By Peter Behr
Washington Post Staff Writer
Monday, March 22, 1999; Page F34

Pedro "Pep" Lujan, who runs a bakery business in the District, got a three-word money-saving tip from his accountant recently. "Move to Virginia," the accountant said.

Lujan, who runs Hellers Bakery in Mount Pleasant and a baked goods store on upper Wisconsin Avenue, would save as much as $2,000 a month by crossing the river to take advantage of Virginia's lower tax load, his accountant advised. "It's killing the small-business people," Lujan protests.

For years, the D.C. government had a two-word response to such complaints, business owners say. The message: "Tough luck."

Now, in his new budget for the District, Mayor Anthony A. Williams proposes to ease this tax burden by reducing or eliminating seven types of taxes. The savings for small businesses would add up to an estimated $66.7 million in the coming fiscal year and about $82 million a year thereafter.

Williams's proposal would free businesses from having to file a D.C. franchise tax return if their revenue is less than $3 million a year.

About 26,000 D.C. businesses -- nine out of every 10 -- fall below this threshold. Eliminating this obligation would remove a nuisance and lighten the D.C. government's paperwork chores significantly at an estimated cost of $56 million, said D.C. Deputy Chief Financial Officer Natwar Gandhi.

A second change would exempt about 24,000 businesses with less than $2 million in annual revenue from the Arena Fee, a special assessment that helps finance the downtown MCI Arena. The revenue loss of $9 million would be made up by a 15 percent increase in the fee for enterprises over the $2 million ceiling, according to the plan.

Third, the plan would eliminate the D.C. sales tax on Internet access charges, making it clear that Web-based businesses are welcome in the capital, Gandhi said.

The administration's strategy would close only a small part of the tax gap between the District and its surrounding suburbs, while not dealing with fundamental problems in the District's ability to tax fast-growing business services firms, Gandhi acknowledged.

A corporate headquarters office with a $6 million payroll, for instance, would pay $260,000 in taxes if located in the District, according to a Coopers & Lybrand study several years ago. In Arlington the tax burden on this hypothetical firm would be $138,000, versus $144,000 in Montgomery County, $162,000 in Fairfax County, $174,000 in Prince George's County and $135,000 in Loudoun County.

But the proposal would take a first step, Gandhi argued. District businesses pay about $500 million more in total city business taxes than they would if located in the suburbs and the Williams proposal would trim that by about 10 percent.

Whether that's the best use of an $82 million tax cut is now for the D.C. Council to decide. So far, the plan has been lost in the commotion over Williams's proposal to relocate the University of the District of Columbia.

Beyond the revenue effects, the proposal would signal businesses that the city is no longer giving them the back of its hand, Gandhi said.

"There's a perception out there that D.C. is an anti-business city, that once we find a taxpayer, we never let him go and we keep piling on," he said. "We hope this [plan] would go a long way in improving the climate for economic development" in the city.

"It's not a magic bullet," said tax consultant Jim Prost of Basile Baumann Prost & Associates Inc. in Annapolis. "But it certainly creates more opportunity for a lot of small firms."