Lessons learned from past recessions underscore that DC lawmakers need a balanced approach to the recession that includes raising revenue to minimize budget cuts at a time when need is growing. More public investment in residents’ wellbeing during an economic downturn can speed up recovery, by partially replacing lost income for unemployed residents, for example. Typically, federal assistance can be counted on to minimize harm to communities and to help generate economic recovery, but that kind of relief is not forthcoming for DC. With Republicans in Congress pursuing trillions in tax cuts paid for in part by slashing the federal safety net, DC’s wealthiest residents can afford to pay more in local taxes to reduce cuts to DC’s critical human needs programs.
Massive federal layoffs instigated by the “so-called” Department of Government Efficiency are projected to throw the District into its own local recession, although a national recession may not trail far behind. This recession is projected to depress local revenues by $1 billion over the next few years, according to the Office of the Chief Financial Officer’s February forecast. DC, along with the rest of the country, also faces the increasing possibility of sharply reduced federal funds for Medicaid and food assistance to finance multi-trillion dollars in federal tax cuts for the wealthiest Americans.
The last three non-pandemic recessions were marked by lengthy “jobless recoveries,” meaning employment didn’t start to recover alongside a growing economy when those recessions ended. This resulted in longer lasting high levels of unemployment for people of color and young workers, in particular, according to analysis by the Center on Budget and Policy Priorities (CBPP). Black workers always bear the economic brunt of recessions due to centuries of historic and systemic racism, and Black DC residents are already four times likelier to be unemployed than white workers. Unemployment makes it more difficult for people to afford essentials like food, housing, and health care, brings harm to businesses as people spend less, and can have long-lasting negative effects on workers’ employment and earnings prospects.
The pandemic-induced recession in 2020, to the contrary, was initially much deeper but followed by an extremely quick recovery. While there are many differences in the causes of the Great Recession and the COVID-19 pandemic, CBPP notes that the federal response to the Great Recession of 2007-2009 was “neither large enough nor sustained long enough to promote a rapid recovery with stronger job growth,” and that the much larger pandemic response suggests “that policymakers had learned key lessons from the Great Recession experience.” Indeed the contrast in job and economic recovery between the two downturns is dramatic. Expanded federal food assistance, tax credits for low-income families, and unemployment benefits, for example, meant more dollars circulating in DC’s economy as residents and businesses stayed more economically active than they otherwise could have. The federal pandemic response also provided support to states and localities to replace declining revenues, which meant the District could sustain its own public investments, including in its safety net programs.
At the local level, DC also responded to the pandemic with a key revenue raiser that allowed the District to increase early educator pay, invest in housing vouchers, and vastly expand the DC Earned Income Tax Credit, getting local economic support to people and families with low and moderate incomes. Lawmakers combined these additional resources with significant federal aid to support residents’ economic security and the District’s recovery.
DC Should Raise Revenue and Deepen Tax Equity in Face of Huge Federal Tax Cuts
Raising revenue to reduce budget cuts, especially to basic needs programs, is even more urgent and pragmatic this time around because DC will not have federal aid to stem the effects of the downturn. Instead, federal lawmakers are likely to slash funds for health care and food assistance at a time when DC residents will need them most. While the District will not be able to make up for lost federal funding or raise enough revenue to emulate a federal aid package, every dollar raised is a dollar that doesn’t have to be cut. Minimizing cuts will lessen the harm to DC residents and, even if minimally, help reduce the time it takes for the District’s economy to recover.
Moreover, as Congressional Republicans look to slash a net of around $4 trillion in taxes over ten years largely for the top 5 percent wealthiest households, the District has an opportunity to raise taxes for those same households, capturing some of the federal tax cuts to help District residents weather the storm.
If Congress extends the 2017 tax cuts as planned, by itself this would yield the top 5 percent of households in DC an average annual tax cut of up to $36,000, depending on how much the cap on deductions for state and local taxes (SALT) is loosened or if it is eliminated altogether (according to unpublished data analysis by the Institute on Taxation and Economic Policy for DCFPI). And Republicans in the House have already proposed to go further than an extension of the 2017 cuts, with additional tax cuts for wealthy people and profitable corporations. DC residents benefiting from these cuts can afford to pay more in local taxes so residents’ basic needs are better met.
Higher rates on capital gains and very high incomes, including new brackets on multi-million incomes, can help DC capture a portion of federal tax cuts to reduce local budget cuts at a time of growing need. While DC can’t make up for the role of the federal government, Mayor Bowser and DC Council should use all tools at their disposal to minimize the contraction of economic activity and the extent of the harm that will otherwise be in store for District residents and businesses without local action.
