For Tax Reform Lessons, Congress Needn’t Look Far

For Tax Reform Lessons, Congress Needn’t Look Far
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Even more remarkable, the plan drew praise from across the ideological spectrum, including that of conservative supply-side advocates like Grover Norquist, the president of Americans for Tax Reform, which opposes all tax increases.

Among the organizations lauding the effort were the Urban-Brookings Tax Policy Center, the Tax Foundation, the Institute on Taxation and Economic Policy, and the National Taxpayers Union.

“What makes D.C. so unusual was the bipartisan support,” said Joseph Henchman, executive vice president of the Tax Foundation and an expert on state taxes.

The council chairman, Phil Mendelson, who led the effort, said the capital had to reform its tax code and ease the burden on business and middle- and low-income taxpayers to stay competitive.

“We now have the lowest general sales tax and lowest property taxes in the region, and the business tax is the same as Maryland,” he said. “We’re no longer seen as the high-tax jurisdiction. People feel good about that, which is a psychological factor that I feel is very important.”

Contrast that success with what happened in Kansas, which also carried out a notable tax experiment recently. Under the leadership of Gov. Sam Brownback, the Republican-dominated Legislature passed deep tax cuts that went into effect in 2013, with only modest efforts to raise revenue by broadening the base. The governor called the move “a shot of adrenaline into the heart of the Kansas economy.”

If so, it was a shot that nearly killed the patient. There was no surge in economic growth — Kansas lost jobs in 2015, the Bureau of Labor Statistics reported, trailing its neighbors Nebraska and Oklahoma and posting one of the worst performances of any state. In June, faced with a $900 billion budget gap, Kansas lawmakers threw in the towel. They passed a $1.2 billion tax increase and overrode Mr. Brownback’s veto.

Tax reform is never easy, and it wasn’t in the District of Columbia, either. There are no Republicans on the council, but as the Republicans have discovered, there can be sharp divisions within the same party. Among elected officials, the main opposition came from Vincent C. Gray, then the mayor, and the most liberal council members, who favored spending increases over tax cuts.

“The counterweight is always to spend the money,” Mr. Mendelson told me this week. “The mayor wanted to spend it, so I had to step up. Other members were willing to stand behind me as long as I was willing to take the political heat.”

The council passed the measure by a vote of 11 to 2. Opponents have fought a rear-guard action to delay putting the measure’s remaining cuts into effect, without success.

To raise revenue, the plan extended the sales tax to service businesses, which swept tanning salons and fitness centers into the tax base. They mounted a spirited opposition, calling the plan a “yoga tax” and a misguided effort to tax exercise, fitness and health.

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Vida Fitness on U Street. When Washington announced that its plan would apply sales tax to service businesses, some of those merchants mounted a vigorous opposition, calling the levy the “yoga tax.”

Credit
Andrew Mangum for The New York Times

“They almost succeeded in derailing it,” Mr. Henchman said. “It was really just a loophole, but every loophole has a constituency, and they can be very vocal.”

What can lawmakers now trying to reform the federal tax code glean from the District of Columbia’s experience?

The federal tax code is obviously far more complicated. Taxpayers in the capital, as in most states, generally report just their federal adjusted gross income. So thorny issues like mortgage interest, charitable contributions, and state and local tax deductions weren’t part of the debate.

The capital also had a balanced budget that was generating a surplus, which gave it more leeway for tax cuts.

But the philosophy behind the local effort could well apply to the federal government. Steven M. Rosenthal, who served as staff director of the District of Columbia’s tax revision commission and is a senior fellow at the Tax Policy Center, said the Trump administration and lawmakers should seek to “lower rates for competitiveness but tackle loopholes at the same time.”

“Lower rates mean fewer economic distortions — and the broader the base, the more we remove taxes as a driver of economic decisions,” he added. “That’s the tried-and-true theory of tax reform.”

Mr. Mendelson said Republicans might need to sacrifice ideological purity in pursuit of a common goal. “The goal should be to get to 51 percent of the votes in Congress, not 100 percent support within the Republican Party,” he said. “If you don’t have unanimity in the party, you need strong majority leadership that’s willing to form a bipartisan coalition with some dissent within the party.”

Mr. Henchman also stressed compromise. “Nobody got everything they wanted,” he said. “But they got enough that they felt it advanced their goals.”

He also cited the “high-level leadership” provided by Mr. Mendelson — someone who can stand up to special interests and make a persuasive case, as he did, that the code could be fairer and more competitive.

That’s a challenge that now falls to Mr. Trump, especially since he largely abdicated any leadership role in the failed effort to repeal and replace the Affordable Care Act.

Speaking this week in Missouri, he kicked off the campaign with broad themes and few details, pledging to “dramatically simplify” the federal tax code, “eliminate special-interest loopholes” and create a “competitive tax code that creates more jobs and better wages.”

Those may be platitudes, but the most important lesson from the District of Columbia may be a simple one: It can happen.



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