Putting Brakes on Runaway DC Tax Breaks

The District of Columbia has pretty well recovered from the Great Recession. Not all residents have, of course. And some had no recession to recover from because they were jobless, homeless and the like before it began.

But a fair number do seem to have higher earnings now since tax revenues have increased and are expected to increase further during the next several years.

So barring some unforeseen disaster — or dreadful policy choices — we’re unlikely to see severe spending cuts driven by the District’s need to keep its budget balanced. That doesn’t mean the District has the wherewithal to meet all critical needs, however. Not even close.

For one thing, as I’ve remarked before, the District, like other state and local governments, will have to spend more merely to make up for shrinking federal support.

For another, the District has needs beyond what even less stingy federal funding would cover — affordable housing, new shelters for homeless singles, as well as families, better public education, especially for low-income and/or minority students …. Well, you can fill in the blank as well as I.

So the DC Council should do two things during the upcoming budget season — both under the heading of do no (further) harm.

Stop the Triggered Tax Cuts

The Budget Support Act the Council passed in 2014 includes a provision that makes certain tax cuts recommended by the Tax Revision Commission automatic when projected revenues are sufficiently greater than they were when the budget became final to keep it balanced, despite the losses.*

Basically, the Chairman chose the tax cuts he liked best. Then he ranked those that would have immediately thrown the budget out of whack so that the most preferred would kick in first, then the next and so on.

The priority order itself reflects some dubious preferences — a cut in the tax rate for personal incomes over $350,000, for example, and two increases in the minimum value estates must have to owe any District tax.

But the triggers are to my mind — and not mine only — irresponsible in principle because they deny Councilmembers the opportunity to weigh revenue losses against unmet spending needs on a case-by-case basis.

We’d expect triggers from Red states with governors and legislatures bound and determined to slash spending — and in at least some cases, convinced that tax cuts will stimulate so much growth as to pay for themselves.

And indeed, most, though not all states that have adopted triggers are Red. No economic booms. Google Kansas or Oklahoma budget deficit for specific sorry results.

Fortunately, the District isn’t controlled by officials who take their cues from the American Legislative Exchange Council, which promotes triggers as a way to starve governments of funds needed for services, as well as other laws its Koch brother and other corporate backers favor.

So it seems to me our elected representatives shouldn’t persist in an approach that will privilege tax cuts over services that could do more good for more people.

Stop Administrations From Needlessly Giving Money Away

Four years ago, the Council passed a sensible law to exert some discipline into the process of awarding tax breaks to specific entities or projects. It postponed any Council hearing until the Chief Financial Officer provided an assessment.

Well, the Bowser administration recently moved to give a $60 million property tax cut to the Advisory Board — a large consulting firm that had indicated it might move its headquarters to Virginia. Some commitments on the Board’s part, mostly jobs for District residents.

But the Board would probably hire at least as many residents anyway, the CFO opined. And the annual $6 million more it would have to pay without the cut would “not affect the company’s ability to maintain operations or continue its growth.”

In any event, the CFO said, “research indicates that tax incentives are generally not a critical factor in corporate locational decisions.” The Council rubber-stamped the tax break anyway.

This is hardly the first such tax giveaway. The District has a long history of them — more than I could possibly cite here, even if I could compile the list.

Like me, however, some of you may remember former Mayor Gray’s $32.5 million tax break package for LivingSocial — a bad bet, as it proved, on the company’s growth and new hires.

In this case, the CFO took a pass on whether enticing LivingSocial to locate its headquarters here would have economic benefits. But he again concluded that the company would be able to pay its expenses and sustain its operations without the tax breaks.

And he noted presciently that it had yet to turn a profit, casting doubts even then on benefits the District and its residents would reap. Unanimous approval from Councilmembers anyway.

So clearly, the law isn’t working as intended. And every time the Council approves one of these corporate tax breaks, it encourages other enterprises to engage in the same sort of extortion.

It could take an alternative approach. It could fold property tax reductions (technically, abatements) and other locally-funded tax incentives into the budget for economic development.

Not my idea. But to me, it makes all the sense in the world because tax breaks are a form of spending — hence the term tax expenditures, which is how budget wonks refer to them.

Putting a line item for corporate tax breaks into the budget would compel the administration and Council to weigh the total against other spending options — and force choices later, since the budget would cap the total dollar value of the giveaways.

Neither of these policy shifts would ensure sufficient funding for programs and services that benefit low-income residents — because they’re targeted or because they improve the economy and quality of life in our community.

But the shifts would tend to foster decisions that weigh direct spending needs against spending through the tax code.

* The 2015 Budget Control Act pushed the triggers back to an earlier revenue forecast. So some will kick in even before the Council has a proposed budget to work on.

UPDATE: Very shortly after I published this, the DC Fiscal Policy Institute published a post warning that the District could have to cut spending for next year unless policymakers can find alternative ways to fund “one-time” items in the current budget.

 

 

3 Responses to Putting Brakes on Runaway DC Tax Breaks

  1. Yes, these triggers are a bad idea. The Council should revisit the Budget Support Act of 2014 and reject the regressive parts, such as Kathryn mentioned, but boost tax relief to those who need it most, the majority of residents who now pay more than 30% of their income for housing (those suffering from income insecurity), as well as hike the top rates. DC millionaires now pay a lower overall DC tax rate than all but our poorest residents. Families making about $50 thousand per year are paying the highest rate. In 2013, the most recent IRS data available, DC returns with adjusted gross incomes of $1 million and above had a taxable income of $3.62 billion. Those returns with adjusted gross incomes of $100K per year and above had a taxable income of $14.3 billion, 70% of the DC total (more at http://www.dcctj.org/). And a lot of needed revenue would be freed up by curbing tax abatements and subsidies for economic development that is creating unaffordable housing for a majority of our residents.

  2. […] on some already — shelter for newly homeless families year round, for example, and the automatic tax cuts, along with the seemingly, though not technically automatic tax […]

  3. […] Council triggered these tax cuts — and possibly others — in its latest budget-related legislation, but […]

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