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    In D.C. Mayor's Race, Tax Cutting Reigns

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    By Michael Powell
    Washington Post Staff Writer
    Tuesday, July 21, 1998; Page A1

    When it comes to taxes, Washington's oft-contentious mayoral candidates generally speak as one: They want to cut, cut, cut.

    The leading Democratic candidates favor slashing everything from the property tax to corporate franchise and income taxes. The exception is Anthony A. Williams, the city's former chief financial officer, who favors replacing a host of these taxes with a smaller but broader-based tax on the gross receipts generated by businesses.

    Nowhere is the city's ongoing political metamorphosis from Big City liberalism to a more conservative, business-driven politics clearer than in the arena of tax policy. And when taken with the candidates' near-silence on issues directly affecting the poor, the change in tone and philosophy is striking.

    "District politics is now defined by pre- and post-control board," said Jamin Raskin, a law professor at American University and longtime observer of city politics and history. "In this post-board time, [candidates] don't want to do anything that smacks of tax and spend. ... This is the triumph of neo-liberalism."

    Some very real problems have forged this unanimity of philosophy and approach.

    Many businesses and individuals in Washington pay far more in taxes than compatriots in Maryland and Virginia. For most businesses, according to a recent Brookings Institution study by Carol O'Cleireacain, the tax burden is 25 percent higher than elsewhere in the region. And the District is one of a mere handful of cities that levies a personal income tax on earned and unearned income.

    All of this constitutes a real, competitive disadvantage for the city.

    But tax cutting is not as simple as it appears, even though the city has posted surpluses in the past two years.

    One reason Washington's taxes are so disproportionately high – aside from the high costs associated with an expensive and inefficient city government – is that Congress has prevented officials from exercising elementary taxing powers common to most cities.

    Notably, Washington cannot tax commuters or nonresident earnings in the city. And congressional prohibitions essentially act as a tax shield for the city's lucrative and politically influential law, lobbying and accounting firms.

    Because those businesses are not taxed, "you run the risk of placing a heavier tax burden on the rest of the city," said Ted Trabue, of the Greater Washington Board of Trade, one of the organizations sponsoring a mayoral forum on business and tax issues today. "It's a problem, I acknowledge that. But a new gross receipts tax is not the answer."

    A gross receipts tax amounts to a levy on all the money taken in by a business each year.

    Nor can the city tax its hometown industry, the U.S. government. Federal properties are tax-exempt. The Brookings study recommended that the federal government give the city an annual payment in lieu of taxes. The city got $190 million this fiscal year and has received $660 million in prior years, but no lump-sum federal payment is included in the proposed 1999 budget.

    Fiscal analysts caution that the nation's buoyant economy has fattened the city's coffers and disguised these underlying problems. But as candidates promise tax breaks and talk of spending more on schools, welfare reform and capital repairs, some discern a disconnect between election year rhetoric and fiscal reality.

    "The District actually has become even more dependent on its tax revenue," O'Cleireacain said. "Revenue reform is the last step in a restructuring of the city. But that hasn't happened yet."

    Mayoral politics makes for interesting math when the talk turns to taxes. What follows is a brief view of the four leading Democrats' stances, culled from interviews and a D.C. Chamber of Commerce questionnaire.

    D.C. Council member Kevin P. Chavous (D-Ward 7) favors a straightforward tax-cutting regimen. He has promised to repeal the professional license fee – a recurring fee that bears no relationship to oversight – and reduce the corporate franchise, which is levied on corporate income, and capital gains taxes. Chavous, a lawyer, opposes a gross receipts tax.

    On the federal level, he supports a 15 percent flat federal tax on income in the District. Some congressional Republicans, and Del. Eleanor Holmes Norton (D), support the flat tax, but President Clinton opposes the tax and it's widely seen as a dead issue right now.

    Trimming these taxes would cost the city at least $50 million, and about $150 million to fully eliminate them. Chavous is vague about how he would replace the revenue. In answering the Chamber of Commerce, he states that he would finance it "through savings generated through management efficiencies in city government."

    More broadly, Chavous said he "hasn't digested" the report and recommendations of the city's Tax Review Commission yet. But, he added, "fundamentally our tax policy should be geared towards parity with the region."

    Williams favors cutting the professional license fee and corporate franchise tax. He is, however, cautious about exuberant tax cutting.

    He notes that cutting burdensome taxes will carve a hole in the city budget. And he argues that the city can't afford comprehensive tax reform unless Congress agrees to help underwrite it with a payment in lieu of taxes.

    Short of such comprehensive federal help, he would consider replacing a host of inequitable taxes with a broad-based and modest gross receipts tax that would for the first time capture some income from the city's law and accounting firms. The Rivlin Commission – named after its chairman, Alice M. Rivlin, who is the incoming head of the D.C. financial control board – endorsed such a tax in 1990, as did the recent Brookings study of D.C. finances.

    The Brookings study stated that such a tax satisfied requirements of fairness and competitiveness and would reap about $50 million for the District. The study also said that Virginia cities and counties impose such a tax and that Virginia solved the problem of the tax falling heaviest on department stores by imposing different rates for different types of businesses.

    Many law and accounting firms, however, regard a gross receipts tax with extreme distaste. And Trabue, of the Board of Trade, cautioned that some of these firms, which are the backbone of campaign financing, might look askance at Williams.

    "There's a valid case to be made [for such a tax], I don't deny that," Trabue said. "But it has given many in the business community great pause." But Williams said context is everything: "I know it will land with a thud at first, but as part of a multi-year plan it makes sense."

    Jack Evans, the Ward 2 council member, has competed for the title of the most business-friendly candidate. He would repeal the professional license fee and reduce the corporate franchise tax. And, in reply to a question about the city's Tax Review Commission, he said he favors a proposal to consolidate the three commercial property taxes, costing the city $44 million.

    He also opposes a gross receipts tax.

    "This tax would result in a disastrous flight of businesses to the suburbs," said Evans, a lawyer.

    Evans, like Williams, favors carrying out tax reform in concert with the federal government. In exchange for cutting the city's tax rates, he would ask federal officials for compensation for the vast amount of untaxed federal property and semi-public nonprofits.

    Harold Brazil (At Large) has made the most dramatic tax reduction promises, initially pledging to cut city taxes by $800 million to $1 billion within four years. He has since scaled back the promised tax reduction to about $600 million.

    "It was a heck of a lot of money, so I'm trying to get the number down," Brazil said. "I'm going to try and come up with my half of that $600 million and ask Congress to finance the rest. ... They may tell us to jump in the lake, but it's worth a try."

    Brazil proposes to pay for the city's portion of the tax reduction with procurement reform – worth about $100 million – and a host of unspecified regulatory and managerial reforms. "I've got folks working on this, but we're not there yet," Brazil said.

    Brazil favors cuts in the property, corporate franchise and professional license fee. And in his Chamber of Commerce questionnaire, he describes the gross receipts tax as a "gimmick." But in a later interview, he acknowledged some merit to the tax.

    "I haven't said I'm opposed, but the jury is out," he said. "The broader gross receipts tax at least helps you capture income that is going out of the city right now."

    © Copyright 1998 The Washington Post Company

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