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FIRST TAKE: Metro funding is about commitment, not fairness

September 01, 2017

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

Jumping into the debate over funding Metro, the DC Fiscal Policy Institute released a report about on how a regional sales tax would be unfair to “working families,” particularly black and Latino families.

That concern has some validity. Sales taxes are regressive: low-income households spend more of their incomes on consumption (and save or invest less), and therefore sales tax consumes a larger portion of their incomes. But considering the alternatives discussed in the report, a regional sales tax might be a better outcome for everyone, including low-income families.

We need commitment to a regional revenue raiser

The primary issue we are facing here is whether the governments of the Metro region are going to stand together to solve the serious problem of transportation funding. The federal government is unlikely to provide more funding. Maryland and Virginia are unlikely to provide more direct funding. No local government can bear the financial load alone. Riders cannot fund the system through fares alone. We have a regional problem that demands a regional solution.

Can we solve this regional problem if we are ecumenical about how each jurisdiction raises their share of revenue? If we are ecumenical, the jurisdictions will negotiate how they share the costs only, and not how they share the revenue burdens. On its surface, this looks like a promising idea. Revenue raisers are politically controversial, and regional revenue raisers are even more so. So, this proposal might simplify negotiations and give D.C., Virginia localities, and Maryland more control over how they pay for their share of costs.

This localism approach could be theoretically sound, but it is politically impractical. Taking the revenue commitment off the table will not take the political tension out of the funding decisions. It will make it worse as local political gains, and not regional benefits, will be the central concern. To wit, DCFPI supports this approach because they want to pay for Metro using a progressive income tax or a business tax, and those are much harder to sell politically outside of the District. If we adopt localism, all other jurisdictions will have similar political tensions. (In fact, the final report from the Council of Governments writes off these options). And the system will collapse into what we have now. We already have an ecumenical system where Virginia and Maryland, their local governments and the District appropriate funds to close the funding gap however they choose, and failing to do so.

A regional commitment to a revenue raising mechanisms is important because revenue raisers are so political. As the region rethinks the governance of the Metro, we have an opportunity to institute a regional tax, which can—to a large extent—solve this political hold-up problem. Otherwise, funding could be eroded, as as it is happening now, risking the financial future of the Metro.

As a regional tax, sales tax is easiest to work with if we want to mitigate the impacts on low income residents

Once we commit to a regional tax, a sales tax is one of the better options. To be sure, a sales tax could significantly alter the distribution of the burdens across the region. But speaking strictly about its impacts on low income households, we can point to many factors will mitigate its regressive effects.

First, most of the people who are going to pay the tax are in middle- and higher-income households. D.C., Maryland, and Virginia already exempt most necessities from sales tax, easing the impact on very low-income households and shifting the burden of the tax toward the middle class.

Second, some portion of the sales tax will be paid by people who live outside the area. Tourists and business travelers—well over 20 million in the District alone last year—will pay some of the cost. Third, half of the sales tax in the metro area is paid by business entities. That is, about half of all sales taxes are imposed on business inputs. Businesses inevitably shift some of that burden to customers in the form of higher prices, but as our region exports a lot of products and especially services, we pass on the sales tax on to customers outside of the region.

And whatever impacts we cannot mitigate, we can address by making direct payments to low income households. If the District likes the jurisdictional impact of the sales tax, but not the incidence on low income households, the District can undo these impacts by providing tax relief to poor residents. It could, for example, expand the earned income tax credit, offer sales tax rebates, or even Metro vouchers.

The economic impacts of income and business taxes are not easy to mitigate

Should the District follow New York City Mayor Bill Di Blasio’s ill-fated attempt to impose an income tax on millionaires to the his city’s subway?  When a local government tries to tax millionaires it usually ends up with fewer millionaires. The findings on whether millionaires leave if their taxes increase is mixed (see here, here, here and here), but we cannot rule out that this proposal could reduce the total economic wealth in the District, and as a result government spending on programs for low income residents could suffer. The District has spent years fixing its reputation as a high tax jurisdiction. Why in the world would it go back?

The proposal to pay for the Metro using business taxes also could have impacts on our economy and low-income residents. Businesses don’t pay taxes; people pay taxes. Every tax imposed on a business entity is born by either the owners and shareholders in the form of lower returns, labor in the form of lower wages, or consumers in the form of higher prices. It is a convenient story to tell that “rich” shareholders bear business taxes. But increasingly, the evidence shows that consumers and labor bear business taxes, particularly in competitive economies. For example, the Minnesota Department of Revenue, hardly a right wing think tank, released its latest incidence study that shows the corporate income tax was actually paid by workers and residents through lower wages and higher prices. However, these impacts will be harder to trace, and therefore more difficult to address.

A regional commitment recognizes that Metro benefits everyone

We need regional commitment to salvage the Metro. At the moment, Metro governance reform is in the front and center of all discussions, and politicians have stayed away from the funding discussions. But there will come a time when the governors of Maryland and Virginia and Mayor Bowser are going to have to decide how to pay for Metro.

When that time comes, we must separate the regional commitment problem from the local impact problem. Among all the proposals DCFPI discusses, a regional sales tax similar to that proposed by Metro General Manager Paul Wiedefeld is the most efficient and sustainable way to pay for the transportation system.  And even then it is facing resistance because of how it shifts burdens across jurisdictions. On the plus side, its impacts on low income households are straightforward, and can be dealt with easily by income tax credits or sales tax allowances. The question is whether the governments and people of the area will commit to pursuing that course.

Feature photo by Ted Eytan (Source).