The written testimony of ITEP Executive Director Amy Hanauer is below the embedded video of the hearing.
Dear D.C. Tax Revision Commission,
Thank you for inviting me to testify last week on the research of my colleagues at the Institute on Taxation and Economic Policy. We’re grateful to have our perspective included and as a D.C. resident, I’m particularly thankful that you’re doing the hard work of trying to solve complex and sometimes competing public problems. We appreciate your mission of ensuring: a broad, resilient tax base; progressivity and racial equity; efficiency and competitiveness; and simple, open, fair administrative processes.
Washington, D.C. is headed in the right direction on tax policy. The income tax change that went into effect in 2022 raises more revenue, does so in a progressive way, and directs its spending toward helping working families with children, raising childcare wages, and addressing homelessness. This makes both the revenue and the spending laser-focused on progressivity and economic and racial equity. D.C.’s tax system is now one of the least regressive, on average, which should be a point of pride. A more adequate and progressive system is good for communities and good for the economy, so we encourage you to continue elevating these goals. Our research and that of many others has begun solidifying on three key points relevant to your work:
One: Children and workers do better in progressive tax states: States with relatively more revenue and relatively more progressive tax systems have better outcomes for children, for families, and even for life expectancy. Just this week a paper in the Journal of the American Medical Association found that infant mortality is lower in states with higher revenue and more progressive tax codes. There’s also research showing that the states with the most regressive tax codes have lower education spending, lower general spending on children, lower wages and lower labor protections. Tax policy can also be a phenomenal tool for reducing child poverty as ITEP found in a study completed in partnership with Columbia University’s Center on Poverty and Social Policy.
Two: Many economic outcomes are better in progressive tax states: Between 2009 and 2019, the states with the highest top income tax rates saw faster economic growth, faster average income growth, stronger growth per person and lower unemployment rates on average than states with no broad-based personal income tax. Our Research Director, Carl Davis, completed a comprehensive report with these findings in 2017 and updated that work in 2020.
Three: Wealthy people generally choose higher-tax, not lower-tax states: The vast majority of Americans with extreme wealth choose to live in relatively higher tax states and those states have a higher share of people with extreme wealth than lower tax states. Of all U.S. wealth over $30 million per household, more than 1 in 5 of those dollars is in relatively higher-tax New York, the highest concentration of extreme wealth in the nation. Nearly a third of the $26 trillion in extreme wealth is in New York or California, both relatively high tax states. D.C. is also among the top four states in outsized concentration of extreme wealth. Despite extensive dire predictions, even after the federal government capped the amount of state and local taxes that people could deduct from their federal taxes, California, New York and New Jersey nonetheless added a significant number of millionaires to their tax rolls between 2017 and 2018. Millionaire wealth has generally grown in states with higher state and local taxes. While the changes to in-person work in the wake of the pandemic are concerning and may reduce the tendency to live in the most vibrant places, the best research has shown that high income earners do not move to shave a few percentage points off their state tax rates and that millionaires have been less likely to move than other Americans. High earners typically choose to live near business connections, quality of life and family. Michael Mazerov of Center on Budget and Policy Priorities recently gave a sneak preview of a forthcoming update on this topic.
In summary: more revenue raised more progressively enables the tax code to reduce rather than exacerbate inequity and generates investment for the very things that help business thrive and create a more vibrant, equitable, sustainable and inclusive D.C. As a community, we’ve been moving in the right direction, something to applaud and continue. It makes D.C. a better place to live, a better place to work, and a better place to do business.
As you review options, we urge you to: Eliminate tax breaks that have outlived their usefulness or mostly benefit higher-income taxpayers; Broaden the tax base to ensure that the wealthiest people and businesses are contributing; and, Address the remarkable concentration of wealth that has accumulated in part because the tax system allows tax-free wealth acquisition.
While we have other ideas, some of which we’ve discussed with your staff, in the interest of brevity five concrete recommendations are:
- Reform tax incentives: Create a clawback provision for DC’s tax incentive programs like those currently being proposed in the mayor’s expansion of the “Tax Abatements of Housing in Downtown Act of 2022.” More broadly, redesign economic development incentives in accordance with the WE Upjohn Institute for Employment Research recommendations:
- Target incentives at firms with high job multipliers.
- Target firms that pay a high wage premium.
- Target created jobs at the local unemployed.
- Minimize long-term incentives.
- Finance incentives by increasing taxes on out-of-state business owners.
- Bolster real estate transfer taxes: Add additional brackets to the real estate transfer tax. Currently, the top bracket starts for homes over $400,000, relatively modest by D.C. standards.
- Improve trust taxation: Close the “ING” (incomplete non-grantor trusts) loophole under the personal income tax as described in this paper from the Center on Budget and Policy Priorities. These complex tax avoidance schemes are relatively simple to fix, as illustrated by New York decoupling from parts of the Internal Revenue Code pertaining to the classification of this type of trust in 2014.
- Create a child tax credit: D.C. has forged the way to a tax code that addresses poverty by providing a robust Earned Income Tax Credit. Other states are also increasingly providing Child Tax Credits (CTCs) which reduce child poverty and are associated with myriad positive outcomes for children and for racial equity. Because this is such a high-cost community with such stark inequality, we recommend adding a CTC to our tax code.
- Reauthorize the DC inheritance tax imposed under Chapter 19 of Title 47 of the DC Code: Inheritance taxes, paid not by the estate of the deceased but by the inheritors of the estate, help address rising wealth inequality while ensuring that critical investments are funded.
Thank you again for the opportunity to submit these brief thoughts. We look forward to being of further assistance and to continuing to monitor your important work.
The text above links to several studies that I cited orally and that you requested, related to correlations between tax rates and economic growth, worker well-being, wealth distribution, and migration. To make it easier to find this research, here they are in list form. There are additional links in the text above to other research on our recommendations.
- Trickle-Down Dries Up: States without personal income taxes lag behind states with the highest tax rates, Carl Davis, October 2017
- Another Reason to Tax the Rich? States with high top tax rates doing as well, if not better, than states without income taxes, Carl Davis, September 2020
- The Geographic Distribution of Extreme Wealth in the U.S., Carl Davis, Emma Sifre and Spandan Marasini, November 2022
- Millionaire Population Swells in Blue States Despite Migration Fearmongering, Carl Davis, September 2020
- New Research Shows Millionaires Less Mobile than the Rest of Us, Carl Davis, May 2016
- Tax-Related Migration is Grossly Exaggerated: a Research Preview, Michael Mazerov, January 2023