Perilous Time for DC to Trigger More Tax Giveaways

January 30, 2017

We’re into the budget season here in the District of Columbia. The Bowser administration is busy preparing its proposal, aiming to send it to the Council in early April. That will trigger hearings, then votes — first by the committees responsible for the major budget areas and then by the Council as a whole.

Budgets are always somewhat of a crap shoot because officials don’t know how exactly how much the District will collect in taxes and fees.

More importantly, they don’t how much the District will receive from the federal government and for what. But they have to factor some figure in for roughly a quarter of what the District will have to spend.

That figure is much more iffy this year for several related reasons. First, we’ve got a new President — and one that’s set on making major changes that would have both direct and indirect effects on the District’s budget.

Second, it’s doubtful anyone, except maybe insiders will know what’s in his final proposed budget before the Mayor finishes hers. The problem here is that District agencies base their budget input in part on the prospective budgets of the agencies from which they regularly receive grants.

The estimates are always just ballparks, of course. Congress can — and often does — change proposed spending levels. Or makes no changes in what it’s currently approved — something it often does, though rarely for all federal budget areas and the entire fiscal year.

But uncertainty this year will be extraordinarily high. Would be even without Trump’s threat to withhold grants from cities that don’t participate in the federal government’s immigrant deportation efforts.

The Hill reports that the administration aims to send “an initial budget proposal” to Congress long about the second week in March, but that it’s likely to run into big-time flak from some Congressional Republicans, especially in the Senate.

Can’t count on easy sailing through the House either, especially if it reflects, as rumored, either or both the Heritage Foundation’s radical downsizing blueprint and Trump’s promise to invest $1 trillion in infrastructure over the next 10 years.

Well, Congress has to do something by the end of April to prevent a government shutdown. But what that bill will look like is anybody’s guess.

What’s lots more certain are cuts to a range of non-defense programs — not only those that depend on annual spending decisions, but like as not Medicaid. But nobody can know for certain which, how much and when they’ll set in.

And nobody knows how the economy will fare. Dire warnings of a recession — in part, just because it’s time for one, though some economists also cite policies Trump has promised, e.g., new trade barriers.

As always, a recession will drive down local tax revenues, while increasing needs (and eligibility) for safety net programs that the District funds in whole or in part.

One would think that District policymakers would want to make extra sure that the ongoing revenue stream, plus money in savings accounts will cover the community’s critical needs — or at the very least, minimize the need for cuts.

Yet District law requires specified tax cuts whenever projected revenues exceed those projected for the prior fiscal year — this no matter what a longer-term forecast might indicate or what seems likely on Capitol Hill.

As a practical matter, this means that the District could give away millions of dollars — and not just for a single year, but for good, unless the law is changed.

As I’ve said before, Councilmembers didn’t carefully consider the automatically triggered tax cuts before agreeing to approve them.

The Chairman tucked them into the Fiscal Year 2015 Budget Support Act, the package of legislation needed to make existing laws consistent with the budget proper, shortly before the first required vote.

How Councilmembers would have voted after public hearings, written testimony and committee discussions of the triggers is an open question. But that was then, and this now — a very different now from several years ago.

Different not only in ominous prospects for federal funding, but in pressing needs that call for more local funds. They’re mostly not brand new, but more urgent, for various reasons.

They include a remedy for the also hastily-passed rigid time limit on participation in the Temporary Assistance for Needy Families program.

Also high on the list are increased investments in affordable housing for the lowest-income residents, both those who are homeless now and those at high risk because they’re paying at least half their income for rent.

The DC Fiscal Policy Institute has cited some others, e.g., more for public schools due to increased enrollment and rising costs, improvements in our aged, hazardous Metro system.

DCFPI and other local advocacy organizations earlier recommended a pause in the triggered tax cuts. It’s surely high time the Mayor and Council do that and set the revenues saved aside to help offset federal spending cuts the upcoming budget didn’t account for.

Didn’t, as I said, because it couldn’t. And sadly, neither the District nor any state can fully offset what they could lose in federal funds.

The DC auditor reports that just the “rollback” of the Medicaid expansion piece of the Affordable Care Act, i.e., the enhanced federal match for newly-eligible beneficiaries, would cost the District $563 million next fiscal year alone.

Just one of many signs that the District needs every penny it now collects in fees and taxes.


Putting Brakes on Runaway DC Tax Breaks

December 10, 2015

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.

 

 


Too Soon to Lock in DC Tax Cuts

June 25, 2015

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.

 

 


Post-Filing Tax Thoughts

April 16, 2011

Just finished up my tax returns. Feeling grouchy, as I always do when I sign on the bottom line.

So many pieces of paper to riffle through. So many figures to enter. Doubts at some points that I’m putting the right numbers into the right places. Anxieties about potential penalties and audits.

And frankly, the amount I owe makes me feel somehow deprived. But I know this is irrational. Many people apparently don’t.

Every year, long about this time, the Tax Foundation announces Tax Freedom Day — the day when, according to its calculations, workers stop working for the government, i.e., have earned enough to pay all their taxes.

And every year, long about this time, the Center on Budget and Policy Priorities explains why the Tax Foundation’s figures are misleading.

But the whole notion of Tax Freedom Day is misleading because the only people who are working for the government during the time they’re earning what they’ll owe in taxes are government employees.

Our taxes aren’t feeding some abstract entity. They’re paying for programs and services we want — public education, police and fire departments, courts, libraries, parks, highways, reasonable assurance that the plane we’re on won’t blow up or crash into another, breathable air, safe food and drinking water, defense against threats to our national security, a modicum of economic security in our old age, a safety net that protects us and our less fortunate neighbors….

I know I’m leaving out a lot of things we want from our public sector. But point, I hope, is made.

Two things got me started on all this. One is the intense hostility to taxes that we see at both federal and state levels. And I’m not talking about Tea Partiers alone.

The other is how relatively easy it is for me to champion higher income tax rates, fewer credits, loophole closers and the like. Because such reforms would have little or no affect on me.

Let’s say I made $84.5 million last year, like the head of Viacom’s media empire. (Yes, let’s!) Would I still feel that the tax code should be reformed that I pay my fair share?

I’d like to think so. But I’ve just done every legal thing I could to reduce my tax liabilities. And I recall how cheery I used to feel when the home mortgage interest deduction — one of the costliest tax breaks in the federal code — reduced them significantly.

Still, I’d like to see a federal deficit reduction plan that restores more of the pre-Bush tax brackets than just the top two — all that President Obama still seems willing to target.

Restoring equal taxation of investment and employment income would be a good idea too.

Here in the District, I’d back a tax reform plan that put a new bracket low enough to capture more of my income and a property tax more in line with what our Virginia and Maryland neighbors pay.

I know I’d grumble at tax time. So I guess would most people fortunate enough to have a livable income and homes we own.

But a goodly number of grumblers have to get over the view that we can have everything we want — lower deficit, no tax increases that would touch our wallets and sufficient spending on everything we care about.

And those of us who advocate for shared prosperity and economic security — for ourselves, our neighbors and the next generation — have to be willing to put our money where our mouth is.

Yours truly included.