Now Here’s a Paragraph For You

From Brookings’ Alice Rivlin:

The dominant fiscal question in a negotiation over statehood for DC would involve taxation of non-resident income. Since all states have the right to tax income earned within their borders, it is hard to imagine that District statehood would not include that power. The CFO’s office estimates that if DC were able to tax non-resident income at its current tax rates it could raise more than $2 billion additional revenue, more than doubling the current yield of the District’s individual income tax of about $1.3 billion. Including non-resident income in the tax base would give the District the option of cutting its income tax rates in half and still raising substantial additional revenue to improve public services. Better services and lower income tax rates would make the District a more attractive place to live and might precipitate substantial in-migration, especially of upper income people whose location decisions are sensitive to income tax rates.

Of course, the very next graph is pretty fascinating, as well:

The fiscal losers in this scenario would be the State of Maryland and the Commonwealth of Virginia, which benefit enormously from the fact that DC cannot tax their residents on income they earn in the District. These states would likely fight hard to block statehood for the District, to restrict the new state’s tax powers if statehood appeared inevitable, and to get federal compensation for their loss if all else failed. The understandable opposition of these two powerful states to incurring fiscal losses seems to me far more likely to derail DC statehood than considerations of party or racial politics.

For those of us used to listing the two main barriers to statehood as Senator 101 and Senator 102, this is an interesting counterpoint.

Comments

  1. IMGoph says:

    well, if ever there was an example of the fact that you need to fight for your rights—you won’t have them handed to you—and that once a group has power, it’s very, very difficult to get them to give it up, this is that example.

  2. Just give it back to Maryland. Every unnecessary border is a barrier to efficient government, especially within a continuous urban area.

  3. EJ says:

    If DC statehood is a non-starter, another way to boost DC’s tax base is to eliminate federal income tax for DC residents. No taxation without representation! The likely effect would be that DC could nudge it’s own tax rate up a little AND there would be an influx of well-to-do folks from MD and VA drawn by the prospect of keeping more of their income. DC’s coffers would fill up in short order.

  4. Tentakles says:

    Gosh, two more senators representing 300k people each! Can’t we just cut Rhode Island in half?

    Clearly DC should be an incorporated city in Maryland and probably a special taxing district, too.

    To make it a little more sporting, how about a binding referendum in 2011 where DC voters decide whether to join MD, or VA, or keep the status quo. MD and VA can make their best offer (assuming either one actually wants DC).