Summary: Except for real property taxes, government-sponsored enterprises are exempt from state and local taxes. Removing the exemption to local income taxation in the District of Columbia would reduce federal corporate tax revenues. Unlike an increase in direct spending or federal tax expenditures, no requirement exists to make up such a revenue loss. If the exemption were not to be removed, equivalent revenue could be raised from some other tax with similar effects on federal receipts. Because this latter tax increase has no budget implications, neither does removing the exemption. If the exemption is removed for D.C. alone, the main effect would be on Fannie Mae. Because of its competition with Freddie Mac, Fannie Mae will have an incentive to reduce its tax bill by shifting activity out of D.C. The tax bill it pays will come from two primary sources: customers and shareholders. To the extent that it can, Fannie Mae will try to pass the tax on to financial institutions and the final borrowers. If Fannie Mae cannot pass on these higher costs to borrowers, it may be forced to cut dividends to shareholders and Fannie Mae stock prices may fall.
