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.



Time to Rethink Homeownership Preferences

November 13, 2012

Several months ago, I was sitting at our dining room table and thought I heard raindrops while my husband was showering. Turns out I was hearing water running down the inside of a wall from a pipe that had been leaking for some time.

So parts of the pipe had to be replaced, of course. Also the rotted drywall, plus an unrotted portion that the plumbers had sawed out. And the whole dining room-living room area had to be repainted because the new drywall would otherwise look lighter.

Got me to thinking about costs of homeownership we don’t read much about — and more generally, about how our public policies tend to push people toward a housing choice that, for many, may be personally unsuitable and/or financially imprudent.

Consider, for example, the federal income tax code. People who sign on to a mortgage get to deduct the interest they pay, plus “points,” i.e., upfront interest that cuts the mortgage rate. Also what they pay in real property taxes.

These are fine examples of  “upside down” tax policies — so called because they deliver the most to those who need it least.

High-earners get the largest deductions because their top tax bracket is higher and they generally buy costlier houses.

Also multiple houses. And they can take interest deductions on the first $1 million they owe for two of them.

Low-income filers who’ve managed to get a home loan get a much smaller tax benefit — less than $100, on average, from the mortgage interest deduction, according to a Center for American Progress brief.

In many cases, this cuts their tax liability less than the standard deduction they can take instead. Which one reason some economists say that the mortgage interest deduction doesn’t promote homeownership — only the purchase of costlier homes.

There’s, of course, no tax preference at all for people who indirectly pay mortgage interest and property taxes as a portion of their rent.

And they generally can’t deduct interest on other debt they incur, except for student loans.

Homeowners who borrow against their equity can — interest on as much as $100,000-worth of debt, no matter what they use the money for.

These policies don’t spring out of nowhere. Owning a home is a key element of the American Dream.

We pay more than twice as much to support it, through the tax code, as for all programs administered by the U.S. Department of Housing and Urban Development, CAP says. And the Center’s talking only about the mortgage interest deduction.

This deduction alone cost the federal government an estimated $140.5 billion last year — more than any other tax expenditure except the exclusion of employer-provided health insurance from what the Internal Revenue Services counts as income.

So there’s a good fiscal argument for blowing away the homeownership preferences — if not altogether while our economy in general and the housing market in particular are still so shaky, then when our recovery seems reasonably secure.

But I think there’s a broader argument as well.

Homeownership is fine for those who can afford it — not only the mortgage, the insurance and the taxes, but the unexpected expenses like leaking pipes and fires.

Fine for those who are quite certain they want to sink roots in one place — and can uproot if they need to, even if housing prices fall.

But we can have secure, stable communities and residents who engage in civic activities, go to PTA meetings, etc. without distorting housing choice incentives, though interested parties say otherwise.

We read that younger people aren’t embracing homeownership the way they used to. Perhaps, as some experts suggest, we’re witnessing “the creation of a generation of renters” — and thus a partial redefinition of the American Dream.

I think this would be a healthy thing for individuals, communities and our society as a whole.

Surely it would be healthy to rebalance public policies and our collective narrative of middle-class success so that signing a lease becomes every bit as good as signing a mortgage contract.