The assignment had the following objectives: (1) to review recent economic developments in the District of Columbia and to discuss future economic prospects, (2) to assess the main sources of revenue and to examine the outlook for new sources, (3) to discuss the bases of the regular Federal payment to the District of Columbia and to examine the likelihood of its continuation, and (4) to determine how statehood might alter access to funding under Federal programs applicable to states, cities, or local jurisdictions.

Economy of the District of Columbia

The economy of the District of Columbia continues to be heavily dependent upon Federal Government operations. In recent years, however, the emphasis on curtailing Federal employment has had a moderating effect on the District economy. At the same time, the private sector has been expanding rapidly with major growth occurring in the service sector. ΤΟ a considerable extent, this shift has been bolstered by

3

the new Federal policy favoring contracting for professional and business services from the local private sector.

in the

growth. District

The shift toward dependence on the service sector placed Washington in a favorable position to participate national trend toward service-oriented economic The resultant changes in the structure of the economy are readily apparent in its employment profile. For example, between May, 1980, and May, 1986, employment in services increased by 44,300 jobs, while government employment declined by 18,600 jobs, and all other District employment was essentially unchanged.

Although the District of Columbia has had a from the 1982 recession, its growth

favorable recovery

in

Personal Income has been running about 2 percentage points lower than the national average. The neighboring state of Maryland has generally been keeping pace with the nation, while Virginia has consistently grown faster than the national average.

Brimmer & Company

forecasts that the District of

Columbia will continue to experience slower growth in

the next five

years than is anticipated for either of

its neighboring states ΟΙ for the nation. The basic conditions that limit economic growth in the District of Columbia will not be significantly altered by statehood. In addition to having to live with a slower rate of economic growth, District of Columbia residents regularly receive less than one-half of the total earnings generated within the District. A large share of District net earnings accrues to persons working in the District but residing in suburban Maryland or Virginia.

Federal law does not allow the District of Columbia. Government to impose an income tax on nonresidents' earnings in the District. In contrast, all other states (and some cities) which tax income originating within their jurisdictions

do tax earnings by out-of-state

residents. If the District of Columbia were to become a state, it too could adopt a commuter tax. Such a move would generate a significant amount of tax revenue. Revenue Sources and Taxation in the District of Columbia The Government of the District of Columbia collects from taxes, fees, grants under Federal and other miscellaneous sources in much the

revenues

programs,

same way as other states and local governments. Yet, its

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discretion.

position differs from that of other jurisdictions because, (1) it receives a Federal payment regularly in compensation for costs associated with the presence of the Federal government, and (2) it is subject to special Federal restrictions on its taxing authority and on its budgetary The District of Columbia is prohibited from taxing earnings of workers residing outside of the District and properties within the District owned by the Federal Government. In addition, the properties of certain organizations located within District are specifically exempt from District

the

taxes.

Income and property taxes are the leading sources of District revenue followed closely by sales taxes. These three major sources provided over 65 per cent of total general fund revenues in Fiscal Year 1986. Taxes from all sources have been providing over 70 per cent of total revenues in recent years.

The remaining revenue sources include the regular Federal payment which had been about 20 per cent of total revenues in 1982 and 1983, but has been a steadily declining share since. Miscellaneous nontax revenues

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(including charges, fines,

etc.) provided about 5 per

cent of total revenues in 1986. The D.C. Lottery is now providing about 2 per cent of the revenue total.

Total tax revenues increased at an average annual rate of 9.1 per cent from FY 1982 through FY 1986. Over the same four years, the regular Federal payment to the District increased by only 5.2 per cent. Largely because of the lower growth in the Federal

payment, total

revenues increased at an average annual rate of 8.7 per

cent.

are

Forecasts of revenue growth for the next five years substantially lower than in the recent past. This reflects the expectation for more moderate economic growth following the period of rapid recovery from the 1982 recession. The overall growth rate for total revenues is forecast at 5.9 per cent annually over the next five years. As in the past, the three largest

contributors

taxes

are

income taxes, property taxes, and sales expected to grow faster than the average

rate. The collective growth rate for all tax revenues is forecast at 7.6 per cent for the next five years.