Tax cuts could be lure to paradise on Potomac


WASHINGTON -- Close your eyes and come to paradise -- to a place where federal income taxes are forgiven and corporate taxes are slashed, where schools actually educate students, and grand boulevards and city streets are safe to stroll at night.

No, it's not Monaco or Hong Kong. It could be Washington, until recently the murder capital of the country and now flat on its financial back, knocked out by relentless crime, fumbling city politicians and a fleeing middle class.

But if an unlikely coalition of die-hard Republicans and left-wing Democrats has its way, Washington would no longer be called "A Capital City." Instead, it might be called "Puerto Rico on the Potomac."

Fed up with the woes of the city and desperate for a quick fix, some Washington politicians and planners think they have found a solution -- scrap federal taxes, cut the rates corporations pay and start luring families and businesses back into the rundown neighborhoods of the once-great city.

Turn the district into a U.S. territory, they say, like Puerto Rico.

It's a concept that has captured the imaginations of such people as former Housing and Urban Development Secretary Jack F. Kemp, House Speaker Newt Gingrich and Washington Mayor Marion S. Barry Jr. It's a concept that has found its way into legislation that is expected to be the subject of hearings later this year on Capitol Hill.

It's a concept that makes it hard for people like Neal P. Gillen to control their glee.

"It would be like the Oklahoma land rush," says Mr. Gillen, a trade association executive who commutes to the city from his $750,000 home in Potomac. "People would be putting their houses up on jacks in Montgomery County and then rolling them down the major thoroughfares into Washington."

But it's a concept that some say could threaten the Maryland counties that border the district -- Montgomery and Prince George's. With the city turned into a low-tax haven for the middle class and the wealthy, the suburbs could be the new refuge for the poor in the metropolitan area.

"I believe in government on the move, but not from Montgomery County to Washington, D.C.," said Rep. Constance A. Morella, a Montgomery County Republican. "This idea needs a lot of work before it can become a possibility."

Before Mr. Gillen and others start jacking up their homes and rolling them toward the city, they need to keep in mind that the creation of a tax-free D.C. is just a dream. But it's an idea that's starting to gain momentum and support in a city that has become a national nightmare.

Washington has one of the nation's highest crime rates, and the chief of police quit over budget troubles last month. It's a city where the mayor is under investigation -- again -- this time for alleged ethical misconduct. It's a city where 80,000 students were sprung early for summer vacation this year because the school board ran out of money.

Last week, the city announced that it may hire Education Alternatives Inc. to take over 11 of its schools, the same company that Baltimore is paying nearly $43 million to run 12 of its troubled schools.

As the problems mount, more Washington residents are fleeing to the suburbs, leaving fewer people behind to pay taxes. Last spring, the district's $3.2 billion budget dipped $722 million into the red, prompting Congress to create a board to take control of the city's finances.

Desperate for a solution, politicians, urban planners and activists are promoting the "Puerto Rico on the Potomac" concept as a sure way to save the city from financial ruin.

"There's no middle class left in Washington," laments Thomas N. Edmonds, a city resident who came up with the concept last year in a book called "D.C. by the Numbers: A State of Failure."

"The tax levels here are so high," Mr. Edmonds says. "You're going to lose half of your income to taxes. And all of that money is going down a rat hole."

Flat tax proposal

Under the concept, Washingtonians would not pay current federal personal or corporate income taxes. Instead, they would pay a flat tax of about 15 percent, presumably inspiring people to buy houses and open businesses and shops. Property taxes would be frozen. The capital gains tax would be eliminated.

The intended result: A renaissance of Washington.

"Something dramatic has to be done to stop the downward spiral," says Mr. Kemp, a former congressman and NFL star who is now one of the most vocal champions of the concept. "The feds are not going to raise taxes. So why not cut taxes?"

Mr. Kemp, now with a Washington think tank, says he met with Mr. Gingrich and other Republican leaders last week and that the House speaker asked him to present his case to Republicans this month.

What does he plan to tell them?

"It's the nation's capital, and the Republican Congress cannot afford to have it implode on our watch," Mr. Kemp says. "It's also a down payment on urban America. We have to prove that a liability can be turned into an asset."

For Mr. Kemp and Mr. Gingrich, Washington could become the test site for a theory they have both been advancing for years -- that sweeping tax cuts will fuel economic growth and prosperity.

The concept of a tax haven in D.C. is catching on. The U.S. Commission on Civil Rights has urged Congress to adopt it. The president of George Washington University is supporting it. The district's nonvoting delegate, Eleanor Holmes Norton, has introduced a bill in the House of Representatives. Congress is expected to hold hearings later this year.

Even though the concept is considered a long shot on Capitol Hill, it's something that resonates with people like Robert Denny, now 74. His family moved to Washington from Baltimore more than 60 years ago. He lived on 16th Street, worked for the old Washington Times-Herald, married and moved to a home behind the National Zoo.

But when it was time to raise a family, he left for Bethesda. That was 38 years ago. If the tax-cut plan ever became law, Mr. Denny says he would probably put his $350,000 brick colonial on the market and move back across the district line.

"I'd love to move back to D.C.," says Mr. Denny, a community DTC activist in Montgomery County. "I really have a great affection for the city."

That kind of talk could frighten people who want to stay in the suburbs. The fear is that the district will become a magnet for the wealthy, and the Washington suburbs could become sprawling, low-income areas.

"It's possible that people could buy up entire city blocks and the poor people could move out. It could result in a transfer of population," said Howard A. Denis, a former state senator from Montgomery County who now works as the counsel for the District of Columbia Subcommittee on Capitol Hill. "We need to study what the economic impact would be."

Mr. Gillen, the trade association executive, says he doesn't think the poor would leave Washington, but he does believe the suburbs would become a vast, modern ghost town.

"The suburbs would be abandoned," says Mr. Gillen before becoming more wistful about the possibilities. "It would be a no-brainer buying a house in the district. It would be a mecca. It would be like living in Monaco."

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