DC’s Revenues Continue to Grow, but the Gains Will Not All Be Available, Due to Tax Cut Triggers

The District’s revenues are growing, but the new funds will not be fully available to fund needed services like affordable housing or TANF assistance. Instead, based on the budget passed by the DC Council in 2015 and this past summer, about a substantial portion of the projected revenue increase will be used for tax cuts.

A tax cut “trigger” policy adopted by the DC Council devotes 100 percent of revenue growth, beyond projections from last year, to a series of tax cuts recommended by the Tax Revision Commission.

DC’s tax collections are rising sharply, according to a forecast released on September 30 by the DC Chief Financial Officer. It shows higher revenues than projected just a few months ago: an additional $180 million for the 2016 fiscal year that just ended, a $36 million increase for FY 2017, and a $20 million increase in FY 2018 and beyond. The 2016 increases reflect better than expected collections from business income taxes, deed recordation/transfer taxes, and estate taxes.

The portion of the increased revenues that will continue every year—about $20 million—is enough to trigger the next step in the series of tax cut triggers, to raise the standard income tax deduction. (See this chartbook for how DC’s tax triggers work.) The standard deduction will increase from $5,200 to $5,650 for singles, $6,500 to $7,800 for head of households, and $8,350 to $10,725 for married couples. The added deduction will reduce tax collections by $9 million a year.

The new revenue forecast was not enough to trigger further tax reductions. The next step in the tax-cut series – an increase in the income tax personal exemption – would cost $13 million per year. That, along with the change in the standard deduction, would exceed the $20 million in ongoing revenue increases.

The increase in the standard deduction will help many DC households, the majority of whom claim the standard deduction. It is a progressive tax cut: most low- and moderate-income households use the standard deduction, while most higher-income households itemize deductions. However, the effect will be quite modest. For example, for someone at the 6.5 percent income tax bracket, an increase of $1,300 in the standard deduction nets only $84.50.

While the most recent triggered tax cut, and several others, are beneficial to low- and middle-income households, the automatic nature of the tax cut triggers raises concerns, because it does not allow policymakers to weigh other possible uses of growing revenue, such as schools, housing, or health care. For example, recent DCFPI analysis has found that while the city’s overall economy continues to grow, that growth has not been evenly shared. East of the Anacostia River, the poverty rate and child poverty rate remain stubbornly high, and median incomes have not grown since before the Great Recession. Rather than providing very modest tax cuts to residents, additional revenues could be put towards services to help those who need it most—homeless services and TANF assistance, for example.

The tax cut triggers have already resulted in substantial tax cuts over the past several years, contributing to a FY 2017 budget with substantial service gaps. Over $50 million in tax cuts have been triggered over the past year, including a recent elimination of taxes on estates worth $1 to $2 million and a cut in business income taxes. There are still some $128 million in tax cuts yet to be triggered. This means that without changes to the policy, the District could see several more years of stagnant revenue growth.

The tax trigger policy is affecting the city’s revenue collections and the ability to meet the demands of a growing city. Going forward, a more balanced approach to tax triggers—one that doesn’t devote 100 percent of revenue increases to tax cuts—would help the District fund necessary services. A more balanced approach could include, for example, devoting half of each dollar of new revenue above the baseline for tax cuts, and preserving half for services. We hope that the Mayor will include a revised policy in her proposed FY 2018 budget.

If you are curious as to where the rest of the surplus money will go, stay tuned to the District Dime!