Testimony

Testimony of Ed Lazere, Executive Director, DC Fiscal Policy Institute, At the Public Hearing on The Fiscal Year 2006 Budget Request for the Office of the Chief Financial Officer District of Columbia Committee on Finance and Revenue

PDF of this testimony

Chairman Evans, other members of the Committee, thank you for the opportunity to speak today.  My name is Ed Lazere, and I am the executive director of the DC Fiscal Policy Institute.  DCFPI engages in research and public education on the fiscal and economic health of the District of Columbia, with a particular emphasis on policies that affect low”‘ and moderate”‘income residents.

I would like to comment today on the tax proposals included in the FY 2006 budget request.  Before I do that, I want to offer praise for the Office of Tax and Revenue’s efforts to administer the DC EITC program.  This year, OTR contacted households that appeared to be eligible for the DC EITC but had not applied.  We also worked with OTR to develop a proposal to provide modest funding in the 2006 budget to support community-based EITC outreach and free tax preparation services.  While the funding, $100,000, ultimately was not put in the budget, I am confident that this committee can find a way to support this important service.  I want to thank Dan Black and his staff for working diligently on this issue.

As context for a discussion of tax proposals, the mayor’s request included a core budget tied to the Council-set 4.7 percent budget cap, but it also included $108 million in enhancements.  This includes $78 million in “community investments” and $30 million in new funding for roads and bridges. Taken together, the proposed FY 2006 budget would be 6.0 percent higher than the FY 2005 budget.  This growth rate is lower than in any suburban jurisdiction, with the possible exception of Arlington County, where proposed growth ranges from 3.2 percent to 7.7 percent because of a set of optional funding items.

In addition, the mayor’s budget request includes $94 million in tax relief, or nearly as much as the proposed enhancements.  This is, in effect, a relatively modest budget that splits additional revenues fairly equally between tax reductions and service enhancements.

For these reasons, I believe that any efforts to find savings on the expenditure side, as well as any additional revenues identified during the budget debate should be divided between additional service enhancements and additional tax relief. 

In addition, the proposed tax reductions in the mayor’s budget include a mix of progressive and regressive items.  The net effect is a package that by and large is not progressive. For this reason, DCFPI believes that any additional tax relief should be targeted on lower-income residents and should make the tax system less regressive.

The mayor’s budget proposes $72 million in income tax relief for FY 2006 ‘ $19 million in new tax reductions and $53 million from continuation of the Tax Parity Act.  The new cuts include:

  • An expansion of the DC Earned Income Tax Credit.  The EITC is a credit for low- and moderate-income working families, particularly those with children.  The DC EITC currently equals 25 percent of the federal EITC.  The mayor’s budget would expand the EITC to 50 percent of the federal credit for some current EITC recipients ‘ working families with children and incomes of roughly $18,000 and $34,000.  The maximum benefit from the EITC expansion would be about $500.

    DCFPI supports the EITC expansion strongly.  The EITC has proven to be an effective anti-poverty tool and supports welfare-to-work efforts.  We have some concerns, however, that the expansion would not provide relief to working households with earning below $18,000, as the current EITC does. We would like to work with the Council to modify the EITC proposal to ensure that all low-income workers benefit.

  • DCFPI also supports the proposed increase in the DC personal exemption from $1,370 to $1,500 and an increase in the standard deduction from $2,000 to $2,500.  These provisions, which have not been adjusted for inflation for 15 years or more benefit all taxpayers but target relief on low- and moderate-income households.  These increases are relatively modest, however.  They would provide just $45 to $71 in relief to a four-person household.  The budget would leave the personal exemption and standard deduction well below the federal levels.  The federal personal exemption is now $3,100.  The federal standard deduction is 9,700 for a married couple this year, $7,150 for a single-parent household, and $4,850 for a single person.
  • The proposed Tax Parity Act cuts would lower the District’s three tax rates, and it would expand the income range for the District’s middle income tax rate.  The rate, which now applies to taxable income between $10,000 and $30,000, would apply to income between $10,000 and $40,000.

DC Income Tax Rates and Brackets,

Current and As Proposed in the Mayor’s FY 2006 Budget Request

Current Rates and Brackets

2006 Budget Proposal

Under $10,000

5.0%

$Under $10,000

4.5%

$10,000 to $30,000

7.5%

$10,000 to $40,000

7.0%

Above $30,000

9.0%

Above $40,000

8.7%

 

  • Yet tax relief from the Tax Parity Act would vary widely.  Tax reductions range from as little as $38 for a family of four and $15,000 in earnings ‘ or slightly more than full-time work at the minimum wage ‘ to $852 for a family with $150,000 in earnings.  The reductions for high-income households are also higher as a share of income than the relief that lower-income households would receive.  The tax cuts would equal 0.25 percent of income for a household at $15,000 but 0.57 percent of income for a household at $150,000.

The combined tax cuts would be larger in dollar terms for high-income households than for low-income households.  As a percentage of income, the tax reductions would be roughly the same for all households other than those benefiting from the EITC expansion.  This means that the full effect of the proposed income tax reductions by and large would not be progressive, as shown in the table below.

Estimated Impact of Proposed FY 2006 Income Tax Proposals*

Income

Tax Parity Act

Standard deduction/ Personal Exemption

EITC

Total

Total as Percent of Income

$15,000

$38

$45

$0

$83

0.55%

$25,000

88

71

407

566

2.26

$75,000

386

36

0

422

0.56

$150,000

852

45

0

897

0.60

* Impact on a hypothetical family of four

 

 Property Tax Reductions

The mayor’s budget includes $22 million in property tax relief to address the impact of rising property assessments on DC homeowners.  The new proposals build on property tax relief provisions enacted in 2004, which included an increase in the Homestead Deduction from $30,000 to $38,000 and a 12 percent cap on annual tax increases.

Together, the new proposals would provide relief to all homeowners, but the greatest relief would be targeted on low-income homeowners who are likely to face the greatest hardship from rising property tax bills.

  • The budget would increase the Homestead Deduction from $38,000 to $60,000.  This accounts for $19 of the $22 million in proposed property tax relief.  This would provide a $211 tax reduction for all homeowners, which means that the relief as a percentage of a home value would be greatest for owners of homes with the lowest assessments.  For a home with a taxable assessment of $200,000, for example, the additional homestead deduction would represent more than a 10 percent tax reduction.  For a home with a taxable assessment of $500,000 the relief would be 4.4 percent of the tax bill.
  • The increase in the homestead deduction is more progressive than other leading property tax relief proposals, including a proposed five percent cap on annual tax increases.  The homestead deduction generally would provide greater relief than the average benefit of the five percent cap for homes under $500,000.  The homestead deduction increase would provide less relief than the average benefit of the five percent cap to homes worth above $750,000.

Impact of Proposed Homestead Deduction Increase

And 5% Property Tax Cap, by Home Value

 

Homestead Deduction Increase

Average Benefit

Of 5% Cap*

Under $250,000

$211

$44

$250,000 to $500,000

211

98

$500,000 to $750,000

211

209

$750,000 or more

211

425

* based on DCPFI analysis of DC property assessment database

 

 

Other Tax Relief Ideas

The Committee Chair is seeking an additional $78 million in tax relief from a variety of sources.  As noted earlier, DCFPI would support additional relief if included in a package that also included targeted service expansions.  Because DC’s tax system is regressive ‘ that is, that lower-income households pay a higher percentage of their income in taxes than higher-income households ‘ and because proposed reductions are not progressive outside of the EITC, any additional reductions should be structured to be progressive.

The $78 million in proposed new relief includes a mixture of progressive and regressive elements.  The least progressive elements of this package include the following, all of which DCFPI has testified on this year.

  • The five percent cap on property tax bills is not progressive;
  • The increase in the estate tax threshold;
  • The increase in the pension income exclusion for DC and federal government retirees.

The most progressive component of the $78 million tax package would increase the DC standard deduction to match the federal standard deduction.  Nearly all of the 60 percent of DC households that claim the standard deduction have adjusted gross income under $50,000.

Finally, I would like to raise the idea of modernizing the 25-year old property tax credit for low-income households.  The Schedule H credit is limited to those with incomes below $20,000, an income eligibility level has not been adjusted since the credit was created in the late-1970s.  The maximum credit amount ‘ $750 ‘ has been unchanged since 1979.  Modernizing the “Schedule H” property tax credit to cover a wider range of low and moderate-income families thus is one step that can be taken to target aid on those most in need of property tax relief.  There currently is a bill before the Council, modeled on a recommendation from the Tax Revision Commission, that would improve the Schedule H credit by increasing both the maximum income eligibility and the income threshold.

Thank you. I am happy to take any questions you may have.