted in allowing more than 2,200 units to be built there, essentially quadrupling the density.

The documents show that FiveSquares was substituted for Streetscape as the developer and that the appraisal of the land would only be done after the completion of the rezoning process. So, the price was set based on the appraisal which, like all appraisals, took into account all of the costs and the market for units that would be needed to support those costs. One has to assume that FiveSquares fully understood what they were doing because had they thought the appraisal was wrong, they could have walked away from the project. FiveSquares agreed to the appraisal and signed a deal. The appraisal assumes that the property can be developed at the determined price and FiveSquares obviously concurred with that assessment. Having been personally involved as an Executive negotiating over the value of land, I know that it is common for buyers and sellers to differ in appraisals and then to reach agreements that attempt to accommodate the assumptions of both parties. One has to assume that FiveSquares knew what they were doing when they accepted the assumptions and the appraisals that went with it.

If FiveSquares had a problem with the price and appraisal, they had an opportunity to reject the appraisal and the deal. At no point during the Council’s consideration of the Minor Master Plan was there any indication that additional public subsidies would be required to get a high-rise project “shovel ready,” let alone a 15-year abatement of all property taxes.

I would also note that others have commented that FiveSquares will pay for amenities; those amenities attract residents and make the project feasible. They would also have been included in the appraisal and are key in marketing the property.

Fiscal impact of a PILOT and the FiveSquares project

According to the Bill’s Fiscal Impact Statement that compared Strathmore Square with existing nearby buildings, the development’s approximate annual property tax bill upon completion would be between $5.8 million to $7.1 million a year. Over 15 years, the approximate loss of property tax revenue would be between $87 million and $106.5 million for just this single project.

No evidence that this Bill is necessary to stimulate market-rate (non-affordable) housing and this approach is not done region-wide

There is no evidence that this subsidy is required. In fact, if you look around the region, many of our neighboring jurisdictions have their highest taxes on property nearest Metro sites and the tax rates are substantially greater than in Montgomery County. If property taxes were the key to development, we would have won the development battle a long time ago because we are lower than most surrounding jurisdictions.

Furthermore, market housing is being built rapidly in Bethesda and is likely to spread to other densely zoned areas as Bethesda builds out. Rents in Bethesda are extraordinarily high, and it does not make sense to subsidize the construction of apartments that rent at prices far out of reach for most County residents. The Bill, coupled with a separate proposal from the Planning Board to reduce impact fees in most areas, will only deepen the obstacles to growing the tax base. While it is true that residents of these buildings will pay income taxes, the loss of property taxes is significant, and residents could live in other market rate housing where we collect both income taxes and property taxes. For the commercial sector, the only ongoing tax we receive to help provide infrastructure is the property tax.

This Bill was designed without a market analysis to establish whether this type of general legislation is needed. As noted above, the authority already exists to provide these PILOTS on an individual project basis, and a Countywide approach is not warranted.

Workers deserve prevailing wage

A majority of the Council voted against requiring the prevailing wage at these projects. The provision would have required that all contractors and subcontractors pay prevailing wages and be licensed, bonded, insured, and abide by wage and hour laws. Legislation that dedicates public funds to market-rate housing should, at least, also support the workers who build the housing. This provision was supported by the Baltimore-Washington Laborers’ District Council, an affiliate of LiUNA; United Association (UA), United Brotherhood of Carpenters, International Brotherhood of Electrical Workers (IBEW), CASA, Jews United for Justice, Progressive Maryland, Montgomery County Education Association (MCEA), SEIU 32BJ, SEIU Local 500, SEIU Local 1199, UFCW MCGEO Local 1994, and UNITE HERE Local 25. If WMATA was building a structure on the same property, current law would require them to abide by the prevailing wage. I believe the developments contemplated by this Bill should as well. The lack of such a provision to treat workers equitably and to share in the subsidy is another major deficiency in this legislation.

Using limited funds for market-rate (non-affordable) housing development means fewer funds for other services including affordable housing, recreation, and education, which has a racial equity/social justice impact

A Racial Equity and Social Justice (RESJ) impact analysis was not applied to this Bill, which was introduced before the RESJ requirement took effect. Because the Bill will have a significant budgetary impact, it deprives the County of tax dollars that could be used for other programs, including affordable housing that would benefit communities of color most. This Bill allows housing to be built for those who can afford it, not for lower income populations who are disproportionately Black and Latino.


Smart Growth or Corporate Welfare? Part Three

By Adam Pagnucco.

Part Two examined the case made by supporters of Bill 29-20, which offers 15-year property tax breaks on Metro development projects, and found that they have a point: namely, that the economics of high rises at Metro stations likely deter many such projects from being built. But there are other issues with the bill that should be addressed. Some of them are:

Smart growth was supposed to make money for the county.

There are plenty of good reasons to channel economic development through smart growth principles, including transportation management, community building, agricultural preservation, environmental considerations and more. But one of the cited reasons has historically been its alleged impact on county finances. Concentrating development in existing downtowns means that new road and sewer infrastructure does not need to be built. Nor do new police or fire stations. Schools may need to be expanded but new ones are not necessarily required as they may be by remote greenfield development. And high property values in downtowns can generate lots of property tax revenues that can be allocated across the county’s many needs. That was the plan at any rate. White Flint, one of the county’s earlier smart growth plans, was projected to generate $6-7 billion in revenue over the next 20-30 years back in 2010.

That was then. Now we are being told that if we want development at Metro stations, taxpayers need to pay for it.

There is no evidence that corporate payouts have paid off for MoCo overall.

Bill 29-20 is far from the first corporate incentive proposal in county history. MoCo has handed out $67 million in incentives through its Economic Development Fund (EDF) over the last couple decades with millions more on the way. Most of this money has been expended for retention, not attraction. Four recipients alone – Fishers Lane (HHS), Meso Scale Diagnostics, Marriott and HMS Host – were allocated a combined $44 million in multi-year retention grants, of which $28 million remains to be paid. MoCo’s Democratic elected officials even gave a $500,000 subsidy to a subsidiary of Rupert Murdoch’s Fox Corporation. Despite all of these expenditures, the charts below shows how MoCo compares to its neighbors in employment growth and establishment growth since 2006, the county’s peak in the prior business cycle.

Here is the bottom line: we have been paying escalating amounts of corporate incentives for more than twenty years and it has not moved the needle on our economic competitiveness. Any time you do the same thing over and over and don’t get a positive result, you need to reconsider what you’re doing. Council members, think about it.

The county’s own actions make it a tough place for landlords.

Back in April, I wrote an article titled, “Why Would Anyone Want to Build Rental Units in MoCo?” summarizing the many deterrents to residential rental construction here. Among them were the time-consuming and expensive eviction process, the county’s moratorium policy (which does nothing to stop school crowding) and the election of a frequent development opponent as county executive. But little compares to the recent imposition of rent stabilization, which is supposed to be temporary but could always be extended. Many landlords were outraged at allegations of mass rent gouging when in fact there was little evidence to back that up. So are we now offering tax breaks in part to make up for all of this? Wouldn’t it be cheaper for taxpayers if the county simply stopped doing some or all of the above so that tax breaks aren’t necessary to get landlords to build units?

Property taxes by themselves are not the reason why MoCo can’t compete.

In waiving property taxes on Metro projects for 15 years, Bill 29-20 assumes that MoCo’s property taxes are a deterrent to development. But according to D.C.’s chief financial officer, MoCo’s effective property tax rate in 2018 was lower than in Prince George’s, Fairfax and Alexandria and not much higher than Arlington. And according to the General Assembly’s Department of Legislative Services, MoCo’s real property tax rate ranked 14th of 24 local jurisdictions in Maryland in FY20. On top of that, MoCo’s transportation impact taxes are far lower near Metro stations than they are in other parts of the county.

MoCo’s tax competitiveness challenge lies in its income tax (which is not charged by local governments in Virginia) and its energy tax. Bill 29-20 does not address either of those issues.

What are the consequences for income inequality?

High rises on top of Metro stations will be able to command some of the highest rents and/or condo prices in MoCo (and perhaps the entire region). In fact, such projects need to charge high rents and prices to pay off the costs of high rise construction and WMATA requirements. Bill 29-20 does not impose any additional affordable housing obligations beyond the 12.5-15% moderately-priced dwelling unit requirements in existing law. (Council Member Will Jawando introduced an amendment to raise the affordable housing requirement to 25% in committee but it was voted down.) So the bill in effect requires MoCo taxpayers to subsidize high-cost housing. Given the county’s long-standing problems with housing unaffordability and income inequality, that’s a hard pill to swallow.

And so Bill 29-20 presents a tough policy predicament. It’s true that high rise projects at Metro, the local Holy Grail for smart growth in the D.C. region, are not happening because of difficult project economics. It’s also true that sprawl and no growth are bad alternatives to transit-oriented development. But it’s frustrating that some of the architects and advocates of the county’s 15-year smart growth approach are now telling us it can’t happen without big tax breaks.

That said, corporate welfare can in rare cases be a necessary evil. If the county council wants to consider tax breaks for projects on a case by case basis, so be it. In doing so, the council can sort out projects that have a compelling public purpose from those that don’t. The council can also exercise leverage over a developer when public amenities like open space, child care, schools and other priorities are under consideration.

Bill 29-20 does not enable any of that. It creates an entitlement. Developers at Metro station properties will get tax breaks by right according to law. The council gives up most if not all of its leverage to influence such projects. And of course future developers might want to amend the law to get even longer tax breaks or other benefits. Developers of sites near but not on Metro stations might demand concessions too. As with the county’s Economic Development Fund, which began by handing out small grants to companies twenty years ago and eventually distributed 7-digit and 8-digit grants, the subsidies in the current bill may only be the beginning.

Metro station development was supposed to make us money. Now it seems we will have to pay for it, at least up front, to get the benefits that come later. Dear reader, this is your judgment to make. Is it worth it?


Smart Growth or Corporate Welfare? Part Two

By Adam Pagnucco.

In making the case for Bill 29-20, which would grant developers at Metro stations 15-year property tax breaks, supporters claim that Metro high-rise development is not currently happening. And they say that’s the case for the entire region.

Is it true?

WMATA had a spate of development projects at Metro stations from 2002 through 2007, when the region’s real estate market was hot. There are much fewer proposals in the works now. They include:

Grosvenor-Strathmore, Montgomery
WMATA selected Fivesquares Development as its ground lease development partner at the Grosvenor-Strathmore station. In 2018, the Montgomery County Planning Board approved a sketch plan for 1.9 million square feet of mixed use development at the site. The original plan was supposed to include seven buildings, two of which would be 300 feet tall and another 220 feet tall. However, Fivesquares subsequently claimed that it needed tax breaks to finance the high rises, thus giving rise to Bill 29-20. Fivesquares wrote the following in its testimony about the bill:

Simply put, but for this legislation, Montgomery County’s goals to promote high density growth at transit accessible locations and, specifically, to implement the Grosvenor-Strathmore Minor Master Plan Amendment that the Montgomery County Council and Montgomery County Planning Board unanimously approved in 2017, would not be feasible due to the prohibitive economics of building high-rise projects. There is a significant gap in building high rise projects due to the gap between costs and revenue and the unique infrastructure requirements of Metro sites.

In the absence of this legislation, instead of the potential at the WMAT A property at the Grosvenor Strathmore Metro station for over 2,100 units, including over 350 Moderately Priced Dwelling Units (MPDUs), the only feasible development would be lower density, stick-built housing that would dramatically underutilize the site, resulting in less than half the number of total housing units and MPDUs.

New Carrollton, Prince George’s
WMATA plans to replace the parking on the station’s south side with hundreds of thousands of square feet of office, retail and multi-family space. At full build-out, the site could have a dozen buildings ranging in size from five to fifteen stories. Construction of a new garage is also planned for the station’s east side. Along with Grosvenor-Strathmore, this is easily the most aggressive of WMATA’s current development plans.

A rendering of development on the south side. Credit: WMATA.

College Park, Prince George’s
WMATA is planning a 5-story project at this station with more than 400 housing units.

A rendering of development at College Park. Credit: WMATA.

Capitol Heights, Prince George’s
WMATA would like to place a 6-story residential building with ground retail at its Capitol Heights station parking lot. This project was terminated in 2018 but WMATA staff asked for a new solicitation last year. KLNB is advertising the project’s retail component.

Deanwood, D.C.
In 2018, the WMATA board approved a joint development project to replace its Deanwood station parking lot with a mix of residential and retail and a garage. The project is not high-rise; rather, it envisions four-story buildings.

That’s about it. The project in D.C.’s Takoma neighborhood looks stalled as does the Greenbelt site in Prince George’s, which was once considered for the FBI. Amazon’s arrival in Northern Virginia could eventually stimulate development at Metro stations there but that seems quite a ways off.

Other than the Grosvenor-Strathmore site (which led to Bill 29-20) and New Carrollton (which might not have been viable without the relocation of the state’s housing agency), none of these projects has a high-rise component. That’s not an accident. Developers at Metro station sites have to deal with replacing existing parking (either with a garage or underground), station access issues, bus circulation issues and even possible amenities like park space. There is also WMATA’s time-consuming approval process on top of any local planning approvals. Developers of private sites don’t have to deal with these problems. Combine the construction costs of high rise as opposed to wood frame with the extra costs of building at WMATA sites and the economics of such projects get difficult, even with high rents and condo prices.

DC Urban Turf, a website that tracks residential development, lists hundreds of new residential projects that have been delivered, are under construction or are planned in the area. Many of them are high rises. High rises are being built in the region. They are just not being built, for the most part, on Metro stations.

So if high rise construction at Metro stations requires huge tax breaks to work, are the bill’s supporters right? Should Fivesquares and other developers get 15-year property tax exemptions? There are lots of other considerations to be discussed. Let’s do that in Part Three.


Smart Growth or Corporate Welfare? Part One

By Adam Pagnucco.

For many years, MoCo has focused its land use and economic development policies on transit-oriented development. Since 2006, the county has adopted eight master plans centered on Metro stations, another four centered on Purple Line stations and one more centered on Corridor Cities Transitway stations. Another plan is in the works for Downtown Silver Spring.

The capstone for the Metro-based plans is development on top of the Metro stations themselves, which requires joint development agreements with WMATA. Placing the highest density on Metro stations, along with nearby parcels, enables the county to balance growth, transportation and environmental priorities in its march towards the future. For fifteen years, that’s what we have been told.

Now we are told that this approach won’t work without taxpayer subsidies.

The problem is that most, if not all, development on top of Metro stations is not proceeding. And that is because of economics. In order to be economically viable, Metro development projects must charge rents or condo prices sufficient to not only cover construction costs, financing and investor returns but also the unique costs associated with Metro station sites. The economics are particularly difficult with high rise projects, which have higher material and construction costs than wood-frame projects. And so the county council has proposed Bill 29-20, which would eliminate property taxes on Metro station development projects for 15 years and replace them with undefined payments in lieu of taxes to be set later.

In justifying the bill’s purpose, consider these remarks by Council Members Hans Riemer and Andrew Friedson, the lead sponsors of the bill, and Planning Board Chairman Casey Anderson at the council’s first work session.

I want to say that this is a smart growth proposal. This is about making development feasible where decades of inactivity has demonstrated it is not feasible. If you look at Montgomery County and our Metro stations, you will almost universally see empty space on top of the Metro stations and despite efforts by WMATA over many years to support development at those stations, to solicit development on their property, there is very little that has happened. And there is very little that has happened recently, in the last ten years or so. Very little high rise, especially, and because of a shift in the market, I think which is driven by regional economic shifts and global economic shifts that have made the cost of high rise construction prohibitive except in the most high rent communities…

I think very broadly speaking, we have sought to channel all of our development, almost all of it, through a smart growth framework. We want to get housing that is high rise. We want to discourage sprawl. But the problem is we have not – the market isn’t producing the high rise that we have zoned for, that we want. And so the end result is we’re not getting much development. We’re not getting very much housing. We’re not even getting much commercial development.

The idea that we’re forgoing revenue and that has a direct cost, that we’re leaving money on the table, we’re not leaving money on the table – the table doesn’t exist currently. That is the issue. There is no development, there is no investment. At best, the table is going somewhere else. It’s been shipped to another region of the country. It’s been shipped to another county. The whole point here is to create the opportunity. You know, the idea that we would be serious about transit-oriented development, that we would be serious about meeting our significant housing targets to address the housing crisis that we currently face but wouldn’t be willing to do anything about it is troubling. And we need a game changer. We need something to change the economic development path that we’re on, we need something to change the housing path that we’re on, that currently does not work. And I will say our housing situation, that is our version of a wall in Montgomery County. What we do with housing is a decision that we make on whether or not we want new residents here or not. That’s the local government version of whether we put up a literal or proverbial wall to say who can and who can’t live here, who we want and who we don’t want here.

Will the development happen anyway? And I think the market is not just speaking, it’s screaming that the answer is no. Because you don’t have to take any particular real estate developer’s word for it, you can see what’s happening in the real world. It’s not just in Montgomery County, you can look at what market rents are at every Metro station in the region and you’ll see that there’s a few, particularly in Northern Virginia and in Bethesda, where rents can justify new high-rise construction there. Everywhere else, the answer is no, and that’s not just true of Grosvenor, or for that matter Forest Glen, as you mentioned, it’s also true of White Flint.

In considering these remarks, let’s remember who is saying them. It’s not County Executive Marc Elrich, who voted against numerous transit-oriented development master plans when he was on the council. It’s Casey Anderson, who has served on the Planning Board for nine years and chaired it for six; Hans Riemer, who has served on the council for ten years and is the current chair of its planning committee; and Andrew Friedson, who has emerged as the council’s principal champion of economic development during his first term in office. These are not development critics as Elrich has been. Anderson in particular, and Riemer to a lesser extent, are two of the architects of the county’s Metro-oriented land use policy and they are saying that it has failed.

They are also saying that the only way to rescue it is through what may ultimately become the biggest application of corporate tax breaks in the county’s history.

Are they right? We’ll discuss it in Part Two.


Hogan Takes $25 Million from Schools but Gives $20 Million to Northrup Grumman

Governor Larry Hogan has refused to spend $25.1 million that the General Assembly allocated toward education. Apparently, this is because he’s piqued that the legislature did not give the discretion on how to spend the money.

Among the $25.1 million is $6.1 million that would have gone to fixing aging schools. Governor Hypocrite has made a cause célèbre of bringing air conditioning more quickly to Baltimore schools but is uninterested in upgrades when he’s not at the center of headlines or they were the legislature’s idea.

An additional $19 million would have helped local school systems cover the cost of employee pensions, allowing them to free up the money to improve education. Hogan said no.

Instead, Hogan is giving $20 million to Northrup Grumman in a huge dollop of corporate welfare. Avowedly, this bribe to Northrup Grumman is to “retain” 10,000 new jobs in Maryland. Except that the fine print of the Department of Legislative Services (DLS) report reveals that NG is not required to create a single job to get the money.

Bad idea for so many reasons beyond the Trumpian “believe me” approach. First, Northrup Grumman won’t release the taxes it pays to the State, so we don’t even know the benefits. Does NG pay any taxes to the Maryland? Apparently, “don’t ask, don’t tell” has finally found a new home at NG.

Second, unlike some corporations, Northrup Grumman can’t easily move. It has a complex, heavy plant that would be very expensive to rebuild or relocate. The jobs require high skill workers who aren’t going to move or be replaced if NG up and moves to low tax Kansas or Louisiana. Most important, they do a lot of secret work for the federal government and it is very helpful to be near DC.

Third, and perhaps worst of all, the General Assembly already gave Northrup Grumman a $37.5 million tax credit in the past session with the Governor’s enthusiastic backing. So the total amount that NG is receiving at the trough in $62.5 $57.5 million. Yet Hogan won’t release $25 million more appropriated to the schools.

Finally, corporate welfare is a bad idea that both Democrats and Republicans should loathe. Democrats should dislike it because its a giveaway to the wealthy. Republicans should hate it even more, as another government expenditure and market-distorting industrial policy. Businesses should compete on a level playing field.

Maryland is never going to compete for business as the cheapest destination. Here’s a novel idea for Gov. Hogan’s consideration: let’s continue to invest in education so that our citizens remain the best prepared and most competitive in the nation, so we can attract good jobs on our merits rather than cash.


Delegates for Corporate Welfare

The General Assembly managed to pass a tax subsidy worth $37.5 million for Northrup Grumman but not to enact the increase in the Earned Income Tax Credit (EIRC) that both houses favor. Laudably, the House  did not tie the EITC increase to a tax cut for the wealthy like the Senate but instead adopted a broad based tax cut.

Nonetheless, the corporate welfare for Northrup Grumman easily passed the House of Delegates 76-57. Twenty-eight House Democrats supported this giveaway, including several who identify themselves as progressive leaders in the House:

NG Dem DelEight Democrats didn’t vote on the issue, including a few members of the House leadership team:


Two Republicans stood for conservative principles and did not give away your tax dollars to a corporation that already does quite well at the federal trough.



Senators for Corporate Welfare

The General Assembly couldn’t manage to pass an increase in the Earned Income Tax Credit (EITC) even though both houses supported it. In contrast, the bill giving Northrup Grumman a $37.5 million tax credit sailed to passage.

Who in the Maryland Senate supported this fine example of corporate welfare?

One Republican Against Corporate Welfare

Just about every Republican voted for the bill. Sen. Michael Hough (R-4) was the sole Republican who voted no, possibly because he is a conservative who (1) wants a simple tax code, (2) doesn’t think government should interfere in the free market by helping out only favored businesses, and (3) wonders why his tax paying constituents shouldn’t get the break instead of Northrup Grumman.

Democrats for Corporate Welfare

Nineteen Democrats joined the twelve Republicans who voted for the bill. The following chart lists them in decreasing order of support for Democrat Anthony Brown in the last election:

DforNGThough seven represent legislative districts that voted for Hogan, the rest hail from districts won by Brown. Nine of the 19 represent extremely safe Democratic districts. In these nine, Brown won by 59% or more, and all won election in 2014 by 62% or more.

Four more represent districts carried only narrowly by Brown (i.e. 50-52%). But even these senators do not face serious general election danger. Obama fared much better in the same territory, and Democrats won them by 57% or more in 2014 despite the terrible electoral fortunes faced by Democrats around the country.

Sen. Craig Zucker (D-14), recently appointed to replace retired Sen. Karen Montgomery, is tacking to the right of his predecessor. Besides voting in favor of giving money to Northrup Grumman, he also supported the tax cut for the wealthy. An interesting strategy as incumbent Sen. Rona Kramer lost to then-Del. Montgomery the primary after being attacked as too pro-business.

Dumb Politics

The politics of the legislation make little sense. It’s not even a question of alienating liberals. It’s hard to see how Democrats win more votes here from anyone. Are moderates, let alone liberals, really going to vote Democratic because Northrup Grumman received a tax giveaway?

The icing on the cake is that the Senate simultaneously killed off an increase in the EITC by standing firm in favor of a tax cut for the wealthy instead of for the middle class.