Highlights of Mayor’s Proposed FY 2007 Budget

Key Findings

• The proposed local funds budget for the District of Columbia in FY 2007 is $4.83 billion. This is 5.0 percent above the revised FY 2006 budget, after adjusting for inflation.

• New initiatives in the budget include funds to start implementing recommendations of a mayoral task force on housing (though at levels below those sought by advocates), and expansions of Medicaid coverage for children. The budget also includes some cuts, including a $6 million cut in child care.

• The proposed budget includes $74 million in “opportunity enhancements,” which are services that would be funded if revenues rise in future revenue projections. In some cases, these “enhancements” would be needed simply to restore budget cuts.

• The budget would implement the last step of income tax cuts under the Tax Parity Act, which will result in $64 million annual revenue losses. The tax cuts are not progressive, providing $120 to a family earning $25,000 and $765 to a family earning $150,000.The budget would raise deed recordation and transfer taxes on residential properties to fund the housing initiatives.

 

Report

On March 21, Mayor Williams submitted his proposed budget for fiscal year 2007.  The District’s economy continues to be strong, resulting in projections of solid tax and revenue collections in 2007.  At the same time, the basic costs of running the District are expected to rise notably next year, due to pay raises, increases in fixed costs, and other factors. While the rising revenues are sufficient to maintain existing services, they did not allow the mayor to propose substantial new budget initiatives.

The highlights of the proposed budget are as follows.

• The mayor submitted a local budget of $4.83 billon, which is 5.0 percent above the revised local budget for FY 2006, after adjusting for inflation.[1]

• The budget includes a handful of significant new initiatives.  It would devote an additional $25 million to affordable housing programs to start implementing recommendations of the Comprehensive Housing Strategy Task Force, although advocates note that this is relatively small increment compared with the task force’s 15-year plan to expand funding by $3 billion.  The budget also would expand Medicaid health care coverage for children and would implement new dental benefits for adults.

• There are a number of savings resulting from administrative changes but only a few budget cuts affecting service levels.  One notable cut is a $6 million reduction in the child care assistance program for low-income working families.

• The budget proposes an additional $74 million in expenditures ‘ described as “opportunity enhancements” ‘ that would be implemented if a future revenue estimate shows enough new revenue to cover the services.  In some cases, these expenditures would restore budget cuts rather than provide an enhancement.

On the revenue side, the Mayor’s budget proposal includes both tax cuts and increases.

• The budget would implement the last step of income tax cuts included in the 1999 Tax Parity Act, which would reduce revenues by $51 million next year and $64 million in subsequent years.  The cuts would provide far more relief to high-income residents than to low-income residents.  For example, a family earning $25,000 would get $121 in tax relief, while the tax cut would be $765 for a family earning $150,000.

• The primary revenue enhancement in the proposed budget is an increase in the deed recordation and transfer taxes on residential properties from 1.1 percent to 1.5 percent.  These are one-time taxes paid when a property is sold.  Deed taxes were raised for both commercial and residential properties to 1.5 percent in 2003 to address a substantial budget shortfall but were reduced in 2005 as the city’s fiscal conditions improved.  The 2007 budget would restore the taxes to the 2003 level for residential properties, generating $47 million in new revenues.  Some $22 million if these revenues would be used to fund existing housing programs, leaving $25 million for new programs.

• The budget also proposes to raise the fee imposed on phone customers that is used to support 911 services, resulting in $15 million in additional revenues.

There have been a number of revenue reductions enacted or implemented in recent years, including property tax relief for homeowners, income tax cuts under the 1999 Tax Parity Act, a reduction of deed recordation and transfer taxes, and others.  By 2007, the impact of tax reductions implemented since 2004 will total nearly $370 million annually.

It is worth noting that despite the solid revenue growth in the District in recent years, overall tax collections remain at a relatively low level when measured as a share of the DC economy.  Tax collections are expected to equal $4.4 billion next year, or 13 percent of personal income in the District.  Over the past two decades, tax collections generally matched or exceeded this level. The only point during which tax collections fell notably below the FY 2007 level was in 2002 and 2003, when the nation suffered both an economic recession and a significant stock market decline that greatly reduced capital gains income.

 

Spending Highlights by Program Area

The proposed local budget for FY 2006 is $4.83 billion.  This is 7.2 percent above the revised FY 2006 budget of $4.53 billion.  After adjusting for inflation, the proposed increase is 5.0 percent.

The District’s budget is divided into seven programmatic areas, known as “appropriations titles.”  As shown in Table 1, growth in spending under the mayor’s proposed budget would be spread throughout these seven areas, although there are substantial variations.  Funding for government direction, public safety, and public works would be well above average.

• Funding for government direction and support would grow 8.3 percent, after adjusting for inflation, largely due to an increase in funding for tax compliance efforts.

• The public safety budget would grow 10.8 percent.  This largely reflects an increase in the Metropolitan Police Department ‘  for pay increases implemented in mid-2006 and planned for 2007 ‘ and an increase in the required contribution to the police and firefighter retirement system.  The MPD budget also includes $4 million, for 81 police officers, to address a reduction in federal funds.

• Public Works spending would grow 9.4 percent, reflecting an increase in the costs of existing services in the Department of Public Works, a higher contribution to the Metro system, and $9 million in funding for the new District Department of the Environment.

 

Funding for other program areas ‘ education, human support services (including health) and financing would grow less than six percent.

The proposed budget for economic development and regulation is 15 percent lower than the 2006 budget, largely due to an $11 million cut in funding for the DC Housing Authority.  It is expected that this funding cut will be offset by the mayor’s proposed housing initiatives, described below.  Without this cut, funding for this portion of the budget would be roughly the same in 2007 as in 2006.

Longer-term Budget Trends Show More Even Growth across Functions

The proposed funding growth for FY 2007 is consistent with budget increases in recent years.  Since 2000, the local funds budget has grown an average of 6.5 percent per year.  After adjusting for inflation, the annual average increase is 3.7 percent.

• As shown in Figure 2, funding for economic development and government direction has grown somewhat above the 2000-2007 average, 8.7 percent per year and 5.5 percent per year, respectively, after adjusting for inflation.

• Budgets for public safety and public education have grown between four percent and five percent per year, or modestly above the average for total budget growth.

• Funding for human support services, public works, and financing functions has grown less than three percent per year since 2000, adjusting for inflation, or more slowly than the overall budget.

 

Enhancements in the FY 2007 Budget

Much of the growth in the proposed FY 2007 budget is needed to meet “baseline” funding needs — the costs of providing current services.  As noted above, for example, a $60 million increase in funding for the Metropolitan Police Department largely reflects the impact of negotiated pay increases over the past two years.  In fact, the proposed local funds budget of $4.8 billion is less than the amount needed to maintain all services ‘ $5.0 billion ‘ as estimated by the Chief Financial Officer.  The FY 2007 budget includes a number of administrative savings and a select number of service reductions.

Nevertheless, the budget includes notable new investments in a small number of program areas.  The most significant increases are in housing and health care.

 

Affordable Housing

In January, 2006, the Mayor’s Comprehensive Housing Strategy Task Force issued its report and recommendations.  The task force called for new investments of $3 billion over the next 15 years to help build or rehabilitate more than 50,000 housing units and to preserve thousands of existing affordable housing units.

The proposed FY 2007 includes proposals to start implementing the recommendations of the task force.  The budget proposes to raise deed recordation and transfer taxes on residential properties from 1.1 percent to 1.5 percent, which would generate $47 million in new revenues.

The new revenues would be used in the following ways.

• $7.1 million would be devoted to the Housing Production Trust Fund, under the requirement that 15 percent of all deed taxes be dedicated to the trust fund.

• $14 million would be used for rent subsidies and emergency assistance for families behind on rent, mortgage or utility bills.  At the same time, the budget proposes to eliminate $11 million in funding for the DC Housing Authority, which supported similar activities in 2006.  This means that the new funding will provide a net increase of $3 million for these services.

• $10 million to fund the Homeless no more plan.  At the same time, the proposed budget would eliminate $7 million in existing funding for homeless services, leaving a net gain of $3 million.

• $4 million to cover existing housing services provided through the Department of Mental Health.

• $6 million to support the New Communities initiative, including $4 million in social services for families in the Northwest One area.  The New Communities initiative seeks to establish mixed-income housing developments and support other improvements in selected distressed communities.

• $6 million for “workforce housing,” which appears to mean assistance to moderate-income workers facing housing challenges, such as teachers, firefighters, and police officers.

While this represents an important step toward addressing the affordable housing shortage, it is relatively modest relative to the task force recommendations.  This is true in part because, as noted, some $22 million of the $47 million would be used for existing programs.  Thus the new revenues will add $25 million to existing housing programs.

It is worth noting that the housing task force recommended restoring deed recordation and transfer taxes to 1.5 percent, but it suggested doing so for both residential and commercial properties rather than solely for residential properties as proposed by Mayor Williams.  Restoring the taxes for both types of property would raise substantially more funds and thus would support a greater investment in these initiatives.  The mayor’s budget focuses only on residential properties because school modernization legislation adopted earlier this year potentially could lead to an increase in the deed taxes on commercial properties in 2008.  Under that legislation, the deed taxes would be raised if other sources of revenue are not adequate in 2008 and beyond to fund expanded funding for school replacements and renovations.

 

Health Care

The mayor’s proposed budget makes a number of health care expansions.

• Medicaid eligibility for children would be expanded to 300 percent of poverty, or about $48,000 for a family of three.  Currently, both parents and children in families with incomes below 200 percent of poverty are Medicaid eligible.  The expansion does not include parents.  Only two states, Massachusetts and New Jersey, have eligibility limits above 300 percent of poverty for health coverage for children, and only five other states ‘ Connecticut, Maryland. Missouri, New Hampshire, and Vermont ‘ set eligibility for children at 300 percent.

• The budget would establish new dental benefits for adults who currently are not eligible for any dental assistance.   Currently, only adults in families with children receive dental coverage under DC’s Medicaid program.

The budget also proposes to continue implementation of the Medical Homes initiative, designed to provide greater access to primary care services in under-served neighborhoods.  The budget would provide roughly $20 million to build new community-level health facilities.

 

Other Enhancements

Other notable enhancements in the mayor’s FY 2007 budget request include:

• A $1.8 million ‘ or five percent increase in library funding, plus $4 million in one-time funding. These funds would be use to extend library hours and for collections.

• $4 million for the Metropolitan Police Department to cover the loss of $4 million in federal fund.  This would help maintain 80 police officers.

• $2 million to fund a subsidy program for grandparents raising grandchildren, a program that was implemented this year.

• A $2 million ongoing increase in funding for the Commission on Arts and Humanities, plus $3.5 million in one-time funding.  This is a substantial increase for this agency, which had a budget of less than $2 million until 2006.

 

Contingent Funding in the Proposed Budget

The FY 2007 budget identifies $75 million in possible funding proposals ‘  items that are not funded in the budget as proposed but would be funded if future revenue forecasts show that the District will collect more revenue than currently expected.  These are described in the budget as “opportunity enhancements.”

In some cases, however, the enhancements are needed to restore budget cuts or otherwise maintain existing services.  This includes $5.1 million in contingent funding for child care ‘  which would restore a portion of $6.2 million in proposed cuts in this area ‘  and $3.3 million for bed space at the DC  Jail, that would only maintain space at the 2006 level.  A third example is $5 million to cover the loss of funding the DC Public Schools have faced from students using vouchers to leave the public school system.  Mayor Williams had pledged to cover the full $10 million of lost funding, but the proposed budget includes only $5 million in actual funding, with the remainder in the contingent funding pool.

Other contingent funding proposals include the following:

• $2 million to expand the number of teens in the Summer Youth Employment Program.

• $6.6 million for health programs, including school health and further expansion of dental services for adult Medicaid recipients.

• $5 million to help develop a “youth development strategy.”

• $1 million to expand civil legal services for low-income residents, based on recommendations of the Access to Justice Commission (the commission recommended $6.2 million in funding).

• $1 million to expand assistance with utility bills for low-income residents.

 

Revenue Proposals in the FY 2007 Budget

The mayor’s budget request includes both revenue enhancements of about $65 million, and revenue cuts that will result in $64 million in lost revenues when fully implemented.  The budget would implement the last step of income tax cuts under the 1999 Tax Parity Act.  The revenue increases would come from raising deed recordation and transfer taxes to fund new housing initiatives, discussed above, and an increase in the fee paid by phone customers to support 911 services.

In recent years, revenues have been reduced significantly due to implementation of the Tax Parity Act and adoption of additional tax relief measures.  Overall, revenues in 2007 will be $370 million lower as a result of tax cuts implemented since 2004.

 

Tax Parity Act

The intent of the Tax Parity Act when it was adopted in 1999 was to bring DC taxes more in line with taxes in suburban Maryland and Virginia, so that the District’s effort to attract and retain residents would not be hindered by its tax burdens.  It included cuts in individual income taxes, business income taxes, and business property tax cuts that would be phased in over several years.  The last step of the Tax Parity Act, a set of income tax cuts, was scheduled for FY 2007.  This step would reduce revenues by $51 million in 2007 and $64 million per year in FY 2008 and beyond.

While the Tax Parity Act has provided tax relief to households at all income levels, the tax cuts have largely benefited higher-income residents.  Moreover, the goal of parity with suburban jurisdictions already has been met; the 2007 step of the Tax Parity Act is not necessary.

• The full effect of the Tax Parity Act’s income tax cuts has been to provide substantial relief to high-income DC households.  If the tax cuts scheduled for 2007 are implemented, the income tax for a family of four earning $150,000 will be $2,700 lower as a result of income tax cuts implemented since 1999.  The tax relief for a family earning $25,000 will be just $337.

• The cuts scheduled for 2007 are not progressive.  The 2007 cuts alone would provide $765 in tax relief to a family earning $150,000 but just $121 to a family earning $25,000.

A review of new tax return data and other research shows that taxes on DC households are effectively the same as in suburban Maryland, while taxes in Northern Virginia are modestly lower than in both DC and suburban Maryland.

• For example, IRS data show that the average income and property taxes paid in 2001 by DC households with income between $100,000 and $150,000 were 6 percent lower than in Montgomery County and one percent lower than in Prince George’s County.  (See Figure 1.)

• According to the DC Chief Financial Officer, estimated income and property tax burden on a married couple with two children and income of $100,000 in 2003 was $634 higher in DC than in Fairfax County, an amount that equals 0.6 percent of household income.[3]   (See Figure 2.)

For these reasons, it is not clear that the tax cuts scheduled for 2007 should have remained a budget priority.  Instead of continuing the Tax Parity Act, the last step could have been suspended, with the revenues used for more progressive tax cuts or to fund various investments, including some of the mayor’s contingent funding initiatives.

 

Revenue Enhancements

As noted earlier, the mayor’s budget request includes a proposal to raise deed recordation and transfer taxes on residential properties ‘ taxes which are paid when a property is sold ‘ from the current level of 1.1 percent to 1.5 percent.  These taxes had been raised to 1.5 percent in 2003 to generate revenue in the face of a budget shortfall, and they were reduced back to 1.1 percent in 2005.   The mayor’s proposal would restore these taxes to the 2003 level for residential properties.  This would raise $47 million, some $22 million to support existing housing services and $25 million to enhance affordable housing programs.

A second source of additional revenues would come from raising the fee used to support 911 services. The fee, imposed on phone bills, would be raised to $1.45 per month from the current rate of $0.76.  This would raise $15 million.

In addition to these measures, the budget proposes an enhancement of tax compliance efforts within the office of the Chief Financial Officer.  This is expected to increase collections from current taxes by $49 million.

Tax Relief in Recent Years Has Been Substantial

A number of tax cut measures have been adopted in the District in recent years, including property tax relief for homeowners, income tax cuts under the Tax Parity Act, a reduction of deed recordation and transfer taxes, and others.  Collectively, these have reduced revenues by a substantial and growing amount.

• New tax relief implemented in 2004 totaled $25 million.

• By 2007, the impact of tax reductions implemented since 2004 will total nearly $370 million.

These tax reductions have limited the revenue growth resulting from the District’s strong economic conditions.  Most notably, while tax collections rose roughly 10 percent in both 2004 and 2005, growth in tax collections in 2006 is expected to be less than two percent.  Without tax cuts, growth would have been nearly six percent

Revenue growth in 2007 (without counting revenues resulting from enhanced compliance) is expected to be 5.6 percent.  Without the tax cuts, projected growth would be nearly seven percent.

It is worth noting that despite the solid revenue growth in the District in recent years, overall tax collections remain are at a relatively low level when measured as a share of the DC economy.

In FY 2007, tax collections are projected to be:

• $4.59 billion, which equals 13.6 percent of personal income in the District.  (Personal income is the best way to measure the size of the economy.)[4]

• This is lower than in the late 1980s and early 1990s, when taxes exceeded 14 percent of personal income.  (A one percentage point difference translates to a difference of roughly $300 million.)

 

End Notes:

[1] Both the FY 2006 and FY 2007 included some funding designated as one-time.  The one-time expenditures ‘ which are supported by drawing from the District’s accumulate general fund balance ‘ total than $500 million in FY 2006 and roughly $120 million in FY 2006.  In both years, the one-time funding primarily supports capital construction projects.

The summary figures in this analysis refer to on-going expenditures only and do not include the one-time expenditures.

[3] DC CFO, Tax Rates and Tax Burdens, Washington Metropolitan Area: 2003.  The report calculates tax burdens on hypothetical families in DC and in five suburban counties.

[4] These figures include taxes dedicated to a special fund, including sales taxes that are transferred to the Convention Center Fund, deed taxes dedicated to the Housing Production Trust Fund, and taxes dedicated to the Ballpark Revenue Fund.