Last week, Rep. Darrell Issa (R-California) made news when he said that he thought there should be a discussion about DC’s inability to tax the earnings of people who work in the District but live outside of it. States have the right to tax economic activity within their borders, including income earned by non-residents who work in the state’and states do. DC is a special case, however, because of the role of the U.S. Congress in our lawmaking and taxing authority.
Why do we talk about a “commuter tax”?
DC performs the functions of a city, state and county, running everything from police and fire services’to a Medicaid program and public school system. Yet in its unique role as the nation’s capital, the District is constrained in its ability to raise revenue to support all of the functions it performs for two main reasons. One, much of DC’s land’approximately 40 percent’is not taxable because it’s occupied by the federal government, non-profits, or other tax-exempt institutions. Two, federal law denies DC the power that every state has to tax the incomes of people who work within their borders but live elsewhere.
In 2003, the Government Accountability Office did a study that found that because of the District’s limited ability to raise revenues and that the costs to provide basic services were higher in DC, it had a structural budget gap between $470 million and $1.1 billion, depending on which set of assumptions were used. A paper co-authored by DCFPI and the Brookings Institution estimated that the most reasonable estimate of this gap was somewhere between $900 million and $1.1 billion a year. And while the GAO pointed out that other states had structural deficits as well, DC had the largest structural deficit per capita.
What could the fiscal impact be?
IF DC were able to tax the income of non-residents who worked and earned money in the city, it was estimated that in 2009 that DC could have brought in an additional $2 billion that year in income taxes. That level of funding would certainly help to close DC’s estimated structural budget gap, but it also would likely face fierce opposition from Maryland and Virginia elected representatives both in Congress and in their respective statehouses. That’s because these residents would get a credit against their state income taxes for the taxes they pay to the District, which means less revenue for Maryland and Virginia.
Alternative Proposals
One proposal to address DC’s structural deficit outside of a non-resident income tax was proposed in 2004 by DC congressional delegate Eleanor Holmes Norton. It would create a federal contribution to support DC’s infrastructure. The bill, the “District of Columbia Fair Federal Compensation Act of 2004,” that was introduced by Norton would have established an account of $800 million for DC’s infrastructure that would be adjusted each year. At the time, the funds were proposed to be used for transportation, IT improvements, debt service, and school maintenance and construction.
Another approach raised by DCFPI and Brookings in a 2005 paper, was to tie a federal payment to the costs of state-like services that the District provides. Currently, the federal government provides and pays for the court system and adult felony prisoners for the District. The federal government could provide an additional payment to cover the District’s costs of DC running the other state-like services it provides such as Medicaid, mental health, college, motor vehicle and child and family services.
According to the Washington Post, Rep. Issa feels that the District’s inability to tax non-residents who work in the city is worth a closer look and we agree. DC’s inability to tax non-resident income certainly limits the District’s ability to raise revenue. Exploring if a commuter tax or an updated and restructured federal payment are needed is welcome news.
