A Flat Tax for D.C. - And Then Where?

Commentary by Pete du Pont

On April 16, Eleanor Holmes Norton, Washington, D.C.'s delegate to Congress, introduced a bill to institute a flat rate federal income tax in the District of Columbia. The rate would be 15 percent on all income above a large threshold - $15,000 for single filers, and $30,000 for married couples filing jointly. She would also eliminate capital gains taxes for D.C. investments. In recent weeks, the Norton proposal has been endorsed by House Speaker Newt Gingrich and Senate Majority Leader Trent Lott.

What Norton, a liberal Democrat, hopes to achieve with her plan is a reversal of the downward spiral of jobs and population from the District of Columbia. The District's population has dropped by a third over the last 30 years and the exodus is accelerating. The number of taxpayers and their wealth is declining as well. Twenty years ago 307,000 individual income tax returns were filed in Washington. In 1994, the most recent year for which there are data, only 281,000 returns were filed.

Of those returns, nearly two-thirds were filed by those with adjusted gross incomes below $30,000. Just 12 percent were filed by those earning between $50,000 and $100,000, compared to 16 percent for the entire nation. The District's economic and revenue base is now so depleted that only radical surgery will help.

Of course, Washington has brought this on itself. The District has very high taxes of its own. The top income tax rate goes up to 9.5 percent, far higher than surrounding areas, and it starts at a relatively low income. D.C. also has higher sales taxes, a vast political patronage machine, and very poor public services, from schools to police protection. Americans living outside Washington might be more inclined to give the city a break if they thought the city was already doing the best it can to attract business and retain jobs and taxpayers. Clearly it is not.

Nevertheless, Norton's abandonment of the tax-the-rich, redistribute income philosophy of her fellow liberals is a substantial step.

Would the Norton plan turn Washington into a tax haven? At first glance, it would appear to be a magnet for rich people to move from other jurisdictions and enjoy big tax savings without contributing anything to the local economy. But the fine print intends otherwise. Norton would restrict the benefits of her flat tax to people physically resident in Washington for at least 183 days of the tax year, and who pay taxes to the District of Columbia.

Supposedly, the flat tax would apply only to income earned in Washington or the surrounding metropolitan area. It would apply to investment income, but that income would have to "originate" in the District of Columbia - an odd and impossible requirement in the information age.

But is the Norton plan fair to the rest of us? Should the people of Arkansas, or Kansas, for example, be allowed to pay lower federal taxes, simply because they are disadvantaged compared to the residents of Connecticut or Texas? Norton argues that Washington is not like a state, but more like a territory such as Puerto Rico or Guam where residents, although they are U.S. citizens, do not pay taxes to the federal government, but only to their territories on income earned within the territory.

Moreover, Norton argues, Washington is the only city in the United States that is not part of a state, and therefore eligible to receive state aid. And Washington is the only city prohibited by federal law from imposing a commuter tax on those who work in the city but live in the suburbs. Thus Washington is uniquely limited in its ability to raise revenue and must bear many costs that for other cities are paid by the states.

On the other hand, the Federal Government already pays Washington $660 million each year to compensate the city for the lack of state aid and a commuter tax, and for costs the city bears due to the federal presence. The Norton plan would in effect add another $700 million to this payment in the form of lower federal tax revenues from District residents.

So the D.C. flat tax is far from a done deal. But its enactment would sow the seeds of an irrepressible tax revolt. Suppose it worked? Suppose that investment boomed, incomes rose, and jobs became plentiful in Washington?

What would the high tax liberals say to the rest of us then? That we can't have a flat tax in our state or the whole nation because it's too expensive? Too unfair to the poor? Too good to the wealthy? Tough arguments to make in the face of success in one of the nation's most depressed cities.

In the end, the liberals will wish they had never heard of the whole thing.