Revenue: Advance Policies that Support an Equitable Pandemic Recovery

photo of dollar bills planted in the ground

This blog post is part of a series on DCFPI’s Fiscal Year 2022 Budget Priorities. Read all of our related resources in our Fiscal Year 2022 Budget Toolkit, here.

The Fiscal Year (FY) 2022 budget will be one of the most important in DC’s history. This year’s budget choices have the potential to address the ongoing damage and suffering caused by the pandemic, and to put DC on a path for a recovery that addresses longstanding racial inequities exacerbated by the pandemic—but only if our leaders seize the opportunity and make bold investments. The Mayor and DC Council should find the resources needed—from federal assistance, the city’s substantial reserves, and taxes on our highest-income residents and most profitable businesses—to put us on a path for a stronger and more equitable community.

The pandemic continues to devastate our public health, the financial security of many of our city’s residents, key sectors of our economy, and our education system. Yet DC’s ability to respond to these demands remain fragile, even with a large FY 2020 surplus. The District has an FY 2021-2024 financial plan deficit, and revenues over the next four years are projected to be over $2.3 billion below pre-pandemic levels. And while the Biden Administration pandemic plan has the potential to provide more than $2 billion in short-term assistance to DC, that support is uncertain.

The FY 2022 budget should seize the moment and tackle the District’s immediate and long-term challenges together. Any additional federal relief funds should be spent to address as fully as possible the challenges created by the pandemic—such as avoiding evictions, helping small businesses stay afloat, and addressing educational losses—and funds should be spread between FY 2022 and FY 2023 in recognition of the time it will take. These federal funds may not be enough, and in any case will only last for the short-term. Lawmakers should fill any gaps by using more of the $1.2 billion in reserves, including changing rules to ensure that they can be used for a rainy day.

The Mayor and Council should also use this moment to address a tax system that has been used for too long to protect our wealthiest residents and most prosperous businesses, leading to a system where the richest 20 percent of residents pay less in taxes as a share of income than the bottom 80 percent combined, according to ITEP. Increasing taxes on our richest residents and most profitable corporations can provide funding now to address any short-term gaps and provide the long-term support needed when federal assistance runs out.

This opportunity, if used well, can ensure that the District survives the pandemic without alarming increases in evictions, without Black and brown students set back further, and without vast losses of small businesses. A long-term investment plan centered on racial equity can tackle intergenerational poverty and create a more just DC that also is more resilient.

Below are specific steps DC should take to achieve this vision.

Raise revenues from wealthy residents. The pandemic has exposed and widened vast racial inequities in wealth and income. Unemployment among Black residents soared to 18.2 percent from 11.2 percent, while white unemployment increased to just 4 percent, up from 1.7 percent. Meanwhile, higher-income residents, predominantly white, benefited from a booming stock market and remote work. Yet DC’s tax system does little to address racial inequities, with millionaires paying a marginal income tax rate that is barely above what a teacher or nurse pays.

The District should set an FY 2022 income tax surcharge on residents with the highest-incomes—above $250,000—while laying plans for comprehensive reforms to make DC’s tax system more racially equitable. This would raise taxes on just 3 percent of DC’s taxpayers.

The income tax rate the richest District residents pay on added earnings is barely above what a teacher, nurse, or firefighter pays. With white residents accounting for the vast majority of our wealthy residents, this is a matter of racial equity and justice.

Close tax loopholes. Each year, the District wastes millions of dollars on ineffective economic development tax incentives. The District has taken steps in recent years to scale back or eliminate some of these, freeing up resources to invest in DC residents, and the Mayor and Council should continue that in FY 2022.

  • Repeal a college savings deduction that primarily serves the richest residents. DC taxpayers can receive up to an $8,000 deduction for contributions to DC’s college savings plan. Yet his tax break primarily benefits upper middle class and wealthy residents, while providing almost no benefit to lower-income families. More than 90 percent of the benefits flow to families making over $100,000, and 70 percent flow to those earning above $200,000.
  • Repeal grocery store tax subsidies that don’t do a good job of addressing DC’s food deserts. The District’s effort to expand access to groceries through tax subsidies hasn’t worked, resulting in new stores in gentrifying communities but not in Ward 7 or Ward 8.  It should be repealed or reformed to be targeted to these wards.
  • Demand accountability for corporate tax breaks. The Council should establish clear accountability mechanisms that ensure businesses hold up their end of the bargain (known as “clawback provisions”) for all economic development tax breaks to hold companies accountable to their commitments, including the Line Hotel.

Use more of DC’s reserves. The District entered the pandemic with over $1.4 billion in reserves, but then budgeted less than $250 million to help balance the FY 2020 and FY 2021 budgets. In particular, DC has $728 million in a reserve that serves a very limited purpose—supporting DC’s cash flow needs—and can’t be used to address needs in a recession. The Mayor and Council should change these rules to allow some of the cash flow reserve to be used in the FY 2022 budget. Funds used should be replenished when the economy recovers.

Amend the budget process. The Council should amend the budget process to include a DC Council Committee of the Whole hearing on revenues after budget oversight hearings but before the hearing on the Budget Support Act, which includes policy (not just spending) changes. This would ensure that lawmakers have an early opportunity in the budget process to assess and debate whether changes to the tax system are needed, to keep up with growing needs.

Reduce spending on policing. The District spends far more on policing that other large cities. Beyond that, traditional policing evolved from efforts to control Black people, and systemic racism in policing continues to result in police brutality and unequal treatment of Black and brown residents. The District should reduce funding for traditional policing and reinvest those savings in alternatives that support Black and brown communities.

More transparency needed around use of federal relief funds. The District has received hundreds of millions in federal pandemic assistance funds, with more coming from the assistance package adopted by Congress in December. These funds provide vital assistance to residents and businesses hurt by the pandemic. Yet it is not clear how funds have been spent to date, making it hard for the Council and DC residents to understand the impact. As part of the FY 2022 budget process, Mayor Bowser should submit separate documentation on uses of funds to date, plans for use of additional federal relief funds in her budget proposal, and where those funds show up in the DC budget so the DC Council can have a say in how those dollars are spent.

These ideas will help pave the way for bold investments in FY 2022 to help the thousands of residents facing eviction, small businesses that may not recover, residents struggling with food insecurity, and students who have fallen behind. This is not only the right thing to do but also will stop the slide in our city’s economy.