Tax Commission Tuesday: Tax Expenditures in DC
It’s Tuesday, which means the return of our weekly series looking at important research generated by DC’s Tax Revision Commission. Today’s installment focuses on presentations given to the commission by the Office of the Chief Financial Officer on tax expenditures.
A tax expenditure is a way of using the tax code to achieve a public purpose. For example, some tax expenditures are used to attract certain businesses (DC’s supermarket tax incentives) while others are used to boost the take home pay of low-income working families (DC’s earned income tax credit). A tax expenditure isn’t a general tax cut—like recent sales tax cut enacted by the Council— but rather a change in the tax system to benefit certain groups.
In recent years, the use of tax expenditures has grown both in number and dollars yet there has been little accountability about whether the expense was worth it. In fact, in FY 2012 tax expenditures cost DC $2.9 billion in forgone revenue, but a comprehensive review isn’t happening to determine if the tax expenditures are still needed, work as intended, or could be improved to be more efficient.
That could soon change. As we noted in yesterday’s blog, Councilmember Mary Cheh (D-Ward 3) recently introduced legislation that would require greater review and evaluation of locally-enacted tax expenditures. DCFPI supports the goals in this bill and urges the Tax Revision Commission to take a closer look at the tax expenditures in DC.
Every two years the CFO’s office reports on the tax expenditures DC has made and the revenue lost. In the most recent report for FY 2012, the CFO notes that DC had nearly 230 tax expenditures and the total revenue lost from these expenditures was approximately $2.9 billion. This includes:
- Locally-enacted tax expenditures ($1.1 billion). These are tax expenditures passed by the DC Council. The largest areas of spending include economic development (30 percent), social policy (20 percent) and housing (12 percent). The top three locally enacted tax expenditures in terms of forgone revenue include: sales tax exemption for professional and personal services ($250 million), property tax exemption for educational institutions ($105 million), and sales tax exemptions for public utilities ($90 million).
- Local exemptions for other governments ($1.05 billion). These are tax expenditures related to the feds and embassies. The largest areas of spending include property tax exemption for the federal government (78 percent), sales tax exemptions for both DC and the federal government (17 percent) and property tax exemptions for embassies (4 percent).
- Conformity to the federal tax code ($786 million). These are tax expenditures DC has by choosing to follow parts of the federal income tax. The largest areas of spending include health (23 percent), income security (22 percent), and housing (16 percent). The top three tax expenditures for federal conformity in terms of foregone revenue include: employer health care contributions ($109 million), employer retirement contributions ($91 million) and the home mortgage interest deduction ($87 million).
The use of tax expenditures has also grown significantly in DC and other states for economic development. The CFO’s office notes that the use of the tax code for economic development has gone from essentially zero in the 1990s to nearly 30 percent of total funds spent on economic development by FY 2012. In fact, the CFO’s office notes that nearly $178 million was spent in FY 2012 for economic development under the tax code. This varies from using the tax increment generated by specific economic development projects to pay off bonds to abating the property and sales and use taxes for grocery stores that locate in certain DC neighborhoods.
The CFO’s office notes that may groups have offered ideas on ways to reform tax expenditures. These ideas include having mandatory reviews and sunsets of tax expenditures, looking at the design of tax credits to ensure they are used efficiently and making tax expenditures part of the budget process to ensure they are not being automatically given priority over other programs and services.
With nearly $2.9 billion of revenue forgone in FY 2012 for nearly 230 different tax expenditures, it’s important that DC take a closer look at its spending through the tax code. DCFPI looks forward the Commission taking a closer look at tax expenditures, as well as working with Councilmember Cheh to ensure a comprehensive review and evaluation of tax expenditures in DC.