DC Took a Balanced Approach to Addressing Its Last Major Deficit: The Budget Shortfall in 2002 Was Addressed With Both Budget Savings and Revenue Increases

The District is facing a tremendous budget shortfall that has been caused by a weak economy and declining tax collections. DC’s expected revenue collections for FY 2010 have fallen by nearly $800 million in recent months. While federal stimulus funds, DC reserves, and surplus funds from 2008 will help address this, the unresolved shortfall is more than $400 million.[1] This shortfall will have to be addressed when Mayor Fenty submits his proposed FY 2010 budget in mid-March.

Balancing the budget in the midst of a revenue shortfall can be accomplished by reducing spending – through better efficiencies or cuts in services – or by increasing revenues. The District already has adopted significant budget cuts this fiscal year in response to the shortfall, and further budget cuts seem likely. Revenues have been increased only modestly, however – through an increase in parking meter rates – covering a small share of the budget gap.

While raising taxes or fees is never popular or politically easy, addressing the remaining budget gap entirely on the expenditure side may require painful cuts in a number of services. As the District’s leaders prepare to address the budget shortfall, it is instructive to review how the city handled its last major budget shortfall, which occurred in 2002 following a national recession and the economic aftershocks of the September 11 terrorist attacks. The plan developed then by Mayor Williams and the DC Council included a mixture of spending reductions and revenue increases. The package was not evenly split – spending cuts outweighed revenue increases two to one. Nevertheless, the revenue increases were notable, totaling $113 million – or $132 million in today’s dollars. These included a mixture of permanent and temporary tax increases and a number of fee increases

The fact that the District raised revenues as part of its budget balancing effort during the last economic downturn, rather than relying on budget cuts alone, suggests that revenue increases can be a part of a balanced approach to deficit reduction that limits the impact on critical public services.

Click here for the PDF of the full report (4 pp.)

[1] See DC Fiscal Policy Institute, How Bad is DC’s Budget Shortfall?, March 2009

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