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 CFOâ€™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 Districtâ€™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 stateâ€™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.