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Baseball Tax Raises Question Of Fairness

By Neil Irwin
Washington Post Staff Writer
Monday, October 25, 2004; Page E01

Pepco wants baseball in Washington, and the electric utility is ready to pay up. Under a proposal by Mayor Anthony A. Williams, it would pay $28,200 a year in new taxes to help pay for a ballpark.

That isn't much for a company that earned $107 million last year. "We're all for it," Pepco spokesman Bob Dobkin said of the Montreal Expos moving to Washington. "The tax isn't enough to make a very big difference to us."

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A few miles away on Georgia Avenue NW, Dudley Dworken sees it a bit differently. He is the president of Curtis Chevrolet, which he expects will earn less than $150,000 this year. Under the mayor's proposal, the tax would cost Curtis $19,100 -- nearly 13 percent of its profit.

Pepco would pay less than three one-hundredths of 1 percent. "I want a baseball team as much as the next guy," Dworken said. "But I don't see why I should have to pay so much for it."

Businesses have been among the strongest supporters of bringing baseball to Washington, with major business groups agreeing to a tax on businesses to help pay for a publicly financed stadium. But both advocates and opponents of a publicly funded baseball stadium say that there are big inequities in the details of the business tax that Williams has proposed.

Aides to Williams say they are open to changing the tax to make it more fair, a process that will begin this week as the D.C. Council begins hearings on baseball-related legislation. They said the legislation had to be drafted hastily after the District was awarded the franchise, and it essentially revised the arena tax that helped pay for MCI Center before it was phased out in 2001.

"There may be a more equitable way to approach it," said Stephen M. Green, a special assistant to the mayor. "We're fully open to changes and would like to be sponsoring friendly amendments."

Three key decision-makers -- Williams, Finance and Revenue Committee Chairman Jack Evans and Economic Development Committee Chairman Harold Brazil -- returned from a trip to Asia over the weekend and intend to focus on details of the baseball plan. Business groups plan meetings early this week to come to specific conclusions about what changes they will push for, though some of the inequities in the law have no obvious solution.

Under Williams's proposal, which all sides said is likely to be a starting point for the eventual plan, businesses with less than $3 million in annual revenue would pay no tax. That means about 31,000 of the District's 33,000 enterprises would be exempt, according to data from the D.C. Office of Tax and Revenue. Green said that the level under which there would be no tax might be raised, as long as other changes are also made that would ensure that the tax bring in $24 million.

The mayor's proposed tax would be capped, so any D.C. company with more than $16 million in revenue would pay the same: $28,200. The largest companies, like Pepco, generally consider a $28,200 tax to be inconsequential. Green said he would be open to having higher brackets to collect more from large companies.

Under the current draft, the companies that are most squeezed are mid-size enterprises -- those with annual sales of $3 million to $20 million. Especially hard hit are those with low profit margins.

Curtis Chevrolet is an example. Its $15 million annual revenue may seem impressive, Dworken said, but most if it goes to pay for the cars it sells, the workers who sell them, and the land the business occupies. The company's pre-tax margin is less than 1 percent. However, because the baseball tax is envisioned as based on revenue, rather than profit, Curtis would pay the same ballpark tax, $19,100, as a company with the same revenue and a 50 percent profit margin.

That means the tax would hit businesses that do a large volume of business on very thin margins particularly hard, especially wholesalers and low-margin retailers. Companies whose primary function is to collect money from clients and then pass most of it on to others, such as advertising agencies and general contractors in construction, also would suffer.

"Gross revenue is everything you take in, but most of that goes out to subcontractors and suppliers and employees," said Christopher Landis, president of Landis Construction Corp. in Northwest. "I don't think it's right for me as a businessman to be forced to support another man's business."

But changing the tax to be based on profit would introduce other complications. Many of the biggest companies in the District are law firms and consulting companies, which are typically structured as partnerships, not corporations. That structure allows them to pass profits to partners as individual income wherever they live, and avoids the corporate income tax. Thus, if the District tried to pay for baseball with a surcharge on its corporate income tax, many of the largest businesses in town would not pay.

"If you want to impose a business tax within the framework of the District's business-tax system, this is about the best we can come by," said John Ross, a senior adviser to the D.C. chief financial officer, referring to a tax based on revenue. "It allows us to tax a number of partnerships that otherwise escape our tax system, primarily the big law firms."

Barbara C. Lang, president of the D.C. Chamber of Commerce, said she would like to find a way to make the tax less onerous to mid-size, low-margin businesses, but saw no obvious way to do that. "I don't know if we can figure that out or not, but I feel an obligation to our members to try to find a solution," she said.


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