The District’s progressive advocacy organizations have put together an impressive coalition, urging the Mayor and the Council to reverse the tax cuts that are current law, remove local reserve requirements the District imposed on itself in 2011, and use this money to increase spending. This coalition says potential federal budget cuts will impair the District’s ability to spend on key areas such as affordable housing, the Metro, and education. Therefore, they argue, rather than cutting taxes or preserving reserves, the District should spend.
The fiscal risks stem largely from the economic risks of federal action.
At the core of the argument for delaying the tax cuts to increase spending is the observation that the District’s economy is strong, and therefore can handle more “tax and spend.” This observation needs a bit more scrutiny.
While losing federal money is a fiscal risk, history suggests that the bigger concern is an economic slump that would follow from reductions in the federal workforce, another feature of the President’s budget plan. We experienced this once before in 1990s, which, combined with poor financial management, lead to the federal Revitalization Act, forcing D.C. to surrender financial control to the federal government. Incidentally, the 20th anniversary of the Revitalization Act will fall on August 5, when the Council will be on its summer break and nary a politician or an advocate will be here to reminisce. So, let’s review now, as only a quarter of District’s current population was here in 1997 to live through those difficult times.
The District started the 1990s rocked by a national recession. By 1992, D.C. employment fell by 21,000. Jobs recovered elsewhere in the nation beginning in 1992, but a federally engineered local recession, in the form of federal job cuts, kept the city weak while the rest of the nation grew quickly. By 1999, total federal employment in D.C. had decreased by 36,000. Private employment was slow to recover, and by 1997, it was still 26,000 below its 1990 level. The economic impacts of these job losses, combined with poor fiscal management in the city, led to D.C.’s bankruptcy and the federal Revitalization Act. The 1990s thus produced a lost economic decade, with after-effects still felt in comparisons of the District to the Metro area.
More of the current District residents were here during the Great Recession, but few discuss how federal actions helped the District’s rapid recovery. The Great Recession hit the District’s finances hard, but employment in D.C. stayed strong, with rapid federal hiring. By 2010, federal job increases (17,000 since 2008) had fully compensated for the job losses in the private sector and local government (down by 8,500). Increased federal appropriations for the District helped with fiscal stabilization as well, but the real impact was the preservation of our economy. Housing—the epicenter of the crisis elsewhere—remained strong, commercial property values increased as investors found security in the District.
So long as the federal government dominates the District’s economy, its actions will deeply affect us. If we want to make D.C. more resilient in the face of federal budget cuts, we should do all we can to bring a diverse array of employers to the city and reduce our dependence on federal employment. This means, at a minimum, that D.C. should be competitive with neighboring jurisdictions so that employers in the region decide to set up shop in our borders instead of just over state lines.
The tax cuts that will go in effect on January 1, 2018 will help. The business tax rate will go down by 0.75 percent, putting the District at par with Maryland’s neighboring counties (but still above Virginia). Only $30 million of the tax cuts in fiscal year 2018 go to business tax reductions. Income tax reductions will put $60 million in the pockets of low- and middle-income families. Given that the solution for Metro’s estimated $12 to $18 billion financing gap will surely involve revenue increases from somewhere, implementing these tax cuts now is even more important.
Fiscal flexibility does not mean “tax and spend.”
The push for relaxing reserve requirements conflates fiscal flexibility with easy spending. It’s true that the District has $2.4 billion in reserves, but the District can spend by only $778 million of this amount by changing local law. Over three-quarters of a billion dollars is a healthy reserve and if the spending restrictions on these locally mandated reserves are too strict to accommodate federal budget risks, the Mayor and the Council can change local law to make them less strict.
The advocates’ solution, however, is to turn reserves into appropriations. Granted, the spending priorities that advocates have raised are important. But their plan would turn what is now a stable reserve into a political football.
No amount of reserve or spending alone will diversify our economy. Reducing tax burdens on businesses and low- and middle-income families—a plan that the city is already committed to by law—is a right step. The city should likewise keep the funds in its current local reserve, which were established to help us weather exactly this sort of fiscal risk. To suggest that we should spend our reserves in anticipation of hard times, or commit to further spending that would not address the core drivers of these potential economic shocks, is irresponsible.