The DC Tax Reform Story Everyone Missed

By now, the familiar media narrative about the nation’s capitol is one of glittering condos, staggering inequality, and the fraught race relations between newcomers and older residents. The trope shapes the coverage of everything from sports to politics, education to public transportation. When it comes to our nation’s capital, every reporter is Charles Dickens.

And so it was last week, when the DC City Council passed an ambitious tax reform package. “D.C. Council votes to keep ‘yoga tax’ as part of tax-cutting budget deal,” wrote The Washington Post, portraying the deal as an epic showdown between established progressive backbenchers and ritzy health-conscious transplants. (To be fair, The Post’s coverage of the recent tax bill has been far more substantive than reporting from other outlets, which wrote about the yoga tax controversy without providing context.)

The story most people missed? Washington, D.C. managed to pass a mostly sensible and progressive tax cut package that will deliver the biggest benefits to middle- and low-income residents – and the ‘yoga tax’ is just one small part of a much larger plan. What’s more, the DC City Council largely followed the recommendations of a nonpartisan commission designed to study the issue. 

The council also voted to expand the District’s Earned Income Tax Credit (EITC) for childless workers. Working low-income taxpayers who qualify for the federal credit will receive a D.C. credit worth 100 percent of the federal benefit (increased from 40 percent of the federal).  But, the policy change actually expands upon the federal program by allowing childless workers to continue receiving the tax credit above and beyond the federal income limits.   The tax cut lowers the income tax rate for those earning $40,000 to $60,000, from 8.5 percent to 7 percent (the rate will go down to 6.5 percent if the city meets revenue targets). The measure also increases the standard deduction and personal exemption to federal levels by 2017, with interim increases going into effect in 2015.

The EITC is one of the most effective anti-poverty programs, and is an economic winner as well: The Center for Budget and Policy Priorities estimated that the EITC put about $128 million into the DC economy in 2011.  Workers receive the tax credit based on their wages. If the credit exceeds the amount of tax a worker owes, then that worker receives the difference as a refund.

Pictured: Hell.

Of course, cutting taxes is easy – paying for tax cuts is the difficult part. Here again, the D.C. proposal shines. Instead of relying on regressive sales tax rate increases that disproportionately hurt the lower and middle classes, as states like Kansas have done in recent years, the District took the route supported by academic research and sound policy: they broadened the sales tax base. The city expanded the sales tax to cover additional services, such as construction contracting, storage units, carwashes, health clubs and tanning salons – yes, including yoga studios. Expanding the sales tax to cover services as well as goods in an increasingly service-based economy makes a lot of sense.

The D.C. Council, known more in recent years for political tawdriness than prudent fiscal management, has made the right move for the city’s residents and the city’s fiscal future. Many of the proposed cuts are tied to future economic growth, and will not take effect if this growth doesn’t materialize.

If there’s something not to like, it’s the Council’s decision to increase the threshold for application of the estate tax from $1 million to $5.25 million (the federal threshold). This proposal will benefit a handful of families and cost the city almost $15 million in lost revenue. Even this proposal, however, is tied to future revenue increases.  Businesses also got a significant cut in rates, from 9.975 to 9.4 percent, with the goal of reaching 8.25 percent by 2019. 

So hats off to the D.C. City Council for proving that tax cuts don’t have to be a giveaway to the rich, and that tax reform doesn’t have to soak the poor. Other jurisdictions should follow their lead.