In her annual budget, Mayor Muriel Bowser has proposed fully funding DC’s share of WMATA’s costs. Part of that cost would come from a higher sales tax on parking garages and lots. Will the DC Council go along? If it does, who will pay more?
Under Bowser’s budget, the tax would rise from 18% to 22%, raising $9.9 million out of the $30.8 million by which DC’s payment for Metro transit service will rise this year.
Bowser also wants to raise the general sales tax from 5.75% to 6% and use that money to fight homelessness.
Bowser’s staff compiled a set of comparable cities and their parking taxes.
- San Francisco: 25%
- Chicago: 22% weekdays, 20% weekends
- Baltimore: 19%
- Pittsburgh: 31%
- Miami: 20%
- New York: 18.5%
The new rate would put DC around the middle of the pack among cities on this list.
Who pays if rates rise?
Most analysis of the tax, like that from DC’s CFO, has assumed that parking rates will rise, and commuters will be the ones paying. Some arguments for the tax cite this as a plus.
For example, unlike many taxes, this will affect both District residents and non-District residents who commute into DC. Past DDOT analysis has estimated that about two-thirds of the vehicles on DC streets during rush hour are from non-residents. Metro service, which the tax money will help fund, also benefits people who live all across the region and not just DC residents.
Also, the federal government subsidizes parking by letting federal and private-sector workers (if their employers offer the program) pay for up to $250 a month of parking out of pre-tax salary. (Sadly, that figure is now only $130 for transit riders).
This means that if garages raise their rates in response to the rising tax, many people will not feel the full brunt of the increase. The money is going to Metro to compensate, in part, for the revenue WMATA lost when the federal transit benefit dropped to $130 in January 2014 and some long-distance riders stopped riding Metro.
Metro riders weathered a price increase of 3% for rail and 9% for bus (and double for bus-and-rail riders). A 4% increase in parking costs is wholly in line with this.
Car cost image from Shutterstock.
But… will rates rise?
This analysis assumes that the tax will drive up parking prices. Economics 101 says that if you impose a tax, it will increase the price of the good, lowering the quantity demanded. Will that happen here?
The parking market is a little different than most markets. For one thing, at least for daily parkers, garages generally post prices and collect cash payments in round numbers which include the tax. This is different from the way it works at a store or restaurant. There’s incentive for the garages to keep their prices at a round number of post-tax cash dollars.
Also, parking operators are in the business to make money, so aren’t they already charging as much as the market will bear? In other words, if they could raise their prices when there’s a new tax, why don’t they just raise their prices now regardless?
Well, isn’t that true of all markets? But in most markets, competition drives down the prices of goods. If you’re making more money than a small profit over and above the cost of providing the service, someone else will enter the market too and try to undercut you.
Parking isn’t really a competitive market. In the short run, the supply of parking is absolutely fixed, and there isn’t empty land to turn into new parking in central DC. Also, many people also only really want to park in the building where they work, are going to the doctor, etc. and aren’t shopping around. That’s especially true when a company is buying parking for executives.
These factors make the parking market closer to a monopoly and/or oligopoly, and consequently, the pricing is more at the level that maximizes total revenue in the entire market, a level that’s higher than the perfect competition price.
Therefore, there’s some reason to conclude that garages already charge as much as people will pay, and can’t easily raise rates a few percent.
The other possibility is that garages actually could charge more, but nobody wants to be the first; with the tax, it will trigger a wave of price increases.
Philly parking operators and an expert agree
When Philadelphia was debating the level for its parking tax, the parking operators commissioned an economic analysis that concluded that the burden would fall on them rather than on consumers. It says:
In the short run, a change in the parking tax has no impact on the parking rates paid by the consumer. Consequently, the parking facility operator pays the entire amount of a parking tax increase. Parking facility operators face the same short run problem every day — how to maximize revenue.
In other words, parking operators are already charging as much as they can and the price consumers pay is determined by the number of spaces and the demand for parking, not by the level of taxes. The level of taxation and the other costs of operating a facility do not affect the price charged or the number of spaces available unless the costs are so great that the operator shuts down the facility.
In the long run the story is quite different. An increase in parking taxes discourages the rejuvenation of aging facilities, the replacement of facilities lost to development, and the construction of additional facilities. Thus higher parking taxes will decrease the long-run supply of parking, will increase the cost to the public of parking, and will decrease profits to owners of parking facilities.
Further, should an additional parking facility be required, a higher parking tax implies that the facility will require larger subsidies to develop than it would in the absence of the parking tax increase.
Rick Rybeck, a transportation consultant who previously worked as deputy associate director for transportation policy and planning at DDOT, agreed. He wrote in an email, “For the most part, parking operators are charging the maximum prices that they can charge for parking. If operators are charging the maximum possible price for parking at their location, an increase in sales price will not immediately increase the price of parking.”
"Instead, the additional tax will reduce the net revenue to the operator, effectively reducing the base price for parking that the operators collect,” Rybeck added. This would just come out of their profit margin, if that margin is large enough (or, depending how the parking deals with buildings are structured, out of the building owner’s revenue from leasing the parking to an operator.)
In the long run, this might lead to less incentive to build parking, though DC is not Philadelphia. The Philadelphia report is saying that it might no longer be economically viable to take land in job center areas and use it for surface parking lots or garages. In and around downtown DC, that became the case long ago, and all new parking is underground.
Underground parking is already so expensive to build that developers build what they think is necessary to attract the kinds of tenants they want. According to testimony developers have given at zoning hearings, the revenue from the parking often doesn’t cover the cost of building it (though, once it’s built, they certainly want to try to sell it).
Maybe a slightly higher parking tax would lead a few companies to rethink exactly how much parking they really need in an area with plentiful transit service.
What will the DC Council do?
The tax increase first has to go to the Committee on Finance and Revenue, which Jack Evans chairs. He is one of the council’s most anti-tax members, but is also now the DC Council’s voting representative on the WMATA Board and a longtime supporter of keeping Metro strong.
At a recent hearing on WMATA, he said, “I am a big fan of Metro. I served on the baord back in the 1990s and I serve on it again today. Metro is responsible for moving a million people around the area and is critical to the well-being of the metropolitan area.”
Evans may not like the tax, but if he wants his committee to remove it, he might have to find the money elsewhere in his committee’s budget. More likely, he could try to convince Chairman Phil Mendelson to rearrange the budget in other areas to make up for the money. Evans also opposes the sales tax increase.
In an op-ed in the Georgetowner, Evans wrote,
What is my greatest concern in my initial review of the budget? Proposals to increase our sales and parking taxes. ... This latest [parking tax increase] is a triple whammy. When it’s more expensive and difficult to find a parking spot, people are less likely to go out, spend money in the District and generate tax revenue.
Plus, most of these costs get passed on to residents, making it more expensive for people to park near their offices, restaurants and stores. More than a third of those parking in garages are District residents. So, in effect, we are taxing our own people again and again.
Evans makes one strange link when he talks about parking being “more expensive and difficult to find.” In truth, more expensive does not mean more difficult. If anything, it’s the reverse; more expensive parking means there’s more available and it’s easier to find. Also, when Evans says a third of affected drivers are District residents, even if drivers do pay more (which isn’t certain), two-thirds come from outside DC.
Evans’ committee will mark up its section of the DC budget on May 13. After that Chairman Mendelson will propose his own set of changes, and the council will vote on the budget on May 27th.