All this week, the District’s Dime blog is featuring entries that highlight some of Mayor Gray’s proposals to raise revenue in the FY 2012 proposed budget.
In his FY2012 budget proposal, Mayor Gray took a fairly balanced approach to closing a $322 million budget gap, using a mix of revenue measures (40%) and spending cuts (60%). (The nature of the cuts, however, were highly unbalanced).
One of the major sources of new revenue would come from increasing the amount of income tax withheld from the paychecks of DC residents and from residents with other sources of income raising $65 million in the coming fiscal year. If this would result in having more tax withheld than the worker ultimately owes, the additional withholding would be returned as a refund when the worker files a tax return in 2013. For workers who have too little tax withheld, the proposal would mean that the worker would owe less when they file a tax return.
This week we laid out three important criteria to consider when assessing any revenue-raising measure:
- Would it provide sustainable funding?
- Would it make the DC tax system more progressive?
- Would it strengthen DC’s tax system?
In the case of additional withholding, the answers are “no,” “no,” and “maybe.” The additional withholding is not justified in most cases, since three-fourths of DC households already get a refund, which means their withholding is adequate. For some workers with low-incomes, the added withholding would make it even harder to pay their bills, even if they would ultimately get that money back.
Does the revenue proposal provide sustainable funding for DC’s budget? Nope. The proposal would raise $65 million in 2012 but only $7 million in 2013 and only $3 million per year after that, since any added withholding in one year would be offset by families getting larger tax refunds (or owing less when they file the next year). That makes this proposal really just a one-time revenue source, even though a large share of the funds would be used to support ongoing services. Basing the District’s budget on a revenue source that will only be available in one year and not the next is not how budgeting should be done, as Gray has said many times himself.
Does the revenue proposal make DC’s tax system more progressive? No, it does not. Withholding would be increased by $160 for each working resident, whether they make $30,000 or $100,000. A resident making $100,000 may not notice this loss, but working-class residents who already live paycheck-to-paycheck most certainly would. While workers would get the money back a year later (through a refund or owing less in taxes), the impact of this policy is regressive, because it holds back a greater share of income for those earning the least.
Does the revenue proposal help modernize or strengthen DC’s tax system? Maybe. Some residents, who owe substantial taxes, including back taxes, do not file a tax return. DC finance officials have noted that an increase in withholding would help collect more of the taxes owed by these non-compliant residents. This amount is rather small, however — just a few million per year. Moreover, a policy to withhold more income tax from everybody to help collect a small amount of unpaid taxes from others is not very desirable.
While we welcome the Mayor’s attempts to include new revenues as part of the solution in balancing the budget, we would prefer that he focus on long-term, progressive revenue solutions that do not place an undue burden on working-class residents.
