D.C. Council member David A. Catania says the city must “fish or cut bait” regarding how it collects certain taxes on commercial properties in the District — a confusing topic that nonetheless has put millions of dollars at stake during the past decade.
Mr. Catania, at-large independent, sparred with the city’s chief financial officer, Natwar M. Gandhi, and the city’s top lawyer Wednesday about the esoteric area of tax recordation subject to a law passed in 2001, which Mr. Gandhi then altered through a private ruling in 2007.
“He may have had this opinion, but he is not the legislature,” Mr. Catania said of the unpublished maneuver.
Council member Jack Evans, Ward 2 Democrat, called the hearing as chairman of the Committee on Finance and Revenue to “really get to the bottom of what happened here” and discuss legislation that would clarify the issue.
In simple terms, a bill introduced by Mr. Evans requires an entity that purchases commercial property — and then refinances the property — to pay taxes only on new debt acquired in the refinancing and not the original debt.
The city over-collected $1.4 million in 2001-2011, if only new debt should have been taxed as per the CFO’s 2007 policy, according to the CFO’s office.
But the city missed out on an estimated $15 million that would have been collected if all of the debt had been taxed during that period, as required by the 2001 law.
D.C. Attorney General Irvin B. Nathan added a ripple to the discussion by testifying that Mayor Vincent C. Gray would like to tax the entire debt in these situations — a departure from the council bill that only taxes the debt added in refinancing.
Moving forward, Mr. Catania said the city should “draw a line in the sand and say, ‘Going forward, this is the way it will be.’
“Others want us to collect every dime,” he said. “I just think at some point you’ve got to fish or cut bait. You’ve got to just decide to move on.”
Mr. Gandhi said he has no position on the law going forward but wants to clear up any ambiguities.
“I do not recommend this way or that way,” he said. “That is not my obligation. That is not my prerogative.”
Mr. Evans will continue the hearing on Oct. 20 to gather testimony from two lawyers who raised concerns about the tax earlier this year, resulting in a series of fiery letters between the offices of Mr. Catania and Mr. Nathan.
Mr. Catania acknowledged the topic is “very complex stuff” and that members of the public watching the hearing will probably “roll their eyes, throw their hands up and walk away.”
He explained that when a commercial property with a mortgage is sold in the city — and there is a subsequent refinance of more debt — it traditionally had been the city’s policy to tax only the additional amount and not the original debt.
Yet Mr. Evans and Mr. Catania co-authored the Tax Clarity Act of 2000 to remove the exemption.
Mr. Gandhi reversed course in 2007 with a policy decision based on a private letter case — a taxpayer’s request for guidance — that taxed only the additional amount.
“Why did it take us so long to figure this out?” Mr. Evans said, noting it took about six years. “If it were a month, no one would have cared.”
Mr. Catania called the 2007 policy change a “frolic and detour” that caused confusion, noting the council and some members of the real estate industry did not know about the changes.
He also aired frustrations with an opinion by Mr. Nathan, which said Mr. Gandhi was entitled to latitude as an agency head.
Mr. Catania said that kind of breathing room is “utterly ridiculous” in light of the “plain meaning” of the law passed in 2001.
“What happened thereafter is just a colossal comedy of errors,” Mr. Catania said. “And I don’t blame the real estate industry being down here opposed to the broader tax.”