Tax Commission Tuesdays, our weekly series that look at important research generated by DC’s Tax Revision Commission, returns this week for a special Wednesday edition!
Today, we’ll discuss research presented to the Commission about DC’s major demographic and economic trends — such as changes in the age distribution or in the types of jobs being created — and the implications for our tax system. Population and economic changes can affect DC’s ability to raise revenues to pay for services — which means our tax system may need to adjust to keep up.
This topic is known as “fiscal architecture” and was the subject of a paper and presentation given by Sally Wallace of Georgia State University. Dr. Wallace’s report contains a number of findings and recommendations for DC’s future revenue system. Here are some that stand out to us:
- More Young Adults: DC is likely to continue to see a growing number of young workers who both live and work in the city, which will boost property and income taxes but could reduce sales taxes as young workers spend more on items that may not be taxable such as personal services and entertainment. Dr. Wallace also noted that many jobs are increasingly mobile and can be done remotely. In response to questions, she suggested that public investments to keep the city attractive to young adults may be important.
- More Older Adults: DC also is likely to see a rise in the elderly population. This may reduce income, sales and property tax collections somewhat, because DC doesn’t tax social security income, because elderly residents spend more on non-taxable items such as health care, and because DC offers seniors significant property tax reductions. One option noted by Dr. Wallace is to means test the tax exemptions which can help keep revenues more stable to help provide the increase in services an aging DC’s elderly population may need.
- Growth in the service sector: Although DC’s sales tax has been expanded to cover services, many services remain untaxed. The growth in services will erode the sales tax over time. Dr. Wallace recommended broadening the sales tax to services as much as possible to stabilize this revenue source.
- Increasing globalization and technology. Wallace notes that increased globalization and competition could make it harder to collect corporate income tax. She recommends simplifying DC’s corporate income tax, such as by increasing the minimum tax. DCFPI will have more on our thoughts on changes to DC’s business taxes this fall.
The paper also discussed two reforms that would be helpful to any city or state.
- Implementing an internet sales tax. States are losing out on millions of dollars in sales tax revenues from online sales. If an online retailer has no local physical presence, they don’t have to collect and remit sales tax. The Marketplace Fairness Act’currently being debated in Congress’would give DC and the states the ability to collect internet sales tax and help stabilize the sales tax in the long run.
- Tax expenditure analysis: Wallace notes tax breaks targeted on specific populations or certain kinds of activities — known as “tax expenditures” — often grow in cost over time yet rarely get reviewed by policymakers. She recommends that DC and all states adopt processes to help ensure that tax expenditures are being used judiciously. As we noted last month, Councilmember Cheh has introduced legislation to do just that.
Be sure to check out Dr. Wallace’s full report here, which has more data, analysis, and the complete list of recommendations on DC’s fiscal architecture.
To print a copy of today’s blog, click here.