The DC Tax Revision Commission, made up of a group of economists, business leaders, and public policy experts (including DCFPI’s Ed Lazere) has been meeting for almost a year. Led by former Mayor Anthony Williams, the Commission soon will move into deliberations about the changes they will recommend.
A good deal of important research on DC’s tax system has come out of the Commission’s work. To help you get a handle on it, we’re introducing Tax Commission Tuesday to the District’s Dime. Each Tuesday through early September we’ll feature one area of the commission’s research, with our own take on what it means. This series will help you weigh in on the changes you want to see to DC’s tax system, and help you prepare for the public hearing tentatively scheduled for late September.
Our first installment takes a look at the District’s economy and tax base from a presentation titled “Overview of DC’s Economy and Tax Base“, given by Steve 
Swaim of DC’s Office of Revenue Analysis. The overview highlights significant progress DC’s economy has made since 1998, the last time there was a tax revision commission. The city’s population and employment base have grown, contributing to large increases in revenues. At the same time, the presentation highlights some causes for concern looking ahead, such as federal government reductions that may have impacts on DC’s economy and tax base.
Major Contributor’s to DC’s Revenue System
DC’s revenue system is supported mainly by four major areas: income taxes, real property taxes, sales and business taxes, and fees and fines (see figure 1).
Since 1998, collections from each area have grown. In particular, real property taxes from residential and commercial properties more than doubled from 1998 to 2012, after adjusting for inflation, despite cuts in property tax rates. Swaim notes that the rise in property taxes was nearly as much as the combined increase in income, business income, and sales taxes.
Notably, revenue collections have grown slower than the DC economy, which means the tax system takes a smaller bite out of DC’s economy and the pocketbooks of residents and businesses, than it did 15 years ago. In 2012, taxes consumed 14.2 percent of personal income in DC, down from 15.4 percent in 1998.
Swaim also noted that most changes in DC tax policy since 1998 were tax cuts. In the recent recession, the District made increases to a number of taxes, but rates for all major taxes remain lower than in 1998.
DC is Growing and its Economic Standing is Improving
DC is adding more residents and more jobs. We’re the 25th largest city in the US and at the center of the 7th largest metro area (by size). More than two-fifths of the jobs in the city are in the federal government or legal and professional services, areas with above average pay. In the suburbs, just 24 percent of jobs are in these areas.
DC’s population has been on an upswing in the last decade adding nearly 30,000 residents. Population growth in recent years has been especially high. In fact, the number of working DC residents is growing faster than the number of jobs in the city. This is important because DC can collect income taxes only from people who live in the city, due to federal prohibition on taxing non-residents who work here. DC is getting younger, but it’s also losing families as the number of households with children has fallen.
Swaim also noted that DC’s economic position has increased compared with the area suburbs. For example, DC’s share of the metro area employment and of metro area personal income (as a share of DC’s population) have both increased in the last decade.
DC’s Economy has Changed Since the Recession
Compared to the rest of the US, DC’s economy performed fairly well in the recession. While rising unemployment took a big hit on many DC families, especially those without higher education, overall job growth in DC didn’t take the same dive. In fact, as Swain noted, overall job growth in DC only took a slight dip into negative territory in 2009 and has been on the climb since then.
Yet there have been notable changes in DC’s economy and tax base. Growth in employment in federal and technical and professional services has essentially stopped and actually declined in 2011. With sequestration’s impacts still unfolding, federal employment in the DC region may continue to decline.
Over the last four years, Swaim noted that the growth in jobs in DC has been in five major areas: health care, education, non-profits, hospitality and retail.
These changes affect our taxes as well. While growth in real property taxes strongly led the growth in DC’s revenue collections over the past 15 years, and helped to cushion some of the loss in revenues at the very start of the recession, their growth over the last two years has slowed. From 2010 to 2012, the recovery in DC’s revenues has largely been driven by individual income, a reflection of population growth, and business taxes.
Looking Ahead
So what do the changes in DC’s economy mean for the future discussions of the tax revision commission? What employment areas, if any, will fill in as federal employment stagnates or declines? Will our population continue to swell? These will have a major impact on DC tax collections.
For example, growth in commercial office space leasing, which has already started to slow, could slow even further as a result of reduced federal employment and plans to reduce the amount of office space used per employee (“densification”.) In addition, current job growth is concentrated in education and health care, which Swaim noted are largely non-profit organizations which tend to seek out more affordable office space, have fewer top-paying jobs and do not have taxable business profits. At the same time, DC’s increasing attractiveness to young college-educated adults is likely to prove to a boon to the city’s economy.
Having a sense of DC’s economy and tax base can help lay the groundwork for the Commission as they consider how the changes they may make to DC’s tax system fit with the current economy and how it may or may not alter DC’s tax base.
Be sure to check out Swaim’s complete presentation which is filled with far more facts and numbers than we could fit, here. And stay tuned for next week’s installment, when we discuss national, state and local trends in fiscal policy.
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