Rebuilding Place in the Urban Space

"A community’s physical form, rather than its land uses, is its most intrinsic and enduring characteristic." [Katz, EPA] This blog focuses on place and placemaking and all that makes it work--historic preservation, urban design, transportation, asset-based community development, arts & cultural development, commercial district revitalization, tourism & destination development, and quality of life advocacy--along with doses of civic engagement and good governance watchdogging.

Wednesday, September 06, 2017

I don't think DC's tax reform is an exact model for the US

DC is the nation's only "city-state."

By that I mean that DC is a fully urbanized place (no rural or exurban land), a city with close to complete taxing power, including income taxes--with the huge exception that the city can't tax nonresident income, which among other effects means, unlike every other jurisdiction in the US, DC can't assess nonresident income tax on professional athletes (which is one way cities and states collect additional monies after subsidizing sports facilities).

Last week, the New York Times columnist James Stewart suggested ("For tax reform lessons, Congress needn't look far") that DC would be a great example for Congress to consider as a model for how to go about "tax reform" -- although tax "reform" if by reform you mean improvement seems to be off the table in favor of a tax cut for the rich.

From the article:
... in 2014 the council cut corporate and business taxes, reduced individual rates for everyone earning less than $1 million and broadened the tax base by eliminating many loopholes.

In the ensuing years, economic growth and tax receipts have surged, enabling the city to accelerate cuts that were being phased in. The legislation was not revenue neutral, in the sense that broadening the tax base offset the reduction in rates. It was a tax cut. But in a development that would surely warm the hearts of pro-growth Republicans, the economic lift was so strong that tax receipts increased, and last year hit a record.
Tax cuts were simultaneous with significant growth.  The problem with the argument is that DC's economy and population have been growing significantly over the past ten years.  It's easy to "cut" taxes when your economy is growing.

In the last nine years--despite the 2008 Great Recession--DC's population has grown by slightly more than 110,000 people ("D.C. population reaches four-decade high," Washington Post), an increase in population of almost 20% over the base number of 570,000 residents in 2007.

From 2014 when the tax cuts were approved and 2016, the population increased by about 3%, from 660,000 to 680,000. 

New condominium and apartment buildings continue to open and plans for large mixed use developments continue apace.

Income tax and property tax revenues were already increasing at an increasing rate.  Most of the new residents, excepting children, are paying out plenty in terms of income and sales taxes, and property taxes for home owners.

It's easy or at least comparatively easy to cut income taxes when the number of earners is growing and it's easy to cut property taxes when the number and size of buildings is growing, along with property values and assessments.

Plus, DC's property tax base is insulated somewhat by the inclusion of a hefty tranche of highly valued commercial property, primarily but not limited to Downtown DC.  DC's commercial property is highly valued in part as a safe place to park money from overseas, generated in countries with lower economic returns and/or more unstable economies.

Expanding the range of sales taxes had limited impact on revenue.  Complementing tax cuts by expanding somewhat the range of goods and services being taxed is likely a minimal proportion of the total revenue mix compared to the large increase in the number of people paying income taxes and rising property tax revenue from residential and commercial property.

Kansas as a lesson.  Although DC's economy is much stronger than that of Kansas, which has been wrecked by Governor Brownback's application of classic Republican supply-side tax cuts, which decimated state and local government funding, especially for schools because there was no increase in "animal spirits" and tax revenue in response ("Why Sam Brownback's tax cuts failed to make Kansas thrive," Bloomberg View; "The Kansas tax cut experiment," Brookings Institution), many of us worry about the tax cuts because of potential threats to the local economy that are out of the hands of the local government.

The economic winds buffeting DC are not favorable, and this will continue through the entire Trump Administration.  First, local employment and commercial building activity is very much susceptible to the vagaries of federal government policy, which these days is focused on reducing government spending, not increase it--except for the military.  This has a disproportionate effect on the regional economy of Washington ("Uncertainty in Washington is hurting D.C.'s job market, economists say, Post).

For example, a neighbor down the street works for a unit of the Labor Department, where next year's budget proposal calls for the unit to be downsized by 80% and hundreds of people will be fired.  Extend that example across most government agencies and you can see a tremendous negative impact on the local economy.

And the increase in military spending won't impact DC that much, because most of the local beneficiaries would be located outside of DC, in Maryland somewhat and Virginia especially.

Second, the commercial office sector is slowing anyway as federal agencies move out of DC proper,  law firms merge and contract, and as more companies reduce the amount of space per worker, leading to reduced need for commercial office space.

-- "Implications of a Trump/McConnell/Ryan Administration on DC's commercial real estate market," 2016
-- "Why Mayor Bowser is right to be leery of systematic lowering of taxes," 2015

Third, because the city's population is growing there is a greater demand for civic amenities, infrastructure expansions and improvements, and clamoring for various social programs such as an increased amount of services for the homeless and expansion of the amount of affordable housing.

-- "Town-City Management: We are all asset managers now," 2015

But this comes as the city's debt financing cap is close to being exhausted.

Conclusion.  Fortunately the city is in a much different place than Kansas.   The city is much smaller, urban, with fewer economic responsibilities.  But imagine the impact on risk management, predictability, and perception if there is a federal government shutdown, or Congress refuses, if only for awhile, to not raise the debt cap, and long term plans by the Republicans to shrink the federal government with its catastrophic effect on the local economy?

Then it's not out of the question to make the assessment that these tax cuts were foolish, that the city failed to plan for severe exogenous economic shocks that were foreseeable.

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At 2:20 PM, Anonymous charlie said...

Not arguing with the logic here, BUT

Kansas and DC have similar sized budgets. If you include WMATA and WASA the DC budget is much larger.

At 3:19 PM, Anonymous Alex B. said...

The Kansas comparison strikes me as absurd. Kansas was running an ideologically driven experiment; DC's tax reform was modest and pragmatic by any standard.

DC is indeed a unique city-state, which makes it hard for any direct comparisons to other states or other levels of government. But DC is also a very small jurisdiction, one that shares a labor market and commuting shed with two different states. A great deal of the tax reform agenda was about harmonizing various tax rates with MD and VA rates so that DC residents and businesses didn't face a penalty compared to those places; thereby opening the door for DC to compete for those residents on the basis of location (and thus getting them to contribute to the tax base directly).

Too often, I've heard this derided as some sort of Laffer Curve, Voodoo Economics, but it's not - not when there are clear border effects happening.

And that's part of the reason there was political consensus (at least when they reforms were initially put together) among the pro-business interests as well as Ed Lazere; there really was a strong case to lower some key rates that weren't ever going to generate revenue because of the easy tax avoidance by just moving to Maryland or Virginia.

At 3:44 PM, Blogger Richard Layman said...

1. I thought about mentioning that DC and Kansas have similar budgets, but didn't. KS's population is about 4x DC's. But of course, there is the separate layer of local govt., so it wasn't an exact comparison.

2. I didn't mean to imply that DC is comparably insane to Brownback, just that you have to be very attuned to the circumstances.

The fact that DC is growing at a great rate makes it easy to cut taxes. That kind of growth isn't comparable to what is happening vis a vis the federal tax revenue stream.

So you need to be very careful in using DC as an example to shape how Congress could approach rewriting the tax code.

Especially because the main point of his argument -- lowering taxes but also reducing deductions and increasing the number of activities subject to tax -- isn't why DC was able to do what it did. It was able to do it because regardless of the tax cut, DC's tax revenues were growing.

Note that you see a comparable effect in the Virginia suburbs wrt property tax. They have passed particular rates, which because property values generally have been going up, raise "more revenue" than authorized. Many jurisdictions on an annual basis lower, slightly, the assessment rate knowing that the same revenue will be generated overall because property assessments are rising regardless.

3. I still feel confident in asserting that DC's economy is not well balanced and in this period especially, is subject to serious exogenous shocks, especially as growth in population is slowing.

4. Tax harmonization is a good thing vis a vis the other jurisdictions, as Alex B. points out. Personally, the thing about property tax, at least for residential property, it's always been "pretty low" considering.

Cutting taxes for the highest earners, how much difference does it really make if people are choosing where to live on the basis of an array of considerations, not just taxes. Research generally shows that it's not a big element, except for the highest earners (e.g., CEOs moving their corporate headquarters to Florida, which doesn't have an income tax; how DE doesn't have a sales tax because historically they made so much revenue on corporate income tax, particularly from Dupont, etc.).

5. I think business climate and the regulatory environment do make a difference vis a vis choosing to open and maintain a business in DC. That's a much broader set of conditions than taxation.

I can't claim to be able to assess "every business" and their thinking on this.

I think DC probably has a ways to go to ease regulatory complexity and efficiency as it relates to business formation and operation.

6. FWIW, but for reasons different from me, Ed Lazere has disavowed his earlier support of the tax revision program.

He compromised on some things, to go along with the preference for unanimously supported recommendations. That included the firm schedule for ongoing reductions. He didn't favor that position then, and now has stated that publicly.

For him, it's to be able to spend money on other priorities. Actually, I agree with that in part -- given the city's growing and needs to spend more on some things as a result -- but also because I think the city is in a precarious situation financially.

Not because of how it is running the government, but because of how the status, actions, and practices of the federal government affect the local economy.

The example of my neighbor having to cut 300 people and $72 million from his unit's budget wasn't something I made up.

It's real. And it's happening across the federal government.

7. I didn't mention the cost implications of financing the capital budget. I imagine the interest will rise over time, although a lot of the debt was sold at a time of particularly low interest rates.

At 8:35 AM, Anonymous charlie said...

RE: Kansas.

I am belaboring this -- just proof of how hyper-expensive DC's very flawed government service delivery is.

Kansas doesn't have a city the size of DC, but Witicha is about 1/2 the size of DC.

Witcha city budget is 227 in 2015. Let even that up to 250, and then double it. So 500 for city services.

Segwick County budget is about 227, so again let's just double it as say 500.

That is a billion for local services for about 600,000 people, in addition to the state budget.

So we are talking about 16B for kansas + an urban area of about 600,000 people.

Again, if DC wanted to take over Metrorail, there is plenty of financial space to do so, although you'd need to cut social services to a more normal level.

At 9:14 AM, Blogger Richard Layman said...


I am not capable of in-depth Larry Littlefield type analysis, but such does need to be done vis a vis the DC social services budget.

At 9:17 AM, Anonymous chrllie said...

Yes, really channeling Larry.

Witicha poverty rate is 17% for adults, vs. about 20% in DC.

I suspect the bigger difference is the "extreme poverty" or half the poverty line income category in DC which DCFPI claims in about 10%. Suspect that is much lower in Witicha.

At 11:06 AM, Blogger Richard Layman said...

good inference about the rate of extreme poverty. Thought very interesting the article in yesterday's Metro section about ACT results vis a vis "three poverty indicators" and how results on the test for college readiness pretty much tracked the number of poverty indicators, despite all the investment in school reform.

The only shock from the article was that this was a surprise to the ACT people.

And that if you want to address poverty impacts on children you need to do more than require the taking of more achievement/assessment tests.

another stand in for poverty indicator would be percentage of murders.

Wichita is about 60% of DC's population, it has about 30% the number of murders.


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