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.
The National Center for Policy Analysis is a public policy research institute
founded in 1983 and internationally known for its studies on public policy
issues. The NCPA is headquartered in Dallas, Texas, with an office in Washington,
D.C.