What are the sources of revenue for the District’s Government? DC Tax Facts, A Visual Guide, Part 1

This blog series is built on a report that analyzed annual tax revenues for the District’s Government.

In 1871, (before District residents had the right to self-government in the Home Rule Act of 1973) District legislators officially adopted taxes as the major engine to balance the District’s expanding annual budgets.[1] Questioning why they choose to tax real estate or why it is taxed the way it is (using the value of land and improvements or buildings, as compared to just the land value), and debating its fairness or economic efficiency is for policy makers to decide and not the intention of this discussion.[2] In this blog post and in later installments, we will study what are the sources of District Government revenues and how they are collected using visually aggregated statistics with our latest tax data.

To start, almost 65 percent of the District Government’s revenues came from its own taxes on various transactions, possessions, profits, goods, and services within its borders in Fiscal Year (FY) 2018. There are three other primary sources of revenue the District Government uses for its day-to-day operations and to pay for capital improvement projects. These other sources are the non-tax revenues generated by the District Government, Federal funding, and private grants or donations. Figure 1 represents all of the revenues in FY 2018 gathered by the District Government from the four sources of funding. The General Fund, which functions as a large pool of money, includes all the local revenues raised by the District Government and is comprised of taxes, fines, fees, charges, economic interests, and bond proceeds or bond administration fees. These local revenues are usually separated from Federal and private revenues in the city’s budget books. Later in this post, we describe the four main sources of revenues, where they come from, and how they are distributed among District programs and activities.

Figure 1: All the District Government’s Revenue in FY18 [3]

Local Revenue

The first and most important source of funding for the city’s balance sheet is the local revenue we generate for ourselves. These local revenues represent 74.3 percent of the total revenue collected in FY 2018. Figure 2 represents a snapshot of the different kinds of FY18 District local revenue.

Figure 2: Local Revenues Collected in FY18

Within the General Fund there are three appropriated or devoted funds: The Local fund, Dedicated Taxes fund, and Special Purpose (or O-Type or Other) Revenues fund. And there are two ways in which revenue raised from the District is distributed to agencies or governmental activities like education, health and social service, criminal justice, etc.:

  • Through the Local fund all the tax and non-tax revenues not legislatively restricted for a particular purpose are designated for each agency or activity through the city’s annual budget process. To access full reports on recent approved budgets please visit https://cfo.dc.gov/budget.
  • Or, through a legislatively required investment or reimbursement to an agency for a particular purpose, e.g. dedicated taxes and special purpose revenue. Dedicated tax revenue is transferred out of the Local fund and is not available for general budgeting. For example, a small percentage of the sales and use tax is dedicated to the Healthy Schools program every year. Special Purpose Revenue, i.e. O-Type or Other revenues, comes from non-tax revenues generated from fees, licenses, permits, etc. that are dedicated back to the specific agency performing the fee-based function.  For example, Capital Bikeshare’s usage fees go to the Department of Transportation’s Bicycle Sharing fund which covers the city’s share of the service’s maintenance and operation.

The District Government relies on three local taxes, income, property and sales and use, that flow into the General Fund, as shown in Figure 2. The individual income tax is the District’s main revenue source and it comprises 23.1 percent of all local revenues. The property tax is the second making up 18.7 percent of the Local fund. Taxes on commercial properties bring in most of the property tax revenue, partly because commercial property is taxed at a higher rate than residential property and the market values of commercially zoned buildings are much higher in comparison. And, the District’s sales and excise tax comprises about 17.9 percent, the third largest source, of the Local fund. In FY18, the District raised $8.9 billion in taxes — equal to over six percent of the District’s economy that produced $142.626 billion in gross domestic product in calendar year 2018.[4]

The inner pie chart of Figure 2 shows the major types of taxes/non-tax revenue as a percent of the total amount collected in the middle ring. The outer part of the pie chart breaks down each major tax and non-tax by source with the percentage that each source contributes to the total revenue collected on the outside.

Federal Revenue

Federal grants come directly from Federal agencies to District agencies to fund certain specified services or functions that the District as a state, county, city and school district manages, such as road repair, education, community development, among other activities. These grants come in various forms like block grants (funding for broad purpose programs like community development and provide more spending autonomy to District agencies); formula grants (formulas established by law that fund state-administered Federal programs such as Medicaid or TANF with most funding formulas determined by a state’s population, median income, poverty, etc.); certain entitlements (binding obligations by Congress  to pay for state-administered programs like Social Security); and competitive grants (grants that District agencies apply for and compete against other potential recipients who also meet a grant’s eligibility requirements). This means the amount of Federal funding from year-to-year does not stay the same.

Even though the Federal Government provides grants and payments to all 50 states plus their localities and U.S. territories, through the Federal Government’s own income tax revenue, the District has had a unique funding relationship with the national government. Due to structural budgetary issues like large amounts of tax-exempt properties, the costs of public events, such as Presidential inaugurations and national demonstrations, as well as financial mismanagement and other mitigating circumstances, the District’s Government came under the supervision of the Congress’ Financial Control Board in the mid-1990s. Through various agreements with Congress, the District relinquished financial responsibility over its public employee pension system before 1984, its prison and court systems, and received a higher share of Medicaid payments among others.

All the Federal money and private grants or donations go into the separate Federal and Private Resources Fund. Part of the reason for this is that when the District receives money from Federal sources it comes with conditions, guidelines or requirements, and cannot be indiscriminately spent on activities. There are, however, a few exceptions to fund placement, like Federal funding for capital projects going directly to the General Capital Improvements fund, or instances where a fraction of Federal funding is transferred to the General Fund to pay for the indirect costs an agency incurs while managing a Federal grant.

The Federal funds the District receives are grants or payments that vary in size, frequency, and intent. In FY18, Federal contributions or payments and operating grants, including private sources, accounted for roughly 26 percent of the District’s total annual budget.[5]

Federal payments are direct appropriations from Congress, usually to a District agency for a particular purpose like security or logistics for public events like state funerals, Presidential inaugurations and demonstrations; they are like formula grants but are not mandatory or based on certain indicators. Another example of a Federal payment would be for Medicaid and Medicare because they are Federal programs that District human support service agencies administer. Figure 3 represents all the Federal money spent in FY18 by agencies clustered by their similar functions. Because of differing fiscal years and funding lifecycles, the District’s governmental activities by agency cluster and source of funding is specified through money spent in its public financial reports. Funding from the Federal Government for human support services constituted over 55 percent of the total District budgetary expenses in this category.[6] Every other category received and used an insignificant amount of mandatory funding for Federally mandated programs in comparison, following a recent pattern of historically low levels of Federal funds received outside of major health programs.[7]

Figure 3: Federal Revenues Spent by Agency Cluster in FY18

Note: Because of differing fiscal years and funding lifecycles, the District’s governmental activities by agency cluster and source of funding is specified through money spent in its public financial reports.

Private or Non-Profit Sector Revenue

Finally, grants and donations from private individuals, foundations, or organizations to the District Government are used to supplement District funding for mutually accepted policy goals. Like Federal grants, private grants and donations usually come with stipulations that are narrow in scope and go directly to the implementing agency such as the Public Schools. Agencies in the education cluster collectively received almost 39 percent of the total amount of private funding in FY18.[8] Figure 4 shows a breakdown of how much each agency cluster spent from private sources in FY18. Again, because of differing fiscal years and funding lifecycles, the District’s governmental activities by agency cluster and source of funding is specified through money spent in its public financial reports. The total money received from private sources in FY18 represented only 0.1 percent of the District’s total revenue received in that fiscal year.

Figure 4: Private Grants and Donations Spent by Agency Cluster in FY18

Note: Because of differing fiscal years and funding lifecycles, the District’s governmental activities by agency cluster and source of funding is specified through money spent in its public financial reports.

In future posts related to this series, we will discuss income taxes, property taxes, sales and excise taxes, the gross receipts tax and other taxes. This series, and the report behind it, focus on taxes levied in the District so Federal, private, and non-tax sources of revenue will no longer be discussed after this post. If you would like to see more of this kind of tax analysis, please visit the OCFO’s website at https://cfo.dc.gov/node/230872 for the full Tax Facts Visual Guide report.

[1] D.C. Official Code § 47-401.

[2] Taylor, Yesim. “Land Value Tax: Can it Work in the District?” DC Policy Center, 21 Oct. 2019, https://www.dcpolicycenter.org/publications/land-value-tax/

[3] District of Columbia’s Government. (2019). FY 2020 Approved Budget and Financial Plan. Washington, DC: Office of the Chief Financial Officer.

[4] U.S. Bureau of Economic Analysis, Total Gross Domestic Product by Industry for District of Columbia, retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DCNQGSP, February 13, 2020.

[5] District of Columbia Comprehensive Annual Financial Report, Exhibit 2-d pg. 51, FY 2018

[6] DC CAFR, Exhibit D-2 Actuals, pg. 172-177, FY 2018

[7] The Center on Budget and Policy Priorities. “Federal Aid to State and Local Governments.” 19 April, 2018, https://www.cbpp.org/research/state-budget-and-tax/federal-aid-to-state-and-local-governments

[8] DC CAFR, Exhibit D-2 Actuals, pg. 172-177, FY 2018