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Overview of DC’s Dedicated Taxes, FY 2010 – FY 2019

Sharain Ward and Charlotte Otabor
Thursday, February 3, 2022 - 9:30am
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Like many other states and municipalities, the District sometimes earmarks or dedicates tax revenue for specific purposes rather than general budget purposes. One of the most common examples of a dedicated tax is the motor fuel tax used to fund roads and highways and it has become more popular as a way to raise tax revenue. On one hand, dedicating taxes guarantees funds are available for a particular purpose, such as making bond payments or matching federal grants.  On the other hand, dedicating taxes to specific purposes reduces general funds available to support the full range of programs and services provided by government.

All or part of a tax may be dedicated to a specific purpose. For example, the Housing Production Trust Fund, which receives 15 percent of the revenue generated by the District’s deed recordation and deed transfer taxes while the sales tax on parking is fully dedicated to fund the District’s annual commitment to the Washington Metropolitan Area Transit Authority (WMATA).

Dedicated taxes in the District were first reported in 1999. In that year, $51 million was dedicated to the Convention Center Fund from sales tax revenue associated with restaurant and hotel activity.  The amount dedicated was 1.5 % of total gross revenue. Since FY 1999, the number of dedications from taxes has increased significantly. In FY 2019, there were 22 dedicated taxes (chart 1).

Chart 1: Change in number of dedications 1999-2019

Chart 1: Bar chart showing annual changes in the number of DC dedicated sales tax transfers from 1999 to 2019. Blue bars represent years with increases in the number of dedicated transfers; orange bars represent decreases. Notable spikes include 9 new transfers in 2010 (blue) immediately followed by 25 eliminations in 2011 (orange). Other significant additions occurred in 2005 (+7), 2006 (+3), and 2007 (+4). Most recent years (2018: +2, 2019: +2) show modest increases.

In addition to the increase in number of dedications, there has been substantial growth in the amount of tax revenue earmarked for dedications. During the period between FY 2010 and FY 2019, total dedicated taxes increased from $334 million in FY 2010, to $805 million in FY 2019, a 141 percent increase in the proportion of tax revenue set aside for specified purposes (Chart 2).  The percentage of dedicated taxes to total taxes also increased from 7 percent of total taxes to 9.8 percent during the same period.

Chart 2: Aggregated dedications FY 2000 – FY 2019

Chart 2: Stacked area chart showing the cumulative dollar amounts of DC dedicated sales tax transfers by recipient program from 2000 to 2019. Total dedicated transfers grew from near zero in 2000 to approximately $800,000 by 2019. Programs shown include TIF/PILOT (2005), DDOT (2006–2011), Convention Center (2000), Ballpark Fund (2005), School Modernization (2007–2009), Healthcare Programs (2006), Arts and Humanities (2019), WMATA (2012), ABRA (2012), HPTF (2003), Neighborhood Trust Fund (2005–2011), Highway Trust Fund (2000), and Healthy Schools (2012). WMATA and Convention Center transfers appear as the largest components in later years.

Sales and use tax provided much of the revenue earmarked for dedications in FY 2010 and FY 2019, whereas the percentage of motor fuel, gross receipts, and property tax revenue as a total of dedicated taxes was reduced in FY 2019, compared to FY 2010 (Chart 3). The percentage increase in the proportion of dedications from sales and use tax revenue is due to 1) the number of new dedications (for example, a new dedication of $178.5 million for WMATA capital improvement projects representing most of the increase in FY 2019), and 2) changes in rates for some taxable items listed in Tables 1 and 2.

Chart 3: Dedicated tax by tax type as a percentage of total dedicated taxes

Chart 3: Horizontal grouped bar chart comparing the share of DC sales tax dedicated to different purposes in FY 2010 (blue) vs. FY 2019 (orange). Sales and Use Tax dominates in both years: approximately 47% in FY 2010 and 63% in FY 2019. Other categories (each under 15%) include: Other (~10%), Gross Receipts (~12% in FY 2010, ~7% in FY 2019), Property (~14% in FY 2010, ~6% in FY 2019), Deed Recordation (~5%), Deed Transfers (~4%), and Motor Fuel (~6% in FY 2010, ~3% in FY 2019). Sales and Use Tax's share grew significantly from FY 2010 to FY 2019.

Note: Other includes dedications from health-related taxes and the Baseball Project. 

Table 1: Changes in rates from sales and use tax, 2019 compared to 2010

Table 1: Table titled 'Sales and Use Tax' listing DC sales tax rate increases for specific taxable items. Medical marijuana: 0% to 6% (new taxable item). Soda: 0% to 8% (new taxable item; note states sales tax on snack foods was eliminated in 2001, exemption repealed in 2012, and rate increased from 6% to 8% in 2020). Liquor: 9.0% to 10.25%. Rental vehicles: 10.0% to 10.25%. Parking: 12.0% to 18.0%. Hotel: 14.5% to 14.95%.

Table 2: New tax dedications by tax type, 2019 compared to 2010

Table 2: Text box listing nine DC dedicated tax transfers along with their funding source. Sales-funded transfers include: Transfer to ABRA, Transfer to Arts and Humanities, Transfer to Destination D.C., Transfer to Healthy DC, Transfer to Healthy Schools, and Transfer to WMATA (capital and parking tax). Real property-funded transfers include: Transfer to PILOT and Transfer to St. Elizabeth's. Source: Annual Comprehensive Financial Report 2010 and 2019.

The District’s dedicated taxes are directed towards economic development, transportation, health, housing, and general services.  In FY 2019, economic development projects and transportation accounted for 75 percent of dedicated taxes, shown in Table 3.

Table 3: Dedicated tax use categories, FY 2019

Table 3: Table showing DC dedicated sales and property tax transfers in FY 2019 grouped by purpose. Economic Development (including WCSA, TIFs, PILOTs, and Baseball Project): $317,109 thousand (39.4%). Transportation: $286,217 thousand (35.6%). Health: $85,995 thousand (10.7%). Housing: $82,150 thousand (10.2%). General Services (including DGS, ABRA, Arts and Humanities): $33,376 thousand (4.1%). Total: $804,847 thousand (100.0%).

A summary of dedicated taxes is reported in the Annual Comprehensive Financial Report (ACFR), as is information on the District’s debt.  In addition to the ACFR, the CFO’s Office of Revenue Analysis prepares a report on dedicated taxes every two years.  In addition, dedicated tax revenue is estimated as part of the official quarterly revenue estimate and details about fund balance, revenue, and use are included in the revenue chapter of the annual budget summary. However, these reports focus on reporting the data and do not evaluate the effectiveness or the continuing need for dedications.