Mayor Fenty’s proposal for closing DC’s recently-announced budget shortfall includes major budget cuts to programs affecting DC’s low-income residents. These are the very residents that are struggling the most during this economic downturn.

Cuts to programs affecting low-income residents total $52 million. That’s more than half of the $99 million in proposed cuts. Yet these programs only make up about 30 percent of DC’s budget. In addition, the low-income cuts are more than three times as large as the cuts to any other area of the budget:

DCFPI’s analysis of the Mayor’s proposed amended FY2010 budget.

Dollars in millions. See note at the end of the post.

What’s on the chopping block? Rental assistance, neighborhood economic development, adoption subsidies, and financial assistance to grandparents taking care of grandchildren, just to name a few. Some of the deepest cuts were made to DC’s Temporary Assistance to Needy Families (TANF) program — a program that provides financial assistance to low-income families with children — and to adult literacy and workforce development. These areas of the budget have long been overlooked and underfunded in the District. DC’s has almost 15,000 more unemployed residents this year than last. Coupled with increased demand for public assistance, cuts to these programs will be particularly painful for DC’s neediest families.

It’s a tough job to balance a budget in the midst of an economic downturn. DC’s revenue collections are down, but because of the economic downturn, the need for assistance is rising. So how can officials create a balanced budget that doesn’t rely disproportionately on cuts to programs for low-income residents?

Part of the solution is using DC’s $330 million rainy-day fund that’s available for budget shortfalls. Congress should fix the onerous payback rules which require us to replenish what we take out within two years, which other states needn’t do. The Mayor has proposed using $125 million of the rainy day fund, but hasn’t addressed the payback rules.

Another part of the solution is raising revenues. DC’s budget shortfalls almost entirely result from falling revenues from the economic downturn, not from increased spending. The Mayor’s proposal only includes one $7 million revenue increase. This solves just five percent of the FY 2010 budget gap. A fairer approach would be to balance progressive revenue increases with expenditure cuts.

Some say raising revenues in an economic downturn is bad idea, but it is actually a reasonable approach, especially for states that have to maintain a balanced budget. Leading economists have shown that raising income taxes on high income earners is better for the local economy during an economic downturn than cutting government services.

In addition, it provides us with an opportunity to begin some smart tax policy fixes.

For example, DC could eliminate the income tax exemption it gives DC residents for investing in out-of-state bonds. All states that have an income tax allow exemptions for in-state bonds to provide an incentive to invest in the state’s own infrastructure projects. However, DC gives the same break for out-of-state bonds. That provides an incentive for its residents to invest in other states’ infrastructure projects. That’s not good policy, which is why only one other state, Indiana, allows it. Moreover, this tax break mainly goes to high-income DC residents who could still claim a federal tax exemption for their investment, even if DC eliminated its tax exemption. Eliminating the exemption would give an incentive to invest in DC’s infrastructure projects and could also help prevent the need for cuts to important programs and services.

Relying on these principles can help DC officials create a balanced budget that protects the safety net for DC’s most vulnerable residents.

Notes on the graph: Total cuts in each appropriation title do not include costs that were shifted from federal funds to O-type or special purpose funds with the exception of Human Support Services and other low-income programs which includes a $440,000 cut to DCRA’s building repair fund. Human Support Services and other low-income programs also includes the following amounts from the following appropriation titles: $1.8 million from Government Direction & Support (legal services for low-income residents), $9.84 million from Economic Development (neighborhood economic development, local rent supplement program, building repair fund, and adult workforce development) and $1 million from Public Education (adult literacy).