Greater Greater Washington

Mendelson plans to slash streetcar funding, pay for tax cuts

In his proposal for the DC budget, council chairman Phil Mendelson will propose lowering the streetcar's capital funding from what Mayor Gray has proposed. Mendelson will fund other streetcar-related projects like a new bridge near Union Station, while much of the decrease will fund a package of tax cuts.


Photo by Rena Tom on Flickr.

In a phone conversation, Mendelson said the change will devote about $400 million for the streetcar over five years. The mayor's proposal dedicates about $800 million over five years, rising to $3 billion over ten years.

Mayor Gray's budget director, Eric Goulet, says this is not nearly enough to build the streetcar system as planned, and the change would effectively halt the streetcar program. Mendelson disagrees, and says that he'd like to see a clearer plan from DDOT about how it will spend the money before approving it.

Gray had proposed a system where as DC's revenue increases, 25% of that increase beyond the projected level for 2015 would go into the streetcar. This would ensure the streetcar has an ongoing pool of money, and since the streetcar will supposedly generate economic growth, it can capture some of that benefit.

Mendelson's proposal would change the formula so that it's only 25% of the gain in any specific year. In other words, if revenue rises from 2015 to 2018, Gray's proposal would dedicate a quarter of the difference from 2015 to 2018 to the streetcar, while the Mendelson proposal would instead use a quarter of the difference just from 2017 to 2018.

Councilmember David Grosso, who agrees with Mendelson's plan, emphasized that he does not want to see the streetcar program wither, but he also doesn't think it needs the quantities of money that Gray wants to dedicate. He said there is a $100 million surplus in the streetcar account; therefore, there isn't a need for more. "It's been proven that they aren't spending the money," he said. "You should budget according to what you can actually accomplish and get it done right."

The mayor has disputed the $100 million number as well. That number came from calculations by staff for Mary Cheh, who chairs the transportation committee. But in a letter to the council yesterday, Mayor Gray called this an "incorrect financial analysis"; Gray's budget staff have described it in more colorful terms.

"It's just not sustainable," said Mendelson. Council budget director Jennifer Budoff explained that while the city's revenue increases by about $200 million a year (of which $50 million would go to streetcar under Mayor Gray's plan) the city's budget also increases, often by more than $200 million a year, due to rising costs. Therefore, she said, the streetcar allocation would eat into the base budget after about five years.

Some of the money will go to pay for a new Hopscotch Bridge, the bridge over the railroad tracks north of Union Station which the streetcar will use. That bridge has to be replaced before the line can extend to downtown and Georgetown, and needs about $200 million.

The cuts will also fund a series of tax breaks which will $165 million a year. These are some of the proposals from the Tax Revision Commission which former mayor Tony Williams chaired. Mendelson's budget proposal leaves out a few proposals from that commission, such as a "local services fee" that would charge all DC employers a flat rate per employee (seemingly a backdoor way of getting some revenue from companies that employ out-of-state workers who don't pay any income taxes) and an increase in the sales tax.

The tax breaks will phase in over 5 years. They include a new middle tax bracket for people making $40-60,000 of 7%, then dropping to 6.5%; making single people eligible for the Earned Income Tax Credit; a higher standard deduction; a cut to 8.75% for people making $350,000-$1 million (but not those making more); a cut in the business franchise tax; and a higher estate tax exemption that would rise from the current $1 million up to $2 million and later to the federal level of $5.25 million.

The sales tax would still broaden to more businesses, like health clubs and yoga studios, a proposal that these businesses fought heavily in recent years.

The DC Fiscal Policy Institute, which supports a more progressive tax code, supports most of these changes and notes that cuts for low and middle income families, which will cost $123 million, make up about three-quarters of the $165 million tax cut package.

The business tax cut costs $40 million a year, and the estate tax cut will make DC lose out on about $14 million a year from deceased residents.

Cheh said her staff have not been able to look at the proposal, which won't be released to councilmembers until 5 pm today; she only has spoken to Mendelson verbally about the plans thus far and has not formulated a position on the proposal. She emphasized that, if the cuts go through, she will work to ensure the streetcar gets enough money to continue building, and recognizes that a project like this can build up momentum which could be lost if there are too many budget hurdles.

I will update this story as it develops.

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David Alpert is the founder and editor-in-chief of Greater Greater Washington. He worked as a Product Manager for Google for six years and has lived in the Boston, San Francisco, and New York metro areas in addition to Washington, DC. He now lives with his wife and daughter in Dupont Circle. 

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Tax cuts? We just got through a winter of cramming people into rec centers because they couldn't find a place to live, and we are cutting taxes? Even if they think the streetcar isn't that high a priority, how is this making the city better? It's already drawing high income residents here. There is no need to cut taxes. Help the people who are being squeezed out by the city's success!

by Priorities? on May 27, 2014 3:14 pm • linkreport

An estate tax cut? Seriously?

by Evan on May 27, 2014 3:14 pm • linkreport

It's like half a step forwards, a mile backwards downhill with transit in DC. And especially with this bunch of clowns for "leaders."

by LowHeadways on May 27, 2014 3:16 pm • linkreport

"Grosso said that the mayor only budgeted $400 million "

Do you mean Goulet, or was David Grosso mentioned in a paragraph that was cut?

by Todd on May 27, 2014 3:17 pm • linkreport

So much for being the "environmental" Council Chair. Why does the Sierra Club keep endorsing this guy?

by William on May 27, 2014 3:18 pm • linkreport

If we were rank those things most important to District residents, would cutting taxes rank in top 20? How many debates were centered around taxes? How many Council hearing dealt exclusively about reducing taxes?

Strange.

by Randall M. on May 27, 2014 3:22 pm • linkreport

Move to Texas if you want tax cuts for the rich. The District desperately needs this infrastructure. Now is not the time to slash taxes for millionaire home owners.

by DCDenizen on May 27, 2014 3:41 pm • linkreport

FTFY: "We just got through a winter of cramming [Maryland's homeless residents] into rec centers because they couldn't find a place to live"

by H Street Rez on May 27, 2014 3:44 pm • linkreport

Thanks for the clarification in the story. You did mean Grosso. That's interesting.

by Todd on May 27, 2014 3:46 pm • linkreport

Honestly, ignoring the, albeit sexy, transportation aspects of the proposal, the tax proposals seem pretty reasonable from a structural standpoint. DC taxes are relatively hard hitting for middle income taxpayers, and the standard deduction is pretty low. Raising that could well do more to help those with lower-middle income levels than almost anything else, since it is disproportionately taken by those with lower incomes who lack families(read: entry level people). Sure, pulling money from streetcars may suck, but if they have some multiplier based on development, cutting marginal rates on lower-middle class people certainly does to, and it's spread across the entire city rather than benefiting those in streetcar corridors, who are already more likely to have higher incomes.

by JPC on May 27, 2014 3:58 pm • linkreport

@H Street Rez:

I teach high school in DC. One of my former students was placed in a rec center with her child. There might have been Maryland residents there too, but don't assume the problem away. Real people who are from DC are being harmed by the situation. Cute little jokes don't make it better.

by DC Teacher on May 27, 2014 3:58 pm • linkreport

@JPC

But can you justify the quintupling of the estate tax exemption? That part just blows my mind - of all the tax priorities, that seems like the biggest giveaway with the smallest possible gain for the District.

by Evan on May 27, 2014 4:01 pm • linkreport

Oh I agree that not all of the proposal is a good or high priority thing. Estate tax changes are good tax policy, but among the least important things(Really, do we want to force high net worth people to retire to Florida instead of spending their time and money here?). I'm just saying that certain aspects of the reform proposal seem really reasonable, and will benefit a broader cross-section of society, more directly, than any streetcar could.

by JPC on May 27, 2014 4:07 pm • linkreport

When you think of all the money the District wastes on contracts with firms owned by Jeffrey Thompson and other political cronies, they can probably find some extra money for the streetcar. As for taxes, for economic growth reasons (and that the wealthy will simply re-domicile to avoid extremely high tax rates, thus costing tax revenue), Mendo's proposed adjustments are reasonable.

by Jasper2 on May 27, 2014 4:12 pm • linkreport

Tax cuts might make sense in some situations, but the city has been seeing a steady in-migration of upper income residents over the past decade. Why is there a need to cut taxes now if the current tax system isn't keeping them out? When a product is hot you don't cut prices.

by Timing is Everything on May 27, 2014 4:20 pm • linkreport

1. An increase in sales tax, espcially for online sales, isn't going to help. DC has a chance to again stand out for young people and NOT charge sales tax as you're not going to have distrubtion in the city. The benefits of bringing in affulent residents should be pretty obvious.

2. The same goes for health/gym memberships.

3. Cut social services, spend more on infrastructure. Plenty of savings there. I'd look into Ft. Myers paving as well as I can't understand how much money they have blown.

by charlie on May 27, 2014 4:29 pm • linkreport

@Timing is Everything

"seeing a steady in-migration of upper income residents"

Do we know this for sure. I think the largest demographic of people moving into the city are folks in their 20s and 30s who, while not poor, are probably not considered upper-income residents. I know a few people who live in Virginia to save the extra 3% on their paychecks.

For the upper-income residents who do live in the city, I think many are part-time residents. I know for sure that if I had enough money to pay estate taxes I would be sure to live 183 days outside the District of Columbia.

by Adam L on May 27, 2014 4:33 pm • linkreport

You always knew the $800 million for the streetcar was the cookie jar for whatever pet projects the Council wanted.

Grosso wants a committee to chair during the next session, so he's not going to say anything to annoy Mendo. Gotta admit, it is pretty hard to believe anything DDOT might say with its track record, so why believe they actually need the $800m. Cheh is trying to do something about that with her DDOt reform proposal, but the new transit DDOT is just a gleam in her eye. So it is entirely plausible to argue that all this money might never be used.

Putting aside the fact that Mendo is an enviro-NIMBY and the Sierra club ought to be ashamed of itself endorsing him, this move is what progressive liberals do when it comes to the income tax. While I don't agree with that approach, it is quite wise of Mendo to couple those proposals with a rollback of the estate tax. DC's structure simply causes the really rich folks to establish residence elsewhere like Florida. For many DC residents who are not of great means, they will tend to move rather than having two homes.

Mary needs to step up here and make sure there is enough funding for everything that has been planned. It might not be part of this year's budget, but if she gets commitments from Mendo it will come in later years, I can live with that.

by fongfong on May 27, 2014 4:37 pm • linkreport

Estate tax changes are good tax policy, but among the least important things(Really, do we want to force high net worth people to retire to Florida instead of spending their time and money here?).

Since when do estate taxes force anyone to go anywhere? They don't hit you until you're dead!

by MLD on May 27, 2014 4:38 pm • linkreport

Yeah, the rich are going to leave DC because they won't get a tax cut that they haven't gotten yet. Just like the rich will leave Manhattan, London, and Paris because...taxes. I can't believe I'm reading a thread that resembles the young republican club from the 80s. Trickle-down economics a little?

by dc denizen on May 27, 2014 4:43 pm • linkreport

This proposed, unneeded tax cut = more coddling of the rich for political purposes. This hasn't changed any since the 1980's. This is why our national budget is so tight...because the rich don't pay their fair share...thanks, GOP

by DaveG on May 27, 2014 8:04 pm • linkreport

So it's not just Arlington. The backers of expensive, unnecessary and very slow streetcars on on the defensive in DC too. Hail to the rise of politicians and citizens who favor fast, frequent cost-effective transit over wasteful Disneyland "transit" designed for the egos of politicians and the developers that line their pockets.

Wonderful news for anyone that cares about good transit, good urban spaces, and good governance.

by Real Urbanist on May 27, 2014 8:51 pm • linkreport

Stop dismissing the rich as uncaring jerks. The rich pay a lot more than most. Thank them for their contribution and sit down. Mendeleson, pay for the streetcars with our money or I'll be upset. This is my city and time is running out.

by NE John on May 27, 2014 9:32 pm • linkreport

@"Real" Urbanist:

I would agree if I saw a single practical, implementable plan for proper transit with dedicated lanes and (ideally) grade separation. But where are those?

Unfortunately, thanks to VDOT, DDOT, MDOT, and a lack of vision, willpower, and municipal bonds, it's become streetcars or nothing. And I'd rather have something than nothing.

by LowHeadways on May 27, 2014 10:07 pm • linkreport

Wait a minute...when did the streetcar double in price to 3 billion? The price tag was 1.4 billion last year, why the proposed set aside of 3 billion now?

by Streetcar on May 27, 2014 10:38 pm • linkreport

Now that Maryland just raised the estate tax exemption, it probably makes sense for DC to follow suit. Some people are happy to leave a final bequest to their state government, while others would rather leave all of it to their kids. The high tax could otherwise deter suburban retirees from moving into the city.

by JimT on May 27, 2014 10:46 pm • linkreport

"Unfortunately, thanks to VDOT, DDOT, MDOT, and a lack of vision, willpower, and municipal bonds, it's become streetcars or nothing. And I'd rather have something than nothing."

In the case of the mixed-traffic streetcar, 'something' in this case is a marginal improvement at best - more likely, it's a net-neutral change relative to the amount of bus service removed to accommodate it - and the stated goal of the streetcar has been said to be development. It's talked about in terms of revenue generation, in terms of investment potential, how much cash we can rake in rather than how many people we can help.

And when the main beneficiaries of a transit project become someone other than the riders, I think that's a huge problem.

So, no, I'd rather have "nothing" than "something" because in this case I consider the "something" to probably bring more harm than good. It is long past time that we need to stop being suckered into beautification projects that don't help riders. Every single time one of these projects comes up, whether it be the mixed-traffic streetcar or "BRT," the first and most important component - dedicated running room, without which none of the other improvements are frankly worth anything - is always the first one on the chopping block and the first one to be cut away to "save on cost."

No streetcar without dedicated space. It's a worthless project without the dedicated space, and the money is better spent just about anywhere else - particularly, as I continue to stress, in improving bus service on parallel routes.

by Ryan on May 27, 2014 11:10 pm • linkreport

Agree- the H Street streetcar, as designed, is awfully short-sighted and will do more harm than good for transit. So much poor planning, lack of planned connection to existing transit hubs (will bypass Chinatown), and many mistakes along the way. Everything from poor design of the stops/curbs to the concrete not getting tinted to match to the massive underspending of the allotted budget.

Incompetence all around (though, I note that Gray's administration has spent the most on the Streetcar, and isn't to blame for the many problems inherited from Fenty's folks).

by H Street Rez on May 27, 2014 11:21 pm • linkreport

Mendelson disagrees, and says that he'd like to see a clearer plan from DDOT about how it will spend the money before approving it.

consider, a hearing from a year or two from now:

Mendelson: what's your plan for the streetcar?
DDOT: Well, since the funding was cut, there isn't one.
Mendelson: See? They never needed the money in the first place!

by drumz on May 28, 2014 8:03 am • linkreport

drumz: Plans precede funding, not the other way around. "Well, since the funding was cut, there isn't one" actually probably means that there was never a plan in the first place.

by Ryan on May 28, 2014 9:30 am • linkreport

Ahh yes, Mendo, the only one espousing fiscal responsibility on the Council!

Saving for future projects? BAD!
Tax cuts right now? GOOD!

by MLD on May 28, 2014 9:52 am • linkreport

@ Timing,

Even with recent growth in the city's population, I imagine that the "affluent" Millenials aren't terribly worried about the estate tax. However, 50-60-somethings who have good incomes and other property (on which they pay hefty DC property taxes) start to worry about these things and can easily re-domicile to a state with a lower, or no estate tax. DC is just moving its estate tax structure closer to the median -- it will still be on the higher side.

by Alf on May 28, 2014 10:34 am • linkreport

Is there any evidence that anyone cares about the estate tax other than conservative tax policy wonks and politicians who follow the "soak the poor" method of government financing?

by MLD on May 28, 2014 10:55 am • linkreport

@MLD; it matters quite a bit, depending on the level.

Baseline for a middle class retirement is 1M in assets on retirement. In DC probably more like 1.5 or higher. Now, if you are 65 and having 1.5M in assets (small house + savings) and die the day after retirement that local estate tax is going to hurt.

If you live to 95 and blow through 90% of your assets on health care, no, it doesn't matter.

Plenty of life insurance salesman make their living on that.

And it makes a big difference when those rich old peple decide to move out of state to avoid the taxes.

Even more so for elderly rich people without children.

by charlie on May 28, 2014 11:14 am • linkreport

Now, if you are 65 and having 1.5M in assets (small house + savings) and die the day after retirement that local estate tax is going to hurt.

No, it won't. Your death may or may not hurt, but you'll be beyond caring about worldly concerns. (Your next of kin may see their inheritance reduced, but speaking from personal experience I found the early loss of a parent to be vastly more painful than a reduction in inheritance.)

by cminus on May 28, 2014 11:38 am • linkreport

But can you justify the quintupling of the estate tax exemption?

I also oppose it, but the justification in the report was that it made things simpler and meant DC could piggyback on federal auditing. I was writing a big post on the whole tax plan when this broke and I rushed it out. Not sure if GGW will still run it since it is a bit OBE.

by David C on May 28, 2014 11:42 am • linkreport

Saying this is a tax cut for the rich may not be accurate. Some taxes on the rich are cut are others are not. Some taxes on the poor and middle class are cut and others are not. It's unclear if this will make the tax code more progressive or not, but it very well might. As near as I can tell, no one has run the numbers to find out. On average, everyone's taxes will go down. So the question is who will win most.

There are many things to like in this. And many things to dislike.

by David C on May 28, 2014 11:48 am • linkreport

1. Property passed on to a surviving spouse is exempt, so you have to get to over $1M in other assets for that to set in in that case.

2. If there is no surviving spouse then I guess I can't really see why I should be bothered if that money gets taxed. Part of the purpose of the estate tax is to put a damper on the inheritance class and preserve equal opportunity. The retiree saved that money for themselves; I don't see why we should be enabling the continuous passing-down of that wealth.

3. I hear lots of talk about the rich moving out of state and the devastating effect on the economy of that, but I have yet to see any real evidence of either of those.

Also, nobody ever seems to address the fact that taxes imposed at death have lower disincentive effects on labor supply and savings - since it's only taxed when you're not there to use it!

by MLD on May 28, 2014 11:50 am • linkreport

@MLD; all good points, but the rub is again planning. The estate tax is easily avoided with planning and expenses (moving assets around etc) that it isn't as effective as it used to be when wealth was less transportable (land).

Throw is the costs to admister it, and there is a decent case to go with federal limits.

In all cases, there isn't much to squeeze out -- 14M.

regading your last point, the general tendancy is to tax transactions since those are easier to document.

by charlie on May 28, 2014 12:19 pm • linkreport

@MLD:

When Ted Leonsis has been quoted he lives in Potomac exclusively for the lower taxes and Snyder lives in Virginia for the same reason you can bet that we are losing money by having higher taxes.

People care about their kids a lot and rich people care about their money. When we have a law that attacks both on money they already paid taxes on, we lose. Virginia or Florida wins. Clarendon is on the metro too and rich people will move there to avoid the estate tax. If I earned it my whole life, I'm not giving it back to everyone. $14 million is action neutral and ignores the reduction of wealth flight/hiding.

by Mintwood on May 28, 2014 1:45 pm • linkreport

@Mintwood

Except that's just anecdotal and the rest is speculative. I'm talking about someone actually doing the math that says that you make up the money somewhere else.

money they already paid taxes on

Here's another thing I love. All money is money that has been taxed before. Your employer pays you income and it is taxed. You buy something and pay sales tax. The company uses those earnings to pay its employees and it's taxed again.

The same is true here. You earned income which was taxed. Then you saved it and you died, and when that money (over $1 million if you have that) is given to your heirs it is taxed again. Taxes occur all the time at points of transaction.

by MLD on May 28, 2014 2:02 pm • linkreport

@MLD: There have been some empirical studies about where retirees move, and they mostly suggest that estate taxes have some effect on residential decisions, but not enough for an estate-tax cut to be self-financing. The caveat, however, is that states with estate taxes are often more desirable than those without, so the estate tax by itself may have a greater deterrent to moving into a state than is easily discerned. Alot of Pennsylvanians leave their estate-tax-free state for the NJ shore with the lowest exemption, for example. Delaware (with a lower estate tax) is simply not a good substitute for the New Jersey shore.

Perhaps the greater problem with the estate tax is that people willing to do estate planning can avoid it in so many ways. So it rewards adult children for doing financial tax planning with their aging parents when perhaps it would make more sense to spend the same time looking at old photos etc. In Maryland, for example, (not sure about DC) you can double the exemption if the parent who dies first leaves the money to his children instead of his spouse.

Care to defend the proposition that the children who persuade the father who dies first, to leave the money to them instead of to their mother, should get to keep more money in the end than the children who urge dad to leave it all to Mom? For that matter, why should children who persuade Mom to pay their mortgage or kids tuition avoid taxes that must be paid by the adult children who don't?

by JimT on May 28, 2014 2:38 pm • linkreport

$14 million in lost revenue when the tax was 10% of 4.25 million means 33 people per year stay here to die at that level of wealth. Since the top 10% of DC residents currently carry that much wealth and they are old. People clearly leave.

by Mintwood on May 28, 2014 2:41 pm • linkreport

@JimT

So at most what we can say is that the research says Estate Tax cuts don't pay for themselves, but maybe not.

And the rest of your argument is just pointing out incongruities between taxing different things, which isn't an argument for or against the estate tax or how it is levied. Care to address why taxes on investment income are so much lower than taxes on wage income? Or is that not part of this debate either?

I don't see why those scenarios are reasons why the estate tax should be lower - seems to me like they are arguments that money thrown around between people should be taxed at higher rates. Indeed, why should wealthy people get a break if they pay their kids' mortgage instead of dying and leaving money to them? They probably shouldn't get a break on that - would make a more level playing field for all.

The overall argument is that we shouldn't bee taking from our future investments that make the city better (transit system) in order to pay for some tax cuts right now just because things are going OK. But I guess it worked so well for our federal budget circa 2001!

by MLD on May 28, 2014 3:38 pm • linkreport

Look, folks, when the the present DC estate tax kicks in at 1/5 the level of the Federal exemption, the tax is way, way out of whack -- enough that people will make domicile decisions based on it. All Mendo is trying to do is to restore some balance.

by Jack on May 28, 2014 4:01 pm • linkreport

@Jack:

Well, no, the whole point is that the federal exemption is too damn high, and that as the laboratories of democracies the states are free to set their own estate tax at whatever they deem fit.

Are we seriously that worried about losing a half dozen people to Florida? If they're the type of people willing to move to Florida to save money after they die, eff them.

by LowHeadways on May 28, 2014 4:19 pm • linkreport

People clearly leave.

Someone is buying those $10 million homes. But, I think the more likely answer is that people know how to avoid the estate tax without leaving. How does that 33 a year compare to other areas?

enough that people will make domicile decisions based on it.

I don't think there is evidence to support this. And this isn't why the Tax Commission recommended changing it. I believe their research showed this wasn't a concern.

Raising the federal threshold was a Republican proposal that our non-voting delegate opposed. And I suspect every one of our council-members would have voted against it given the chance (except Catania maybe). But here we are raising our threshold, not so much by our own choice but in response to a Congress in which we have no voice. I say no to that. There is nothing particularly admirable about inheriting money, we should tax it to reduce the tax on income (a.k.a. working) which is something we want to encourage.

by David C on May 28, 2014 4:29 pm • linkreport

I cannot understand this liberal nonsense most contributors seem to have here.

On one hand, they admit the government wastes money and the street car plan has not been planned out carefully. Yet let's continue to give more of our money to incompetent people to continue to was OUR money? There is so much waste in the bloated DC government, money can easily be found from places it is currently being wasted and put toward the streetcar. It's time to start demanding some accountability from the government, or else I'd rather spend my money on what I want to.

On another note, most people who are "rich" actually get there by, you know, working hard. The underlying notion is here is the rich people were just chosen at random, did not nothing to get where they are, and thus, there's no problem with having them continue to subsidize the "poor". I'm no where close to the "rich" category, but I hope that my continued hard work will eventually get me there. And when I do, I don't want my hard earned money going to an incompetent, wasteful government instead of my loved ones once I die via the estate tax.

More taxes =/= better standard of living. Tax payers demanding accountability from their government and responsible spending does.

by SB on May 28, 2014 7:07 pm • linkreport

@Jack. Are you sure about the 5:1 ratio for the federal and DC exemption. The federal exemption is $10 million per could. I know that with Maryland, it is $1 million/individual, which often works out to $1 million per couple as the surviving spouse inherits almost all the estate.

@MLD: From scanning the studies, I don't think there is any evidence that estate tax cuts pay for themselves in terms of revenue to a given state. The question is whether the loss in other revenues from some relatively well off people substantially offsets the revenues from the estate tax.

I think you are correct that the ability to avoid a tax through wasteful activities does not necessarily mean it should be repealed or that fewer people should be subjected to it. But as a practical matter, that is the typical response--see also the alternative minimum tax.

Your proposal, I think, is that instead of relaxing the estate tax, the District of Columbia should enact an extremely strict gift tax. It's an interesting thought, and if enacted as a revenue neutral measure (e.g. lower estate tax rate to offset increased gift taxes) if might be worth thinking about. But how would that work? Would you subject everything to the existing $14,000 gift tax limit? Or would you create a second limit below which bills being paid are not taxed. How about family vacations, Ivy League tuition...where do you draw the line? It's an interesting thought experiment, but I wonder whether perhaps you would find that the existing gift tax is as far as we can really go before the wheels spin off the whole thing.

Nevertheless, I think that some of those problems would be better solved by allowing the unused portion of the $1 million exemption to be passed to the spouse, as is the case with the federal estate tax. That should be a higher priority than increasing the exemption.

I am happy to opine on tax rates for investment, but please explain: Does DC have a preferential rate for capital gains? Maryland does not. At the federal level, up to a point, I think we have a very complex ad hoc approach that seeks to give lower rates to dividends for corporation subject to the corporate profits tax, while not giving a lower rate to dividends that had not been subjected to the corporate profits tax. So as far as I know, the objective is actually for investment and wage income to pay the same rate, by collecting about half of it from the corporation (in case earnings are retained) and half from dividends.

That does bring up a few other matters. One thing that people hate about estate taxes is that the rate is twice the income tax rate. At least that it the case in Maryland. Maybe lowering the rate to the income tax rate (or just treating the inheritance as part of income) makes more sense than this high tax rate. Second, the stepped-up basis for capital appreciation is a justification for an estate tax--but again, only for a rate comparable to the income tax rate.

On your narrow point about the federal budget, am I correct that the increased estate tax had the effect of drastically reducing the number of people who have to file, without a huge decrease in revenues since most of that tax is paid by a few very large estates? As you no doubt realize, most of the revenue loss from the "Bush tax cut" went to the middle class, which is why the "Obama tax increase" raised so little money.

by JimT on May 28, 2014 7:45 pm • linkreport

@Lowheadways: I think the argument is that people who split the year between here and Florida have some flexibility in declaring their domicile state.

by JimT on May 28, 2014 8:25 pm • linkreport

@SB:

"most people who are "rich" actually get there by, you know, working hard. The underlying notion is here is the rich people were just chosen at random, did not nothing to get where they are..."

Well, traditionally, that’s exactly how people got rich. The point of the estate tax is to prevent aristocracy-style multi-generational fortunes, i.e., that you should have to do some work to get rich – not just end up that way because of the random chance of who you’re born to.

If you have enough money to be affected by the estate tax, you're still leaving your heirs substantial amounts and they likely grew up very privileged, well-educated and well-connected anyway and can take care of themselves just fine.

by peter on May 28, 2014 11:26 pm • linkreport

Yet let's continue to give more of our money to incompetent people to continue to was OUR money?

I don't think anyone is saying that.

There is so much waste in the bloated DC government, money can easily be found from places it is currently being wasted and put toward the streetcar.

This is always the argument, that we could pay all our bills if we just got rid of waste. But no one has ever pulled that off. No conservatives, and no liberals. Even businesses have waste.

It's time to start demanding some accountability from the government

we have it, we call them elections.

The underlying notion is here is the rich people were just chosen at random, did not nothing to get where they are, and thus, there's no problem with having them continue to subsidize the "poor".

Being rich isn't a matter of winning the lottery (not totally), but some people are born on third base. An inheritance tax levels the playing field if only a smidge, but more importantly it allows us to tax people who work hard less (by reducing income taxes). If we want to reward people for hard work, then we need to tax people who make money for hardly working, i.e. inheritors.

once I die via the estate tax.

Wait, the estate tax is killing people.

More taxes =/= better standard of living.

No. And less taxes =/= better standard of living, either.

We have to tax people because we need a government. The question here is not about how much to tax, it is who or what to tax. Personally, I'd like to see us tax pollution more (carbon taxes for example) and work less. I'd like to see us tax wealth and inheritance more and school supplies (such as via the sales tax) less. And there is a good case for a progressive tax that taxes someone's 10 millionth dollar at a higher rate than someone's 10 thousandth dollar.

by David C on May 28, 2014 11:49 pm • linkreport

You're right that we need to raise revenue David C, but states are laboratories for social change. Creating an estate tax that climbs to 16% is the highest level in the country and means we lose wealthy individuals who otherwise might stay and spend money in our economy. Taxing wealth instead of income I completely agree, lowering sales tax to zero to foster economic growth is great. But you can only make fiscal policies like that with open borders. We both know we'd do our shopping in Georgetown and live in Rosslyn if DC had no sales tax and VA had no income tax.

Tax rates that completely counter the rest of the country better be damned well explainable ala high sales tax in a tourist area, high property tax in a bedroom community or high car tax in a city jurisdiction to intentionally discourage cars. But high income taxes or high estate taxes are not the way to go, they are the fairest and the best revenue raiser, I wish we could only tax wealth, but it doesn't work. Just like anti-gay or anti-abortion on the federal level when I can have my state over-rule it and live in VA but get married in DC. Social progress is for states economic progress is for federal.

by Mintwood on May 29, 2014 2:14 am • linkreport

Creating an estate tax that climbs to 16% is the highest level in the country and means we lose wealthy individuals

Perhaps, but the net effect of raising the threshold is lower tax revenue, so any gains from keeping wealthy people are more than offset by losses in tax revenue.

We both know we'd do our shopping in Georgetown and live in Rosslyn if DC had no sales tax and VA had no income tax.

Fine, we'd make the money back on business income taxes and property taxes (land in Georgetown's commercial district would go up in price). But that won't happen anyway. For one, Virginia does have an income tax. Not everyone can live in Rosslyn, so many people would be priced out.

BTW, that's the exact situation that exists in Oregon (no sales tax) and Washington (no income tax), but still plenty of people choose to live in Portland, OR even though Vancouver, WA is just across the river.

But high income taxes or high estate taxes are not the way to go, ... it doesn't work.

It would work just fine. People already pay a premium to live in DC, they would continue to do so (especially the wealthy who can most afford it). An alternative would be to raise property taxes, which have the added benefit of being deductible from ones federal income tax.

But in the hierarchy of "good" taxes and "bad" taxes. Pigovian taxes are at the top, with taxes on inheritance not far behind. Taxes on work and school supplies round out the bottom.

by David C on May 29, 2014 9:56 am • linkreport

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