Setting the Federal Payment With the recognition that an annual Federal payment was necessary, the central policy question has been how much should the payment be. Several studies over the past 150 years have attempted to define more precisely the relationship between the Federal Government and the District of Columbia. These studies introduced a variety of factors which have a bearing on the level of payment, all of which are linked by the fact that the Federal presence imposes significant-and in many instances unique-costs on the District, and the Federal Government should make some contribution to help cover these costs. An examination of this matter was undertaken by the Committee on the Organization and Effectiveness of the District of Columbia Government (Nelsen Commission) whose results were published in 1972. The Commission concluded that "the Federal payment will thus continue to represent a kind of equilibrium, balancing extraordinary net benefits of the Federal presence with extraordinary net costs, however these benefits and costs may be defined." While the need for a Federal payment is widely accepted, defining the costs and benefits that must be considered in setting the payment level requires subjective judgment and analytical rigor. Exhibit 5 outlines some of the main concepts that are usually considered in establishing the Federal payment amount; each element is explored in greater depth in subsequent chapters. Elements Foregone Taxes Cost of Services State Surrogate Inter-City Revenue Elements To Be Considered in Determining The Federal Payment Section 501(b), P.L. 93-198 The Mayor, in studying and identifying the costs and benefits to the District brought about by its role as (1) revenues unobtainable because of the relative lack of taxable commercial and industrial property (5) recurring and nonrecurring costs of unreimbursed services to the Federal Government (7) benefits of Federal grants-in-aid relative to aid given other States and local governments (9) relative tax burden on District residents compared with that of residents in other jurisdictions in the EXHIBIT 5 II. Foregone Taxes The foregone taxes concept represents an attempt to quantify the amount of tax revenues the District Government loses as a result of the Federal presence. Some of the foregone revenues are due to the Federal Government being centered in the District, while other restrictions are due to explicit actions taken by the Federal Government (e.g., tax exemptions for certain organizations). Tax losses due to extraordinary Federal presence include such examples as (1) a narrower property tax base because of the substantial amount of Federally owned (and therefore tax exempt) property in the city, (2) a reduced income and sales tax base because of the tax exempt status of the city's largest employer (the Federal Government), and (3) a less diversified economic base because of the limited size and totally urban nature of the District. Some of the explicit Federal actions which have limited District tax revenues include: (1) a Federal prohibition on taxation of nonresident income earned in the District, (2) exemptions granted for land held by foreign governments or corporations located here for the sole purpose of doing business with the Federal Government, and (3) Congressional limitations on the height of buildings in the District (which also restrains the economic development of the District to an unknown degree). There are a host of methodological difficulties associated with determining the amount of tax losses stemming from exemptions established by the Federal Goverment. Property tax losses illustrate the kind of problems encountered. First, a value must be assessed for all Federal property holdings which inevitably poses imponderable questions like "What is the Washington Monument 'worth'?" The next methodological problem arises from the need to assume that all exempt property would be replaced by taxable property of equal value so that the tax loss can be determined. If the Federal Government were not based in the District, however, we do not know what would replace it, and thus a true market value cannot be established for property that could have entirely different land use and development patterns. The basic issues associated with estimating property tax losses are magnified several times in attempts to determine the revenues from business taxes, bank taxes, insurance taxes, sales and use taxes, and the like, which would be generated if the Federal establishment were not here. The uncertainties involved in these tax categories are so large that tax loss estimates for them have not been attempted. Despite inherent methodological problems, the Department of Finance and Revenue has attempted to affix dollar figures to the exemptions in the two primary tax categories: income taxes and property taxes. A discussion of these exemptions and their financial impact follows. |