A Tax Revision Commission, created by Mayor Vincent Gray and under the direction of former Mayor Anthony Williams, recently undertook a comprehensive analysis of the District’s tax system. The Commission made dozens of recommendations for changes to that system. Many of these changes were adopted into law under the leadership of Council Chairman Phil Mendelson. In our mind, the most important of these changes was a reduction in the individual income tax rates for moderate to middle income DC residents.
Along with regulatory policy, tax policy is the most effective tool at the DC government’s disposal for making the District’s economy more competitive, for advancing the District’s economic interests, and for promoting prosperity for its residents. We believe the Commission’s work should be the beginning of our tax reform efforts, not the end. With that in mind, here are our principles of sound tax policy:
1. Simplicity — The tax code should be easy for the average DC resident to understand, and it should minimize the costs of compliance. Tax complexity adds costs to the taxpayer, but does not increase tax receipts. For the DC government, the tax system should be easy to administer, and should help foster efficient, low-cost administration.
2. Transparency — The DC tax system should be accountable to residents. Taxes and tax policy should be visible and not hidden from taxpayers. Changes in tax policy should be highly publicized and open to public debate. The Tax Revision Commission did an excellent job on transparency and the District should maintain this trend as it moves toward further improvements to the system.
3. Economic Neutrality – The purpose of the tax system is to raise needed revenue for core functions of government, not to control the lives of DC residents or micromanage the economy. The tax system should exert minimal impact on the spending and decision making of individuals and businesses. The system should be broad-based, utilize a low overall tax rate with few, if any, loopholes and avoid multiple layers of taxation through tax pyramiding.
4. Equity & Fairness – While a tax system should be progressive, a system designed to “soak the rich,” is ultimately self-defeating. One need only look next door to the state of Maryland to see the effects of a tax system that becomes overly dependent on high income earners. The tax system should not be used to bestow special favors on any particular group of taxpayers.
5. Reliability – A high-quality tax system should be stable, providing certainty in taxation, revenue flows, and financial planning for individuals and businesses.
6. Pro-Growth – A comparatively lower tax burden can be a tool for a state’s private sector economic development by retaining and attracting productive economic activity. Effective competitiveness in a tax system is best achieved through economically neutral policies.