Eleanor Holmes Norton's DC Economic Recovery Act (DCERA) has been endorsed by many prominent sources as a major mechanism for transforming DC's mire and misery into a diamond of a city--a shining example for others to follow. Factually, however, virtually every premise can be refuted. DC's root problems are political and demographic, not financial, and stem from failures in local, not Congressional leadership. The quality of life for most of DC's residents is a national disgrace and flows directly from the quality of locally elected and hired government officials.

DC does have very real near-term financial woes. Hopefully the Financial Control Board will alleviate many of them, including those caused by Federal actions and managerial incompetence. But DC's economy is in permanent decline relative to its hugely successful suburbs which truly epitomize the American dream. DC is not a viable independent entity. Its quality of life can only be normalized by greater association with the broader based and better run neighboring counties and states whose populations and economies are growing much faster than DC's are declining.

DC's residents are leaving because of poor--and severely undercapitalized--services, and falling government jobs, not high taxes. If DC had Fairfax County's crime rate, Montgomery County's school system, and the 1980's government payroll, DC taxes would be tolerable for upcoming middle class families. In fact, middle income residents ($50 100,000 household income) have not begun to leave in alarming numbers; over half of those leaving are under 35 and earn under $35,000. "Migration" statistics do not accurately reflect internal economic demographic progress. Moreover, the atypically small cohort of middle income residents has never been a major source of DC tax revenues.

80% of DCERA's proposed $750 million annual federal subsidy would benefit those below $50,000 or above $100,000 in adjusted gross income, not the "bedrock middle class" that Norton hopes to create. 40% would accrue to the wealthiest 5% of taxpayers--among America's richest. In fact, the newly attracted residents will almost certainly not improve the urban political mindset, given the disgraceful state of the city's infrastructure. Surely we do not need to turn DC into a Potemkin Village on the Potomac. That same $750 million, invested in the capital city under federal control, could re-capitalize DC's entire public infrastructure within five years.

DCERA: The DC Economic Recovery Act

The Eleanor Holmes Norton proposal to bribe lower, middle, and upper income Americans to return to live in the increasingly dysfunctional District of Columbia is a world class non-sequitur. She forsees "ominous -if not lethal--dangers" in the city's economic plight and looming insolvency. But under the guise of economic revival and a flat tax, her bill, the DC Economic Recovery Act, is virtually certain to perpetuate the decline of the nation's "capital city" without addressing its real structural problems.

DCERA reflects her belief that DC's basic problems are caused by insufficient city spending, and that the needed funds will not be forthcoming through other options such as a federal bail-out or a commuter tax legislated by an unsympathetic Congress. Holmes-Norton's stated goal is to "revive DC's economy with the money of DC residents" by attracting more "bedrock middle income people" into DC who will "pay most of the taxes and make the schools work"--as in her childhood (well before home rule!). She claims this key segment of DC's demography has begun to leave in "startlingly high numbers"--as many in the first half of the '90s as throughout the '80s.

The suggested mechanism is a large federal tax exclusion for lower income DC taxpayers coupled with a unique federally-legislated "progressive flat tax" to reduce the burden on DC's upper income taxpayers. Other incentives include DC investment write-offs and freezes on DC income and property taxes. Special federal treatment for DC taxpayers is rationalized on the basis that DC residents have no voting representatives in Congress, though they do vote for their city government and for presidents. Moreover, federal representation has not stopped the decline of other US inner cities.

Activists Jack Kemp and Kevin Chavous assert that this influx will eliminate the "mire and misery" of DC, caused by its "Third World socialist welfare state" status, and restore to the nation's capital a "blossoming, productive, democratic capitalist economy". This is abjectly unrealistic. The influx would more likely skew DC's economic demography further from the American norm in mindset and lifestyle--and hence in politics and self-governance. Virtually every premise can be refuted:

DC's root problems are political not financial, and stem from failures in local, not Congressional, leadership

The quality of life for the vast majority of DC residents (modest to low income) is a national disgrace. The litany of failures in education, medical services, human services, crime control, and even the DC morgue, need not be rehearsed here. Local quality of life reflects directly local quality of government, which in turn reflects the quality of voter preferences and the quality of available governmental personnel. DC accurately reflects the dilemma of other American "inner city" jurisdictions trapped in outdated boundaries and crumbling infrastructures that filter out or segregate the successful and filter in the dependent. Stripped of the grand federal buildings and parks (maintained by the National Park Service, not DC!), the underlying squalor represents an American failure to deal with urban blight. It symbolizes American fears, not hopes.

DC has some very real near-term financial woes, many of its own making. Most analysts--and the fledgling Financial Control Board--agree that the root problems cannot be cured by infusing money. (viz DC's Human Services debacle). Hopefully, the Board will correct many of the city's fiscal anomalies, particularly those created at the Federal level. But the DCERA does not address DC's failures of inner city governance.

DC's economy cannot be "revived": it is in permanent relative decline

As elsewhere, inner city economic development has not kept pace with the more affluent, vibrant and flexible suburbs. DC economic growth has always been negative relative to its hugely successful suburbs--which do epitomize the current American dream. Less than 15% of the region's half million new jobs in the '80s fell within DC's boundaries, which now encompass less than 10% of the region's wealth. And government jobs alone have dropped more than 10% in the past four years.

But DC is a uniquely isolated urban area: a thoroughly outdated quirk of history that exacerbates the problem. (The Congress initially feared a takeover by local state militia, not welfare recipients!) Unless this underdeveloped inner city can be more fully integrated with its prosperous surrounding counties and subsumed under more representative state governance, its economy--and quality of life--will continue to atrophy. As now isolated, DC will never be the core of a model American metropolis.

DC is not a viable independent political entity

The romantic notion of DC statehood, pursued by many who favor tax relief, is ludicrous. It ignores the different roles, focus, and constituency of municipal, county, and state governments in preventing the excesses of special interest groups. DC's failures can only be accentuated by further autonomy. But they could be lessened by closer association with the far more efficient neighboring county and state governments--which profit, perhaps too greatly, from proximity to the nation's capital. Surely, DC's citizenry--and economy--cannot better reflect the American norm by adding fringe groups attracted by avoiding the responsibilities of democratic capitalism.

DC residents are leaving because of poor services, not high taxes

Working Americans are the world's most mobile people. Job changes and migration from rural and urban areas to metropolitan suburbs are national facts of life. Like DC, most inner cities are losing residents: some- without DC's inescapable federal attractions--at a faster rate. 65% of DC's taxpayer migration is an exchange with its suburbs, but suburban taxpayer growth is five times larger than DC's current losses.

It seems unlikely that departing taxpayers are fleeing the nation's capital be-cause of high local taxes (only one-third of their federal taxes) and is not confirmed by pollsters (or real estate agents). But bed-rock middle income families do expect a functioning infrastructure and proper services for their taxes (schools, hospitals, police, etc.) and see they can get far more for their money in the up-beat, optimistic suburbs. And dependence on "guaranteed" government jobs no longer seems so attractive.

There are substantial tangible and intangible benefits from living in the Free World's capital city. If DC had the crime rate of Fairfax County and the excellence of the Montgomery School System, no one would move away to avoid paying taxes. The real question is not why people are leaving the district--as they are--but why they are staying. Low income residents (an atypically high 85% of population) enjoy the higher welfare benefits. Until recently, the atypically few middle income residents (10%) have enjoyed secure local or federal government jobs. Most high income residents (5%, including many lobbyists) willingly abjure their minority voting rights to keep an address connoting the nation's seat of power while avoiding dependence on most city services. They are not fleeing, and need no bribe to stay. To them, increased voting privileges for an antithetical majority is counterproductive. Why would new people in any of these groups work hard to solve DC's core economic or political problems?

Nevertheless, DCERA would require US taxpayers to provide a $300 million annual subsidy for DC's 240,000 lower income taxpayers, $150 million for the 35,000 allegedly escaping middle class, and $300 million for the 15,000 wealthy (60% above the US norm). 50,000 more affluent taxpayers could eventually raise in-come and property tax revenues each by perhaps $150-200 million annually for DC after years of losing $750 million in federal revenues. But bribing suburbanites to come into the inner city will surely be harder than bribing current residents to stay. There are clearly more direct ways to get a better long-term return on such a federal investment.

Middle income residents have not begun to leave in startling numbers

The IRS operates a huge national computer program to track "migrating" federal taxpayers, based on where they file their tax returns from one year to the next. Net migration out of DC so far in the '90s (5100 less tax returns per year) has been above the '80s rate, but still somewhat below the '70s rate. 62% of the recent loss is in households below age 35. The average income of those exiting returns (1.7 exemptions) is $33,500, which seems too low for the mature middle class. Only 15% of the loss is for those over 45. But almost 80% of the 150,000 drop in population from 1970 to 1990 was in children under 20 years old--at no loss to the tax base! DC now has 10% fewer "exemptions per taxpayer" than its neighboring states or the US norm.

Other statistics would seem to dispute any exodus of taxpaying adults at all. There are no abandoned middle/upper class homes being sold for back taxes. 1300 single family houses and condos are swelling the property tax rolls every year. The population of the more affluent Wards 1, 2, and 3 has been rising. Electric and water meter taps are up. There are no fewer automobile registrations and a steady increase in registered voters. DC income tax receipts have continued to rise (through 1994), as have federal income tax receipts and adjusted gross income of DC residents (albeit at only 25% of the rate for the neighboring states and the US as a whole). Property values in DC have declined only slightly more than in the surrounding metropolitan area. Encouraging tax evaders to bid up property values seems a peculiar way to improve the quality of life in the nation's capital, and not above suspicion since it is home to many of the nation's lawmakers and other government officials.

IRS migration statistics do not accurately reflect changes in economic demographics

Off-year Census population change estimates are based on the number of exemptions claimed on federal income tax returns by IRS-defined migrators, combined with projections of "natural increases" in population (i.e., excess of births over deaths). This gives a reasonable estimate of changes in population, but it does not accurately reflect changes in the remaining tax base for two reasons: a) there is no equivalent estimate of the "natural increase" in non-migrating taxpayers as women and young adults enter the workforce; and b) there is no recognition of increasing income among the employed. If one adds up net taxpayer out-migration from 1992 back to, say, 1980, there should have been 342,400 federal tax returns from DC in 1980. But IRS reports there were only 307,600 (there have not been 340,000 DC resident taxpayers since 1955). Thus this method appears to overstate the exodus.

Secondly, despite the claim of middle class flight, the number of federal and DC tax returns from DC residents with adjusted gross incomes above $50,000 has continued to rise each year, and the share of total taxes paid by this cohort has continued to rise quite substantially. Clearly, the DC tax base is poorly related to DC population figures, and to IRS migration numbers taken out of context. But even a "stable" inner city tax base cannot keep up with a fast-growing (3.7% p.a.) suburban tax base.

Middle income residents are not a major source of DC revenues

Revenues gained by "stabilizing the DC tax base" with more middle income taxpayers would be small at best. Middle income residents have never been a majority between the very rich and the poor. Revenues from residential property taxes equate to only about 15% of DC's gross expenditures (including federal grants). Only 35% of DC's residential assessment stems from $100-200,000 single family dwellings; lack of surplus housing in this range would prevent a rapid influx of middle income families.

Personal income taxes also account for only about 15% of DC's needed revenues. Based on equivalent federal tax receipts from DC residents for 1992, only 22% was derived from filers with adjusted gross incomes between $50,000 and $100,000 (albeit another 48% from AGIs above that). The proposed preferential federal tax rates apply only to wages and salaries earned in the Washington metropolitan area. The unlikely return rush of bedrock middle income families, then, would have to be by those currently living and working in DC's world class suburbs.

Moreover, those newly attracted middle income employees are no more likely to spend their sheltered wealth inside the antiquated boundaries of the District than their current counterparts. Virtually all (97%) of the regional growth in big- and small-ticket retail sales space (and hence in sales taxes) since 1960 is in malls outside those boundaries.

Most economists doubt the efficacy of "trickle-down economics": in DC it is clearly "trickle-out economics". DC cannot solve its fiscal problems from the wallets of newly arriving federal flat taxpayers, and surely not in time to prevent bankruptcy in DC finances-- and more important, bankruptcy in DC quality of life.

The newly attracted residents will not improve the urban political mindset

The DC government (in one of its ill-advised "state" roles) provides welfare payments roughly 20% higher than national averages, thereby attracting an inordinate and ever-increasing share of tax consumers--a fact well known to Holmes-Norton--and DC's mayor--but not addressed in DCERA. DC residents receiving welfare of some sort reportedly now exceed 180,000 in a city of well under 600,000 (i.e., 30+%).

The DCERA would absolve from taxes all lower income earners (family income below $30,000), and offer special incentives to first-time home buyers. Such pro-visions would only exacerbate the incongruities. A majority of DC's 350,000 voters could end up paying no federal taxes at all, while DC's exceptionally prosperous minority would pay 35% less than the not as well-off top bracket nationwide. How does this turn a socialist enclave into a shining example of American democratic capitalism?

Packing more well-to-do residents into Wards 1, 2 and 3, while attracting more low income and welfare residents into the other five Wards cannot change DC politics or its "third world" city government structure engrained after 30 years of home rule. But a federal commitment to re capitalizing the inner city infrastructure might in fact attract new people who might in turn demand a more accountable government.

The natural consequences of this bill may be counterproductive

Norton claims her bill includes measures to avoid "unnatural consequences" such as: excessive rises in property values; tax shelters; and "gentrification" (i.e., up-grading poorer neighborhoods towards the middle class--where then would the newly enlarged middle class live?). But it is the natural consequences of attracting the wrong residents for the wrong reasons that needs to be guarded against.

What will be the likely general profile and civic mindedness of new residents attracted by tax avoidance. Would these people have families and put their children in local schools? Would they buy homes here or just rent apartments? Would they be concerned by the drug culture and drive by shootings in other parts of town? Would they use public emergency and hospital services--or even public water? Would they bother to vote? Would they set up real businesses that hire real people inside the city limits, given the current DC bureaucracies? Would they care about the quality of local life and government? Would they shop anywhere but in the suburbs?

Potemkin on the Potomac

DC's basic problem is a slowly but steadily declining quality of life caused by a continuously declining quality of its governmental bureaucracy (not just its leadership), perpetuated by a permanent majority of economically atypical Americans, encouraged not to pay their own way. DCERA will simply accentuate the conditions that already make DC a national embarrassment, by trying to disguise--rather than fix--them. Let us not turn our nation's capital into a Potemkin Village on the Potomac.



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