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District of Columbia Shows How to Cut Taxes Responsibly

June 12, 2014 at 11:57 AM

The District of Columbia functions much like a state government when it comes to tax policy, and new tax changes there show how states can cut taxes in a responsible way for a broad range of families while still funding important services.  It’s a particularly helpful model in light of the poorly designed tax cuts that have been so common in states over the last two years.

The D.C. bill, which the City Council approved on May 28, takes several steps to create a more equitable and sustainable tax system, including:

  • Providing progressive tax cuts while investing in needed services.  The bill includes several income tax cuts that are much larger (as a share of income) for low- and moderate-income families than for high-income households — an important goal in this era of widening income inequality.  And, the cuts are fully paid for with funds from transportation projects that have more resources than they need.  Financing the tax cuts with those dollars — rather than pulling the money out of the general fund — enabled lawmakers to devote more general fund revenues to homeless and mental health services, affordable housing, help for low-income parents with newborn children, and other important services.
  • Expanding help for low-income childless workers.  The bill’s progressive tax cuts include boosting the maximum earned income tax credit (EITC) for childless workers and expanding the credit’s phase-out range so that childless workers with annual incomes up to twice the federal poverty line (that is, up to roughly $23,000 for an individual) can qualify.  Boosting the EITC for childless workers is good policy — it will reduce poverty and encourage work — and has gained bipartisan support at the federal level as well.
  • Broadening and modernizing the sales tax base.  The bill expands D.C.’s sales tax to cover more services — a fast-growing share of overall consumption that many state tax codes overlook.  For example, the sales tax will now apply to carpet cleaning and fitness club memberships, so that consumers of those services will pay the same sales taxes as purchasers of tangible goods like vacuum cleaners and barbells.

The bill includes some unwise changes.  In particular, it gives wealthy households a significant estate tax cut by raising the threshold — that is, the value of an estate that is exempt from taxation — from $1 million to $5.25 million.  This change will benefit only a few wealthy households while costing D.C. millions of dollars a year.

Nevertheless, D.C.’s tax and budget choices stand in stark contrast to some other states’ irresponsible policies.

North Carolina, for example, has slashed taxes on wealthy households and corporations while raising taxes on low- and middle-income families, cutting jobless benefits, and blowing a huge hole in the state budget that will make restoring recession-era cuts in funding for K-12 schools and public colleges and universities next to impossible.

In Kansas, costly tax cuts overwhelmingly directed to wealthy households and corporations have led to further cuts in funding for colleges and universities, local health departments, and other important services — adding to cuts enacted after the recession hit.  The tax cuts haven’t delivered the promised boost to the state’s economy.

With economic growth modest and revenues just now returning to pre-recession levels, states should approach tax cuts carefully and thoughtfully.  But if tax cuts are part of the conversation, the District of Columbia provides a model worth considering.