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FIRST TAKE—Pull the trigger, the tax cuts are working

April 05, 2017

First Take is a regular column by D.C. Policy Center Senior Fellow David Brunori.

The District of Columbia is going to see another round of tax cuts as a result of hitting revenue targets for the next four years, as recommended by the D.C. Tax Revision Commission in 2014. Allowing these tax cuts to go forward—in a city that was once criticized for its onerous tax burdens—is good for the city for several reasons.

First, the specific tax cuts due to be triggered will benefit everyone in the District. In January 2018, not only will the personal exemption increase from $1,775 to $4,000, but the standard deduction for everyone will increase: Single filers will see it increase from $5,650 to $6,100, and married filers will see it increase from $10,275 to $12,200. All taxpayers—rich and poor—will benefit from those changes. At the same time, the business tax will fall from 9 percent to 8.25 percent, and the estate tax threshold will be increased to the federal exemption levels.

These tax cuts are sound. Citizens will have more money in their pockets. Whether they spend or invest that extra money, the District as a whole will be better off. The business tax cuts are a necessity. Even after reducing the rate to 8.25 percent, the District will still have relatively high tax burdens on capital (see Table 5 in the Office of the Chief Financial Officer’s most recent Metro Area Tax Burdens study). This matters because the District competes with Virginia and Maryland for businesses. The new rate will still be higher than Virginia (6 percent) and will be even with Maryland (a state with reputation for high taxes). And yes, even the estate tax reductions are necessary, as they might just slow the exodus of rich, old people from the city.

Right now, the tax cuts—now in their third budget cycle—are working. The population is growing. The District’s economy is growing. The city has more businesses and more jobs. It is often difficult to assert short term causation between tax policy and development. But the city should not make changes to the fiscal plan because the tax cuts and economic growth might be a coincidence. Indeed, it is likely that the city’s economic growth is the result, in part, of it shedding its high tax reputation. There was a time when people said you shouldn’t live or work in the District because the taxes are too high. People don’t say that anymore.

Over the years, many states have cut taxes in a reckless manner, without regard to spending or replacement revenue. The District has been smart; the tax cuts are triggered by revenue growth, meaning they are not going to put the District in a dire financial predicament. This disciplined, responsible approach is viewed favorably across the country and received support from advocates from both sides of the aisle. Many states considering tax cuts are looking to the District as a model. We should take pride that the District is looked at as a leader for sound tax policy.

A lot of very thoughtful people are opposed to allowing the pending tax cuts to occur. Some people simply want to spend more money on a variety of programs—education, transportation, health care, etc. However, the city has consciously taken a disciplined approach to spending. The tax cuts have helped, but there is nothing in the tax cut triggers that prevents the city from spending more on a particular public service. What the triggers do, however, is force the powers that be to make budget choices that best reflect that values of the city. Interestingly, states and cities around the country, indeed around the world, are reducing the size of their governments to be more competitive. The District would take the opposite approach at its peril.

Some people have fears that the Trump administration’s budget policies will hurt the city financially. They would prefer to use the expected revenue to replace lost federal money. Curiously, some of these same people urging caution with respect to tax cuts are also calling for increased spending. Nonetheless, those concerns are real; the federal budgets cuts would have negative effects on D.C. finances.

But many of those concerns do not justify holding off tax cuts to increase expenditures. Today, we do not know the exact impact of the President’s budget. However, the Chief Financial Officer’s revenue projections in February took into account uncertainty about the federal budget are still quite robust. Finally, as the CFO noted, there will always be the potential for risks in the future—a slowing national economy, stock market fluctuations, etc. But the City Council and Mayor can address those issues when—and if—they arise.

We do know that the District’s economy is good. And it’s good in part because of the reasonable approach the city has taken with respect to cutting taxes. The current trigger is the last phase of the tax cuts enacted in 2014. Now is not the time to end this very successful economic policy.