D.C. Tax Revision Commission narrows options, but it puts off final vote

December 9, 2013

Williams said Monday there is more compromising to be done before a package of tax changes can be finalized. (Michael S. Williamson/The Washington Post)

It was supposed to be a red-letter day for the D.C. Tax Revision Commission, ending 16 months of work with a final vote on a package of recommendations to be forwarded to city lawmakers.

But, alas, there was no closure to be had at the commission’s meeting Monday. Some proposals, particularly those related to personal income tax, remained in flux as some commission members expressed concern about the price tag for the final package.

Commission Chairman Anthony A. Williams, the former mayor, drafted two sets of recommendations for deliberation Monday. One set has a projected price tag of $20.3 million yearly, which — considering that the D.C. Council has already set aside $18 million in next year’s budget for the commission’s recommendations — should be relatively easy for lawmakers to swallow. The other, more ambitious package costs $141 million yearly, meaning some elements would likely have to be implemented over time, if at all, and some commission members openly wondered Monday whether a more modest package would be more politically feasible.

Commission member Stefan Tucker, a tax lawyer with Venable law firm, said it was important for the group to offer recommendations that were feasible but also meaningful. The more modest package “might be the easy answer for people, but we need to take the long term view,” he said, and push for more expansive but politically workable changes.

The two sets of recommendations shared some elements. Among them: An expansion of the sales tax to some services (+$28.2 million yearly), an increase in the sales tax from 5.75 percent to 6 percent (+$22 million), and a higher threshold for application of the estate tax (-$15.8 million). Other elements varied in degree between the two proposals. For instance, the more modest package would cut business franchise taxes from 9.975 percent to 8.25 percent (-$57 million), matching Maryland’s rate, while the more aggressive package cuts that rate all the way to 7.75 percent (-$74 million), getting D.C. closer to Virginia’s 6 percent rate.

There appears to be agreement that the District’s current individual income tax structure should be more progressive, but there are differing opinions on how to achieve that. While there is apparent consensus on adding a new bracket for middle-income residents, in which those making between $40,000 and $80,000 would pay a top rate of 6.5 percent rather than the current 8.5 percent, there are differing views on how to handle married couples filing jointly. There are even more seriously differing views on whether to continue a top rate of 8.95 percent on those earning more than $350,000, passed in 2009 and set to sunset after next year.

The more liberal members of the commission, primarily Kim Rueben of the Tax Policy Center and Ed Lazere of the D.C. Fiscal Policy Institute, led efforts to keep the top bracket intact — arguing there is little evidence to suggest the slightly higher marginal rate would drive high-income residents out of the city. But commission member and entrepreneur Mark Ein pushed back strongly on the higher income tax rate, among other proposals, saying it contributed to the perception of the District as an unfriendly place for business investment and also cut against the commission’s stated goal of increasing the city’s standing vis-a-vis its surrounding jurisdictions.

“We’ve addressed our progressivity goals,” Ein said. “I don’t think we’ve come close to our competitiveness goals.”

Williams, who must now craft a new consensus proposal, tried to tone down the debate: “What we’re trying to come up with here is a compromise package,” he told the group. “There are going to be some elements of this to which we disagree, which is the nature of a compromise.”

There was one unusual area of agreement: Assessing a new tax of city employers based on the number of employees they have. At a rate of $25 per employee per quarter, that is expected to raise $45 million yearly. The idea behind that assessment is to capture revenue from large nonprofit institutions like hospitals and universities that may not pay property or income taxes but also consume city services. For private-sector employers, the thinking goes, the new tax would be offset by cuts to the business franchise tax.

Past attempts to squeeze revenue out of large nonprofit employers, typically through payments in lieu of taxes, have not gone well, and the organizations representing D.C.’s hospitals and universities are again on the record against them. But the employee tax could be a more politically palatable way for the District to recoup some additional revenue from those institutions — and also their many out-of-town employees, who of course do not pay D.C. tax on their income.

In one hopeful sign for the proposal, D.C. Council member Jack Evans (D-Ward 2), chair of the tax-writing committee, didn’t dismiss it out of hand — particularly when paired with an offsetting business tax cut: “I would definitely take a look at that.”

But underscoring the political complexity of recalibrating the District’s entire system of local taxation, Evans gave his personal veto to a proposal likely to make it into the commission’s final package: the sales tax hike, from 5.75 percent to 6 percent, where it stood for years until Oct. 1 this year.

His reasoning makes clear that to political actors, “signals” and sentiments often matter more than research and rationality: “It’s the only tax in the region we have that’s lower than Maryland and Virginia,” Evans said, adding, “We’re not going to raise taxes. We want to head in the other direction.”

Mike DeBonis covers local politics and government for The Washington Post. He also writes a blog and a political analysis column that runs on Fridays.
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Mike DeBonis · December 9, 2013