Op-Ed

A Fair Plan for D.C.’s Deficit

Walter Smith and Alice M. Rivlin

Washington has come a long way in a short time. It has reformed major parts of its government, worked its way out of numerous receiverships, improved its relations with Congress, balanced its budget for six years running, achieved a respectable bond rating and built up a cash reserve. It now has the potential to become a truly great, world-class capital—one the whole nation can enjoy and take pride in. But it needs immediate help from the federal government to get to that level.

You don’t have to take our word for this. Congress’s own General Accounting Office demonstrated in an exhaustive report last May that the District has a built-in “structural deficit.” By this the GAO meant that even if the District were perfectly managed, it would not have the tax revenue it needs to deliver even an average level of services to those who live, work and visit here unless it significantly overtaxed its residents. The GAO found that District residents already face a tax burden that is among the highest in the country, and that further overtaxing of D.C. residents would only make the structural deficit worse. Raising tax rates even higher would drive people out of the city, harm its ability to attract new businesses, reduce its tax base, require still further overtaxing of those who remain and further decrease the quality of services to all who live, work and visit here.

Moreover, according to the GAO, because the District does not have the funds it needs to deliver even an adequate level of basic services, it constantly defers badly needed investment in its deteriorating infrastructure. Years of neglect have left the District with inadequate roads, antiquated school buildings and insufficient police stations, health facilities and sewer systems, all of which are expensive to operate and maintain, and all of which drag down the capital for everyone who comes here.

The structural deficit results from the fact that the District has the spending obligations of a state but lacks the taxing power of a state. Federally imposed restraints on the District deprive it of that taxing power. One critical federal restraint is that the biggest employer in town, the federal government, pays no taxes; neither do numerous international institutions and national organizations located here; and nearly half the property in town is tax-exempt. The other critical federal restraint is that Congress has prohibited any income tax on the 70 percent of the people who work here every day—and require services—but who live outside the District.

Taken together, these revenue restrictions have produced the District’s structural deficit and effectively prevent it from becoming a great national capital. The revenue shortfall is a national problem, and it calls for a national solution. As U.S. District Judge Ellen Segal Huvelle declared recently in the commuter tax lawsuit, in which we participated, “the unfairness of the District’s situation is obvious and regrettable.” She labeled that situation “manifestly inequitable” and said that Congress, not the courts, should fix it.

Eleanor Holmes Norton, the District’s delegate to Congress, and all the House members in the region have joined in proposing a fair, sensible and workable solution. They would not change the tax limitations on the District—relax, Virginia and Maryland, no commuter tax! Instead, they propose that Congress compensate the District for the structural deficit produced by those limitations, which the GAO estimated at between $470 million and $1.1 billion per year. Their legislation would pay the District $800 million a year in federal money (approximately the mid-point of the GAO’s range) to be used only to improve the District’s infrastructure and reduce its debt. Under their proposal, the District could count on receiving this needed revenue (which would increase with the cost-of-living index) every year, and thus make realistic plans.

Congress should pass this proposal. It is a fair way to make sure that the nation as a whole makes a contribution to improving its capital. It addresses the overhanging structural deficit. And it will give us a chance to make Washington a great city of which we all can be proud.