Tax Policy – D.C. Council to Consider Tax Hike Despite Balanced Budget
Many in the District of Columbia breathed a sigh of relief when Mayor Muriel Bowser (D) unveiled a balanced budget that managed to avoid painful spending cuts or raise taxes in the midst of the COVID-19 pandemic. Although the budget delayed some new spending and does include cuts to operating budgets, it represents a belt-tightening exercise that leaves the District’s core services in good shape and maintains staffing levels and pay for city employees.
This Wednesday, however, the Council—which must approve the budget—will hear testimony on proposals to raise taxes anyway, not to cover revenue shortfalls arising from the ongoing public health crisis and its economic fallout, but to fund several newly proposed spending projects.
Budgeting during a recession is a precarious undertaking: insufficient revenue means an inability to fund services or maintain staffing levels, while raising taxes can delay the recovery and hit individuals and businesses when they have the least ability to pay. The exodus from cities during the pandemic, moreover, likely presages a greater mobility going forward: most workers will return to their offices in time, but the telework share is unlikely to ever go back to pre-crisis levels. Employers and employees alike have discovered that remote work can be effective, and that greater mobility enhances the salience of tax competition, since businesses and individuals can more easily move without compromising employment or losing access to a qualified labor pool.
The proposal from Council member Charles Allen (D-Ward 6), for which language has not been released, is understood to roll back part of the comprehensive tax reform package adopted by the District in 2014, the creation of a new bracket for income between $350,000 and $1 million, with a rate of 8.75 percent. Previously, all income above $350,000 was taxed at the top rate of 8.95 percent, a rate that Councilman Allen’s proposal would restore for that income bracket. Neighboring Virginia and Maryland both subject such income to their already far more competitive top rates of 5.75 percent.
Relatively few states raised taxes during the Great Recession, with one recent analysis showing that most states tend to wait at least a full calendar year after recessions to implement any revenue increases. And even then it’s often focused on excise tax increases on alcohol, tobacco, and gambling, in an effort to avoid taxes that could interfere with the recovery or unduly burden struggling individuals and businesses.
The D.C. proposal, therefore, stands out: not only does it propose raising the rate of a major tax (the individual income tax), and not only would it do so well before any significant recovery has taken place, but the tax increase is not even intended to cover revenue losses, but rather designed to raise revenue for new programs. While many states will be attempting the difficult balancing act of maintaining the funding of core services without imposing taxes that undermine the recovery, the District is considering tax hikes to fund an expansion of government.
It does so, moreover, in the context of a tax environment where employees are increasingly mobile. The District of Columbia has long had substantially higher taxes than its neighboring jurisdictions, and plenty of commuters living in Northern Virginia and the Maryland suburbs chose not to live within the District at least partly on the basis of comparative tax burdens. Still, for many—especially higher earners—the perquisites of life in the District, and especially the promise of a shorter commute in an area with some of the worst traffic congestion in the nation, make the higher taxes and higher cost of living of residing in the District worth it.
But what if, after successful coronavirus-related experiments with remote work, employers increasingly provide telework flexibility, allowing many employees to work fully remote or to only come into the office once or twice a week? Suddenly the trade-offs shift significantly, and even more people employed within the District may find taxes driving them to the Virginia and Maryland suburbs. A rate increase on some of the most mobile employees may only accelerate that trend, both because of the additional liability and because of the signal it would send that the District is no longer committed to keeping the 2014 tax deal in place.
The tax reform package adopted in 2014, and implemented over several subsequent years, represented a dramatic change in the District’s approach to taxation. Although D.C. remains a high-tax jurisdiction, it is far more taxpayer-friendly than it had been previously, and an important part of the continued success of the package has been the consensus that it is to be left alone—that the D.C. Tax Revision Commission deal, which was hammered out by policymakers and policy experts representing a wide range of opinions, should be respected, without going back and making piecemeal adjustments that undercut the compromises made by all parties.
Reverting an income tax rate cut would, therefore, be especially significant, as it would represent the collapse of that consensus. Perhaps that is one reason why Mayor Bowser has said that she does not believe tax increases are necessary.
Beyond the fact, that is, that for now they certainly are not necessary to balance the budget. And should a second wave of COVID-19, or a recovery that takes longer than anticipated, revise revenues downward, council members could have cause to regret that they used a tax increase on new spending rather than keeping revenue options in reserve for a scenario in which things get worse.
Source: Tax Policy – D.C. Council to Consider Tax Hike Despite Balanced Budget
Upstate Tax Professionals