Too Soon to Lock in DC Tax Cuts

Life is full of surprises, they say. So is the District of Columbia’s budget. I’m referring here to the Budget Support Act, the package of legislation that’s paired with the spending bill.

Turns out that the BSA the DC Council will soon take its second required vote on could trigger tax cuts before either the Mayor or the Council knows how much the District will need to spend just to keep services flowing — let alone how much it should spend.

Whoever knew? Doubtful all Councilmembers did, since Chairman Mendelson distributed the final BSA shortly before the first vote. Other interested parties surely didn’t because it wasn’t published.

And one would have needed time to figure out what the Chairman had done because his bill doesn’t spell out how it would change trigger provisions enacted as part of last year’s BSA.

Well, we know now — or could, thanks to a heads-up from the DC Fiscal Policy Institute and a DC for Democracy post that adds some angles.

The basic issue here — though not the only one — is when tax cuts recommended by the Tax Revision Commission should go into effect. Both the original BSA provision and the new version require a revenue projection higher than an earlier one.

Tax cuts wouldn’t all kick in at once, since that would immediately throw the budget out of balance. Last year’s BSA ranked them in priority order. The ranking would stay the same. But that’s as far as the parallels go.

Set aside for a moment the egregious lack of transparency. What’s wrong with the latest plan for triggering tax cuts based on rosier revenue projections? Three big things.

Tax Cuts Take Priority Over Spending Needs

The new plan would dedicated all of the projected revenue increase to tax cuts, rather than the excess over a threshold set by the current BSA.

And it would do that before the Chief Financial Officer had estimated the costs of sustaining existing programs in the upcoming fiscal year. These tend to rise for various reasons, as DCFPI notes.

Beyond that, we’re not spending as much as we should in a number of areas — affordable housing and homeless services, to name just two. This year’s budget makes some progress on both. But further progress will stall if the Mayor and Council can’t allocate the revenues needed.

Without them, the Housing Production Trust Fund — the single largest source of financial support for affordable housing construction and preservation — could have less next fiscal year, since half of the $100 million it has now reflects a one-time appropriation.

The next steps envisioned in the latest strategic plan to end homelessness in the District also hinge on further investments. For example, the plan envisions year-over-year increases in permanent supportive housing for families, plus some rapid re-housing vouchers extended past the usual one-year limit.

It also calls for some indefinite-term vouchers earmarked for families and single adults who can’t afford housing when they don’t need intensive supportive services any more or come to the end of their rapid re-housing extensions.

And at the risk of beating a dead horse, I’ll add that we’re likely to have homeless families until the Mayor and Council significantly increase Temporary Assistance for Needy Families benefits, which now, at best, leave a family of three at about 26% of the federal poverty line.

More generally, setting automatic triggers for a series of tax cuts denies both the Mayor and Council a chance to weigh priorities during budget seasons. Those tax cuts, recall, will mean relatively less in revenues not only next year, but every year — unless they’re repealed.

A whole lot harder politically to repeal a tax cut than to defer it until it won’t preempt spending that will do more good for more people than reducing tax obligations for some.

Cuts in the Offing Tilt Toward Well-Off Taxpayers

The Tax Revision Commission made nearly a dozen recommendations for cuts — a mixed bag if you believe that individuals and businesses should contribute to the general welfare according to how well they’re faring.

The Council adopted a couple that ease tax burdens for low and moderate-income residents. But those ranked highest in the BSA now don’t reflect a consistent preference for a progressive tax structure — far from it.

The second listed, for example, would reduce the tax rate on income between $350,000 and $1 million. Next on the list — and again in fifth place — are cuts in the franchise taxes that businesses pay.

The threshold for any tax on estates would increase to $2 million before filers would get larger standard deductions — the option virtually all low-income taxpayers choose because they’d pay more by itemizing.

Bigger Revenue Losses Than Recommended

The Tax Revision Commission recommended revenue increases to offset the losses resulting from its recommended cuts. The Council took a pass on two. The new BSA would do the same, forgoing $67 million, DCFPI reports.

So there’d be a straitjack on revenue growth — possibly indeed future shortfalls. The District has had these before — the latest only just remedied by savings found.

What the shortfalls tell us is that revenue projections are inherently iffy — the more so as they estimate collections beyond the upcoming quarter of a fiscal year. That’s just how forecasts are. Ditto projections of spending needs.

Who, for example, can foresee a prodigious snowstorm, requiring millions more to clear the roads than budgeted? Who, at this point, can predict how much crucial programs will lose due to federal spending cuts?

So it seems unnecessarily risky to plow ahead with tax cuts before next year’s budget is even on the drawing board. And if past is prologue, programs that help low-income residents are what the BSA would actually put at risk.

UPDATE: I’ve learned, from reliable sources, that the excess revenue threshold in the current BSA applied only to the forecast used as the basis for next fiscal year’s budget. Under the current law, tax cuts would kick in with any higher revenue forecast, but not until next February. The Mayor could, if she chose, ask the Council to approve using the extra for unmet needs instead.

So what I wrote about the current BSA is misleading, but my basic point that the new BSA would trigger cuts prematurely stands.

 

 

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