Doing the Math on the Cost of the D.C. Height Limit

Some further thoughts on the case for allowing skyscrapers in Washington, D.C. Ryan Avent brings us a 1998 study which estimated the “shadow tax” imposed by land-use regulations in different markets.

It concluded that in Washington it was equivalent to 22 percent of the price of real estate. Now everyone knows that land scarcity in the city has gotten more severe since then, so let’s say this sets a lower bound to the cost. Avent does a little back of the envelop math:

Downtown Washington, which is a small part of the city’s total area and which excludes portions of the central business district, has an estimated 66m square feet of office space. The average commercial rent in downtown Washington is $94 per square foot. Using the 1998 shadow-tax figure, we can guess that perhaps $21 of that rental cost is attributable to regulatory restrictions, which means that the total annual regulatory cost in downtown alone is around $1.4 billion: well above even implausibly high guesstimates of the aesthetic benefits of the height limit.

In purely financial terms, that well exceeds the $1 billion that the city collects per year in sales taxes. In other words, you could allow for skyscrapers in the central business district, impose a staggering 22 percent tax on office rents, eliminate the D.C. sales tax, and still come out with cheaper after-tax office rents and more tax revenue than we have today. Obviously the combination of more customers and lower taxes would be great for local retailers. And what’s not to like about the combination of lower taxes, a more progressive tax structure (since retail sales taxes are regressive), and higher revenue?

And note that the positive revenue impact here is being badly underestimated, since I’m assuming that the increased real estate development doesn’t lead to any increases in employment, incomes, or alcohol sales—none of which is correct.

The other thing I hear about this is that we can’t have taller buildings downtown because the existing transportation infrastructure can’t handle it. That seems backward to me. Transportation capacity constraints are the reason why even a freer market in real estate development won’t, in practice, lead to the creation of a black hole of infinite density. There are positive spillovers associated with density and negative congestion spillovers, and at some point they balance. One very good reason for cities to both invest in transportation infrastructure (a separated blue line under downtown would be nice) and to manage their existing infrastructure better is that it lets you balance at a better point on the curve.