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Overview

What are tax expenditures?
What are the major tax expenditures in the District?
How can the Commission best address tax expenditures during its policy debates?

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What are tax expenditures? Are they good or bad?

Special provisions that reduce tax payments for specific groups or activities

Includes abatements, deductions, exclusions, exemptions, and preferential tax rates

Called “tax expenditures” because many function the same as government spending

That is, a housing tax credit or deduction is a form of housing policy

Sometimes referred to as “tax loopholes” or “special tax breaks”

Common tax policy goal: Broaden the base (eliminate expenditures) and lower the tax rate

However, both nationally and across states, the most costly tax expenditures go to policies that are broadly popular and have policy justifications
Typically remain unless policymakers modified them (like entitlement programs)

Thus, critical to ensure tax expenditures achieve stated goals and are worth revenue cost

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How do different tax expenditures work?

Exclusion or exemption. All or some value is omitted from tax

Social security benefits are exempt from DC income tax; value of churches excluded from property tax; purchase of groceries exempt from sales tax

Deduction. Policy lowers the taxable amount by a set amount for an eligible taxpayer

Homestead deduction lowers taxable property value; standard deduction reduces taxable income
Tax rate is then applied to the remaining/lowered value and tax payment is calculated

Credit. Lowers the tax bill (income or property) by a set amount for an eligible taxpayer

Example: After exclusions/deductions you owe $1,000 in tax. A $100 credit lowers tax to $900.

Abatement. Similar to a credit but just for property tax. Typically for a specific taxpayer (not a group) and set as a percentage of the bill (e.g., a 20% abatement on the payment)
Preferential rate. Federal government uses different rates for wage and capital gain income

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DC tax expenditure reports and resources

ORA publishes a tax expenditure report every other year that for each expenditure:

Estimates the revenue loss in the current and next two fiscal years
Articulates how it works and the stated purpose of the tax expenditure
Describes the impact the expenditures has on residents and businesses

In addition, ORA publishes a deeper review of expenditures on a five-year cycle

Publishes a report on a specific topic every year and an overview every five years
These reports analyze the efficacy of the tax expenditure and not just the revenue cost

Pew Charitable Trusts’ positive review of ORA tax expenditure reports:

“The District’s evaluation contains a clear history of the city’s incentives and concise findings and recommendations on how to make these incentives work better for residents.”

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Tax expenditures in the District of Columbia

DC has over 200 tax expenditures totaling billions of dollars in forgone tax revenue
However, some are historical or required by law and not a local policy choice

State and local government cannot tax federal property ($1 billion revenue loss in DC) or federal government purchases ($350 million)
Governments do not generally levy property taxes on educational institutions ($160 million), places of worship ($75 million), or charities ($15 million)

Remaining tax expenditures are spilt into “federal” and “local”

*All revenue estimates cited in this presentation are from ORA and annual estimates

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Federal tax expenditures in DC

Some DC tax expenditures are actually federal individual income tax and corporate income tax rules that DC “conforms” with (i.e., uses in its own tax code)

When you do your taxes, you copy your federal AGI into your DC return
This means your DC tax return uses federal tax rules (e.g., various exclusion and deductions for retirement income) in its own tax calculations

TPC study found 72% of DC individual and corporate income tax expenditures were the result of federal conformity (TPC: 72% in MA and 85% in CA and MN)
That said, DC can and has “decoupled” from federal rules

For example, you deduct local income taxes from your AGI on your federal tax return but cannot deduct local income taxes on your DC tax return

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Local tax expenditures in DC

Local tax expenditures affect property taxes, sales taxes, deed recordation taxes, and individual and corporate income taxes
Some of these are long-standing (exemption of places of worship from property tax) or consensus (exemption of grocery food from sales tax) policy
However, others might be relatively new, have complicated policy justifications, or require data collection and analysis to ensure they are meeting their stated goals
Some of the most expensive local tax expenditures are among the most popular and successful: grocery food exemption ($100 million DC revenue loss); EITC ($80 million); homestead exemption ($70 million); property tax circuit breaker ($50 million)

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Largest groups of local DC tax expenditures (ORA study, FY 2020)

Social policy: $310 million

Property tax exemptions for nonprofit organizations ($120M), churches ($70M), charity ($20M)

Housing policy: $185 million

Homestead deduction ($60M) and other efforts at providing/supporting affordable housing

Education: $140 million

Mostly property tax exemptions ($130M) but also exemptions for college saving plan contributions (e.g., 529 accounts) and the public charter school tax rebate

Income security: $90 million

Almost entirely EITC ($50M) and the local exemption for Social Security income ($35M)

Economic development: $30 to $60 million (fluctuates depending on year)

Attract and retain high tech firms, supermarkets, small businesses

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Are tax expenditures worth the money?

Questions to ask:

Does the tax expenditure achieve its stated goals?
Does it duplicate or conflict with other policies?
Could goals be better achieved with other policies?

Example: ORA found only a few firms were benefiting from Qualified High Technology Company (QHTC) tax incentive program and not producing the desired results so DC Council limited what a firm could collect and how long it could collect the incentive
Eliminating or reducing tax expenditures could provide revenue that pays for lowering tax rates—thus achieving other tax policy goals

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Tax expenditures and racial equity

Tax expenditures that exempt or deduct certain sources of income and wealth from tax can disproportionately benefit white households

For example, tax expenditures for retirement income provide larger benefits to higher-income households (i.e., more accumulated retirement income = larger benefits)
Additionally, roughly two-thirds of white households have retirement income compared with one-third of Black households, so benefits disproportionally go to high-income white households
Does not mean there should be no benefits for retirement income or seniors more broadly, but that policymakers should consider who benefits from specific policies and the overall tax system

In contrast, refundable tax credits (e.g., DC’s EITC and Schedule H) provide benefits to low-income households who do not earn enough to benefit from tax deductions and exemptions

Refundable tax credits disproportionately benefit non-white households
Nationally, Black households constituted 14% of all households with children but 22% of those with income below $55,000 (2018 data)

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Note: There is no race information in tax data. We use other estimates.

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ORA policy options from tax expenditures

Tax cut/revenue loser

Expand DC EITC to reduce marriage penalty for childless workers
Increase public teacher deduction for out-of-pocket classroom supplies

Tax increase/revenue raiser

Limit exemption for Social Security income
Include “claw backs” for economic development and housing projects if recipients do not meet tax expenditure goals or leave DC
Place caps on what a single firm can claim for economic development tax expenditures

Admin: Assign agency to monitor non-tax performance data of each tax expenditure

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Additional recommendations for future debates

Tax cut/revenue loser

Tax abatements for office-to-residential conversion (Mayor Bowser proposal)
Enact a DC child tax credit (DCFPI proposal)

Tax increase/revenue raiser

Eliminate or reform specific tax expenditures (DCTRC staff is compiling options)
Cap or limit local income tax benefits based on the filer’s income

Currently a phase-out of DC itemized deductions for filers earning more than $200,000

Placing time restrictions on tax expenditures so that the DC Council must actively reapprove expenditures that are working and let poor performing expenditures expire