No politician is fond of increasing taxes. So you know this recession must be severe when more than half of the states have adopted tax increases to help balance their budgets.
This summer, the District crossed that bridge as well, voting for about $50 million in new taxes to help address a $340 million shortfall. (Program cuts played a much larger role.)
That allowed many services to be spared from the budget ax. But DC’s specific tax choices ‘ including an increase in sales, cigarette, and gas taxes ‘ will fall hardest on low-income residents, while more progressive options were set aside. Working poor families will pay higher income taxes due to elimination of inflation adjustments to DC’s standard deduction, for example. Yet the DC Council kept a tax break that goes mostly to high-income residents, for their investments in bonds issued by other cities and states. The District is one of the few places in the country to offer this tax break, by the way.
As the District braces for its next budget shortfall ‘ whenever it comes ‘ it’s important to think about not only whether to raise taxes ‘ but what kinds of revenue increases make most sense. The economic downturn offers an opportunity to close tax loopholes or reform ineffective parts of DC’s tax code. We have written before, for example, about expanding the sales tax to more services ‘ such as pet grooming ‘ as well as to tickets for live-theater events.
It also makes sense to adopt progressive tax changes ‘ so that tax increases fall on higher-income residents rather than on lower-income families that already struggle to make ends meet. Studies show that DC’s overall tax system is regressive.
Eliminating the income tax exemption for interest on out-of-state bonds is a good place to start. Every state offers an exemption for interest on in-state bonds, which provides an incentive to support that state’s infrastructure projects. But only DC and Indiana give a tax break for bonds issued by other cities and states. It’s a policy that doesn’t make sense. Why should DC provide a tax incentive to invest in other states’ infrastructure?
Moreover, changing DC tax policy to be in line with the vast majority of states ‘ including Maryland and Virginia ‘ would be a progressive step. Two-thirds of the interest on tax-exempt bonds goes to DC households with incomes of $200,000 or more.
Raising taxes may not be very popular. But we should at least start with the ones that make sense.