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Tax Systems Resilience and Sustainability

Presentation to the District of Columbia Tax Revision Commission

Kim Rueben, Sol Price Fellow

January 31, 2023

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Characteristics of a good tax system

Fairness, adequacy, simplicity, transparency, and administrative ease
A government wants to raise money to provide services in a way that is fair across taxpayers and generally does not distort economic activity

Exception: Used to change behavior (e.g., cigarette tax)

This is generally easier to achieve with multiple taxes performing multiple roles

broad base and low rates minimizes changes in economic behavior

www.taxpolicycenter.org

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Challenges to a good tax system

Need to examine who we tax

Check specific burdens across representative individuals or businesses

Policy example: Offer property tax caps or deferrals for people house rich, income poor

Target funds to offset burden

Policy example: Soda taxes disproportionately affect low-income households, target resulting revenue at those communities

As a jurisdiction’s economy and population evolve, policymakers must adjust or change taxes to keep up

And ideally anticipate where things are heading

Skating to where the puck will be

www.taxpolicycenter.org

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Challenges to DC’s system

DC only city-state so limited geography and space
DC also broad variation in population

Has highest per capita income in country ($96,483 vs $63,444 in US)
But also high poverty rate (15.5% vs. 12.8% in US)
Variation across wards, racial groups wide
Desire to raise revenues but also provide opportunities

Federal limitations on the District’s tax system

Inability to tax income earned by nonresidents

Part of multi-state metro

Congressional intervention in District lawmaking can limit options (e.g., Congress prevents DC from taxing cannabis)

www.taxpolicycenter.org

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DC policy accomplishments/solutions

DC has very progressive income tax system in the country

By far the most generous EITC
Schedule H property tax credit is refundable and available to renters (interaction of property and income tax systems)

DC recently expanded sales tax to more services
Corporate income tax in line with neighbors and competitors
District faced challenges before and has institutions in place to help fiscal sustainability

www.taxpolicycenter.org

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Industrial mix has changed over time, but still dependent on government

While reliance on federal employment declined, large share of employment is still in government and in the non-profit sector (education and health-care)
Professional & technical and leisure & hospitality was growing

www.taxpolicycenter.org

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District’s economic mix is very different from the country as a whole

www.taxpolicycenter.org

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How did the pandemic change things?

Employment has recovered but not in all sectors

Federal employment currently declining
Slow recovery in leisure & hospitality and professional & tech (below US recovery) of special concern, as those sectors were responsible for pre-pandemic growth

Declines in commercial occupancy and shifting employment patterns can have multiplier effects

CBRE FC2 Office space report highlights office vacancy rates high in District

Vacancy especially high for older buildings

However, residential property values are still strong

www.taxpolicycenter.org

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Possible reform – broaden tax base

Explore ways to expand tax base to cover all economic activities to the extent allowed by Congress and helps meet District’s goals.

Per-employee service fee and/or PILOT

Goal: Broaden District’s tax base, subject to current limits
Reason: Recognize not all business activity contributes to the tax base yet all receive services
Challenges: Interaction with current charges (Paid Family Leave payroll tax) and effect of more hybrid work or PILOTS voluntary

www.taxpolicycenter.org

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Possible reform – Economic Development

Take great care with economic development incentives – don’t give away tax base unnecessarily

Tax abatements and economic development deals

Goal: Encourage businesses to locate in the District, offset lower vacancy rates
Challenge: Revenue costs and efficacy (i.e., tax help often does not drive business location decisions)
Solution: Examine if breaks are needed for investment
Include time-limits and benchmarks
Examine what terms are and evaluate that commitments are met – and include clawbacks

www.taxpolicycenter.org

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Possible reform – use administrative information to ensure consistency in treatment in tax systems

Make sure homeowner tax breaks limited to bona-fide DC residents

Administratively check residential income tax filing against individuals claiming homestead exemption
Goal: Ensure fairness and broaden base
Challenges: Push-back from residents. Will there be some who don’t need to file? (Schedule H should ensure if primary residence will be in income tax system)

www.taxpolicycenter.org

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Principles to keep mind as move forward with commission

Where is District economy and its employment mix going?
What are the District’s policy goals?
What tax changes can be made that help the District reach that future?
And how do we move forward while acknowledging uncertainty and unknown unknowns?