By Josh Barro
Rep. Darrell Issa, the California Republican who chairs the House committee that oversees the District of Columbia, made a surprising remark at the end of a hearing yesterday. He said the federal government should look into whether the District should be allowed to tax the incomes of people who work, but do not live, within its boundaries.
The act establishing home rule in the District of Columbia allows the district to levy an income tax, but only on its residents. That's different from the states, which may tax residents and non-residents alike. While barring D.C. from collecting non-resident income tax was unusual, it was a good idea that shouldn't be changed.
The problem isn't limited to Washington: non-resident income taxes are generally a bad idea. Taxpayers mostly receive services from the jurisdictions where they live, not where they work. You send your children to school where you live, and use libraries and parks there. Eligibility for state-run welfare programs is determined by residence.
And while workers do get some benefits from the government where they work, they also pay taxes there other than income tax. The most obvious example is sales and meals taxes, but workers also bear the indirect burden of commercial property taxes on the buildings where they work.
Non-resident income taxes break the link between taxation and government services. They also weaken the finances of jurisdictions that have many residents who work elsewhere, as taxes paid to the work jurisdiction are deducted from the tax bill in the home jurisdiction.
That said, the effects of cross-border income taxation are generally small, because most people live and work in the same state. In some cases, the effects are so small that states voluntarily agree not to tax each other's residents for reasons of simplicity. Pennsylvania and New Jersey, for example, have agreed that people who work in one state and live in the other will pay tax only to their home state.
But Washington would be able to especially abuse the power to tax non-residents, since it's such a small jurisdiction and so many people who work there live elsewhere. A non-resident tax would let the district grab tax revenue that ought to go to fund services in Maryland and Virginia.
It would also be a solution in search of a problem. Washington D.C. already has an extremely strong tax base, despite the fact that it can't tax non-residents and also can't tax real estate owned by the federal government. Average incomes in the District are very high and private property is very valuable, which allows the government to collect lots of taxes even without imposing exorbitant rates.
In 2009, Washington, D.C. collected $8,360 in taxes per resident, more than any state except Alaska. Virginia got by with $3,992 in tax per head; Maryland collected $4,733. (Note: these figures include both state- and local-level tax collections.) This gap is despite the fact that tax rates in the District are comparable to those in Maryland.
Washington D.C. should be able to make do with 109 percent more tax collections per capita than Virginia. It doesn't need the federal government to give it another thing to tax.
(Josh Barro is lead writer for the Ticker. Follow him on Twitter.)
Read more breaking commentary from Josh Barro and other Bloomberg View columnists and editors at the Ticker.
-0- Jul/20/2012 20:58 GMT