Brookings Policy Brief No. 11:
THE ORPHANED CAPITAL:
Adopting a Revenue Plan for the District of Columbia
by Carol O'Cleireacain
THE DISTRICT OF COLUMBIA'S REVENUE STRUCTURE IS COLLAPSING, but
it can be fixed. Unlike other cities, the capital's tax base is severely
restricted by federal law. There is no state aid, and government, the hometown
industry, is tax exempt.
A sustainable revenue system is key to the survival of
Washington, D.C. First, however, services must improve dramatically. Public
officials must show that the District can live within its means. But as
painful management reforms are made, District residents, employees, and
political leaders should expect a tangible payoff: a rational and stable
revenue base on which the city's budget will rest.
This study offers workable remedies. It proposes a budget-neutral
revenue structure more like that of a typical American city, with the federal
government playing the role of a state. We propose that four business taxes
be eliminated and that commercial property and personal income taxes be
cut. The federal government should increase aid in three specific ways:
a payment in lieu of taxes to make up for the 41 percent of property that
is tax exempt; "state" aid comparable to that received by similar-sized
cities; and coverage of 50 percent of the cost of state-type services provided
to District residents.
The DC Revenue Project's plan is fair and manageable.
It is the least that the nation can do to ensure the viability of its own
The nation's capital is in a fiscal crisis. A presidentially
appointed Control Board has been charged with balancing the budget of the
District of Columbia by 1999. If the budget is to remain in balance, a
number of structural changes will be necessary. This study offers the adjustments
required on the revenue side. It presupposes that the Control Board and
the District's chief financial officer will bring spending under control
and deliver District services efficiently, thus making possible the proposals
The District's long-term fiscal problems stem from its being the nation's
capital. By intention, it is neither a state nor a city within a state.
To avoid the inherent conflicts between local and national interests and
to ensure the federal government's independence from any state, the drafters
of the Constitution established the capital as a district, and in Article
1, section 8, clause 17, retained for Congress the authority to exercise
exclusive legislation in all cases whatsoever, over such district.
This unique status and congressional oversight have familiar ramifications.
Congress has defined the District's physical presence, setting its boundaries
and stipulating its appearance, including the height of its buildings.
Congress has also defined the political landscape. While District citizens
are now allowed to vote for the president, the vice president, and a nonvoting
delegate to the House of Representatives, they do not have voting representation
in either house of Congress, even though Congress ultimately determines
the District's budget and its taxes.
The District's unique status has less familiar revenue implications.
As both the nation's capital and a city that is not part of a state, the
District has a limited tax base. As an entity unto itself it must provide
a range of nonfederal services to its residents, including welfare and
the state portion of Medicaid, financed from that limited tax base. In
its oversight capacity, Congress has limited the District's taxing powers
and revenue sources. The more limited the tax base, the heavier the tax
burden on the remaining parts of the District's economy. Increasingly,
businesses and residents are leaving town. Truly, this is an orphaned capital.
The District of Columbia's present revenue structure is not sustainable,
as explained below.
The Tax Structure is a Dysfunctional Hybrid
As a small, open economy, the District functions like a city.
However, because of its unique nature, its budget is a hybrid of city-
and state-type taxes and fees as well as state and city service responsibilities
(see figure 1).
Compared with cities, the District levies many more, and higher,
taxes on resident households and businesses. For example, the District
is one of only a handful of cities to levy a full personal income tax (on
unearned as well as earned income). Compared with states, the District
lacks both the constitutional standing and the state sovereignty to determine
whom and what it taxes. For example, its personal income tax looks like
a state income tax. But unlike any state , the District is not allowed
to tax nonresident earnings. The courts have ruled that this exclusion
extends to nonresidents' income from professional partnerships, including the legal,
accounting, management, and political consulting firms clustered in the
For households, the tax burden becomes progressively higher as income
levels rise, and at $100,000 and above is the highest in the metropolitan
area. For businesses, the District tax bill is at least 25 percent greater
than elsewhere in the region. The District's high commercial property tax
and sales tax rates are probably a significant factor accounting for the
city's declining share of metropolitan-area private employment.
The Hometown Industry Is Tax Exempt
The District's tax base is significantly reduced because it is the nation's
capital. Forty-one percent of the property in the District is exempt
from property taxes. Sixty-five percent of the exempt property belongs
to the federal government. The rest, exempted by Congress or by executive
order, includes property of churches, libraries, hospitals, and universities,
plus that of foreign governments, multilateral institutions, and national
Most employment in the District does not generate income tax revenue
for the District. It generates it for Maryland and Virginia. Every day,
almost half a million workers flow into the District, but Congress does
not allow the District to tax their earnings. We estimate a $20 billion
earnings gap between suburban commuters into the District and residents
who work outside, which is worth about $1 billion in revenue: $366 million
to Virginia and $619 million to Maryland and its counties.
FIGURE 1. District of Columbia Discretionary Revenues, Fiscal Year
thousands of dollars
Source: District of Columbia 1995 Comprehensive
Annual Financial Report.
Finally, other economic transactions, by military and diplomatic personnel
as well as by the federal government, go exempt from sales, income,
and personal property taxes. The District estimates annual revenue
forgone, at present tax rates, at $120 million.
The District Lacks State Aid
In the rest of America, states redistribute tax revenues to localities
in the form of aid. State aid accounts for 28 percent to 38 percent of
general revenues for Boston, Memphis, and Baltimore, cities of similar
population and area. This state aid is not available to the District.
The District does receive a unique federal payment of $660 million ($2.50
annually from every taxpaying American). But at 19 percent of District
revenues, that payment represents only half the share of help that Maryland
provides Baltimore through state aid. The federal payment is not large
enough to cover the revenue shortages resulting from the unique character
of the nation's capital.
The Revenue Collection System Is Broken
Moreover the District does not have the capacity to enforce and fairly
collect the more than 20 different taxes and 115 fees and charges now on
the books. Enforcement is arbitrary and unsystematic, resulting in unfair
tax burdens. Voluntary tax compliance is languishing, evasion is significant,
and business tax revenues derive largely from audits.
High turnover in management. The District's tax agency has had nine directors
in the past twenty years. This has resulted in lack of leadership, leaving tax
collectors no match for the private sector. Internal appraisals indicate
that the District's auditors and assessors have not kept up with the technological
developments that have revolutionized tax collecting and have not been
trained to use even the outmoded technology that is available to them.
Finally, there is a serious risk of corruption. Neither an internal
auditor nor a resident inspector general watches over tax collections.
External audits point to serious deficiencies in the accuracy of the tax
collection numbers and in the accountability for money received. Many properties
are underassessed, some perhaps intentionally. Growing backlogs (in part
the result of a 22 percent decrease in staff since 1990 and the lack of
technological or management improvements) offer easy opportunities for
outstanding tax bills to remain uncollected.
The DC Revenue Project proposes cutting some taxes, eliminating others,
streamlining the tax structure, and creating a new federal-District revenue
relationship. To produce a revenue structure comparable to that of other
American cities, the project takes as given the present size of the District's
budget, which has been approved by Congress.
Our proposal would completely eliminate four taxes including the personal
property tax, the professional license fee, the corporate income (franchise)
tax, and the unincorporated income (franchise) tax. In addition, two broadly
based taxes would be cut significantly. Real property tax revenues would
be cut by 27 percent, with five classes reduced to two, and the timing
of assessments and payments would be simplified to improve cash flow. The
personal income tax would be cut by 30 percent, meaning that all residents
with federal adjusted gross income of less than $200,000 would have their
taxes cut and that 36 percent of District residents would pay no income
tax. The new income tax would be a single rate of 28 percent of federal
liability, with collection and enforcement delegated to the IRS. The plan
would also increase the broadly based gross receipts tax by $50 million.
The new fiscal relationship with the federal government would have three
distinct elements. Each addresses a particular part of the revenue shortage
resulting from the unique nature of the nation's capital. The first is
a payment in lieu of taxes, amounting to $382 million, to compensate the
District for the reduction of its tax base by federally owned, tax-exempt
property. This would allow property taxes to be reduced for all other owners.
The second is state aid of $434 million, an amount comparable to that received
from their state governments by cities of similar size. The third is a
50-50 sharing of state-type spending, on Medicaid and welfare ($220 million)
and on general programs ($158 million), which together amount to an additional
$378 million. This partially compensates the District for the fact that
it has no state to provide a range of state services. The compensation
would not be necessary, of course, if the federal government chose to provide
these services directly to District residents. Federal resources in this
proposal total $1.2 billion.
DETAILED PROPOSALS FOR LONG-RUN BUDGET BALANCE
Adjusting Washington's revenue structure will not change its unique
status as a city-state, but it can change a dysfunctional hybrid revenue
structure into one that more closely resembles that of cities of similar
The proposed structure has been governed by the practical constraint
of the tax burdens in the surrounding jurisdictions. The District already
has the highest per capita tax burden in the region, as well as the highest
tax costs of doing business. As a result, businesses and households have
been voting with their feet.
The revenues shown here should be treated as orders of magnitude or
general neighborhoods rather than budgetable amounts since they are estimates
based on the less-than-perfect data available to this study.
Table 1 shows both existing and proposed structures for the District
of Columbia's general fund discretionary revenues. Table 2 demonstrates
Table 1. District of Columbia General Fund Discretionary
Revenues, Current and Proposed, Fiscal Year 1995
millions of dollars
|City Revenue (total)
|State revenues (total)
|State and city revenues a
Sources: District of Columbia 1995 Comprehensive Annual
Financial Report; and author's calculations.
City-type taxes could be reduced by almost half a billion dollars by
reforming the real property tax; by eliminating two city-type business
taxes (the personal property tax and professional license fee); and by
increasing one city-type business tax (the gross receipts tax).
Real Property Tax
None of the jurisdictions surrounding Washington has property classification
systems or effective commercial property taxes as high as the District's.
The present five-class system in the District has resulted in a $2.15 (per
$100 of market value) effective commercial rate on occupied property and
$5.00 on vacant property. These rates result in commercial tax liabilities
that are, on average, 40 percent higher than those in the suburbs. Our
econometric analysis indicates that these differences are significant in
explaining some of the District's declining share of the region's jobs
and showing that a property tax cut may increase employment in the District.
We propose reducing the five-class system to two classes- a residential
rate of $0.90 and a commercial rate of $1.35 with a maximum 150 percent
ratio between the two rates, to be set by statute, to prevent a creeping
increase in the commercial rate. We also offer a series of structural reforms
and calendar changes in collecting and budgeting the property tax, including
a reserve for delinquencies, that will improve cash flow and budget stability.
These lowered rates, holding other things constant, will result in increased
property values and lower rents, for both households and businesses.
Simplicity argues for a single-class system, but the District's present
rate structure makes it very difficult to get from here to there. The District's
lowest (residential) rate is now $0.96, and its highest is $5.00. The suburban
rates range from $0.90 to $1.45 (with the modal rate at $1.07). Imposing
a single-class system at the current residential rate would reduce commercial
rates in the core of downtown office buildings (now at $2.15) to a level
far below that of the surrounding area. Alternatively, imposing a single
rate system at the suburban rates would require a tax increase on all homeowners,
which this study has ruled out given the present low quality of District
services, looming assessment changes, and our proposals for an income-targeted
relief program. Thus the inevitability of a two-class system.
Table 2. Budget Reconciliation, Fiscal Year 1995
millions of dollars
|General fund, discretionary revenuea
|Federal categorical grantsb
|Federal aid for state-type spending
|General fund, budgeted revenue
Sources: District of Columbia 1995 Comprehensive Annual
Financial Report, (CAFR); and District of Columbia 1997 Budget
and Financial Plan.
a. Includes $3,248 million of appropriated revenues as
defined in the CAFR, plus $85 million in lottery revenue, plus $229
million in federal aid to cities (total federal grants of $882 million
less $653 million in categorical human services grants), less the $35 million
motor fuel tax, less the $175,000 health care provider fee, and less the
$468,000 general fund portion of the arena fee (CAFR, p. 23, 46).
b. Federal grants for human support services, primarily
Medicaid and welfare (CAFR, p. 46).
c. Nonappropriated charges for services and miscellaneous
revenues (CAFR, p. 23).
d. Total expenditures for the enterprise funds as reported
in the budget (Budget, p. 35).
Personal Property Tax
Having accepted two classes, we determined that the District would be
able to meet a further goal of eliminating unenforceable taxes by setting
the commercial property tax at a rate that would allow for elimination
of the business personal property tax ($61 million), a burdensome and increasingly
unenforceable tax. The resulting $1.35 commercial rate is a significant
reduction from current burdens and a rate on a par with that in Prince
William County. Since surrounding jurisdictions still impose a personal
property tax, eliminating the District's tax provides some competitive
Professional License Fee
The professional license fee applies largely to professionals doing
business in the District and is the remnant of attempts to tax the thousands
of legal, accounting, political, and management consulting partnerships
that cluster in the nation's capital. It is not well enforced, which makes
it unfair and discourages potential payers from acknowledging self-employment
in the District. It should be eliminated.
Gross Receipts Tax
The Rivlin Commission, in its 1990 report to the mayor on budgetary
reform, recommended a broadly based gross receipts tax, in large measure
because it is so easy to audit and enforce and, at low rates, issues of
fairness are minor. The District has implemented a small tax and dedicated
the $10 million in revenue to financing the downtown sports arena now under
construction. From data provided by the Department of Finance and Revenue,
we determined that collecting five times the current amount for general
revenue, while continuing the portion designated for the arena, would still
keep the burden comparable to that in the surrounding area.
We propose that the federal government make a payment in lieu of taxes
(PILOT) covering the 41 percent of the property base of the nation's capital
that is tax exempt and receives local services. The federal government
should compensate the District for the cost of the tax exemptions by paying
a full tax-equivalency PILOT on the value of the tax-exempt property. Unlike
the present federal payment, the amount of the PILOT should not be negotiable.
Its value should be determined by assessments and by the commercial property
tax rate. It should be a permanent part of the federal budget, incorporated
into the grants section with other PILOTs.
Based on existing assessments and the proposed commercial property tax
rate of $1.35, the federal PILOT would be $382 million. Like a state, the
federal government has determined which local properties are exempt from
taxation. In this proposal we have included all tax-exempt properties,
except those belonging to the government of the District of Columbia, as
part of a federal PILOT. About 65 percent of the PILOT would compensate
for federal government property, with the remainder covering property owned
by traditional tax-exempt organizations and diplomatic, national nonprofit,
and multilateral institutions. Many consider these institutions part of
the fabric of the nation's capital. If some people question whether the
federal government should pick up the costs of the one-third of the property
that is not federally owned, the option always exists for the federal government
to negotiate to share the burden with those receiving this benefit.
The values for tax-exempt property should be treated with caution. Because
the assessments of exempt property have never been used for a material
purpose, neither the District nor the owners have had an incentive to ensure
their accuracy. Under this proposal, there might be an advantage for both
the federal and District governments to form a partnership with the International
Association of Assessing Officers (IAAO) to ensure state-of-the-art valuation
for some of the unique properties of the nation's capital. Similar valuation
techniques are used by New York City to value Central Park and to arrive
at the PILOTs that New York State pays for the World Trade Center and Battery
We propose eliminating unenforceable and arbitrary business income taxes
and converting the personal income tax into a flat percentage of the federal
income tax liability, administered by the Internal Revenue Service. While
these actions would cost the District revenue, they would improve markedly
the fairness of the tax structure and the enforcement and collection process.
The Personal Income Tax
Most cities do not levy a personal income tax on unearned and earned
income; states do. Even by state standards, District residents pay a greater
share of their income toward an income tax. The District's income tax is
higher than Virginia's and similar to that in the Maryland suburbs. The
income base requires numerous adjustments from the federal form 1040, and
the tax, though progressive, is less progressive than the federal tax,
which causes some residents who receive the federal earned income tax credit
to pay District income tax.
Washington should follow the lead of two small East Coast states, Rhode
Island and Vermont, and piggyback on the federal income tax. We also recommend
that the IRS administer the tax for the District.
Under this proposal, the District would raise about $200 million less
than it does now. District residents would pay a flat 28 percent of federal
liability. Virtually no taxpayers would be worse off; the effective tax
rate would decrease for all income classes. The average effective rate
in the District would fall from 5.15 percent to 4.33 percent, with the
largest drop (from 5.42 percent to 3.34 percent) occurring for those with
federal adjusted gross incomes of $30,000$50,000. Those with federal adjusted
gross incomes of $100,000-200,000 would see a reduction of their effective
rate from 6.73 percent to 5.29 percent. Those with incomes greater than
$200,000 would receive only marginal reductions in their District tax liability.
The strongest reason for this simplification is to have the IRS, headquartered
in the Washington area and acknowledged as the best tax agency in the world,
administer this tax on behalf of the District. While it could take as long
as two years to put the programming and administration in place, this proposal
offers significant administrative and enforcement relief to the District.
Business Income Taxes
The two income-based general business taxes, each flawed in its own
way, should be eliminated. The reform would cost about $160 million in
revenue. However, to the extent that S-corporation owners and partners
of unincorporated businesses are residents of the District, some revenue
would flow back through the personal income tax.
The District's corporate franchise tax, structured like typical state
corporate income taxes, has an effective rate of 9.975 percent (including
two surcharges). This is significantly higher than the 7 percent and 6
percent marginal rates in Maryland and Virginia, respectively; the franchise
tax generates only 5 percent of the District's tax revenue and is exceedingly
complicated and poorly administered. The data are so incomplete that the
tax collectors do not know who the biggest taxpayers are, what industries
bear the heaviest burdens, or how tax liabilities vary by size or type
of corporation. The revenues, largely audit driven, are erratic and unpredictable.
Increasingly, the District is being subjected to blackmail by corporations
that seek special treatment for remaining in Washington.
The unincorporated franchise tax should also be eliminated. The remaining
model for it is New York City's unincorporated business tax (UBT). Levied
at the same rate as the corporate tax, it was intended to create parallel
tax treatment regardless of the form of the business and to reach, primarily,
the lucrative 4.5 percent of private employment represented by legal services.
However, as a result of a court ruling in 1979, the District exempts professional
partnerships from this tax, which has effectively been reduced to a levy
on small proprietors. About 8,000 payers produce $39 million in revenue.
The already mentioned gross receipts tax would take the place of these
two flawed taxes. The broadly based gross receipts tax is simple, enforceable,
and, with a graduated payment structure, not unduly burdensome. It also
does not violate the prohibition on the taxation of nonresident income.
It would be patterned after the existing arena fee. The net revenue loss
would be no more than $119 million.
As a city, the District needs a state. States provide aid to cities
in large part to ensure fair treatment for the residents of all jurisdictions
in a metropolitan area. At present this does not happen in the District
of Columbia, where 44 percent of the metropolitan area's poor people live.
We propose that the federal government take on the role of state to
the United States' orphaned capital city. One way states help their localities
is by providing aid in the form of general revenue. It comes from state
taxes and is distributed in recognition of special spending burdens and
as compensation for services that localities are expected to provide. Like
other localities, the District contributes to federal collections. In this
way the District has the same relationship to the federal state that
many small counties have to their states. They pay taxes; they receive
Table 3 summarizes the proposed fiscal relationship between the federal
government and the District. In addition to the PILOT, the federal government
would provide two distinct sources of budget funding, helping the District's
revenue sources to resemble more closely those of typical cities, allowing
a reduction in taxes for District residents of more than one-half billion
dollars, and making the district more competitive with the surrounding
We calculated an annual state aid payment of $434 million. To determine
the amount of state aid that would be appropriate for the District, we
took the amount that Massachusetts provides to Boston and adjusted for
the small difference in population between the two cities.
Table 3. Proposed Restructured Relationship between
the Federal Government and the District of Columbia, Fiscal Year 1995
millions of dollars
|Direct state aid
|Shared costs for state redistributive services (Medicaid and welfare)b
|Shared costs for other state services
Sources: Author's calculations based on District of Columbia,
Department of Finance and Revenue, Study of Property, Income and Sales
Tax Exemptions in the District of Columbia. 7 April 1995; District
of Columbia, Department of Finance and Revenue, "Schedule of Organizations
in the District of Columbia Exempted from Real Property Taxation by Acts
of Congress," 1996 assessment; Philip Dearborn and Carol Myers, "The
Necessity and Cost of District of Columbia Services," August 1996;
and FY 1995 Boston Comprehensive Annual Financial Report.
a. Not included in PILOT are other tax exemptions that
reduce the District's tax base and the estimated revenue forgone: sales
tax on military purchases, $10.9 million; sales tax on diplomatic purchases,
$11.2 million; income tax on military purchases, $10.9 million; sales tax
on diplomatic purchases, $11.2 million; income tax on military purchases,
$21.1 million; income tax on diplomatic purchases, $25.6 million; federal
and special act of congress personal property, $52.6 million; and federal
sales tax (not available).
b. State services provided by the District include the
following: SSI supplements, general relief, need determination, foster
care, development disabilities, rehabilitation, child support, health labs,
long-term care, mental health, higher education, parole, and vehicle registration.
State-Type Services (Medicaid)
The absence of a state also means the District provides a range of state-type
services. We are proposing that the federal government act as a state for
these services, although it is useful to distinguish between redistributive
services, such as Medicaid and welfare, and all others. In the case of
Medicaid, for example, there is no perfect model for the federal-District
relationship because this is a national program in which the federal government
already provides at least 50 percent of the funding. With the exception
of New York City, cities do not pay for Medicaid; states do. At the moment,
the federal government is treating the District of Columbia as if it were
a state. The federal government pays half the costs and the District picks
up the other half.
Acting as the state, the federal government would provide Medicaid directly
to the District of Columbia. However, these may not be services the federal
government wants to provide or believes itself equipped to provide. Compensating
the District fully for performing these state functions would give no incentive
for the District (with none of its own resources at stake) to provide this
service efficiently. A better, though not perfect, model is that of New
York City, where the federal government picks up an additional 25 percent
state share. That would leave the District to provide the service and cover
25 percent of the cost.
State-Type Services (Others)
Finally, there remains a range of general state-type services that the
District is presently providing. In a recent study for the Control Board,
Philip Dearborn and Carol Meyers of the Greater Washington Research Center
estimate these at an annual cost of $316 million. Here, too, there should
be a sharing of costs-a 50-50 split. Again, the option always remains for
direct federal provision. The judgment lies with the federal government
as to what it may be able to provide efficiently.
The Norton Plan
At the moment the only alternative proposal for restructuring the federal
relationship with the District is Delegate Eleanor Holmes Norton's 15 percent
federal flat income tax for District residents. Given the structure of
District incomes and the progressive nature of the federal income tax, the Norton
proposal generates the largest benefits for those with the largest incomes.
For example, taxpayers with incomes in excess of $200,000 (1.8 percent
of the District federal returns) would receive 28.5 percent of the benefits.
For middle-income families earning $40,000 to $75,000 a year, about 17
percent of present District taxpayers, the cut would be $2,100 to $2,700
a year. For those earning $100,000 a year, the cut would be worth $6,500
to $7,000. As to whether the Norton tax cut is, on average, big enough
to affect individuals' decisions on whether to live in the District, there
is no empirical evidence. In contrast to the Norton proposal, our proposal
reduces the taxes of District residents with incomes less than $200,000
and would result in about 36 percent of the population paying no District
income tax at all.
At an estimated additional annual cost to the federal government of
$750 million, the Norton proposal would more than double the existing federal
commitment to the District ($660 million) without offering the District
direct budget relief. The $750 million cost must be seen as the minimum,
for two reasons. One is the impossibility of enforcing the definition of
bona fide residents. The other is the result of behavioral changes induced
by lower taxes. According to the Joint Committee on Taxation, such behavioral
changes result in a potential annual cost to the federal government of
$1.8 billion by 2006. The DC Revenue Project's proposal costs the federal
government less and provides the District with direct budget relief.
Restructuring the District's revenues is essential to ensure the survival
of the nation's capital. It is not the first step; nor is it a silver bullet.
First, services must improve. Present and potential taxpayers must perceive
a value received for their tax dollars. Second, financial accountability
and prudent fiscal management must be in place. Aid to the District, as
well as taxes, no matter how justified, cannot be wasted. Third, a long-term
financial plan must set out all the revenue and spending changes.
But even if the District were providing services efficiently and operating
under state-of-the-art systems, our analysis indicates that its revenues
would fail to keep pace with spending over the long term. In addition,
as tough management decisions are made, District residents, employees,
and political leaders need to know that there will, eventually, be a more
rational revenue structure on which the District's budget will rest.
The proposals presented here are budget neutral and can be phased in.
For example, the income tax proposal requires a planning process for the
IRS that should begin immediately. Changes in the property tax calendar
and payment schedule need to precede cuts in the property tax rates (and
revenues) to avoid making bondholders nervous over the District's ability
to repay debt. Further, the property tax cuts can proceed hand in hand
with the refinancing of existing debt and the bonding-out of the accumulated
deficit over the coming years. Or the gross receipts tax could be dedicated
to paying off the accumulated deficit. The elimination of the business
taxes can be linked to changes in spending or the introduction of an independent
economic development agency. And, of course, the introduction of state
aid and federal sharing of state-type spending can be linked to improvements
in the District's delivery of these services and greater efficiencies in
their operations and can be provided through the Control Board, if necessary.
Finally, we must note that while the addition to annual federal spending
proposed here is not great, the federal budget is moving toward balance,
and federal budget constraints are real, too. The case presented here for
the federal fiscal role with respect to the District rests on a constitutional
obligation set out in Article 1. From the point of view of federal budget
scoring, this obligation should translate into all of the aid's being properly
categorized as mandatory spending, thus not subject to the cap faced by
The DC Revenue Project has demonstrated that the nation's capital suffers
from a limited tax base and the absence of a state government, a situation
that has produced an unsustainable revenue structure. Because Washington's
solvency is in the national interest, the study proposes a revenue structure
more comparable to that of other American cities, including the fiscal
relationships with the states that granted them home rule. It is fair;
it is manageable; it is the least that the nation can do for its own capital
Carol O'Cleireacain is a visiting fellow in the Economic Studies
program of the Brookings Institution. She is the former budget director
and finance commissioner of the City of New York (Dinkins adm.).
The DC Revenue Project represents dedicated work by Martha Stark, Stephen
Mark, Robert Zahradnik, and Jeremy White. They have proved to be a remarkable
team. Responsibility for any errors, of course, remains with the author.
The Brookings Institution began the DC Revenue Project in the spring of
1996. The goal has been to devise a revenue structure compatible with long-term
budget balance for the District of Columbia. The complete study will be
available in book form, with selected data on the Brookings web-site, in
The DC Revenue Project has been financed by the Brookings Institution
and by generous contributions from individuals, local foundations, and
the Ford Foundation. The author has benefited from conversations with District
residents, community groups, an advisory group for the project, economists,
and wide-ranging meetings with policymakers and analysts in greater Washington.
All have been extraordinarily generous with their time and expertise.
The project's completion would not have been possible without the cooperation
of staff at two particular District institutions. We thank John Hill and
his staff at the Control Board for being there whenever we needed help.
We also owe much to the District of Columbia's chief financial officer,
Anthony Williams, who provided generous access to his time and to his staff.
We are especially grateful for his designation of Dr. Julia Friedman, chief
economist at the Department of Finance and Revenue, as liaison to this
study. She expedited our data requests, answered our many questions, and
deserves a huge thank you.
Brookings gratefully acknowledges the generosity of both the Stephen
and Barbara Friedman Fellowships and the Cabot Family Charitable
Trust for their support of the Policy Brief series.
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