August 18, 2003

August 18, 2003 | Commentary on Taxes

...And a Bogus Case For a Commuter Tax

Mayor Anthony Williams and members of the D.C. Council seem to think that their city is starved for cash. How else to explain their efforts to enact a commuter tax?

The mayor has said that non-residents -- some 500,000 of them -- impose "substantial costs on the District." He argues that the burden of these costs falls disproportionately on the District's 571,000 residents. D.C. leaders also hint that commuters shouldn't care about paying an extra tax because their home states probably would offer offsetting tax credits.

Let's put aside the possibility that offsets won't be enacted and look at whether the District needs more tax dollars.

The mayor's budget for the coming fiscal year is $7.5 billion, and his government has almost 34,000 full-time employees. How do these numbers compare with other major cities?

Baltimore, with annual revenue of about $2 billion, employs 29,000. Boston takes in less than $2 billion and employs 23,000. Chicago, not exactly known for government efficiency, has annual revenue of $4.6 billion and employs 40,000.

Of course, advocates of a commuter tax point to the District's special relationship with the federal government. They say the District's tax base is too small because the government, embassies and nonprofit groups own so many buildings in the city.

Plus, the tax advocates say, commuters demand snow removal, good roads and police protection, but they don't pay taxes for these services. These commuters, however, fork over enormous amounts of money in the form of federal taxes that go to the District. Under Congress's latest D.C. appropriations bill, federal taxpayers will contribute $2.3 billion to the city's fiscal year 2004 budget. That's almost one-third of the District's total revenue, and it's more than Baltimore or Boston's total revenue.

Still, the commuter tax supporters say, the District can't tax any federal office buildings, which crimps its property tax haul. Not so. The District will take in almost $1 billion in property taxes this year, slightly more than Boston ($917 million) and slightly less than Baltimore ($1.2 billion). The District's top property tax rate is the highest in the metro area.

The District has plenty of other revenue streams, too. It collects retail sales tax of 5.75 percent on general merchandise and 9 percent on food for immediate consumption. Commuters who shop or eat out at lunch pay these taxes.

Virginia has a flat 4.5 percent sales tax on retail purchases, with 3.5 percent going to the commonwealth and 1 percent going to the locality in which the purchase occurs. Maryland has a flat 5 percent sales tax with all proceeds going to the state.

What about income taxes? Again, the District's are the most burdensome. Its income tax rates range from 6 percent on the first $10,000 of income to 9.5 percent on incomes of more than $20,000. Virginia and Maryland have progressive income tax rates, but they max out at 5.75 percent and 5 percent, respectively. To be fair, some counties -- mainly in Maryland -- impose a local income tax of 50 percent to 60 percent of the state tax rate, but their overall income tax rates still are well below the rates in the District.

So why is the Williams administration short of cash?

Is it because having the highest tax rates in the metropolitan area has had a perverse effect on the city's bank account, causing expected tax revenues to drop for fiscal year 2004? Not according to congressional documents. They indicate that income, property and sales tax revenues are all expected to rise.

Well, maybe it is because Congress has cut its federal grant money to the District? No, federal funding is set to rise by more than 11.5 percent.

That leaves only the real reason that the District is short of cash -- it spends far more per capita than other major cities and for that money it delivers sub-par schools and largely fails to provide a safe community for its residents. The District doesn't need to collect more tax revenue -- it needs to do a better job with what it already gets.

About the Author

Norbert J. Michel, Ph.D. Research Fellow in Financial Regulations
Thomas A. Roe Institute for Economic Policy Studies

Originally appeared in the Washington Post