Another Take on the Proposed DC Sales Tax Increase

The DC Fiscal Policy Institute makes a case for the proposed increase in the District of Columbia’s sales tax. It’s persuasive. And the more I’ve thought about it, the more I’m persuaded that the increase will serve the interests of some of the District’s poorest residents better than a campaign to replace it.

So, in a semi-retraction of my earlier post, here’s what DCFPI says, fleshed out for those who haven’t been immersed in the issues and punctuated with remarks of my own.

The increase is very small. It would add a quarter of a penny per dollar to the purchase price of anything subject to the sales tax. DCFPI has figured that poor families would probably have to pay at most $25 more a year.

The District needs additional revenues for homeless services. The Mayor has said that the additional tax revenues would fund the first steps in making reforms laid out in the new strategic plan adopted by the Interagency Council on Homelessness.

Her budget would, among other things, provide more permanent supportive housing for chronically homeless individuals and families with a chronically homeless adult member.

It would convert a pilot rapid re-housing program for individuals into a regular program and expand it so that more of them who don’t need PSH could move from shelter into housing they’ll be able to afford — at least, till their short-term subsidy expires.

It would create some new, specially-targeted housing vouchers for individuals and families who no longer need the intensive services PSH provides, but can’t afford market-rate rents. Individuals and families who come to the end of their term in rapid re-housing, but still can’t afford those rents would also be eligible for the vouchers.

The budget would also dedicate funds to begin the process of closing the over-large, decrepit DC General family shelter. About $4.9 million would pay rent to landlords who’ve offered up units — thus moving 84 families into more habitable living quarters swiftly.

All worthwhile investments, I think you’ll agree.

Other recent changes in the District’s tax code would more than offset the increased sales tax burden on lower-income residents. The DC Council enacted a higher standard deduction for income taxes last year. It expanded the Earned Income Tax Credit for childless adults, enabling them to get the same credit as from the federal EITC.

And it raised the income threshold for Schedule H property tax relief, which benefits renters, as well as homeowners. Elderly residents get a higher tax credit too.

Now, of course, residents with no earned income and not enough income from any other source to owe income taxes or pay rent won’t benefit from these changes. But “a large share of lower-income households” would come out ahead, even with the sales tax increase, according to DCFPI.

The Tax Revision Commission recommended the increase. Now, the Commission need hardly be the last word on the District’s tax policies. In fact, at least one of its recommendations made me cringe — a five-fold, plus increase in the dollar value of estates exempt from our local estate tax. (DCFPI didn’t like this either.)

At the same time, the Commission’s recommendations have credibility where it counts. The income tax and EITC changes I mentioned above originated with the Commission. So from a political perspective, the sales tax increase stands a better chance in the Council than some more progressive revenue raisers coming out of left field (pun intended). And we already have some evidence that any increase is likely to encounter headwinds.

The increase would make the sales tax rate the same as Maryland’s and Virginia’s. The point, I think, is not that the District should model its tax policies on its neighbors’. It’s rather that the new sales tax rate wouldn’t be higher than theirs — and thus tend to shift retail purchases across the borders.

Perhaps DCFPI is also giving preemptive reassurance to Councilmembers who’ve used Maryland and/or Virginia tax rates as arguments against tax increases here. Whether this strategy will work remains to be seen. It doesn’t seem to have gotten Finance and Revenue Committee Chairman Jack Evans on board. Nor will it, I suspect. But he’s only one Councilmember out of what will soon be twelve.

Bottom line: I doubt the Council will adopt an alternative, more progressive revenue raiser to support reforms in our homeless services system. And I’m quite sure it won’t shift nearly $19 million from other programs to support them while leaving revenues alone.

If we want those homeless service reforms, then we’ve seemingly got to settle for a less than ideal way of getting money for them. And this won’t be the end of the story anyway because the sales tax revenues won’t cover the costs of putting all those needed reforms in place.



3 Responses to Another Take on the Proposed DC Sales Tax Increase

  1. Yes, the impact on low-income residents is small, but for those living in poverty it is not insignificant. Yes, other recent changes in the District’s tax code would more than offset the increased sales tax burden on lower-income residents, but obviously without this sales tax increase their burden would be lower. If the Council passes the proposed sales tax increase it should at least be coupled with compensation to low income residents affected, with an estimated $2-3 million needed in additional revenue, provided for example by a small hike in the DC EITC. A far better alternative is to generate significantly more revenue than the proposed regressive sales tax increase by hiking the top DC income tax rates on the wealthy, and by restoring the franchise tax rate to 9.975% thereby generating $28 million in extra revenue for FY 2016* and even more in future years. Remember that Ed Lazere opposed this reduction but ended up voting for the Tax Revision Commission report that included it. Other tax giveaways should be curbed as well, particularly for unwarranted tax abatements for big developers. While the Council may not be in the mood this session to pass progressive tax hikes, without a lot more pressure, raising this demand and exposing the already existing and proposed corporate tax giveaways will create space for revenue generatiion that would enhance the low-income budget.

    *Corresponding to the reduction this year from 9.975 to 9.4%, plus the 9.4 to 9.2% reduction to be phased in for FY2016.

  2. Kathryn Baer says:

    I agree that there are better alternatives than the sales tax increase. I also agree that it’s important to continue pressing for more progressive tax policies. However, coupling the increase with a measure that would offset the impact on low-income residents would reduce revenues for homeless services, unless there were still another tax increase. Gaining that, at this point, seems to me highly improbable.

    I should also note that boosting the local EITC would benefit only people with wage income. It wouldn’t do anything for many of those who are the poorest among us and, therefore, most likely to feel the bite of the small sales tax increase.

  3. Of course you are right about using the DC EITC. A progressive sales tax rebate plan would help. While the Council may continue to resist a progressive tax hike, even restoring the franchise tax back to 9.975%, there is a real chance to curb corporate subsidies, freeing up needed revenue, if the low-income community and their allies are mobilized. Go to the CFO reports on the economic development budgets and you will find $hundred of millions transferred to the corporate sector, largely for gentrification which makes housing more and more unaffordable to most residents.

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