A Nobel Prize-winning economist and a senior advisor to President Barack Obama have said that increasing some taxes is the right approach to weathering tough times and moving toward economic recovery.
Some DC Councilmembers, including Committee on Finance and Revenue Chairman Jack Evans, have said raising taxes is wrong and possibly the “worst” thing to do. They say we need to reduce spending through budget cuts.
Who is right?
Evans and his cohorts say that raising taxes, such as increasing the income tax on high earners, will make us less competitive with surrounding jurisdictions. They are concerned that residents and businesses will flee the District in droves.
Yet there is no evidence to support such a claim. Right across Western Avenue, Maryland residents pay a higher personal income tax in Montgomery County than DC residents. So do taxpayers in Prince George’s County. Well, what about suburban Virginia? A 2006 DC Fiscal Policy Institute study found that Virginia residents actually pay more than residents of DC when you add up all taxes, including the car tax.
The anti-revenue raising group on the council is at odds with many prominent economists. Joseph Stiglitz, a Columbia University professor and 2001 Nobel Prize winner, and Peter Orszag, head of the Office of Management and Budget and former senior fellow at the Brookings Institution, argue that severe cuts to state and local government programs and services might be more harmful to the local economy and a future recovery than raising taxes.
This is based on sound economic theory. Cuts to government spending on goods and services takes money directly out of the local economy and might push households on the brink into perilous circumstances. This slows down the economy even more, stalling the recovery.
Instead, Stiglitz and Orszag say, maintaining services by finding additional revenue through tax increases on high-income earners is a better option. The tax hike will not take money out of the local economy, because consumption and spending of these households will probably remain the same. Instead, these households might stockpile less savings, which were built up when times were good.
In the end, District leaders need to make sure that our city is well-positioned to take advantage of the economic recovery when it happens. In order to do that, we need to maintain investments in our critical infrastructure-and that includes our residents, by making sure they have adequate nutrition, education, and housing.
The budget crisis has been caused by a revenue problem that will get better as the economy recovers. Up until now, the mayor and council have focused mostly on cuts and not revenue enhancements. It is time to consider revenue increases, such as raising income taxes on high-earners, as a way to put us on the road to recovery.
