The Best Policy

Mea Culpa

D.C.’s taxes–and mine.

A proposal to lure people into the District by slashing federal income tax rates for city residents got its second big boost in as many days yesterday when Senate Majority Leader Trent Lott joined House Speaker Newt Gingrich in endorsing it.

–Washington Post, July 16, 1996

Forgive me, reader, for I have sinned. I confess that I harbor a belief that contradicts much that I have held dear over the years, that leads me to reject well-established economic theory and practice, that has earned me the understandable scorn of my Slate colleagues. I confess: I favor a substantial federal income-tax break for the citizens of the District of Columbia.

So strongly, moreover, do I cling to this heretical belief, that when one of my colleagues suggested I write a column attacking the district’s tax remission on well-accepted economic grounds, I objected (devotion to a free and fair airing of contrary opinions be damned). Such narrow-minded accountancy, I argued, would destroy the fragile political consensus on Capitol Hill that might actually produce a timely rescue. (Yes, yes, I stole the central theme of this column from a subordinate. Another 200 days in Purgatory.) And finally, oh Grand Inquisitor, it will not have escaped your soul-piercing gaze that, as a resident of the District of Columbia, I stand personally to benefit should the tax cut be enacted.

And yet I do not repent.

Of course I know most economists believe that local tax breaks do nothing to stimulate overall economic growth. My files are as full as any policy wonk’s with scholarly studies demonstrating that using tax lures to attract jobs and taxpayers often ends up robbing not just Peter, but Paul as well. Obviously, much of the “growth” generated by such a break is merely stolen from other jurisdictions–leading them to offer breaks of their own in an ultimately futile “race to the bottom.” Less obviously, the new citizens and businesses may be a bad deal. Meeting their needs may require, for example, new roads and schools, without the extra tax revenues needed to pay for them.

Nor does my heresy blind me to the inefficiency of tax transfers in affecting behavior, economic or otherwise. I will not deny that it has been shown that as much as 70 or 80 percent of a tax “incentive” often goes to pay for activity that would have taken place anyway. As for the pious hope that the Internal Revenue Service will be able to police the new tax breaks–to assure that all claimants are truly residents of the district and that the nation’s capital has not become a flagrant tax haven–well, the IRS has a better chance here than in the Cayman Islands.

Surely you know, argue my colleagues, that Congress could just give as much money directly to the district government as the area would gain from a federal tax break–at a fraction of the cost to the rest of the country. Well, this is where I start falling off the train. We’re talking, after all, about a city government that–with an annual budget of about $5 billion and a shrinking population–runs schools that cannot shelter, much less educate its children; cannot mend its roads or keep its drinking water potable; cannot police its own police force, let alone its streets or jails; cannot care for the sick, or elderly, or homeless. A government that cannot resist the importuning of any special interest or union, that lacks both the will and the talent to reform itself. What would make anyone think that giving more money to that government would fix anything?

The only thing that will save the district is more residents and more businesses able not only to pay more taxes, but to take a lively interest in how they are governed. And only tax benefits, big ones, will persuade them to move into an ill-governed, crumbling capital city. Yes, they will come initially at the expense of other, especially neighboring, jurisdictions. But the areas around the capital have long prospered at the expense of the capital. Their commuters benefit mightily from the services provided by the district, yet pay no taxes to support those services. The surrounding areas cannot ultimately flourish without a vibrant core. Moreover, the district, unlike other cities and because of its unique constitutional origins, cannot annex its fleeing middle class. Nor can it claim the voting representation in Congress that, in America’s historical tradition, has been considered the essential trade-off for taxation.

That is why there is grumbling, but little organized opposition in Virginia and Maryland to the tax grant to the district–worth perhaps $700 million a year–that is gathering bipartisan support in Congress. Still, you may ask, why should the residents of East St. Louis or Detroit provide tax breaks to the district when they have so many problems of their own? Why should they allow the district’s residents to enjoy a federal tax rate of, say, 15 percent, when they themselves may face rates close to 40 percent? Because it’s the nation’s capital, and because it’s a good investment.

No, I do not profess that the tax breaks will pay for themselves in no time at all. How could I, when I have so often written that they will not? But the “supply-siders” are quite right when they say that economies are not a zero-sum game. Is it too large a leap of faith to believe that the right incentives, ones that capitalize on the comparative advantages of people or locations, can reap positive returns not just for the direct beneficiaries, but for the larger society?

Here is a beautiful city, one that ought to make any American proud. Its well-tended (by the federal government) parks, monuments, mansions, embassies, and museums can compare with those of any city in the world. Paris or New York it is not, but its downtown streets have a polyglot vitality they lacked only a few decades ago. Its neighborhoods are filled with solid housing and well-kept gardens–and not just in the wealthy enclaves. You can have a park in your backyard (as I do) and still make it to work in 15 minutes (if you keep a sharp eye out for the potholes). It would be nice if more of the newcomers were artists, artisans, and producers, rather than lawyers and lobbyists, but head for head, I’ll stack up Washington’s intellectual capital against any competitor’s. A timely expenditure of tax revenues might just work wonders. And even if the costs were a dead economic loss to other jurisdictions, surely there are gains in national pride for recompense.

I confess that I cannot prove I am right in my belief. Costly error or painful recriminations lie on either side of my position. The money might, after all, be wasted on windfalls. On the other hand, it’s also possible that the tax incentives would miraculously repay the federal coffers many fold. In either case, my knees are ready. If Paris is worth a mass, Washington is worth a.