We know you’ve been looking forward to Tuesday, for the return of our weekly series looking at DC’s Tax Revision Commission and the important research it has generated. In our inaugural blog last week, we wrote about generally upward trends in the DC economy over the last 15 years and the changes that have occurred in the wake of the Great Recession. Today’s installment looks at some major challenges facing DC and the states, courtesy of a presentation by Carol O’Cleireacain from the State Budget Crisis Task Force.
The task force, chaired by Richard Ravitch and Paul Volcker, identified major threats to the ability of some states to continue to fund their programs and services within their current revenue systems. DC has done well to address many of the risks that task force found in the states they studied, but still faces some important challenges. Some of the identified risks and their impact on DC include:
- Rapid Medicaid Growth: Like all health care costs, Medicaid expenses have been rising faster than inflation. Every state pays a portion of Medicaid, with the federal government picking up the rest; DC’s share is 30 percent. Fortunately, the task force notes, the Affordable Care Act or Obamacare, will help states with rising Medicaid costs by picking up the tab on the majority of the coverage expansion, reducing uncompensated care, and limiting other costs. DC has moved swiftly to implement the provisions that maximize federal contribution and expand coverage, however, it will still need to work to identify ways to control rising health care costs without sacrificing care.
- Underfunded Retirement Promises. Some states have underfunded their pensions and/or retiree health benefits. By pushing pension costs down the road, states can cause significant long-term fiscal problems. Fortunately, DC isn’t one of those states. That doesn’t mean the city doesn’t need to keep an eye on pension and retiree health costs, especially as more and more Baby Boomers retire.
- Volatile Revenues and a Narrowing Tax Base. The task force notes ways in which state tax systems have become weaker and more unstable. For example, the sales tax base has eroded by 26 percent since 1970, as Americans spend more and more on services, which often are not subject to sales tax. The task force notes that states have tried to combat the loss of the sales tax base by expanding the sales tax to more services and attempting to collect more online sales taxes. DC has expanded the sales tax to cover some services, like armored car and dry cleaning services, but there are many services that remain not subject to tax.
In addition, online purchases, while technically taxable, often are not because the sellers cannot be required to collect it. DC and many states are waiting to see what Congress does on the Marketplace Fairness Act, which would require large companies to collect and remit sales tax to states on online sales.
- Federal Deficit Reduction. As the task force notes, federal grants account for just under one third of all state revenue and help support local economies in addition to funding services. DC, where the federal government is the largest employer, knows that all too well. As we wrote about last week, federal hiring in the DC area has seen a slowdown, although other sectors such as education and health care have grown. As the impact of sequestration continues to unfold, it remains to be seen just how much it slows down the region’s economy.
- Inadequate state budget laws and practices. The task force found that many of the states they studied used fiscally irresponsible practices to balance their budgets. To address this, the task force called for multi-year financial planning and disclosure of the full costs of programs and services, which DC does. The task force also calls on states to implement stronger rainy day funds and broad-based tax bases. DC has a strong reserves, but our rainy day fund could be strengthened by eliminating restrictive federally imposed repayment rules. As for developing a broad-based tax base”¦..that seems like something the Tax Revision Commission should look at.
The presentation to the Commission ended by highlighting some the challenges DC will face, including the ability to meet future infrastructure needs and the impact of federal tax reform. DC is now close to its debt cap, which limits payments on debt to no more than 12 percent of the operating budget. Hitting the debt limit means that it will be harder to support projects like library and recreation center improvements but changing the debt limit to increase it would mean fewer resources for programs and services like education, police and fire and safety net programs. In addition, with the District conforming to much of the federal tax code, changes to federal tax reform could impact how DC is able to collect revenues.
Stay tuned for next week when we’ll look at research on tax incentives and tax policy and economic development in DC!
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