D.C. Ponders Case for Commuter Tax

D.C. leaders voiced support yesterday for a plan to use a lawsuit to do what numerous pleas by the city to Congress over 29 years have not: overturn a federal ban on a District "commuter tax" on those who work in the city but live elsewhere.

If successful, the lawsuit could redirect $ 500 million to $ 1.4 billion a year in tax revenue toward the District and away from nearby states, particularly Virginia and Maryland.

About 500,000 people who work in the District pay taxes on their earnings to Richmond, Annapolis or other home-state capitals instead of to the District, a subsidy enforced by a unique ban incorporated into the 1974 D.C. Home Rule Act. The ban on commuter taxes was passed by Congress to protect the treasuries of surrounding states, which supply more than 70 percent of the District's workforce.

But architects of the proposed lawsuit argue that banning such taxes -- which the Federation of Tax Administrators reports are levied to some extent in all 41 states that have income taxes -- unfairly singles out District taxpayers and thereby violates their constitutional rights. The ban forces residents to pay more for services and conveniences -- such as police and fire protection and roads -- that benefit residents and commuters alike, they say.

"In effect, D.C. residents wind up paying their share of services and the share of nonresident workers who get services as well," said Walter A. Smith, director of the D.C. Appleseed Center for Law and Justice, a nonprofit advocacy group coordinating the suit. "We call it discriminatory taxation without representation."

Smith said he expects that he and a consortium of lawyers will file suit in federal court this month. They plan to ask for expedited consideration, but history is not necessarily on their side: The courts took nearly two years to reject a case filed in 1998 by a group of lawyers seeking congressional representation for the District on civil rights grounds.

Mayor Anthony A. Williams (D), who with the D.C. Council might sign on as a plaintiff, said he was optimistic that the suit would get to court. "Our inability to impose a tax on income at its source is a violation of . . . constitutional doctrines," Williams said. "I think it has a good chance of being heard."

A spokesman for Rep. Thomas M. Davis III (R-Va.), chairman of the House Government Reform Committee, which oversees the District, was dismissive. David Marin said the idea "doesn't pass the laugh test" and represents "an unfortunate political gambit devoid of a legal rationale or grounding."

A roster of Washington lawyers and former federal officials testified yesterday in favor of a suit during a D.C. Council hearing where measures the city might take to oppose the ban were discussed. Several witnesses cited a study released last month by the General Accounting Office that supported D.C. officials' contentions about the city's fiscal problems. The study found that the District faces an annual structural deficit of $ 470 million to $ 1.1 billion in its $ 5.6 billion budget because the local cost of providing services exceeds its taxing ability.

Alice M. Rivlin, director of the Brookings Greater Washington Research Program and a former D.C. financial control board chairman, said a recent Brookings study estimated that if nonresident workers were taxed at the city's current graduated rate of up to 9.3 percent, a commuter tax would yield $ 1.4 billion. But she said a lower rate -- such as the graduated rate of up to 2 percent suggested by council member Jack Evans (D-Ward 2) -- would be a more reasonable option and would yield about $ 540 million.

"That makes more sense," Rivlin said of the lower rate. "I don't know what we'd do with a billion-four."

The financial impact of a tax on nonresidents could be indirect. States typically offer a credit to residents to offset income taxes paid to other jurisdictions. In such cases, a commuter tax means additional paperwork but does not increase net tax payments. But Virginia and Maryland, struggling to close budget shortfalls, would face a loss of revenue if the city had a commuter tax.