[Senate Hearing 105-161]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 105-161


 
                       FEDERAL TAX POLICY FOR THE
                          DISTRICT OF COLUMBIA

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                  OVERSIGHT OF GOVERNMENT MANAGEMENT,
              RESTRUCTURING, AND THE DISTRICT OF COLUMBIA

                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 6, 1997

                               __________

      Printed for the use of the Committee on Governmental Affairs



                               


                      U.S. GOVERNMENT PRINTING OFFICE
 39-457 cc                   WASHINGTON : 1997
_______________________________________________________________________
           For sale by the U.S. Government Printing Office, 
 Superintendent of Documents, Congressional Sales Office, Washington, DC 20402


                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   FRED THOMPSON, Tennessee, Chairman
WILLIAM V. ROTH, Jr., Delaware       JOHN GLENN, Ohio
TED STEVENS, Alaska                  CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine              JOSEPH I. LIEBERMAN, Connecticut
SAM BROWNBACK, Kansas                DANIEL K. AKAKA, Hawaii
PETE V. DOMENICI, New Mexico         RICHARD J. DURBIN, Illinois
THAD COCHRAN, Mississippi            ROBERT G. TORRICELLI, New Jersey
DON NICKLES, Oklahoma                MAX CLELAND, Georgia
ARLEN SPECTER, Pennsylvania
             Hannah S. Sistare, Staff Director and Counsel
                 Leonard Weiss, Minority Staff Director
                    Michal Sue Prosser, Chief Clerk

                                 ------                                

SUBCOMMITTEE ON OVERSIGHT OF GOVERNMENT MANAGEMENT, RESTRUCTURING, AND 
                        THE DISTRICT OF COLUMBIA

                    SAM BROWNBACK, Kansas, Chairman
WILLIAM V. ROTH, Jr., Delaware       JOSEPH I. LIEBERMAN, Connecticut
ARLEN SPECTER, Pennsylvania          MAX CLELAND, Georgia
                        Ron Utt, Staff Director
      Laurie Rubenstein, Minority Staff Director and Chief Counsel
                      Esmeralda Amos, Chief Clerk



                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Brownback............................................     1
    Senator Lieberman............................................     2
    Senator Cleland..............................................     4

                               WITNESSES
                        Thursday, March 6, 1997

Hon. Eleanor Holmes Norton, U.S. Delegate to Congress from the 
  District of Columbia...........................................     4
Jack Kemp, Co-Director, Empower America..........................     8
Daniel J. Mitchell, McKenna Senior Fellow in Political Economy, 
  The Heritage Foundation........................................    19
William A. Niskanen, Chairman, Cato Institute....................    21
Hon. Marion Barry, Jr., Mayor, District of Columbia..............    27

                     Alphabetical List of Witnesses

Barry, Hon. Marion (Jr.):
    Testimony....................................................    27
    Prepared statement...........................................    53
Kemp, Jack:
    Testimony....................................................     8
    Prepared statement...........................................    39
Mitchell, Daniel J.:
    Testimony....................................................    19
    Prepared statement...........................................    45
Niskanen, William A.:
    Testimony....................................................    21
    Prepared statement...........................................    49
Norton, Hon. Eleanor Homes:
    Testimony....................................................     4
    Prepared statement...........................................    35

                                APPENDIX

Prepared statements of witnesses in order of appearance..........    35
Additional information from Ms. Norton...........................    63



            FEDERAL TAX POLICY FOR THE DISTRICT OF COLUMBIA

                              ----------                              


                        THURSDAY, MARCH 6, 1997

                                       U.S. Senate,
         Oversight of Government Management, Restructuring,
                     and District of Columbia Subcommittee,
                        of the Committee on Governmental Affairs,  
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:39 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Sam 
Brownback, Chairman of the Subcommittee, presiding.
    Present: Senators Brownback, Lieberman, and Cleland.

             OPENING STATEMENT OF SENATOR BROWNBACK

    Senator Brownback. I think we will go ahead and get this 
Subcommittee hearing started. We have a great set of witnesses 
coming in front of us to talk about some opportunities for the 
District of Columbia.
    My name is Sam Brownback. I am Chairman of this 
Subcommittee, and our focus of today's Subcommittee hearing is 
on making the District of Columbia a shining city on a hill, a 
capital city worthy of a great Nation. If I could put it in 
such glowing terms, I have that type of hope. I think we have 
that kind of opportunity for us to be able to do it in the 
District of Columbia, a shining city on a hill, worthy of a 
great Nation. That is my objective, and I know it is shared by 
the Ranking Member on this Subcommittee as well, Senator 
Lieberman.
    We have a number of good people here to testify today. I 
would like to recognize from the very outset, if I could, a 
couple of members of the D.C. City Council. John Ray and Carol 
Schwartz are here, I believe, if you would stand up. We 
appreciate very much--and Sandy Allen is here as well. OK. 
Thank you very much as well for coming. I appreciate that.
    Also, if I could, I would like to introduce and will call 
upon shortly for some brief comments, introductory comments, 
from Senator Lieberman, who is the Ranking Member of this 
Subcommittee, certainly a distinguished colleague that has 
worked hard on the issues of the District of Columbia over the 
years, and who I think has shown a very sincere desire to do 
what is best for the District of Columbia. Even though it may 
not directly benefit his constituencies back home, we all see 
benefit in having a great capital city, and he has shown that 
over the years on his work that he has done.
    The first panel up will be Eleanor Holmes Norton and Jack 
Kemp. If I could, in opening, I would say what I would like to 
do through this panel is look to see how we can create more 
opportunities for the District of Columbia to become a shining 
city. We are going to be talking about tax policy today. The 
District of Columbia, undoubtedly, as everybody knows, is 
having a great deal of problems. If you look at troubles with 
the economy, schools, serious crime, all of these--the U.S. 
Census Bureau is even projecting that the District will lose 
almost three times as many residents in 1990's as it did in the 
1980's if we continue on the same trends.
    We cannot let those trends continue. We simply must stop 
that from happening. And I think we have opportunities to be 
able to attack that, and today we are going to be talking about 
tax policy.
    Now, if the Federal Government simply wrote a check to 
cover the District's debt, I think the local failing economy 
would still remain as a problem, and we would still have 
problems with schools and unsafe streets. But to fix both 
problems, we need to explore options that will empower the 
District to open the floodgates for capital to revive the local 
economy as part of a comprehensive plan to restore greatness to 
this city.
    This hearing marks the first of many this Subcommittee will 
hold to examine a comprehensive package of incentive-based 
policies such as enterprise zones, tax policy, improved public 
safety, education and welfare reform. I should also mention we 
had a number of people that wanted to testify today, but we 
simply were not able to accommodate everyone who wanted to 
testify, particularly on this issue of tax policy. We would 
welcome your input into the Subcommittee. The Members would 
greatly appreciate that if you would put that forward.
    Every American citizen, I think, has something at stake in 
our capital city. We want to make it the best possible place we 
can, and that is why we launched these hearings. We will move 
forward with them.
    I would now like to turn the podium and the microphone over 
to the Ranking Member, somebody for whom I have a great deal of 
respect, even though I am new to the Senate. You start to find 
your way around pretty quickly about good people to work with, 
and I have already been up to Senator Lieberman's office to 
receive his counsel and his thoughts. And I have worked with 
him, and I look forward to a long, productive relationship--a 
productive one for the District of Columbia.
    Senator Lieberman.

             OPENING STATEMENT OF SENATOR LIEBERMAN

    Senator Lieberman. Thank you, Mr. Chairman, for those very 
kind words, and let me begin by thanking you and congratulating 
you on focusing the first hearing of this Subcommittee during 
this Congress on the ways in which Congress can be of 
assistance not only to the District of Columbia but to our 
Nation's cities as well.
    As I am sure we are going to hear from our distinguished 
panel of witnesses this morning, the District is now and for 
some time has been in a serious crisis. This Subcommittee, 
quite appropriately, will in the future be exploring several 
aspects of the crisis under your leadership, but today's panel 
is going to focus on how the Federal Government can use tax 
policy to address the financial problems facing the District.
    As I am sure we will hear, these problems are due in good 
measure to the District's rapidly declining tax and, if I may 
say so, population base. The District is literally bleeding 
population, falling from 640,000 to 530,000 residents since 
1980, and all indications are that trend not only will continue 
but will accelerate. In fact, the District has lost more than 
10 percent of its population since the beginning of this 
decade.
    The Census Bureau projects that the District will lose 
almost three times as many residents in the 1990's as it did in 
the 1980's. In that sense, people are speaking with their feet, 
and we have to give them a reason to stop moving those feet and 
stay right here in the District, because with the residents who 
leave the District goes their income and a significant portion 
of the District's tax revenues.
    We have talked a lot over the years here in Congress about 
our responsibility to the District and the problems that it 
has, but all too often we have done much too little. As we 
begin this Congress, I think we have some reason for more hope. 
Perhaps one of the best indicators of that hope is the fact 
that when the President and the congressional leadership of 
both parties got together and looked for some areas on which 
they essentially had enough agreement to go forward together, 
one of the five areas they chose was the District of Columbia.
    Mr. Chairman, Senator Mack and I, if I may say so, inspired 
by a particularly intellectually vibrant and, even at his 
advanced age, physically vibrant former Congressman from 
Buffalo. [Laughter.]
    Mr. Kemp. Advanced? Advance age?
    Senator Lieberman. Right, will soon introduce again 
legislation that we proposed in the last Congress, which is 
companion legislation to that introduced by Delegate Norton, 
which we feel very confident will stem the tide of the 
District's revenue and population loss by giving people a 
reason to stay and giving businesses a reason to come and stay, 
and those are tax and fiscal reasons.
    I am sure, Ms. Norton, who has already introduced the 
companion legislation, her legislation in the House will go 
into the details of that proposal. So in the interest of 
brevity, I am going to defer to her on that.
    The main point here is there are a lot of different ways to 
go at helping the District. The President and the 
administration have introduced a package. This way, if I might 
borrow from Jack Kemp again, is the way of empowerment. This is 
not a bailout that we are talking about with tax relief. This 
is using the tax system to bring people in and stimulate and 
liberate the creative energy and intellectual and economic 
capacity of the District and its people and in doing so, we 
hope, set an example for cities all over America because this 
is, after all, America's capital city. It is in that sense 
America's city. We have not treated it well in the past. We 
have a chance here in this Congress to treat it much better and 
give its citizens the hope that they deserve.
    Thank you, Mr. Chairman.
    Senator Brownback. Thank you, Senator Lieberman.
    Senator Cleland.

              OPENING STATEMENT OF SENATOR CLELAND

    Senator Cleland. Well, it is just wonderful to be with 
Eleanor Holmes Norton again. We worked together in the Carter 
administration, and we appreciate your interest and commitment 
to the District of Columbia, our Nation's capital. It is nice 
of you to come down, and we appreciate your creative approach 
to financing for the District.
    My old friend, Jack Kemp, it is great to see you again. I 
feel compelled as a Falcons season-ticket holder to inform you 
they have a job opening down there for a quarterback.
    Mr. Kemp. I will take it.
    Senator Cleland. And especially a quarterback who knows how 
to deal with third and long repeatedly. [Laughter.]
    We are glad to see you, and we look forward to your 
testimony and comments.
    Thank you, Mr. Chairman.
    Senator Brownback. Thank you, Senator Cleland.
    Our first panel will be the D.C. Delegate, Eleanor Holmes 
Norton, and Jack Kemp. I do not know that either of them needs 
much of an introduction.
    Ms. Norton, I believe we will go with you first as author 
of H.R. 549, the District of Columbia Economic Recovery Act. 
Your testimony is appreciated, and the floor is yours.

 TESTIMONY OF HON. ELEANOR HOLMES NORTON,\1\ U.S. DELEGATE TO 
             CONGRESS FROM THE DISTRICT OF COLUMBIA

    Ms. Norton. Thank you very much, Mr. Chairman. If I may say 
so, Mr. Chairman, some of us already miss you. You were a 
member of the House for a brief, fleeting moment, and I must 
say that if the alacrity with which you got from the House to 
the Senate is any indication, I expect this bill to pass this 
year.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Norton appears on page 35.
---------------------------------------------------------------------------
    Senator Brownback. We are going to try this month. We may 
have to slide to April.
    Ms. Norton. I very much appreciate your initiative, Mr. 
Chairman, in organizing today's hearing on the District of 
Columbia Economic Recovery Act, which I call the DCERA, as the 
first hearing of your chairmanship. I am grateful as well 
because this is also the first hearing on the bill in the 
Senate. The hearing comes at a propitious moment, considering, 
as Mr. Lieberman has just said, that the President and the 
House and Senate leadership have made the capital of the United 
States one of their five priorities for the 105th Congress.
    It is a special pleasure to have the opportunity to testify 
here with my good friend, Jack Kemp, who is one of the most 
thoughtful urbanists in the country.
    Mr. Chairman, there are three essentials for the recovery 
of the District. One is underway--the current efforts of the 
city and the financial authority to restructure and reform the 
finances and management of the D.C. Government. A second has 
been introduced by the President--a plan to take on 
congressionally accrued pension liability as well as some State 
functions that the District alone among U.S. cities has 
carried. The third is a tax reduction as an incentive to keep 
and attract taxpaying residents to the city, the subject of the 
hearing you have organize today.
    With your permission, I would like to place the full 
details concerning the DCERA, including charts and other 
materials, in the record and simply to summarize its major 
features here.\1\
---------------------------------------------------------------------------
    \1\ The information referred to appears on page 63.
---------------------------------------------------------------------------
    Senator Brownback. It is so ordered.
    Ms. Norton. The DCERA has been deliberately designed with 
bipartisan features that offend neither party. The bill 
achieves the tax cut, first, by raising the traditional 
standard deduction and personal exemptions about two-and-a-half 
times their present value; second, by applying a 15 percent 
rate progressively up the income scale so that the smaller the 
income, the larger the cut; and, third, by maintaining the 
charitable and mortgage deductions to assure that the intent of 
the bill to encourage residents to remain or settle in the 
District is fully carried out. The DCERA also exempts capital 
gains on District investments by District residents and applies 
the 15 percent rate to investment income on investments in D.C. 
by D.C. residents.
    I would like to direct the rest of my remarks to a few 
points that may be more difficult for people new to the idea of 
a tax cut for the District. A tax reduction for a particular 
city is unusual and counterintuitive for many. I propose a 
Federal tax cut for the District of Columbia because of the 
city's unique features. I propose a tax cut for this city 
because it is the capital of the United States, is experiencing 
lethal flight in the 1990's at a rate three times those who 
left in the 1980's, has no State to recycle money back as 
residents leave, and is barred by Congress from enacting a 
commuter tax, from extracting a commuter tax from suburbanites 
who hold the lion's share of the city's jobs while paying 
nothing for their use of the city services. A tax cut would 
also eliminate at least some of the disparity between the 
District and the four territories whose residents pay no 
Federal income taxes, but like the District, send a Delegate to 
Congress. The people I represent are third per capita in 
Federal income taxes and are the only Americans to whom the 
American Revolutionary slogan ``no taxation without 
representation'' still applies.
    Because of the District's unique features, I do not pretend 
that the DCERA is directly applicable to other cities. I do 
argue that the great cities could directly benefit from 
allowing some of the ideas incorporated in my bill to go 
forward. Most large cities have lost population and have been 
spared the fate that has befallen the District largely because 
they lie within States that funnel money back from wealthier 
areas in the State. States and cities would be far better off 
if middle-income taxpayers remained to revitalize these cities 
rather than condemning them to becoming non-producing wards of 
their States. If the DCERA encourages people to remain in the 
District, some relief from State taxes, for example, might have 
a similar effect in the States.
    At the same time, the DCERA is no substitute for the 
President's plan to pick up the cost of some State functions. 
My bill cannot succeed without the President's plan because 
even with a stabilized middle-income population, no city today 
could pay for State, county, and municipal functions such as 
Medicaid, which is bankrupting many States, or prisons, as the 
District uniquely does. On the other hand, the President's plan 
cannot succeed without my bill because his plan leaves the 
overwhelming cost of running the city still to local taxpayers.
    Will the DCERA have the desired effect? I believe that it 
already has. A pick-up in home sales after a long period of 
decline was reported last week. I do not claim that a bill that 
has not been enacted is responsible, but I can tell you that 
real estate agents have been explicitly and aggressively using 
my bill to market homes. The bad news is that the article 
reported that most D.C. residents are renters and that actual 
flight has not significantly abated.
    It is clear that in a city where people rent rather than 
buy houses and an economy in decline, many of these sales may 
well be to speculators rather than to homeowners who are 
indispensable to a full revitalization. In any case, there is 
significant evidence that the bill will allow taxpayer flight 
in the overwhelming support the DCERA enjoys in every 
neighborhood of the city and among every income group and race. 
The breadth and depth of the support of this bill is unusual, 
including strong support from every member of the City Council, 
who today represent the richest, the poorest, and the 
traditional middle-income wards, as well as the Board of Trade 
and the Metropolitan AFL-CIO Labor Council.
    I did not plan it this way, but my point is made by the 
fact that among those who are in the audience at this hearing 
today are the members who respectively represent the poorest 
and the richest wards in the District: Councilmember Sandy 
Allen from Ward 8 and Councilmember Carol Schwartz from Ward 3.
    The abundant anecdotal evidence that many residents are 
remaining to see if my bill will be enacted is some indication 
that the DCERA would keep taxpayers here and draw others as 
well as city services improve.
    ``But aren't city services, not taxes, the problem?'' I am 
often asked. The answer, of course, is, ``Of course.'' The 
DCERA, in the absence of a State safety net, uses the tax cut 
as an incentive for people to remain in a large city with 
troubled schools and other services. After all, the tax cut 
would not be necessary if there were already enough reason to 
remain in the city. The tax cut accomplishes what no amount of 
subsidy can. The tax cut goes to people, not to the D.C. 
Government. The tax cut encourages the middle-income taxpayers 
whose presence alone can revitalize schools and neighborhood 
institutions and whose tax dollars are indispensable to 
improving services and keeping them improved.
    The many advantages that traditional middle-income 
taxpayers bring to a city, quite apart from revenue, is perhaps 
the strongest case for the bill. Cities performed the great 
American miracle for almost a hundred years of immigration of 
whites from Europe and migration of blacks from the South in 
the late 19th and early 20th century. The key to the success of 
the cities was that people who had some education and 
opportunities lived in the same place as poor people who had 
just come. Together they nourished neighborhoods and entire 
cities. They built the rest of America. The DCERA seeks to re-
create this synergy, revitalizing the city not only with their 
tax dollars but with a multi-class presence that alone can 
revitalize a city.
    This point is lost on those who see cities as places that 
need money and nothing else. They would send whatever the tax 
cut would cost directly to the city government. Not only is 
this politically and economically infeasible; it would not 
work. It is an insult to treat this city as if it were the 
functional equivalent of a welfare recipient. The goal must be 
to help the city help itself. The District still has a highly 
educated population, has retained its middle class longer than 
most cities, and has dozens of beautiful neighborhoods and a 
downtown in the midst of an exciting renaissance. It is also, 
everyone agrees, one of the Nation's most livable cities. The 
District maintains a high average income largely because of 
what remains of its middle class, now in full flight, and 
because of a committed upper and upper-middle class whose 
income, especially from Wall Street investments that have been 
unusually high, obscures the real picture of a rapidly 
developing huge hole in the middle that will kill the city.
    The sheer difference in the cost of housing between the 
District and the region and the city's poor schools and high 
crime rate are depleting neighborhoods of their struggling 
working people and lower-income and middle-income black 
residents who have been the backbone of neighborhoods across 
the Anacostia.
    However, the District does have a market that the tax cut 
pulls toward the city. Initially, they will not be people with 
school children. However, if we retain and attract middle-
income singles and young married and retired people, we will 
have a tax base while we are rebuilding the city's schools and 
services. The present flight is undermining the work of the 
city and the Control Board to restructure finances and services 
because their work cannot bear fruit if the taxpayers who are 
necessary to support the city leave in the midst of the ongoing 
reform.
    The DCERA is a targeted tax cut, even though all the 
taxpayers would receive it, because taxpayers in every income 
group are leaving the city. If the point is to leave the city 
with a diverse tax base, it would be senseless to leave out 
some and thereby encourage their continued flight. The tax cut 
has very progressive effects, but by allowing some reductions 
to all income groups, it acknowledges that the city as we have 
known it can survive only if it has rich, moderate, and 
especially middle-income residents.
    The critical link between a middle-income, educated tax 
base and a job base is the reason I cannot support a capital 
gains cut without an individual tax reduction for District 
residents. The analysts confirm what District employers report: 
that with the loss of its middle-income, educated tax base, job 
stimulation alone only makes jobs for the suburbs. To assure 
that jobs will go to D.C. residents who pay for D.C. services, 
we must help turn around individual taxpayer flight. The 
capital gains and business relief is important at a time when 
the District's major employer, the Federal Government, is 
downsizing. By now, however, it is a truism that business 
follows an educated or skilled job pool, not tax breaks. I know 
this well from my experience serving on the boards of three 
Fortune 500 companies--two of them in your State, Mr. 
Lieberman--before coming to Congress. I welcome capital gains 
and investment relief, but only as an adjunct to the real 
problem--the death-dealing loss of taxpayers who pay most of 
the freight. It would be useless to the District to simply 
throw down any old tax cut, and especially one unrelated to the 
major problem. The problem is that no city, and certainly no 
stateless city, is viable without middle-income taxpayers. The 
remedy for this problem is a tax cut incentive designed to 
maintain and attract these indispensable taxpaying residents.
    Mr. Chairman, urban policy has become an empty idea. For 
decades, the solution to urban problems has been framed almost 
entirely in government resource terms. There were and remain 
good and sufficient reasons for greater funding for cities, and 
there is no greater advocate of more resources for the cities 
than I am. But there are insufficient funds and little 
determination to help cities if the only solution we continue 
to come forward with depends solely on direct funding from 
Federal and State Government. It is simply not going to happen.
    States are indeed funding the big cities the hard way by 
doling out just enough to keep them from sliding into 
insolvency and by allowing them to become enclaves of the poor. 
Cities supported themselves and a good portion of their States 
as well when they were where middle-income people chose to 
live. The middle-class tax base that built the cities can 
revive the cities. Cities today suffer from a poverty of ideas 
more than from the poverty of their residents. Surely the DCERA 
is a worthy experiment to see what it can demonstrate that is 
useful for the country. For the country's capital, the DCERA is 
more. Thus far, it is the only idea on the proverbial table 
that holds any promise for keeping taxpayers here and the 
capital itself alive.
    Thank you, Mr. Chairman.
    Senator Brownback. Thank you, Ms. Norton. I very much 
appreciate that bold statement that you put forward. I could 
not agree more with your concept that the subsidization that we 
have put forward has just been enough and it is not going to be 
enough in the future. We have to look at some other way, and 
that is why I really appreciate your plan coming forward.
    Our next presenter on this panel is an All-American, all-
pro, and all-friend. I am not sure what all else I could put 
with that other than all-concerned about our urban areas and 
what takes place. He has been a strong, strong champion of 
urban renewal and has put forward aggressive plans on that, and 
he is a good friend as well.
    Jack, we welcome you to the Subcommittee. You honor us by 
being here, and enlighten us, please.

    TESTIMONY OF JACK KEMP,\1\ CO-DIRECTOR, EMPOWER AMERICA

    Mr. Kemp. Mr. Chairman, thank you, and I agree with 
Delegate Norton, it is an act of courage and farsightedness for 
you, a Senator from Kansas, the heartland of America, to put 
this at the front burner of your Subcommittee, and I applaud 
you. I am thrilled to be here with Eleanor. I consider her to 
be one of the most courageous legislators in the United States 
of America. She is the author of the D.C. Financial Control 
Board. That took a lot of chutzpah, a lot of courage, and a lot 
of vision. And I thank my old friend, my rabbi, Senator 
Lieberman, and Senator Cleland for being here. Coming from 
Atlanta, he knows full well how important incentives are to 
economic development in the spirit of Andy Young, our dear 
friend.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Kemp appears on page 39.
---------------------------------------------------------------------------
    The reason I start off that way, Mr. Chairman, this is 
bipartisan. This is not a Republican or Democrat. It probably 
drives some of my friends on the right crazy, drives some of 
our friends on the left even crazier. One of the problems in 
this is that on the left they are afraid that someone may get 
rich. On the right, they are worried that they may be perhaps 
helping to make a city work.
    I believe home rule is essential. I think the only way to 
have home rule is to do what Delegate Norton has suggested: Do 
something dramatic. I was going to use the word ``radical,'' 
but that makes a lot of people fearful. The word ``radical'' in 
Latin means the roots of an idea, and the roots of our 
civilization, as Delegate Norton pointed out, are our cities. 
That is not to be demeaning to rural America. It is simply to 
recognize that the cities are the center of our culture, our 
civilization, education, the arts, the sciences, and the 
economic entrepreneurship for which America has been well-
known. This city is not working. It cannot work the way it was 
set up to work. It is not the people's fault, Mr. Chairman. We 
cannot blame the people. They are a resource, not a drain on 
resources. The city is fundamentally flawed. It was not out of 
malintentions of anyone. It just was set up incorrectly.
    People argue very logically from their premise when it 
comes to the District of Columbia. The problem is they have the 
wrong premise. You have got to get back, as you are attempting 
to do, Mr. Chairman, to the premise, to the predicate, to the 
roots of our city, our Nation's capital, what should be, as you 
pointed out eloquently, Mr. Chairman, a city set on a hill.
    Delegate Norton pointed out that there is a D.C. Financial 
Control Board. Another element, as the President has suggested, 
is to remove the burden on the city of having to finance a 
prison, Medicaid, the unfunded pension liability. They cannot 
do it from a city tax base. And then on top of that is the 
problem of the tax code. This is a heavily taxed city. It is 
not just a heavy tax on the entrepreneur. There is an even 
heavier tax on the poor. I would make a case that the highest 
tax in D.C. is on poor women who want to take a job or 
unemployed fathers and men who want to take their first job and 
get up on that rung of the ladder that we call the American 
dream. It is now in this information age a universal dream, 
writ large. It is happening all over the world.
    Atypical of Kemp testimony, I am not going to be lengthy, 
and I would like to just start with my conclusion. How is that 
for a radical departure from----
    Senator Brownback. Sounds good.
    Mr. Kemp. We must remember that the problems in this city 
are not unique. Philadelphia went through a financial control 
board. New York City did. They recovered. Mayor Rendell, Mayor 
Giuliani--one Democrat, one Republican--both doing a terrific 
job, not only on crime and education, but certainly their 
economies, while not flourishing, are doing much better and 
their tax base has expanded.
    You can get more revenue and more resources for the 
government when the economy is expanding than when it is in a 
contraction. And this city is in a contraction. It is, as I 
think Senator Lieberman pointed out, bleeding. I would use the 
word ``imploded.'' And in every problem are the seeds of a 
solution.
    My wife and I visited China two summers ago, and I found 
out in China there is no word for ``crisis.'' There are just 
two characters. One is for danger; the other is for 
opportunity. There is a danger if we do nothing and sit on the 
status quo, but there is a huge opportunity for the left, the 
right, the Republican, Democrat, conservative, liberal, the 
White House, the city, the City Council, the delegate and the 
Congress to come together and make a huge down payment on urban 
policy for America by making it work right here in the District 
of Columbia.
    It would be a marriage of convenience. It would be both 
practical and idealistic. It has to be done to be utilitarian, 
but there is an ideal behind it, and that is, as--I almost 
called you a Senator. It is, as Eleanor pointed out, to find a 
way to reverse this frightening decline of the District of 
Columbia tax base, and that is through a carefully targeted, 
carefully and prudently constructed, radical alteration of the 
tax code for the District of Columbia.
    My premise today is that this is a Federal city. This is 
not like New York. This is not like Philly. This is not like 
L.A. where I grew up. This is a Federal city. It has, as 
Eleanor pointed out, no State to pick up the Medicaid portion 
or the prison burden or the unfunded pension liability. So it 
desperately needs help, and that does not mean, as she pointed 
out, that spending alone is the solution. And cutting spending 
is not alone the solution, albeit the city needs to practice 
far better management practices, and on that basis, I am sure 
the D.C. Financial Control Board will have a lot to say. But 
there is the element that she pointed out in tax reform.
    Now, I am an advocate of eliminating the capital gains tax 
in urban America in carefully drawn green-lined areas from 
South Central Los Angeles to East Harlem, to East St. Louis, 
those areas of Atlanta--or any area of the country. There ought 
not to be any capital gains tax on any man or woman that 
invests his or her capital, his or her savings into those areas 
to get capital into the hands of potential entrepreneurs.
    Earl Graves of Black Enterprise magazine said the most 
serious problem in America for minority entrepreneurs is the 
lack of access to capital. If you cannot get access to capital, 
you cannot start a lemonade stand, much less a Midas Muffler 
franchise or a fast-food franchise or become that entrepreneur 
that men and women are doing all over the country.
    Why isn't it happening in our inner cities and particularly 
why isn't it happening in the District of Columbia?
    The tax on income--let me take both capital gains and 
income tax. The tax on capital gains is unbelievable. Any asset 
held longer than 4 years in this city is taxed over 70 percent 
through combined Federal, and local capital gains taxes. Now, 
let me take the income tax. At $49,000--now, that is not a lot 
of money, folks; $49,000 in 1997 purchasing power is the 
equivalent of probably somewhere be- 
tween $7,000 and $8,000 circa 1972 when I came to the Congress, 
in 1971. But when you were in the $7,000 income bracket in D.C. 
in 1971, you probably paid 2 or maybe 3 percent of your income 
to the Federal Government. But at $50,000 or $49,000, which is 
a little bit above the median income family, perhaps--but 
nonetheless, not a lot--you are in a 28 percent marginal income 
tax bracket. The FICA tax, the payroll tax, is 15 percent. It 
is close to--an estimate now--over 60 percent. Over 60 percent!
    By moving out of the city, your income goes up. And the one 
point that both Norton and Kemp make, albeit we have come at 
this perhaps from a different perspective--and that is the bond 
that has brought us together--is that people respond to 
rewards. And if the rewards are for unproductive human 
behavior, irrespective of climate, color, geography, or almost 
any other artificial distinction, people will respond to the 
unproductive human activity, i.e., behavior.
    My friends who are conservative say, you know, we are going 
down the rathole because of people responding to those rewards. 
Doesn't it follow, then, that if you introduce incentives for 
proper economic and human behavior you can help reverse that 
trend? And it is true all over the world. Cities have changed 
their economic climate by changing incentives. That has been 
used several times. I do not need to--I told the story a little 
bit earlier. Max, you were not here, but I was telling Joe and 
Sam that Dublin, Ireland, was absolutely collapsing. The 
Docklands area, the major portion of Dublin, Ireland, was 
collapsing, and they decided to introduce radical tax reform 
into that area of Dublin. Today, there is a renaissance--I like 
that--a rebirth of Dublin, Ireland. Elat, Israel, on the Gulf 
of Aqaba, one of the most beautiful cities in the world, is 
made up of Arabs, Moslems, Christians, Jews, Russian 
immigrants, sabras from Israel, Saudis, and Egyptians. It has 
the lowest tax burden of any city in Israel, and it is as 
heterogeneous a society as you could possibly find, living in 
harmony with each other because everybody feels like they have 
a piece of the pie. The only way to create civility is to give 
people a stake in the system, and that, in my opinion, is what 
Eleanor Holmes Norton's bill would do.
    The third point I want to make is the capital gains tax. 
Let me say it as emphatically as I can. It is not a tax on the 
rich. The rich are already rich. They are going to get rich 
almost in any single society. And if they cannot get rich in 
the United States, they will move to the Cayman Islands or 
Bermuda or Monte Carlo or tax shelters. And that is what 
happened to Sweden, the Swedish welfare State, and that is what 
happened in Europe. In fact, you cannot find a tennis player 
anymore in Europe living in his or her own country. They all 
live in Monaco.
    How sad it is to think that people have to move out of the 
city in order to get a job or to protect their income or to 
save their family. And I believe that, with all due respect to 
Congresswoman Norton's idea of eliminating the capital gains 
tax for any man or woman that lives in the city, I would take 
it a step further and say if Henry Kravis or Teddy Forsman or 
any of your fat-cat friends, Senator Lieberman, want to put 
their capital at risk in the District of Columbia----
    Senator Brownback. I thought Democrats did not have fat-cat 
friends.
    Mr. Kemp. We should say no tax on that investment of any 
man or any woman anywhere in the country that puts his or her 
capital and savings at risk. And by at risk, I do not mean at 
risk from crime per se, albeit that is a problem. I am talking 
about any small business is ipso facto a risk. And you have got 
to get capital flowing back into the city. And men and women 
who have access to capital can begin their version of that 
dream for which this Nation is well-known. So cutting the 
income tax rate, eliminating the capital gains tax, the 
exemption that Eleanor Holmes Norton has built into her--I am 
going to call it a progressive flat tax for lack of a better 
word. It makes it progressive because low-income people would 
not face a tax on their income up until they have achieved a 
few steps of the ladder in which they then can perform as well 
as anybody else. But giving people access to rungs of the 
ladder is essentially what this is all about. It will attract 
capital. It will stop the implosion. It will build a tax base, 
and I would not be Jack Kemp if I did not say that we will get 
more revenue at a lower rate.
    Sorry for introducing that dynamic analysis, but I really 
think the Congress is stuck on this idea that if you lower the 
rate, there is prima facie evidence that you will lose revenue. 
Not in all cases. If you lower the rate on D.C., make this a 
great city again, our tax base will expand and we will get more 
revenue for men and women who are working than we will from 
people who have to depend upon the social safety net.
    A postscript to all this. James Julius Wilson, University 
of Chicago professor, New York Times magazine article maybe 2 
or 3 months ago, suggested the most serious problem in the 
United States of America--now, some people can argue with this, 
but this is one very distinguished academic suggesting that the 
most serious social problem in America is the lack of jobs, the 
lack of employment, the lack of opportunity in urban America. 
And we can begin to reverse that, in my opinion, by doing 
something to incentivize this great city again to encourage the 
formation--the recapitalization of this great city, and I 
heartily endorse this effort. I hope that does not hurt its 
chances, but I would say, Mr. Chairman, we have got to get 
moving. Every day we do not pass her bill, your bill--I 
understand you are going to be a cosponsor, Sam--it is getting 
worse.
    Churchill said, ``Success is never final, defeat is never 
fatal. It's courage that counts.'' And let me say this is a 
time for courage. This is a time for someone from Kansas to 
stand up on behalf of the District of Columbia and say to his 
residents, ``When you come to the District of Columbia to visit 
the Nation's capital, as I know you do, you want to see 
prosperity, civility, jobs, a great city. Or do you want to 
allow as an American this marvelous capital city to continue to 
suffer the burden it has suffered over the past number of 
years? ''
    I would like to submit my testimony for the record.
    Senator Brownback. It will be put in, although it is tough 
to get in written words the passion that you feel, and I 
appreciate that very much.
    Thank you both for testifying. We will take a round of 
questions.
    If I could ask my fellow Subcommittee Members, we have 
several other witnesses, and so I do not know if we want to 
take a long time.
    I would ask, Ms. Norton, if I could, in particular, if we 
did this tax bill, if we did your tax bill or Senator 
Lieberman's tax bill, which his would expand capital gains to 
non-D.C. residents, what would you envision the District of 
Columbia would look like as far as its revenue base in this 
city in 5 years? Have you projected that out or had others 
project out what that would actually do in the District of 
Columbia?
    Ms. Norton. It is an important and good question, Mr. 
Chairman. The difficulty with it is the innovative nature of 
the bill. Nothing remotely like it has occurred. For that 
reason, by the way, we have a provision in the bill that will 
require the Department of Treasury to monitor its effects very 
closely, and we say precisely what to monitor by income group 
so that we can see if this works, with what income groups, in 
what parts of the city, whether with business, whether with 
individuals.
    But I have to say to you, Mr. Chairman, it is hard to find 
anybody who does not think that when a tax cut of this size--if 
a tax cut of this size would come forward, that you would not 
begin like a magnet to pull certain kinds of people into the 
city. We certainly do not believe that there would be initially 
an across-the-board effect.
    My goal in the first couple of years is quite modest. Stop 
the hemorrhage. One of the reasons we have to pass the bill 
this year is that if we go much beyond this session of 
Congress, this is becoming a moot point. No city has ever 
recovered its tax base entirely, but I think you can keep a tax 
base from flowing out, and thereby encourage others to move in.
    On capital gains and why I have restricted it to D.C. 
residents, it is in part because we do not know the effect on 
the surrounding the region. You get more people in the region--
interestingly, they are less afraid about the residents because 
it is such a bad rap on the District. They figure people are 
not going to sell their half-million-dollar homes and come 
flying back to the District. They are not as sure about capital 
gains, and I am not sure about what effect it would have from 
other parts of the city either. Very frankly, I do not think it 
would drain business from the rest of the country to come into 
the District.
    At the very least, it seems to me, if one started with 
capital gains and residents and we had no effect, we could then 
move to the next step. In no case would it make any sense to 
start and stop with capital gains, whether for residents alone 
or for the region, because the real problem in a city which has 
never had a large business base, anyway, because the Federal 
employer was the employer, the real problem has been that the 
people who have supported the city for 200 years--remember, it 
has had this kind of tax base all that time, and it has always 
been its own State. Those people are leaving, and nobody who 
looks closely at this city thinks that with a business base 
alone, for example, that you could support the city. So you got 
to have both of them, and if you had both of them, I think it 
is pretty hard to argue nothing would happen.
    At the very least, given what is happening, I do not think 
we can afford to doubt that something would happen, because we 
literally are left without other ideas on the table.
    Mr. Kemp. Could I add a postscript?
    Senator Brownback. Please.
    Mr. Kemp. Just imagine if you left the national capital 
gains tax at 28 percent and unindexed and eliminated it in the 
city. You would have almost a shelter. I think that would be a 
mistake, personally. I want to help the city. I do not want to 
do it at the expense of creating a dodge or a Cayman Island 
type of area of the country. I think that would end up with 
speculation.
    So I strongly support bringing down the tax rate across the 
board on capital gains and indexing, but eliminating it not 
only in the District of Columbia for the whole city--the whole 
city. The whole city should be green-lined for a message to the 
world that we want to attract the talent and the capital 
necessary to put this great city back up on a hill as an 
example to the rest of the world.
    Ms. Norton. Could I reinforce that point, Jack, for a 
moment about the whole city and the capital gains effect? My 
folks from Councilwoman Allen's Ward 8 have subway travel out 
there. They can get to mostly any place in this city. But the 
more traditional approach that has not worked in this city and 
has had limited effects in other cities of confining the tax 
break to the poorest area of the city does not work. And it 
does not work because, in fact, an employer is not going to go 
to a part of the city where the poorest people are, where there 
is the most crime, and where the job pool is least skilled. But 
the employer might well come to a city like this and--my folks 
from the poorest areas across the Anacostia and out in 
Northeast, they can get to the middle of town. Where they 
cannot get to is to parts of Virginia and Maryland where all 
the job growth is because the subways may go out there, then 
you have to catch something to go to East of the Hill. The 
subway line goes out there, but it does not get as far as where 
the jobs are. So we have got to bring jobs to the city without 
doing what Jack initially did. Jack was talking about dynamic. 
Jack, you know, initially focused--and in a real sense, it 
makes sense to focus in some cities on certain areas of the 
city. But it would make no sense in this city, if you want to 
keep middle-income people here, to do capital gains in poor 
areas. Thank you very much. We have poor people. We have to 
support them. We have to have middle-income people here to help 
support them.
    Senator Brownback. That is a good point.
    Senator Lieberman.
    Senator Lieberman. Thank you, Mr. Chairman. Thanks to 
Delegate Norton, to Jack Kemp, my pastor, I want to say, by way 
of a home-and-away series here. [Laughter.]
    How did you know that I have fat-cat friends, incidentally? 
Well, forget that. You can answer that off the record.
    The two of you are----
    Mr. Kemp. You are a Democrat, aren't you?
    Senator Lieberman. Yes. The two of you--this is going 
nowhere, Jack. [Laughter.]
    The two of you are really a wonderful partnership on behalf 
of this. You bring all sorts of head and heart to this topic, 
and I just hope to God that we can get this or something very 
close to it moving.
    In listening to you--and I am going to do this real 
briefly--it seems to me that we are seeing a couple of things. 
One, that the traditional urban policy, in some ways it goes 
back to the 1960's, not that it has been a failure, it has done 
some good things. But if it had totally worked, most of 
America's cities, including D.C., would not be in the condition 
they are in today. So it is time for something new.
    Beginning, I think, in the late 1970's, Jack, you and Bob 
Garcia, I think partially inspired by Margaret Thatcher and the 
Governor of Puerto Rico, as I have heard you tell the story--
actually, when I have heard you tell the story, you actually 
take it back to Moses, if I remember correctly. [Laughter.]
    Mr. Kemp. Joseph.
    Senator Lieberman. To Joseph in Egypt, I am sorry. I like 
that one better. But you had this insight that, you know, part 
of what was happening in the cities is that businesses were 
leaving; they were taking the tax base and the job base with 
them, and we had to create an incentive for them to come back. 
And the best way to do it, because we believe in the reward 
system here in America, that incentives affect people, was 
lower the taxes on business, bring in investment, create some 
more growth. We finally had the beginning of an experiment 
that, when we adopted the enterprise zone empowerment community 
legislation in 1993, though it was not as broad as we had 
wanted when we had worked on it earlier, but it was a 
beginning. It is still in the infancy of its testing, but there 
are enough examples to show that what is logical works.
    So we are trying in this legislation to apply that 
powerfully to the District, but Delegate Norton really has 
taken this one logical, very significant step forward, which is 
to say if we reach that intellectual conclusion, that 
programmatic conclusion about business and capital, then let's 
look at what is really ailing our cities, and you have 
described it very well. Most cities in America are becoming 
like a lot of other countries in the world that we used to 
deride because they had no middle class--the very rich, the 
very poor, and the instability that comes with that. And how do 
we get the middle class back? Lower the taxes. You know, lower 
their taxes and they will come, to paraphrase the ``Field of 
Dreams,'' which we would like again to make the District into.
    Now, the question--do you have an estimate on this bill, 
again, Ms. Norton, the cost of this bill?
    Ms. Norton. The cost of this bill is probably half a 
billion, $600 or $700 million. No very precise costing out has 
been done.
    Senator Lieberman. Annually. OK. Now, people will say to 
you, as they said to Connie Mack and me--I am delighted that 
the Chairman, Senator Brownback, apparently will cosponsor this 
bill with us. At least that is what Jack Kemp announced here 
today. I would be honored to have you as a cosponsor. But 
people have said to us, well, that is a lot of money.
    Your answer, and let me ask it to you again because, at 
least as I have heard it before, is, well, if you can find a 
cheap--I have heard you say it. If you can find a less 
expensive way to bring mid- 
dle-class people, black and white and any ethnicity and race 
characteristic, back to this city and America's cities, tell 
me.
    Have you heard anything? Has anybody given you any better 
way to do that?
    Ms. Norton. I indicated that challenge, Senator Lieberman, 
because I truly am open to ideas that would do the same thing, 
and the silence has been deafening on that. You know, when 
people come back and tell me, for example, well, if I had that 
kind of money, I would give it directly to the city. Really? To 
the city government?
    Senator Lieberman. Yes.
    Ms. Norton. One of the reasons I think that I have support 
for this bill is because I give it to residents, who in turn 
rebuild their city, rather than to the city government which 
has no track record in recent years of rebuilding their city. 
And we could never pump enough money into a city emptying out 
of people to rebuild a city in any case.
    It is interesting that the District kept its tax base for 
longer than most cities. This says something about the capital 
of the United States, the panache associated with that, and it 
says something about how livable the city is. So you have a 
kind of urban type--a kind of pool that would live here.
    I am fourth-generation Washingtonian. I grew up in this 
city when they had segregated schools. I have to tell you that 
if my grandfather, who entered the D.C. Fire Department in 
1902, or my father saw this city, they would be ashamed of it. 
This is not--the city of the past is my city. There is a city 
in the future that is my city. But the proud people I grew up 
with would not claim this as their city. Their city is a self-
sufficient city. Their city is a city that in the midst of 
segregation was not a city that led them to believe that they 
were less equal.
    Their city is a city where by sheer dint of getting some 
education and doing what you had to do, you overcame 
everything. To see this city, which had a large black and white 
middle-class population for so long implode on itself, the city 
of Howard University, the city where Dunbar High School, my 
high school, where even when it was segregated, people came 
from all the best schools in the United States to recruit kids 
to go to the best school, this is not my city. It can become my 
city again if you do one thing, and that is, give an incentive 
to people like my sister who moved her family to Montgomery 
County to live where they would rather live in the city of 
their birth.
    Senator Lieberman. Amen.
    Mr. Kemp. Joe, could I----
    Senator Lieberman. Please.
    Mr. Kemp. I do not live in the city. My wife and I have 
lived in Bethesda, Maryland, ever since we came to Congress in 
1971. I think the people of northern Virginia and southern 
Maryland have a big stake in a renaissance or an economic 
recovery in the District of Columbia. This is not a zero-sum 
game. It will help the suburbs. It will help communities 
surrounding.
    What would be better than to come to a Nation's capital 
thriving with that type of spirit that is caught in the voice 
of Eleanor Holmes Norton's history?
    One other point has to be made. You mentioned the founding 
of this idea. Just real quickly, Luis Munoz Marin, the Governor 
of Puerto Rico, he was a socialist in academia, and when he 
became the governor, he said it was fun to sit around in 
academia and talk about redistributing a loaf of bread, i.e., 
as a socialist. But when he became the governor and he saw 
people starving, he quickly came to the solution that you can 
create more loaves of bread when you incentivize the economy to 
create bakeries.
    What Eleanor Holmes Norton is doing, metaphorically 
speaking, is helping to create bakeries, and bakeries can only 
be done through private enterprise. This is a Federal city. I 
do not think there should be any tax, which shows how radical I 
am. A Federal city should not be taxed at the Federal level. 
Puerto Rico has no Federal tax. Our territories have no Federal 
tax. They should have their own tax system, and we should get 
off their backs. But we are not going to do that just yet, so 
as far as I am concerned, this is the best solution to a vexing 
problem.
    One last statistic. The urban economy in America is close 
to $900 billion. It is bigger than the whole Canadian economy, 
writ large. There is a tremendous talent. Now, you either look 
at this problem as intractable, or you look at it, as you are 
doing, as an opportunity. And it is an opportunity to prove 
that entrepreneurial, democratic--small ``d''--capitalism can 
work in urban America. If we do not do it now, we are going to 
lose the zeitgeist because that is the zeitgeist for the whole 
world. That is the spirit of the whole world.
    Nelson Mandela announced last week he is going to privatize 
and incentivize his economy on behalf of the colored and black 
South Africans. To do what? To empower them. I am going to be 
embarrassed if they do it earlier in a post-apartheid regime 
than we can do it in the United States of America, the land of 
the free and the home of the brave.
    Senator Brownback. We may need to bring him here to 
testify.
    Mr. Kemp. Yes, bring him.
    Senator Lieberman. Mr. Chairman, I want to pose a final 
question, and maybe a brief answer, which is this: We have this 
proposal, which is, admittedly, expensive, though I think worth 
every penny of it. We now have a proposal from the 
administration regarding pension costs, etc.
    As we go forward in this Congress--and I think we are going 
to do something significant here--my guess is that the Congress 
will not be prepared to do both because of the total cost of 
both. And the question that I invite you to think about and 
that we are going to have to think about is: Do we pick pieces 
of each, or if we have to make a choice, what do we choose?
    Ms. Norton. You make a good point, and I have been trying 
to think through the notion of cost and paying for the bill. 
The President's bill is paid for. He has found, understanding 
that his bill would get no place if it did not have offsets--he 
uses the Federal payment because in the outyears D.C. gets more 
than the Federal payment, and apparently Frank Raines has gone 
through dozens of accounts to supplement the $700-some million 
the Federal payment represents.
    Now, my bill had the speaker of the Republican leadership 
in the House and the Senate without being paid for, and I 
assumed that people were going to face that at some point. I do 
not think that one can pay for my bill by extracting some from 
the President's bill.
    Senator Lieberman. Your hope is that we have both. And I 
suppose the other way to go, the Republican leadership--I know 
this was being talked about last time, which was that it would 
be part of the--whatever the total sum allocated for tax cuts, 
that this would be part of that.
    Mr. Kemp. Think of the cost of not doing anything. What is 
the cost of the bridge loans right now going to the District of 
Columbia from the Treasury Department? That is not included in 
the District payment. We are making bridge loans right now, as 
we did to Mexico in the 1980's, we are making bridge loans to 
D.C. through the Treasury Department. And the cost of not doing 
something, in my opinion, is enormous. What is the amount of 
money we spend subsidizing the conversion of corn into ethanol?
    Senator Brownback. Not enough. [Laughter.]
    Mr. Kemp. What is the amount of money we subsidize 
businesses to do things?
    Senator Brownback. That was started by Moses, you know, 
corn into ethanol.
    Mr. Kemp. I have gone from preaching to----
    Senator Brownback. Yes, meddling. I am going to give Max 
here a couple of minutes, and then we do need to get on to the 
next panel.
    Senator Cleland. Well, thank you, Mr. Chairman.
    Let me just say that this sounds, Jack, a lot like some of 
the wonderful ideas, wonderful thinking that you have had 
before, merging the concept of empowering individuals with a 
tax cut. I thought it was fascinating in the conclusion of your 
statement that you talked about the entire District as a 
possible enterprise zone or a possible empowerment zone in 
which not just tax cuts were possible, but other forms of 
legislation. For instance, I am on the Small Business 
Committee, and one of the things we are looking at, Kit Bond 
has got some legislation to look at HUBs, historically 
underserved business areas, both urban and rural, and providing 
certain priorities and incentives in terms of Federal 
contracting.
    In other words, do you see the District of Columbia as 
possibly a model enterprise zone or entrepreneurial zone or 
empowerment zone that the Federal Government, through tax 
deductions and other incentives, can make a model for the 
Nation and hopefully provide some solutions for urban America 
itself?
    Mr. Kemp. Yes, I really do. And I applaud your comments. I 
do not know that we need to engage in--I am not for 
redistribution of income. I do not want to tax someone else in 
order to subsidize anyone of less financial magnitude. But I do 
believe that this would be a model for an urban policy for 
America.
    Governor Engler of Michigan has eliminated all taxes in 
renaissance zones. Now, I am not suggesting you eliminate all 
taxes ad infinitum, but all over the world we know there are 
countries that do things entrepreneurially, politically 
speaking, to--the word keeps creeping into our conversation--
incentivize people's behavior. And I think this city would be a 
perfect--I do not want to use ``demonstration,'' but it would 
be a model, an example to the rest of the country. You could 
not do exactly the same thing, but I think this city is 
different and it requires urgent transfusion of political 
courage and political wisdom and incentive-oriented economics.
    Senator Cleland. Are we third and long with a tough call in 
the huddle?
    Mr. Kemp. Metaphorically speaking, as an old quarterback, 
third and long is probably the most fun part of the game. 
[Laughter.]
    Senator Cleland. Bless your heart. That is the opportunity, 
see.
    Mr. Kemp. Most people run drop plays. We throw long.
    Senator Cleland. Well, we thank you for your passion and 
thank you for your testimony and your thoughtfulness in terms 
of problems of urban America.
    This is just one of the many that you have chosen to tackle 
and speak out on, and we appreciate that more than you know.
    Ms. Norton, we appreciate your legislation, hopefully to 
codify a dramatic new departure here for our Federal city that 
I think is worthy of note and worthy of exploration. And we 
appreciate your testimony today.
    Mr. Chairman, thank you very much.
    Senator Brownback. Thank you very much, Senator Cleland.
    Thank you very much, Ms. Norton, and thank you very much, 
Mr. Kemp. We very much appreciate your testimony.
    Senator Brownback. The next panel will be Dan Mitchell of 
the Heritage Foundation, a tax expert with the Heritage 
Foundation and of some nationwide note, and William Niskanen, 
the Chairman of the Cato Institute. These are two tax experts 
to examine this proposal or others as potential options.
    I would like to, as we are in transition, recognize--I 
believe we have another D.C. Councilmember, Hilda Mason, in the 
audience. Ms. Mason, would you care to stand? We very much 
appreciate your attendance here at our hearing as well today, 
and any submission of statements you would like to make, I 
would be happy to hear of that.
    First we will call up Dan Mitchell. As I mentioned, he is a 
tax expert with the Heritage Foundation of some note. 
Gentlemen, we do have your written testimony. We appreciate 
that. I apologize for the length of time we took back and forth 
on the past panel, but we hope you will give us some insight as 
you dissect these proposals of how we get the city moving 
again, how you would go about it, what you think the best way 
is to do it. And if you would care to truncate your testimony 
and get right to the gravamen of what you are about, let us 
have it.
    Mr. Mitchell, the floor is yours.

 TESTIMONY OF DANIEL J. MITCHELL,\1\ McKENNA SENIOR FELLOW IN 
             POLITICAL ECONOMY, HERITAGE FOUNDATION

    Mr. Mitchell. Thank you very much, Mr. Chairman and Members 
of the Subcommittee. It is an honor to be here to discuss the 
proposed District of Columbia flat tax.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Mitchell appears on page 45.
---------------------------------------------------------------------------
    The question for Congress, of course, as you look at this 
proposal, is whether or not this is the key to rejuvenating the 
city's economy. And on some base level, there is no question 
that providing a tax preference to District residents will make 
the District a more attractive domicile, especially for 
taxpayers facing Federal tax rates of 28 percent or above.
    But when analyzing this proposed District flat tax, one of 
the most important questions is to look at how a flat tax--the 
principles behind a flat tax, and the most important principle 
that a flat tax is equality. All taxpayers are treated the same 
under a flat tax irrespective of the source of their income, 
the use of their income, or the level of their income. And once 
policymakers decide that the law should apply equally to all 
people, there are certain features of a tax system which 
inevitably follow. These are:
    One rate. By definition, you are not treating taxpayers 
equally if you impose more than one rate.
    It is also a key feature of a flat tax that you treat all 
income equally. And in today's system, between capital gains 
taxes, corporate income taxes, personal income taxes, estate 
taxes, a single dollar of income can be subject to several 
layers of tax. This is a particularly shortsighted policy since 
every economic theory that I am aware of, including Marxism, 
recognizes that capital formation is the key to economic 
growth.
    Finally, another feature of a flat tax which does not 
necessarily follow from equal application of the law is 
simplicity. All the flat tax proposals that people think of in 
Washington usually follow the model that was developed by 
Professors Hall and Rabushka out of the Hoover Institution, 
which is designed to maximize simplicity in the tax code.
    While understanding these features of a flat tax, now let's 
apply them to the proposed single-rate Federal tax system for 
D.C. residents. First and foremost, the proposed legislation is 
not really a flat tax. The bill retains all of the provisions 
of the current tax code that impose multiple layers of taxation 
on savings and investment. Nor could it be really said that it 
will result in a simpler tax code. The result will probably be 
just the opposite.
    Last but not least, the bill violates the core principle of 
a flat tax by creating a special tax preference based on 
geography.
    Now, these observations, incidentally, are not offered as 
reasons to oppose the legislation. Indeed, many supporters of a 
pure flat tax, knowing that fundamental reform will not happen 
for the Nation as a whole until after the turn of the century, 
believe the D.C. flat tax will advance the issue by generating 
more evidence on the positive effects of lower tax rates. 
Indeed, I am sure I will be citing some of those things if 
Congress goes forward with this proposal. And also because the 
tax code already is riddled with discriminatory provisions, 
adding one more on the basis of geography probably does not 
really change the fundamental nature of the code.
    In short, the D.C. flat tax is really more a question of 
politics and strategy than it is a question of sound tax 
policy.
    Then, of course, as lawmakers look at whether to accept 
this legislation, they should be realistic about what the D.C. 
flat tax can and cannot accomplished. First of all, it will 
accomplish almost everything supporters say: employment, 
earnings, home values, business formation, local tax revenue. 
It is hard to imagine how those things could not go up under 
this proposed legislation. The amount of the increase is a 
matter of speculation, of course, and would probably depend on 
whether taxpayers felt the preference would stay in place for a 
long time. Also, of course, there would be a vigorous debate 
about whether or not the improvement in all these indices would 
simply represent a transfer of resources from Maryland and 
Virginia, or whether they would represent additional wealth 
creation, which is, of course, what everybody really hopes for.
    What the D.C. flat tax will not accomplish, however, is 
that it will not solve problems associated with failing 
government schools and lack of public safety. Legislators 
leaning in favor of a D.C. flat tax may want to link their 
support to reforms such as comprehensive school choice that 
would allow parents to pick the school that would best address 
their children's educational needs. In addition, a special tax 
preference for the District could have a perverse effect if the 
economic expansion that followed was used as a reason to put 
off long overdue restructuring of the city's budget.
    In conclusion, I applaud the Chairman for addressing this 
critical issue. Washington is our Nation's capital, and 
lawmakers should use their powers, granted by the Constitution, 
to make this city a better home for residents and a source of 
pride for all Americans.
    Senator Brownback. Thank you, Dan. I appreciate that.
    Mr. Niskanen, Chairman of the Cato Institute, welcome to 
the Subcommittee. Thank you for being here and please give us 
your testimony.

 TESTIMONY OF WILLIAM A. NISKANEN,\1\ CHAIRMAN, CATO INSTITUTE

    Mr. Niskanen. Thank you, Mr. Chairman and Mr. Lieberman.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Niskanen appears on page 49.
---------------------------------------------------------------------------
    As a resident of the District of Columbia, I welcome your 
attention to the severe problems of the District Government. I 
conclude, however, that no potential change in Federal tax 
policy would significantly reduce these problems.
    Let me first address the tax bill introduced by Delegate 
Norton. Although this proposal would reduce my personal Federal 
tax liability by over $5,000, I must nevertheless conclude that 
this is bad tax legislation. This bill, and much of the 
discussion about the fiscal problems of the District, I believe 
is based on two false perspectives:
    One false perspective is that the District Government faces 
a special problem because ``it has no State to recycle income 
from wealthier areas.'' In fact, personal income in the 
District per District resident is about 42 percent higher than 
the national average personal income, higher than in any State, 
and about one-third higher than in the adjacent States of 
Maryland and Virginia. The District has an unusually high 
fiscal capacity without any special Federal tax preferences and 
without taxing commuters who are residents of Maryland and 
Virginia.
    The other false perspective is that higher District 
revenues are either necessary or sufficient to reduce the major 
problems of the District. In fact, the current District budget 
is now about $9,400 per resident. That is over twice the 
national average combined State and local expenditures per 
resident. It is higher than in any State. Moreover, the 
District budget does not include the substantial Federal 
expenditures for the Metro, the parks, the museums, the zoo, 
and about half of the police who operate in the District.
    Despite this huge budget and despite a huge Federal 
expenditure independent of the District budget, the District 
has one of the Nation's worst school systems, among the highest 
crime and infant mortality rates, a deteriorating physical 
infrastructure of buildings and roads, a huge unfunded pension 
liability, and a continuing exodus of middle-class families. In 
the absence of a major change in the incentives and constraints 
faced by the District Government, more money would not 
significantly reduce any of these problems.
    Now, let's address the specific effects of the Norton 
proposal, in each case based upon the data for 1993, the latest 
year for which such data are available.
    On a static basis, the proposal would reduce Federal 
revenues by about $700 million. Based on 1993 data, the number 
is about $714 million. About 50 percent of the direct benefits 
would accrue to the 8.5 percent of District tax filers with 
adjusted gross incomes over $75,000. Delegate Norton has said 
that this is a progressive flat tax and that somehow the tax 
cuts decline with income. That is really rather misleading. The 
tax cuts as a proportion of income decline with income, but the 
absolute tax cuts go up very rapidly with income.
    The benefits to the middle class with incomes from $30,000 
to $75,000 would be in the range of $2,000 to $3,000 per tax 
unit, not enough to pay the tuition for one child at most 
private schools.
    The primary indirect effect of the Norton proposal would be 
to induce more high-income individuals and families to reside 
in the District, most of whom are much less affected by the 
terrible quality of the public school system and most of whom 
would be spatially separated from most crime. This would 
increase the loss of Federal revenues relative to the static 
estimates and, of course, would increase District revenues. I 
doubt whether this proposal would increase the low District 
home ownership rate because the reduction in the marginal tax 
rate would reduce the value of the deduction for home 
mortgages.
    It is less clear how this proposal would affect the middle-
class families who are now leaving the District at a rapid 
rate. There is little reason to expect the quality of the 
public schools to increase or the crime rate to decline. The 
proposal would probably increase property values and property 
taxes in middle-class neighborhoods. This would probably deter 
some middle-class families from moving to the District, and it 
would encourage some of those who are now here to take their 
capital gains and move out.
    On net, I expect this proposal would increase, not reduce, 
the polarization of the District population between the rich 
and the poor without any significant reduction of the 
District's major problems. Satisfactory schools and safe 
streets are the two essential conditions to maintain a middle-
class community, and this proposal would not address either 
condition.
    Some provisions of the Norton proposal, I suggest, would 
have much smaller effects than may be first apparent. For major 
businesses operating in the District, it is probably not 
possible to identify the interest, dividends, and capital gains 
specific to invest- 
ments in the District. So the 15 percent rate on capital income 
would probably be limited to that for firms with no investments 
outside the District and the zero rate on capital gains only to 
the sale of such firms or privately owned real property in the 
District. This proposal, thus, would provide only a very weak 
incentive for major firms to invest in the District.
    For several reasons, I suggest, the Norton proposal would 
also not produce an objective test of the effects of a general 
reduction in Federal tax rates. It would not be a useful model 
for what might help other cities or other parts of the country. 
Much of the effects of a lower flat tax on earnings by District 
residents would be cross-border effects that would be a wash 
with a national flat tax. On the other hand, the effects of a 
general reduction of the tax on capital income would be 
proportionately much larger than would be observed from the 
effects only on investments in the District. For those, 
including myself, who favor a general reform of the Federal tax 
system, the District would not provide a useful laboratory to 
test or to demonstrate these effects.
    Where does that leave the case for changing Federal tax 
policy specific to income generated in the District? Back, I 
suggest, to where we started. Congress should not make any 
changes in the Federal tax code specific to the District. There 
is a good case for general tax reform, which I hope is revived 
soon. There are a number of important specific policy changes 
that would help the District. The Norton proposal does not 
address either of those issues. Both of those issues are 
important, but they are longer and more complex stories for 
another day.
    Thank you for your attention.
    Senator Brownback. Thank you very much, Mr. Niskanen. I 
appreciate that.
    Could I pose to each of you--there are a number of reasons 
that I am personally interested in this. Perhaps one of the 
most important is what, Mr. Niskanen, you discount as far as 
the ability of this to show us what a flat tax, a zero capital 
gains does nationwide. It is my theory that the American people 
are pragmatically conservative. They are conservative, but they 
want to make sure that this works.
    Now, I am not suggesting that this is the experiment. I 
think this works. And to show that--now, you discount it. You 
say this is not a good model. Mr. Mitchell, you say that 
perhaps it can be used as a good model. Why do you think--or do 
you think there are other things we are going to have to tie 
into that to make it a legitimate look at this as a policy 
proposal?
    Mr. Mitchell. What I said was that I would be certain to 
use positive numbers that came out of this experiment, were it 
to happen. I do think opponents of tax reform would have a very 
reasonable point to say that maybe these are not really effects 
of lower tax rates, maybe these are just people moving from 
Maryland and Virginia. I would still base the bulk of my case 
on the evidence between flat tax States and non-flat tax 
States, which shows higher income, higher job growth if you 
have a flat tax. I would still base the bulk of my arguments on 
international evidence which shows that countries with low flat 
taxes grow faster and create more jobs than countries with so-
called progressive systems. I would still base my case 
primarily on evidence from America's own Federal tax history. 
The decades in which we cut tax rates have inevitably created 
above-trend prosperity versus decades where we have increased 
tax rates we have had just the opposite.
    But, nonetheless, if we do a D.C. flat tax, I will still 
use those numbers to advance the cause, even if the other side 
might have ways of trying to counter them.
    Senator Brownback. Mr. Niskanen, you think this would be 
not a useful product or way to go at it at all?
    Mr. Niskanen. Well, because so much of the effects would be 
cross-border effects. That would overstate the effects of 
reducing the tax rate on income. I think the particular 
problems of the capital gains proposal in the Norton proposal 
would actually understate the effects of reducing the capital 
gains rate.
    But we have a continuing national experiment in this 
country that is a consequence of our Federal system, and I 
think that provides very much better evidence than any evidence 
that would accrue to the effects within the District.
    Senator Brownback. OK. Mr. Lieberman.
    Senator Lieberman. Very briefly, Mr. Chairman.
    Mr. Niskanen, I think I understand your basic view, but do 
you have any different reaction based on the fact that the bill 
that Senator Mack and I introduced has the capital gains 
reduction or elimination for investments in the District from 
anywhere--in other words, from people who are living outside 
the District?
    Mr. Niskanen. I think that would have more effect on the 
District. It would also be a bigger loss of Federal revenues.
    Senator Lieberman. Right.
    Mr. Niskanen. It would have more effect on the District. 
You still have this awkward problem of identifying capital 
gains that are specific to a multi-state firm operating in the 
District.
    Now, when that firm sells a specific piece of property, 
that is one thing. But there is no non-arbitrary way of 
attributing capital gains in a multi-state firm to the 
activities of that firm in the District. So it is an awkward--
you still have that awkward administrative problem.
    Senator Lieberman. I think you have a helpful question 
there, which we really have to do some work on. Something has 
been done on that by the folks really outside the Congress who 
have helped Eleanor Holmes Norton and Connie Mack and I draft 
this legislation. But some work does have to be done to define 
the circumstances under which the capital gain would be 
enjoyed. In other words, you would not want to have a company 
that just has its headquarters and 20 employees in the District 
and is investing all over America to take capital gains as a 
result of that.
    I have seen capital gains elimination, and I have seen some 
State proposals, to go back to your reference to the Federal 
system, where you only--and this is--you have a definitional 
problem here. You have to be able to write this and enforce 
this, but that the capital gain reduction or elimination is 
only enjoyed on jobs created within the enterprise zone, 
activities that are within the enterprise zone. That takes some 
accounting.
    Let me just ask both of you, since you have been 
thoughtfully critical of the proposals made here, what you 
would do if you were Congress, accepting that we have a goal 
here, which is to help the capital city. And I understand you 
said a lot of this goes, as we all agree, to the quality of the 
schools, fear of crime. But how do we do that in a way that is 
different from what we have been trying to do and has not quite 
succeeded yet?
    Mr. Niskanen. The one measure that would help the District 
as well as help other American cities more than any other 
measure would be genuinely broad school choice. That is the 
single most important condition that is affecting the location 
decisions of middle-class families.
    I see no meaningful prospect of improving the quality of 
the D.C. public school system. I think it is like trying to 
reform a State enterprise without changing the market in which 
that State firm operates. And as long as the D.C. public school 
system has a monopoly on government-financed schools in the 
District, it will continue to have what I regard as a terrible 
performance.
    It is the primary reason that middle-class families, mostly 
middle-class black families, are leaving the District. The $700 
million that would be lost to the Federal treasury from the 
Norton proposal is more than the total school budget for the 
District of Columbia, which itself is now about 50 percent more 
per student than the national average. And so there is a huge 
amount of money there that could be used for a variety of 
purposes.
    There are other policies that you should also address in 
subsequent hearings.
    The only policy that would provide both separation of roles 
between municipal roles and State roles and, in addition, give 
District residents a full vote in Congress is retrocession to 
the State of Maryland. And that ought to be high on your 
priority list. The District then would become a county within 
the State of Maryland. The income tax and sales tax would be 
Maryland tax rates, not District tax rates, which are much 
higher in both cases. The District would be subject to the 
municipal and education codes of the State of Maryland. That 
requires a special deal between the Feds and the State.
    The State would, for example, insist that the Federal 
Government pick up the cost of the unfunded pension 
liabilities, and quite properly so. The State would want to 
have a long-term commitment to a rule for determining the 
annual Federal subsidy to the District that is basically an in-
lieu payment for the fact that the Federal Government is not 
subject to property taxes.
    There are some other measures that I think would be helpful 
as well. A good bit of the government services that are now 
provided at the District level could be decentralized to wards 
or to neighborhoods. There are no economies of scale in the 
provision of municipal services with the sole exception of 
wastewater treatment. That is already maintained on a regional 
basis. And a good bit of devolution to wards and to 
neighborhoods would help provide a better mix of activities 
that are specific to the concerns of people in different wards.
    One other measure ought to be considered. It would have to 
be worked out in conjunction with both Maryland and Virginia, 
and that is to have a peak-hour, peak-direction congestion fee 
for commuters to and from the District. The way to do that, I 
believe, is to give the governments of the originating county 
half the revenues of the totals. That would do a number of 
things. One is it would raise on the order of $250 million a 
year for the District; it would also raise on the order of $250 
million for the suburban counties. It would significantly 
reduce congestion in the peak hours, and it would increase 
ridership on the Metro system.
    Those are all interesting proposals. The District would 
also benefit by shifting the property tax burden from 
structures more on to land. There have been some dramatic 
experiments of this nature around the country in which 
assessment increases are specific to the value of the land, but 
not to the structures on the land, and that has been very 
helpful in reviving selected urban areas around the country.
    So there are a lot of measures, many of which I have 
spelled out in some detail in our Cato report on the District. 
I encourage you to pay attention to that, and that it is 
important to hold a series of hearings on this matter because 
no one measure is going to solve all the problems. But I must 
conclude that the particular measure that was addressed today 
has almost nothing to do with the major problems of the 
District.
    Senator Lieberman. A forthright answer. Some interesting 
proposals, and I look forward to particularly hearing Mayor 
Barry's response to the idea of returning to Maryland. 
[Laughter.]
    Senator Brownback. Mr. Mitchell.
    Mr. Mitchell. As I indicated in my testimony, I am actually 
ambivalent about whether or not this legislation should be 
passed. But if it were linked to some of the ideas that Dr. 
Niskanen was talking about, specifically school choice, then I 
think it would have a hugely positive impact on the District, 
although most of the benefits would probably come from the 
school choice proposal. I have never done the calculations 
myself, but I have read figures indicating that the per pupil 
cost of sending a child to one of the D.C. Government schools 
is quite similar to the cost for the elites to send their kids 
to some of the more wealthy private schools in the area. To me 
that is just a moral outrage that you would want to trap 
children in schools that clearly are not working when you could 
voucherize the system and give them extraordinarily improved 
educational opportunities. I just cannot understand why someone 
would be against such a proposal.
    Senator Brownback. Good comments. Gentlemen, we are going 
to proceed to the next panel. Thank you very much for your 
thoughtful, direct comments. We will look forward to working 
with you as we put forward, as I noted at the outset of this 
hearing, a comprehensive plan working for the District of 
Columbia.
    Thank you very much.
    Mr. Mitchell. Thank you.
    Mr. Niskanen. Thank you.
    Senator Brownback. The next panel will consist of the Mayor 
of the District of Columbia, Marion Barry, who shares something 
with my son. Yesterday was my son's ninth birthday. Mayor, I do 
not think you are 9, but I want to wish you a happy birthday, 
today, I understand, and you grace us by your presence. We 
appreciate very much your coming and attending.
    We do have your testimony, so if you would like to truncate 
those comments and get right to the direct point of what you 
would like for us to know about, we would appreciate that. 
Thank you very much for coming here today. Mayor Barry.

  TESTIMONY OF HON. MARION BARRY, JR.,\1\ MAYOR, DISTRICT OF 
                            COLUMBIA

    Mayor Barry. Thank you very much, Mr. Chairman and Senator 
Lieberman. Let me express my deep appreciation for the 
opportunity to spend some time with you about the critical 
issue of Federal tax policy and the way it affects the District 
of Columbia.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mayor Barry appears on page 53.
---------------------------------------------------------------------------
    Senator Lieberman. Mayor, if you will excuse me, I want to 
just welcome you and offer my apology. I am about 10 or 15 
minutes late to another meeting I was supposed to be at. I am 
going to stay a while to hear the beginning of your testimony, 
but please understand if I go. I will take the comments with me 
and read them.
    Mayor Barry. Thank you very much, Senator, and in reference 
to the questions about receding to Maryland, first of all, 
Maryland does not want to do it; we do not want to do it. So 
that would not even be a shotgun marriage. That would be 
nothing. If I would want anything, it may be to get Arlington 
County and Alexandria back into the District. That is where it 
was before it was ceded back to Virginia.
    Chairman of the Subcommittee, the debate over appropriate 
Federal tax policy is not new. As far back as 1916, a Joint 
Select Committee of the Congress undertook to determine the 
proper role of the D.C. Government and the expenses of the U.S. 
Government. The history of this city has gone from elected 
officials to an appointed Governor, to an appointed lower house 
and elected other house, and then back to commissioners, now to 
elected form of government. So we have had this debate about 
the form of government for a long time.
    We cannot ignore the fact, Mr. Chairman and Members of the 
Subcommittee, that the District is unique. It is our Nation's 
capital. There are only 60 square miles in this city. We cannot 
annex any other land, and we also must be mindful of the fact 
that over 57 percent of all the land in the District of 
Columbia is tax-exempt--57 percent--which means our tax base is 
very, very narrow.
    You also must remember that, unlike other cities and 
counties and States that want to, we cannot tax income at its 
source; $19 billion of income earned in Washington, 70 percent 
of the total, goes outside of our city. If I lived in Camden, 
New Jersey, and worked in Philadelphia, Pennsylvania, I would 
pay a wage tax of about 4 percent to the city in Pennsylvania 
and would deduct that from my State taxes in New Jersey. If we 
were to apply the same formula of 4 percent, we would be 
talking about $720 million of income. I think it is unfair for 
people to work here, use our roads, our streets, our police 
protection, our fire, and not pay taxes to pay for them. In 
spite of real arguments, politically it is not going to happen 
because the Senators of Maryland and Virginia and the Congress 
people are going to protect that $720 million from being taken 
from their treasury. We cannot forget about that.
    We also cannot forget about the fact that there are almost 
170 foreign governments located here that do not pay any 
property taxes or any other kind of taxes, again, using our 
roads and streets, etc. So the Federal payment traditionally 
has been the way of compensating for that lack of income from 
property, but not enough. It is $76 million. It should be 
double that amount if you looked at the market value.
    Also, Mr. Chairman, we cannot ignore the fact that this 
city government has the responsibilities of a State government. 
Forty-six percent of our total budget goes to State functions. 
No other city in America operates a State prison with 7,000 
felons. We are paying 50 percent of a Medicaid budget which is 
$400 million of our money. The Congress, at Home Rule left a 
$306 million unfunded pension liability from fire, police, 
teachers and judges pensions. When you add all that money up, 
you find that 46 percent of our money goes to State functions, 
which means that we are forced to have a higher tax rate in the 
District. And the personal income tax I think is about 9.6 
percent. Our corporate tax is higher than the corporate tax in 
Maryland and Virginia. Therefore, it puts the District at an 
unfair disadvantage in terms of competition when one wants to 
move their company to the District.
    If you look at the economies and economics of it, and the 
fact that we are landlocked, the property values in the 
District are higher in terms of commercial property. So when 
you add all that together, we are uniquely situated. And so 
there have been a number of discussions about how and what we 
ought to do. We would like to just briefly refer to one 
proposal called ``The Orphaned Capital,'' by Carol 
O'Cleiraecain, who did an outstanding job of looking at the 
District, and she came to the conclusion with the basic premise 
that the District has the economy of a city and not of a State, 
therefore, the revenue system should reflect a typical city-
State relationship.
    The proposal meets many of the criteria for a revenue 
system. It will streamline the tax system, reduce the number of 
taxes, and lower tax burdens on both individuals and 
businesses.
    In conjunction with the President's plan, I would like to 
suggest that we keep a portion of the Federal payment. This 
payment is not contingent on the State functions being 
transferred. It is contingent on a PILOT, payment in lieu of 
taxes, for Federal property in the District of Columbia. The 
number she suggested is $382 million, which is a fairly good 
number. We could round it off at $400 million if we wanted to. 
But we cannot trade State function transfers for the Federal 
payment. This is done all over America. In Boston, there is a 
voluntary PILOT from the universities and from other non-profit 
institutions. But it seems to me the Federal Government has the 
responsibility, since it owns 41 percent of the land, to 
continue that level of payment.
    Let me also say that we strongly support the President's 
plan as a first step. The President recognizes that these are 
legitimate State functions.
    Let me just say, Mr. Chairman, parenthetically, if we were 
able to tax income in Washington earned by non-D.C. residents, 
we would be less enthusiastic about transferring these State 
functions because we would then have the State income taxing 
authority to capture income and to pay for these State 
functions. But in the absence of that authority, we ought to 
have these burdensome State functions transferred in terms of 
our prison system, and our Medicaid is disproportionate to any 
other city or State in America. New York comes close, 25 
percent, but most counties and most cities pay less than 10 
percent of their own local budget toward the Medicaid. And we 
know Medicaid is growing by 10 or 15 percent a year nationally.
    To give you an example, we started in 1973 with $17 million 
Medicaid payments, both Federal and local, and last year it was 
over $800 million. So you can see the tremendous burden that 
the taxpayers of the District are paying.
    We know the story of the unfunded pension liability where 
firefighters, police officers, judges, and teachers had a 
Federal pay-as-you-go system until 1979, and then given to us. 
It has now grown to almost a $5 billion unfunded pension 
liability, so we support that Presidential proposed because it 
would save the District $306 million in 1998 alone if that were 
to take place.
    Our court system--the President appoints District of 
Columbia judges. So we do not have anything to do with the 
judges, anyway. The U.S. attorney prosecutes all major crimes 
here, all misdemeanors, the only place in America where the 
U.S. attorney prosecutes local crimes. Therefore, for the U.S. 
Government to pay for the courts is an equitable situation.
    Also, Mr. Chairman, hundreds of thousands of cars come into 
our city every day, many of whom bear Federal workers. Seventy 
percent of the Federal workforce, which is about 300,000 
people, live outside of the city. And those cars coming into 
our 1,100 miles of streets cause an undue strain on our roads 
and streets, potholes popping up, even though we have done 
about 40,000. These cars add to it and the people who drive 
these cars and pollute our air do not pay one nickel in taxes 
to pay for the upkeep and care of those roads.
    So you have all of these burdens here, and that is why we 
support the President's plan of $125 million for an 
infrastructure fund.
    Also, Mr. Chairman, we also support our Metro, but the 
District Government is subsidizing Metro by $175 million, local 
money, whereas in Prince George's County and Montgomery County 
the State pays their subsidy. Again, we are not asking for that 
to be transferred to the Federal Government, but we want to 
point that out.
    Now to Ms. Norton's plan. Mr. Chairman, if you look at 
equity and fairness, the D.C. residents should not be paying 
any taxes at all. We do not have a right to vote in the Senate 
or in the House of Representatives. In the early parts of this 
Republic, we all know the history of where the Founders of this 
Republic went to war against the British around a very simple 
notion of taxation without representation. I am not proposing 
we go to war against the Federal Government, but certainly we 
should not pay any taxes if we were to be logical about it. 
Puerto Rico and Guam do not pay any taxes. They are similar to 
us in terms of voting status. So the Norton proposal is a more 
practical, realistic way of dealing with it.
    Let me say just from the very beginning, regardless of what 
the economists say and others say, all of us know that the 
Norton pro- 
posal in and of itself is not going to keep people in the 
District of Columbia. It is going to require what we are 
already doing, working as hard as we can to reduce crime on the 
streets of Washington, D.C., and we have had a 23 percent 
reduction in homicide in the last 4 months. Senator, even one 
homicide is too much for me, but at least it shows we are going 
in the right direction. Robberies are down. Stolen automobiles 
are down by 15 percent.
    We are reforming our school system. I heard the gentleman 
who testified before about school choice and how this would be 
so revolutionary to solve our economic problem. It does not 
make a lot of sense because a significant number of middle-
income people do not have kids. Look at the census data. They 
do not have any children in school. And if you look at who is 
leaving the city, it is primarily people in Wards 7 and 8, 
which is east of the Anacostia River, not Ward 3, not Ward 2, 
where a significant number of middle-income people live. And so 
the schools are important, no question about that. They need 
reforming, and we are working with General Becton to do so. But 
that is not--if you had school choice--and many of us have some 
reservations about that--that would not be--what you are trying 
to do is find a way to stabilize this economy.
    We are paper-thin. Our economy is paper-thin. We have 
630,000 jobs in the District of Columbia, and almost 300,000 of 
those are Federal jobs, which means we are basically a 
knowledge-based economy. We are a Federal Government economy. 
And when the Federal Government downsizes, as it has, it 
affects our economy tremendously. In the last 10 years, we lost 
over 40,000 Federal jobs in the District of Columbia, which 
means that our economy is largely dependent on this Federal 
Government. The second part of our economy is the service 
industry, over 100,000 people.
    So in terms of Ms. Norton's proposal, I support it 
unequivocally. I would like to suggest, though--and there was 
some discussion about it from the dais--that we ought to look 
at ways to expand the capital gains provision of it. I know it 
is a difficult task to try to figure out how you are going to 
have a company with just an office here and investing, an 
individual who just has an apartment here investing in stock 
and bonds and other things outside of the District. But I think 
it would go a long ways to look at a way to try to give us a 
better broad net as it affects capital gains, because 
investment opportunities in the District are to some extent 
limited in terms of the kind of businesses that we have here 
and the kind of economy that we have. But we support Ms. Norton 
in her efforts. I would like to thank you and others for 
supporting that legislation as well.
    Another thing about the Norton proposal is that we have to 
find a way, all of us, to get our Democratic--my Democratic 
friends, to support this proposal. My own view, Senator, if 
they do not support this, they have to come up with something 
equal to or better. Thus far, the President on down has not 
come up with an alternative to this proposal. And in the 
absence of an alternative, let's support this one and let's get 
it out of the Senate, let's get it out of the House of 
Representatives, and put it on the President's desk. It seems 
to me that he would have a hard time not signing it once it 
gets there.
    So, in summary, we are desirous of stabilizing our economy. 
We are desirous of a fair and equitable way of looking at our 
tax situation. Let me also say that there are those who say, 
well, these are just all management problems; if the District 
were managed better, you would not have to worry about these 
State functions.
    That is not true. You can look at the flawed structure 
here. You can have the best manager in the world--and we have 
our share of management problems like any other city, but we 
are making significant and steady progress. The best managers, 
if you took a Lee Iacocca, who was credited with bringing 
Chrysler back, could not bring this back with that kind of a 
structure we have here where this 46 percent of our budget goes 
to State functions, we cannot tax income at its source, and the 
other inequities where we have a higher tax burden in the 
District than most of our suburban jurisdictions, therefore 
putting us at an unfair advantage.
    So I am urging you to support the President's plan with 
some additions to it in terms of keeping a portion of the 
Federal payment, to add the University of District of Columbia 
to his plan because it needs support as a State institution, 
and add later, maybe in 1999, the mental health system which 
costs us about $190 million. No other city operates a State 
mental health institution and that is what we are doing.
    I thank you for having this hearing. I am optimistic that 
out of this and others will come a basic direction that will 
help us with our financial recovery and make Washington, with 
our help locally, the capital we want it to be where we will 
have safe streets and good schools and a good spirit.
    Thank you.
    Senator Brownback. Thank you, Mayor. I appreciate you 
coming in. There are a couple of questions that I have.
    You are supportive of Representative Norton's proposal, but 
you would expand the capital gains to non-D.C. residents.
    Mayor Barry. I think that would give us a broader base of 
opportunity, and also I think that if we were to use this as a 
model for other places in the country, you would probably want 
to do the same thing as opposed to just limit it to the 
jurisdiction where you had the absence of a capital gains tax.
    Senator Brownback. And we are talking in general about 
going to more of an incentive-based system to help here in the 
District of Columbia rather than a subsidy-based system.
    Mayor Barry. Right.
    Senator Brownback. Which Representative Norton was saying, 
we have been down the road of the subsidy-based system, it has 
been our urban policy for 20 or 30 years, and look what we have 
gotten to in many of our urban areas. Do you support her in 
that, that we need to get away from a subsidy-based system to 
an incentive-based system?
    Mayor Barry. Well, I think in the District, if you were to 
transfer these State functions, I would not call those 
subsidies. Absent that, we do have to get into an incentive-
based system.
    I have looked at empowerment zones and other zones around 
the country, and these tax credits and other devices really are 
not enough to attract major businesses to Anacostia, where I 
live, and other places like the Anacostias of the world.
    Senator Brownback. We have to get a broader set of 
incentives coming together, is that----
    Mayor Barry. Absolutely. You got to. If you look at the 
bottom line--you are a business person, and others know that. 
There is an economic bottom line you look at when you are 
trying to decide what you are going to do with your business. 
And if it is cheaper to operate it right across the line over 
in Roslyn or Crystal City, that is where you go. And to go to 
Anacostia requires a great deal more incentives to help you 
economically than what we got now on the table.
    Senator Brownback. That is what strikes me, and I am new to 
these issues. I am new in the Senate.
    Mayor Barry. I am learning about them, too.
    Senator Brownback. And I am looking forward to learning 
more, but it seems to me that you have to get a broad, 
comprehensive plan together for this to work, and that a part 
of it is the tax policy and incentives based on the financial 
system. Part of it is schools, and part of it is people feeling 
safe. Part of it is the streets.
    Mayor Barry. Right.
    Senator Brownback. It has got to all come together for it 
to work, and if you miss any one of these parts, you are not 
going to be near as successful or you may not be successful at 
all. Even if you have every great incentive in the world and 
people are not safe, they still probably are not going to come. 
That is why in my looking at this, I think you have to go to a 
broad-based, comprehensive set of incentive type of packages 
and proposals for us working together.
    Mayor Barry. I agree.
    Senator Brownback. And this is part of the opening steps.
    Mayor Barry. Mr. Chairman, let me say that we certainly--I 
agree with that, with the broad approach. We certainly would do 
more than our share, locally, that which is under our control, 
to create an environment that is safe, that is positive, to 
reform these schools. But the Federal Government has a 
responsibility to do the reform because you have the authority 
to do the tax reform and other kinds of incentives that will 
make it.
    The other problem we face with it, Mr. Chairman, is that 
some people just do not like an urban environment. They would 
rather be in a much more sedate suburban environment.
    Senator Brownback. Of course, some of us like rural areas, 
too.
    Mayor Barry. Yes. But there a lot of people who love it, 
but we have to make it easier for them to stay here and to do 
business here.
    Senator Brownback. Well, not only that, this is the Federal 
city, which I think is an important thing that we miss a number 
of times.
    Let me direct your attention to the President's proposals 
on it, if I could, because you were supportive of basically the 
Federal Government reassuming several of these functions that 
it had previously at one time, and then sent them back to the 
District, and then now coming back with those.
    You have to do some talking to me and convincing me on some 
of those ideas, where we would take items from a troubled 
District of Columbia system maybe to a troubled Federal 
management sys- 
tem. I am not sure holistically as a Nation we get further that 
way. I could see perhaps where it does some relief for the 
District of Columbia, but does it long term solve the problem 
or not?
    Mayor Barry. Mr. Chairman, take each of those items. Take 
the pension system. What the President proposes is that the 
Federal Government take the assets, which are almost $4 
billion, and the liabilities, which are about $4.5 billion--it 
is about $8 billion when you add it up, and you deduct what you 
already have, so you net about $4.5 to $5 billion. That is easy 
to administer. They propose a trustee system. The Federal 
Government operates pension systems--and some people say 
poorly, but you have the Civil Service Retirement System, you 
have Social Security, which is a type of pension system, 
operated by the Federal Government. Or you take the area of the 
courts. Prior to 1970, the Federal Government--all crimes were 
prosecuted, major crimes, in Federal court. And there were 
those who said the Federal court system may have some 
inequities in it, but it is a system that runs fairly well.
    If you take the area of prisons, the Federal Bureau of 
Prisons has a fairly decent track record in managing America's 
prisons when you do the analysis and the studies. Now, the 
problem is not the Federal Bureau of Prisons. It is a problem, 
I think, of the criminal justice system which some people say 
has a lot of inequities. But at least they know how to manage.
    I think in areas that they are assuming control and payment 
for, they are capable of managing. There are some areas that 
the Federal Government does not manage very well, and we would 
not propose that they take any of that. There is some question 
as to whether or not they could manage our mental health system 
immediately with them not having so much experience in it. But 
I am convinced that in the areas that the President has 
proposed to take over, the Federal Government can do a job 
equal to or better than what we could do.
    Senator Brownback. Well, I will look forward to talking 
with you further on that.
    Mayor Barry. We are supposed to go out and visit Lorton and 
some other places, so we can talk more about the Federal 
Government's ability to manage. Or take Medicaid. Medicaid is 
easy. It is just changing the formula from 50 percent to 30 
percent for us. There are some States that have the Federal 
Government reimbursement as high as 80 percent. So that is just 
a matter of a formula change in the Medicaid allocations. I 
think Arkansas has about a 68 percent reimbursement, 
Mississippi 70-some percent. So that is not a difficult one to 
hopefully convince you that that can happen just with a formula 
changes. The others we can talk about whether or not they can 
do that or not.
    In terms of the prisons, the Federal Government is 
proposing a transition period of 3 to 5 years where we would 
have a trustee that would begin to phase in that part of the 
operation to the Federal Bureau of Prisons. So to me that is a 
workable solution in terms of getting them ready for this major 
prison system that we have here called the Department of 
Corrections.
    Senator Brownback. Well, Mayor, thank you very much for 
coming here. We share the same objective for the District of 
Columbia to be a shining example, and I know you want to work 
and have worked tirelessly to do that. I thank the number of 
Councilmembers that have joined us as well here who have the 
same objective, and I have that same objective. We have a 
process to go through now as we work together to try to design 
a comprehensive, incentive-based system that we all believe in 
our hearts and in our souls will work to make Washington, D.C., 
a Nation's capital worthy of a great Nation. That is what my 
objective is.
    This is the first of a number of hearings that we will hold 
on this. We will invite you and other Councilmembers back, and 
also to visit directly at other times on this as we move on 
forward.
    Mayor Barry. Mr. Chairman, let me recognize Ms. Hilda Mason 
and Carol Schwartz from the Council.
    Senator Brownback. Yes, I had recognized them once 
previously.
    Mayor Barry. Oh, OK. Thank you.
    Senator Brownback. But I am delighted to have them here as 
well.
    Mayor Barry. Also, Mr. Chairman, may I just make a point? I 
have been studying world capitals to see how their nations 
treat their capitals. And if you look at Paris, the French 
really sort of look at Paris as the grande dame of the Nation 
and put a lot of energy and effort, not just money but a lot of 
other efforts and resources into the capital. The same with 
London, and I was in Beijing, China, last November. Even in 
Communist China, Beijing is looked upon as the heart of the 
nation.
    So it seems to me that at least we are beginning to get 
that feeling here in America, that Americans are beginning to 
see Washington as our capital and not somebody else's capital, 
and are beginning to recognize the opportunity and the 
challenge to assist us, not because of any gifts or not because 
of any paternalistic kind of thing, but because we deserve it 
as our Nation's capital.
    Senator Brownback. Thank you very much.
    Thank you all for coming. The Subcommittee meeting is 
adjourned.
    [Whereupon, at 11:38 a.m., the Subcommittee was adjourned.]

    [GRAPHIC] [TIFF OMITTED] TH161.001
    
    [GRAPHIC] [TIFF OMITTED] TH161.002
    
    [GRAPHIC] [TIFF OMITTED] TH161.003
    
    [GRAPHIC] [TIFF OMITTED] TH161.004
    
    [GRAPHIC] [TIFF OMITTED] TH161.005
    
    [GRAPHIC] [TIFF OMITTED] TH161.006
    
    [GRAPHIC] [TIFF OMITTED] TH161.007
    
    [GRAPHIC] [TIFF OMITTED] TH161.008
    
    [GRAPHIC] [TIFF OMITTED] TH161.009
    
    [GRAPHIC] [TIFF OMITTED] TH161.010
    
    [GRAPHIC] [TIFF OMITTED] TH161.011
    
    [GRAPHIC] [TIFF OMITTED] TH161.012
    
    [GRAPHIC] [TIFF OMITTED] TH161.013
    
    [GRAPHIC] [TIFF OMITTED] TH161.014
    
    [GRAPHIC] [TIFF OMITTED] TH161.015
    
    [GRAPHIC] [TIFF OMITTED] TH161.016
    
    [GRAPHIC] [TIFF OMITTED] TH161.017
    
    [GRAPHIC] [TIFF OMITTED] TH161.018
    
    [GRAPHIC] [TIFF OMITTED] TH161.019
    
    [GRAPHIC] [TIFF OMITTED] TH161.020
    
    [GRAPHIC] [TIFF OMITTED] TH161.021
    
    [GRAPHIC] [TIFF OMITTED] TH161.022
    
    [GRAPHIC] [TIFF OMITTED] TH161.023
    
    [GRAPHIC] [TIFF OMITTED] TH161.024
    
    [GRAPHIC] [TIFF OMITTED] TH161.025
    
    [GRAPHIC] [TIFF OMITTED] TH161.026
    
    [GRAPHIC] [TIFF OMITTED] TH161.027
    
    [GRAPHIC] [TIFF OMITTED] TH161.028
    
    [GRAPHIC] [TIFF OMITTED] TH161.029
    
    [GRAPHIC] [TIFF OMITTED] TH161.030
    
    [GRAPHIC] [TIFF OMITTED] TH161.031
    
    [GRAPHIC] [TIFF OMITTED] TH161.032
    
    [GRAPHIC] [TIFF OMITTED] TH161.033
    
    [GRAPHIC] [TIFF OMITTED] TH161.034
    
    [GRAPHIC] [TIFF OMITTED] TH161.035
    
    [GRAPHIC] [TIFF OMITTED] TH161.036
    
    [GRAPHIC] [TIFF OMITTED] TH161.037
    
    [GRAPHIC] [TIFF OMITTED] TH161.038
    
    [GRAPHIC] [TIFF OMITTED] TH161.039
    
    [GRAPHIC] [TIFF OMITTED] TH161.040
    
    [GRAPHIC] [TIFF OMITTED] TH161.041
    
    [GRAPHIC] [TIFF OMITTED] TH161.042
    
    [GRAPHIC] [TIFF OMITTED] TH161.043
    
    [GRAPHIC] [TIFF OMITTED] TH161.044
    
    [GRAPHIC] [TIFF OMITTED] TH161.045
    
    [GRAPHIC] [TIFF OMITTED] TH161.046
    
    [GRAPHIC] [TIFF OMITTED] TH161.047
    
    [GRAPHIC] [TIFF OMITTED] TH161.048
    
    [GRAPHIC] [TIFF OMITTED] TH161.049
    
    [GRAPHIC] [TIFF OMITTED] TH161.050
    
    [GRAPHIC] [TIFF OMITTED] TH161.051
    
    [GRAPHIC] [TIFF OMITTED] TH161.052