March 23, 2005

Tax Reform in DC: Baby Steps

The District of Columbia now allegedly has a budget surplus, and DC elected officials are in a hurry to dispose of it. The DC City Council heard testimony from a lot of smart people last week regarding one proposal to increase the city's income tax exemptions and standard deductions to equal the federal amount.

Pretty much everyone who testified said about the same thing: if DC can afford an $80 million-a-year tax cut, this is a decent way to do it. Exemptions and deductions are the basic mechanism most states use to shelter a minimum amount of income from tax, and DC's exemptions are pretty low by comparison to most other states. This means that DC's income tax hits families near the poverty line much more heavily than in most other states. Increasing the exemptions and deductions would help solve this problem and would reduce the inherent unfairness of the current DC tax system.

However, as Ed Lazere at the DC Fiscal Policy Institute pointed out, fully implementing this plan would eat up the entire budget surplus-- hardly the wisest move for a government just emerging from years of budget deficits.

And as Ed and others have also pointed out, DC has other problems. Skyrocketing property assessments are going to require some form of property tax relief in the near future-- and lawmakers are currently discussing poorly targeted tax caps that would bust the budget once again while providing little tax relief to the low-income homeowners and renters who need it most.

So while lawmakers are to be congratulated for addressing tax fairness issues, it's worth asking whether they've forgotten about the even more important goal of tax adequacy.


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