Tax reform, up close and personal

On Monday, I attended my first meeting of the District of Columbia Tax Reform Commission.  The independent commission was authorized by the Tax Revision Commission Reestablishment Act of 2011 and is chaired by former DC Mayor Anthony Williams.  It includes ten other members appointed by Mayor Vincent Gray and Council Chairman Kwame Brown.

I was appointed to the commission by Mayor Gray and am honored and delighted by the appointment.  As someone who has probably thought about taxes more in theory than practice, I am really looking forward to this opportunity to engage in crafting a better tax system – by which I mean one that is simpler, fairer, and more efficient as well as contributing to the district’s economic prosperity and quality of life. 

If these goals sound familiar, they should.  Presidential candidates and members of Congress tout them whenever they talk about fundamental tax reform, which is often these days as the campaign heats up and the “fiscal cliff” looms. 

But policymakers everywhere have struggled with tax reform, and with good reason.  As TPC co-director Donald Marron pointed out yesterday, tax reform is hard. 

Why?  Because the characteristics of a good tax system are internally inconsistent.   Think of London circa 1990, a very different place from site of today’s Olympics.  As vividly captured in Joel Slemrod and Jon Bakija’s excellent Taxing Ourselves, on March 31, 1990, rioters set fire to luxury cars and smashed windows.  Hundreds of police officers and demonstrators were injured, and hundreds of protestors were arrested. 

The reason?  A poll tax that would have fallen equally on all residents regardless of income or wealth, replacing a property tax that varied with home values.  The poll tax was reviled and eventually repealed.  But it had one advantage squarely in its column:  it was efficient.  As a per capita tax, it could not be avoided by sheltering income, working less, or buying stuff from the Internet.  The only way to avoid it was by not being alive (or, less vividly, failing to register with your local elections official).  In this case, the certainty in life was death OR taxes.

The problem was that efficiency conflicted with another goal:  fairness.  Many people think tax burdens should be progressive, or vary with ability to pay.  However, this can contradict yet another goal:  rewarding effort or economic competitiveness. 

We have all these challenges and more in DC.  There’s the District’s unique status as a state and local government, its special relationship to the federal government (which puts some revenue sources off limits), and its place in a regional economy that also includes heavy hitters like Maryland and Virginia.  DC also struggles with providing services to a diverse population with high per capita income but also a high poverty rate.

Still, the last time anyone took a good look at DC’s revenue system was 1998.  That’s the same year Google was founded.  Mark McGuire was hitting the ball out of the park instead of Bryce Harper.  The district was just emerging from insolvency and people and jobs were fleeing the city. 

A lot has changed since then.  Beyond the effects of a winning baseball team, the local economy rode out the recession better than other regions, thanks in part to a strong federal presence.  Of course, that presence also leaves the district vulnerable to federal belt tightening and limits on local fiscal autonomy.  So, it’s a good time to take a closer look at DC’s revenue system and see what we can do better.