D.C. Council members abandoned efforts Thursday to recoup roughly $15 million in uncollected taxes as a result of a city agency quietly changing an obscure tax policy in 2007.
The city should instead find the best way to “hit the giant pause button” on a commercial property recordation tax, which needs to be clarified through legislation, said council member David A. Catania, at-large independent.
“I think we’ve beaten this horse pretty much to death,” he said. “I do not believe it would be a good use of our time and energy to go retroactively deciding who did or didn’t pay.”
A bill introduced by council member Jack Evans, Ward 2 Democrat, requires an entity that purchases commercial property, then refinances the non-delinquent property, to pay taxes only on new debt acquired in the refinancing and not the original debt.
Mayor Vincent C. Gray wants to tax the entire debt to generate revenue and follow practices in Maryland and Virginia. However, Mr. Evans objects because many of the District’s other taxes are not competitive in the region.
Though arcane, the tax made headlines this year after D.C. real estate lawyer Jeffrey A. Mitchell pointed out that people are using loan modifications to get around the tax.
During his discussions with the city’s Office of Tax and Revenue, Mr. Mitchell discovered the agency had changed its policy without circulating the change or bringing it to the council’s attention.
The policy since 2007 has been to collect taxes on new debt created in a refinancing, which conflicts with a law from 2001 that requires all of the initial debt to be taxed.
“The law is clear,” Mr. Mitchell told the Committee on Finance and Revenue on Thursday. “The only need for clarification, in my opinion, is somebody needs to the tell the Office of Tax and Revenue they’re not the decision-makers.”
The issue raised questions about how much money the city lost from the policy change and set off a war of words in letters between Mr. Catania and Chief Financial Officer Natwar M. Gandhi and D.C. Attorney General Irvin B. Nathan.
“If government can do this under cover of darkness to people who have a lot of money, government can do this to people who do not,” Mr. Catania said. “Not one person has been held accountable for this colossal problem.”
Mr. Mitchell said it would be a civil liability for the city to try to collect taxes from people who thought they were paying the correct amount at the time.
“I’m not a litigator,” he said, “but I’d be happy to take those people’s cases.”
Mr. Evans, the committee chairman, said he will ask the new D.C. Tax Revision Commission to study options for moving forward and closing loopholes people are using to get around the tax altogether.
• Tom Howell Jr. can be reached at thowell@washingtontimes.com.
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