Freeloading Bankers

How the Global Economy's Rule Makers Thrive on Subsidies from an Impoverished and Disenfranchised City

By Chidozie Ugwumba

Most people are shocked to discover that "Taxation without Representation" -- a basic motivation for the American Revolution -- persists today in our nationâs capital, Washington DC. DC has no representative, elected or otherwise, in the US Senate, and one nonvoting delegate in the US House of Representatives. The Congress, with no votes cast by the city, acts as DCâs "state legislature"; Congress can, and frequently does, overrule the actions of the locally elected mayor and city council, and has even overturned citizen-passed ballot initiatives. DC residents have always fulfilled national obligations: they have paid taxes and served in wars. They are taxed without representation

Nestled in this political paradox between theory and practice are the World Bank and International Monetary Fund (IMF). Unfortunately for DCâs residents, who already have little leeway for political self-determination, the World Bank and IMFâs presence in DC has significant implications for DCâs tax and revenue situation. Before exploring those ramifications, a little information about DCâs existing tax situation is necessary.

The tax base has an unusually high proportion of low-income taxpayers.

Even with this constricted tax base, DC must provide services provided by city, county, and state governments such as state courts, driver licensure, liquor control, unemployment compensation, food and drug inspection, health care, professional licensure and designation of development zones.

In DC, the individual income tax burden is substantially higher than the average of cities that levy income taxes.

Property taxes in DC are substantially lower than most cities.

Since 1999, the tax rate for Class II (non-owner-occupied residential property containing less than 5 units) and Class IV properties (commercial, industrial, vacant, or abandoned property) has decreased by 19 and 10 cents respectively per $100 assessed value. The rate for Class I property (owner-occupied property) has remained the same. This is despite the real estate boom of the last two years.

In DC, the regressive tax system places a heavier burden on lower-income people and lower-valued residential property holders. As the "Tax Parity Act" is phased in, the tax system in DC will become even more regressive.

In 2002, DC will use $254,396,000 in local funds for loan repayments. Although DCâs bond ratings -- a standard comparative gauge of general financial health (including indebtedness) -- have improved in the last two years, DCâs remains one of only 4 major cities in a group of 35 with a less than "A" bond rating.

Part of DCâs response to its budgetary constraints has been reducing services to low-income residents. One case is the recent closing of DC General Hospital, a move that mirrors World Bank and International Monetary Fund (IMF) policies imposed on Africa, Asia, Latin America and the Caribbean. The World Bank and IMF, and now DC, maintain that it is generally more efficient for private entities to provide healthcare, and that they should always do so, even in the face of persistent problems with insuring the access of low-income people to private health care.

The World Bank and IMF are public institutions owned by the governments of the world. Their activities, ostensibly intended to promote "development", are mandated by the national governments of the wealthiest countries, which also provide much of the funding they use. Even on the basis of widely available statistics released by the two institutions themselves, it is certainly debatable whether the Bank and IMF act for the public good. Both the World Bank and the IMF operate in a highly secretive matter where substantive decisions are not open to public scrutiny -- of either citizens in the countries which make funds available, or of citizens in countries which are supposed to benefit -- until well after they have taken effect, if at all. Like the DC Control Board, they are unelected organizations that make decisions for a disenfranchised constituency. The two institutions have largely failed in their stated goals.

In most of a group of 83 poor countries that have received substantial IMF financing between 1978 and 1997, unemployment increased, real wages fell, income distribution became more unequal, poverty rose, food production per capita declined, external debt grew, and social expenditures were cut during those years.

60 percent of World Bank projects have failed. Furthermore, because the projects have increased the debt burden of the countries that received loans from the Bank to carry out those projects, and, in many cases, caused environmental damage, they have been losses in economic terms.

International organizations are exempt from customs duties, any judicial process (including suits in civil and criminal court), and revenue, sales and property taxes under the International Organizations Immunities Act÷title 22, section 288 of the United States Code. Four members of the World Bank Group÷the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), International Finance Commission (IFC), and the Multilateral Investment Guarantee Agency (MIGA)÷as well as the IMF were designated as eligible for these benefits by executive order.

the IMF and World Bank do not pay any taxes on their combined yearly profits of over $2 billion,

the IMF and World Bank do not pay taxes on their property in DC, which has a combined value of over $800 million,

foreign nationals who work for the World Bank or IMF, including those resident in DC, do not pay DC (or federal) income tax (and employees who are U.S. nationals have their salaries pro-rated so they have the same take-home pay as their foreign counterparts),

the IMF and World Bank also do not pay sales taxes.

The IMF and World Bank make over $2 billion in profits annually. Since they are multilateral institutions, the least controversial method of calculating "taxes" on that income would be to address a percentage of the profits equal to the United Statesâ voting share -- which corresponds to its contributed capital -- and is around 16 percent.

Based on 1999 tax rates and collected revenues the World Bank and IMFâs unpaid taxes total nearly 3% of all property taxes, 22% of all corporate franchise taxes, and 2% of all taxes collected in a given year. If even just their property were owned by a taxpaying organization, that organizationâs taxes would exceed the cost to the city of the services that organization benefited from: it would be a net contributor. In contrast, the World Bank and IMF are only a drain on city funds.

Payments In Lieu Of Taxes (PILOTs) are voluntary payments made by tax-exempt organizations to the localities (cities and counties) in which they own property -- often to the general tax fund. While some organizations make payments as a response to citizen pressure -- which has been key in many cases -- or to prevent their tax-exempt status from being challenged by localities strapped for cash, most make the payments because they understand:

the importance of property taxes to local revenue, and

that their ownership of property increases the costs of local government, which must provide service to land that is not vacant, while depriving it of the revenue that would be due were the land owned instead by a tax-paying organization.

The amount of the payment is often negotiated by the organization and the locality based on four factors: the fair tax value of the land, the cost of providing services, the local governmentâs need, and the organizationâs ability to pay.

Since 1977 the Bureau of Land Management (BLM) has administered one of the largest PILOT programs on behalf of the Department of the Interior. This program -- called PILT by the federal government -- includes payments made on tax-exempt federal land administered by the BLM, the National Park Service, the U.S. Fish and Wildlife Service, and the U.S. Forest Service. It also includes federal water projects and some semi-active and inactive military bases. In 1998 payments totaling over $100 million were made to 2,327 local governments, and since then payments have increased.

Public corporations and large educational institutions also make PILOTs. The Massachusetts Port Authority, a tax-exempt state agency, makes large payments (totaling $10 million in 2000) to the city of Boston. Similarly, the New Hampshire State Port Authority makes an annual payment to the city of Portsmouth for highway maintenance, fire protection and other services. The Massachusetts Institute of Technology (MIT) has been making payments to the city of Cambridge since 1928. Harvard and Yale Universities also have PILOT agreements with Boston and New Haven.

There is ample precedent for tax-exempt institutions that own amounts of property large enough to substantially influence their localityâs tax base making PILOTs in the interest of good citizenship. In light of DCâs existing tax situation -- a heavy tax burden on low-income residents in a city so swamped with debt it is cutting services to those same citizens -- good citizenship is now more necessary than ever. It is unquestionable that the IMF and World Bank can pay: together they make over $2 billion in profits annually, and the IMF has approximately $30 billion in gold reserves.

The idea of PILOTs has been raised before with regards to the World Bank and IMF. In its May 1998 report, "The [Tax Revision] Commission recommend[ed] that the federal government make an annual payment in lieu of property taxes to the District. Other properties that the federal government has exempted, such as the World Bank, the International Monetary Fund, and other international organizations, should make in lieu payments, or the federal government should make in lieu payments on their behalf."

Currently, the IMF and World Bank drain DCâs resources. With over 10,000 employees combined, they are the third largest employer in DC. Beyond normal police, fire, snow removal, and emergency planning services, the cost of services is also increased in light of the World Bank and IMF attracting increased opposition to their policies. The debate on whether the World Bank and IMF act in the public good is already grounds to reconsider their tax exemption.

$57 million dollars paid by the IMF and World Bank each year to the DC government would make a huge difference to the city and its residents. It could help alleviate DCâs crushing debt burden, which costs DC taxpayers $254,396,000 each year, or cover 35% of DC General Hospitalâs annual cost to the city. Every year, this uncollected tax bill could pay for:

the Local Street Maintenance Fund,

the salaries of over 250 new teachers, and

the salaries and benefits of all DMV employees combined.