Sixteen months ago, the Gray administration formed an eleven member Tax Revision Commission. Its members reflect a broad cross-section of philosophies and agendas. Reaching consensus on big changes seems difficult. The Commission announced this week that it would take more time to deliberate its options and try to reach more consensus. The Commission was tasked with examining the entirety of the District’s tax code, and making comprehensive recommendations for revision of the code that meets five goals:
1) Provide for fairness in the apportionment of taxes
2) Broaden the tax base
3) Make the District’s tax policy more competitive with surrounding jurisdictions
4) Encourage business growth and job creation
5) Modernize, simplify, and increase transparency of the District’s tax code.
The most important word in the Mayor’s direction to the Commission was “comprehensive.” Another way to read that is: let’s make big, impactful changes to our tax system. The individual income tax rate is the tax most visible to District residents and the one that has the most impact on consumer behavior. Of all the tax changes under consideration by the commission, an individual income tax rate reduction would have the largest impact on economic growth and job creation. It would also be the single change that would go the furthest in meeting the five stated goals of the commission. One of the reported packages of recommendation costs just $20 million per year. We feel this level of change, on a $10.5 billion municipal budget, would have virtually no impact on growth, nor consumer behavior. A more ambitious package appears to cost about $141 million per year. If the cuts are in the right place, that type of package, while still on the small side, could have positive economic effects.
It is Economic Growth DC’s position that the District’s economy must grow at a significantly higher rate in order to generate the tax revenues required to meet its spending goals. If you agree, then stimulating the District’s economy should be the top priority. Considering that the District cannot do deficit spending, a significant individual income tax rate reduction is, by far, the most stimulative measure the District can implement. Preferably, all taxpayers would benefit from this reduction, maximizing its effectiveness. If that option is not available, then a reduction for taxpayers earning less than $200,000, plus an increase in the earned income tax credit would be the most effective measures available.
An across the board rate reduction would give low to middle income residents additional disposable income, which they would be likely to spend in the District. This increased economic activity would create a considerable number of District-based jobs. Many small to mid-sized District businesses are owned by high-income residents. Reducing the individual income tax rate across the board would provide these business owners with more capital for investment, hiring, and the training of employees.
The question of whether these rate reductions are affordable revolves around the way they’re scored. The Office of Tax & Revenue has attached a dollar value to every proposed change the Commission has considered. The problem is OTR uses static scoring. Static scoring does not incorporate the increased dynamism and positive effects of increased economic growth that have longer term positive impacts on tax revenues. Dynamic scoring, while imperfect, is a more reliable predictor of the effects a tax rate reduction would have on the local economy.
Members of the commission have expressed concern about the progressivity of our local tax structure. Lower individual tax rates and increased progressivity are not mutually exclusive propositions. Done right, we can do both.
Ultimately, any discussion of taxes is a discussion about asset allocation. The fundamental question is do you believe the government or the private sector makes more efficient, effective, and more productive use of capital. It has been shown over and over that the private sector is a more efficient allocator of capital. If there is any empirical evidence that government at any level allocates capital better that the private sector, we’d like to see it. Please email us at the address below. If you agree, then you favor tax rates that are lower rather than higher.
We believe that keeping as much capital as possible in the hands of private sector actors is good for economic growth, job creation, and ultimately — tax revenues. We encourage the Commission to recommend a substantial individual income tax rate reduction as its first order of business.
Lastly, you cannot have a tax discussion without also talking about income inequality. Income inequality it real, it is detrimental to the economy, and it’s been growing steadily for the last 40 years. Short of confiscatory tax rates, we don’t believe it’s possible to legislate inequality. The best way to reduce inequality is to have an economy that grows faster, thereby creating more jobs at all skill levels (the result of an individual income tax rate cut), a more dynamic and effective job training system (paid for with the increased revenues stemming from the growth associated with the tax cut), and an improved education system (also drawing increased funding from greater revenues generated by a faster growing economy). You cannot tax your way out of income inequality.