February 15, 2014

A FAIR and efficient tax system raises necessary revenue by applying the lowest possible rates on the broadest possible base. That’s a lot easier said than done, as the many disappointed reformers who have tackled, say, the U.S. tax code over the years can attest. The obstacles to tax fairness and efficiency include not only self-interested lobbying by well-connected groups but also genuine issues of principle and practicality.

The District of Columbia, partly controlled by Congress, faces more than its share of constraints when it comes to designing an optimal revenue-raising system. A huge commuter workforce pounds the District pavement and calls District police to report crimes, but Congress forbids a commuter tax. Federal buildings, museums, universities and hospitals define the city’s character, but the land on which they sit, 57 percent of the city’s area, is legally immune from property taxes.

In 2011, the D.C. Council asked a commission headed by former mayor Anthony A. Williams to see if the District could nevertheless find fairer, more efficient means of collecting the funds it needs to serve a growing population — and the panel’s final report is now in. The commission recommended substantial income-tax relief for middle-income households, who face a disproportionate burden under current law, and a significant reduction in the District’s franchise business tax, to make it more competitive with the comparable levies in Maryland and Virginia. These cuts would be offset with an increase in the sales tax of a quarter percentage point, an annual local services levy of $100 per employee on nongovernment organizations and an extension of the sales tax to service providers like hair stylists and health clubs.

The proposal is not perfectly revenue-neutral. It would cost $74 million in fiscal 2015, and $50 million to $60 million annually through fiscal 2018. But that amount — roughly 1 percent of current tax collections — is manageable for a city that’s run three straight surpluses, the most recent of which was $321 million in fiscal 2013. The various taxpayers affected, especially service businesses, may squawk at the commission’s trade-offs. What no one can reasonably say is that the commission failed to think those trade-offs through. Among its more controversial ideas, the $100-per-employee service fee could be a creative way around the commuter tax ban, as well as a fair offset for the tax-free status that large nonprofit employers enjoy, despite their consumption of city services. It’s certainly preferable to one alternative: negotiating payments in lieu of taxation with various institutions individually.

The commission’s report merits debate and, in our view, positive consideration. In this election year, its finely balanced trade-offs could prove a political liability in the sense that the package works as an integrated whole. Even after the election, the council, like all political bodies, is bound to want to do its own horse-trading. Some will undoubtedly point to the District’s brisk growth and solid finances and ask: “If it ain’t broke, why fix it?” The commission’s implicit but wise response is: Let’s make hay while the sun shines.

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