Established in 2001 by the Center on Budget and Policy Priorities, the DC Fiscal Policy Institute plays an important role in the District of Columbia. It provides a voice in the budget and tax policy debate for low and moderate income District residents who are otherwise without representation on these issues.

Economic Growth DC has supported the Fiscal Policy Institute financially in the past and intends to do so again in the future. We support most of the proposals laid out in their initial analysis of the mayor’s budget.

However, their call to increase taxes “if necessary” less than a year after a major tax overhaul is tax policy schizophrenia that does real harm to what is an already fragile business climate by making it impossible to plan for investment and hiring for any period longer than a fiscal year.

Most businesses attempt to plan at least three to five years in advance. They attempt to predict a variety of different costs and risks.Tax rates are central to that planning process. If future tax rates are subject to change every year, that hugely complicates the planning process and leads business owners to be more cautious. Caution means less risk taking, and nothing is more risky than hiring a new employee.

One of Economic Growth DC’s Principles of Sound Tax Policy is reliability. “A high-quality tax system should be stable, providing certainty in taxation, revenue flows, and financial planning for individuals and businesses.”

Saying that a tax system is reliable is just another way of saying that it doesn’t change every five minutes.

FPI’s executive director, Ed Lazere, was a key member of the Tax Revision Commission which reached consensus on a new framework for the District’s tax system just last year. Calling for tax increases less than twelve months later renders the commission’s work obsolete.

The Council should make it clear, by rejecting any changes to the District’s new tax structure, that it understands the importance of a stable tax system.

By far the best way to increase tax receipts is to have an economy that grows faster. Tax reliability and predictability encourage risk taking and are key to faster growth.

Slow/no growth hits low income District residents much harder than anyone else in the form of a dearth of good jobs and wage stagnation. There are several ways to help, such as improved job training, but a better performing economy has to come first.

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We’re also disappointed in the way FPI has rationalized the regressive nature of a sales tax increase.

As the chart below indicates, the sales tax has a huge impact on District residents at the lowest end of the income distribution, and almost no effect on high-income earners.

 

sales tax as percentage of family income

To claim, as it does in its analysis, that low income District residents will suffer no ill effects from a sales tax increase because they will have an offsetting income tax cut misses the point of tax reform.

The point was to provide tax relief to low and moderate income residents. The idea was to put more money in their pocket. Under the mayor’s FPI approved proposal, you’re simply putting money in one pocket of a low income resident and taking it out of the other. It defeats the purpose of the reform.

The council should find savings in other parts of the budget and leave this imperfect, but newly reformed tax system alone.