Today’s Opinion on the flat tax in D.C. was written by Jonathon Schuster.

On March 9 the Senate Appropriations Subcommittee on DC held hearings to discuss Senator Sam Brownback’s (R-KS) idea of using the District as a testing ground for a national flat tax. Forget for the moment that Brownback is far from representative of the majority of District residents with his often extremist right wing statements (such as comparing abortions in America to the Holocaust) his idea of a flat tax doesn’t take into account major issues of municipal finance.

In order to understand what impact a flat tax has on finance for a place like the District it’s important to understand a tiny bit of how municipal finance works. It’s not my intention to give a full primer on municipal finance—for that I’ll defer to experts, but some background knowledge is helpful.

Because of the large cost associated with projects like stadiums, electric plants, schools and libraries, municipalities, like the District, take out loans in the form of municipal bonds http://en.wikipedia.org/wiki/Municipal_bond. In essence, in order to pay the municipality issues a series of bonds in exchange for a cash payment at the time the bonds are issued. In return the municipality offers to repay the bond holder in a set period of time with usually minimal interest. The key to this entire equation is that the interest obtained is usually lower than other comparable bonds. However, the interest is often exempt from Federal tax, and many times it is exempt from state and local taxes.

For people with a lot of cash on hand who don’t wish to pay tax on the monies and wish to grow the monies this turns out to be a win-win situation. Municipalities get the money they need to finance large projects and at the same time the bond holder gets to make a little bit of money without having to pay tax on it.

So what does this have to do with the flat tax?