Taxes and Economic Development in the District of Columbia
Therese McGuire and Stephen Mark
October 1997

TAXES AND ECONOMIC DEVELOPMENT IN THE DISTRICT OF COLUMBIA

Stephen T. Mark, Therese J. McGuire and Leslie E. Papke

based on two reports written for the D.C. Tax Revision Commission

October 27, 1997

From the literature review:

Most studies of the effect of taxes on economic development across jurisdictions in a metropolitan area find that taxes are negatively related to some measures of economic activity, but that the size of the effect is not large relative to other factors.
There are only a handful of reliable studies of the effect of specific economic development policies (such as firm-specific tax incentives and subsidized loans) on economic development, and the evidence is weak. For example, industrial revenue bonds have been found to be positively associated with economic activity in some studies, to have no relationship in others, and to be costly relative to benefits in other studies.
The small number of credible studies of the effect of enterprise zones on economic development indicates that tax incentives will move capital into the zones, but there is little evidence that the welfare of zone residents is improved.
While taxes can be important determinants of business location decisions for some firms in some situations, and while it is possible for the taxes of a specific jurisdiction to be out of line with its neighboring jurisdictions, the empirical evidence indicates that cutting taxes is not a panacea for improving economic growth and development.

From the description of trends in the District and other metropolitan areas:

Over the last two decades, the District lost population while the entire metropolitan area gained population. This general picture applied to most metropolitan areas and their central cities, but the District's population performance stands out. It lost population much faster than the average central city even though its metropolitan area grew faster than the average metropolitan area.
Over the last twenty to twenty-five years, employment growth in the Washington metropolitan area has exceeded the average of comparable metropolitan areas, while employment growth in the District proper was slower than the average of comparable central cities.
Over a recent twenty-year period, real income per capita in the District grew at a robust rate relative to the average of other central cities and only slightly slower than in the D.C. metropolitan area.

From the econometric study of the effect of taxes on the District and its suburbs:

Population growth does not appear to be influenced by sales, property, or personal income taxes paid by individuals.
Population growth appears to be positively related to income per capita and negatively related to concentrations of poverty as measured by AFDC expenditures per capita.
Two business taxes, the personal property tax and the sales tax, appear to have large negative effects on employment growth. The services sector appears to be particularly sensitive to high sales taxes.
Targeted industrial revenue bonds appear to have a positive effect on employment growth in the health services sector.
Employment growth appears to be positively related to income per capita and to total expenditures per capita by local jurisdictions.
We find no evidence that crimes per capita have an effect on either population growth or employment growth after controlling for other relevant factors.

The District might consider a further reduction in its sales tax rate to boost employment growth overall and particularly in the services sector. However, if a cut in the sales tax rate is to be accommodated by a reduction in District expenditures, then the boost to employment growth would be muted.
The use of targeted industrial revenue bonds appears to be an effective economic development tool for the District. An expansion of this program to other worthy firms, in particular to manufacturing firms, might be warranted.
Our analysis finds that reducing taxes paid by individuals would most likely not retain or attract residents to the District.
Our results indicate that efforts to reduce the concentration of poverty in the District, such as through programs that increase the employment of welfare recipients, might be effective in increasing the overall population of the District.

The two reports are "What Do We Know About the Effect of Taxes on Economic Development? A Survey of the Literature", June 2, 1997, revised and reprinted by permission as "What Do We Know About the Effect of Taxes on Economic Development? Lessons From the Literature for the District of Columbia", State Tax Notes, Vol. 13, No. 8, August 25, 1997; and "The Effect of Taxes on Employment and Population in the Washington D.C. Area", October 24, 1997.