District of Columbia residents shopping at stores in the affluent suburbs, in the land of $300 shoes and $9,000 fur coats, have plenty of incentives to evade sales taxes.
Some of them -- no one knows exactly how many -- have found a perfectly legal way to do so, illustrating one of several special problems inherent in the tax structure of the District of Columbia.
Retail customers who live in the District and shop at Saks Fifth Avenue in Bethesda or any of the other luxury stores in Maryland and Virginia can have their purchases delivered to their homes for a nominal charge, thereby bypassing sales taxes in any jurisdiction. Purchases carried away, of course, are subject to Maryland or Virginia sales tax no matter where the buyer lives.
"We've got people who have their panty hose delivered because they don't want to schlep a package," said Kert W. Rosenkoetter, Saks' general manager. The store has no figures on what part of its sales are delivered, or to where. But Saks is one of several suburban stores that do not pay any sales tax to jurisdictions where the recipients of deliveries live, even though the District has requested that they do so.
For the District, the sales-tax dodge is one of the many ways in which being the nation's capital restricts the tax collections of a city facing deficits for the foreseeable future.
The District's tax base is narrower than in many comparable areas because:
* People can easily cross borders to shop where sales taxes are lower -- 4 percent in Virginia and 5 percent in Maryland, compared with 6 percent in Washington. Technically, consumers and businesses are liable for paying the D.C. government the difference between the lower and higher sales tax rates in those cases, but the so-called use tax is only enforced for larger companies.
* Some 55 percent of the District's land area and 57 percent of its assessed value are exempt from property tax. More than 40 percent of that land belongs to the federal government, 5 percent to the District and the rest to religious organizations, foreign embassies and other nontaxable entities. If all the tax-exempt land were taxed at current assessed value, D.C. officials estimate, it would produce $535 million in additional revenue. An annual federal payment of $425 million, which the District says does not quite cover the federal portion of that loss, is not expected to increase in the next few years.
* Sixty-three percent of total personal income earned within the District's borders, or $10 billion, goes to workers who live elsewhere. If that income could be subject to a commuter tax of the type specifically prohibited by the District's legislative charter but used in other cities, the government would raise another $654 million.
"We don't have the kind of diversity our sister cities do," said Melvin W. Jones, director of the D.C. Department of Finance and Revenue. "We have to rely more heavily on our Big Three -- sales, property, income -- than a Baltimore."
That narrower tax structure is one of the principal reasons the tax burden in the District is one of the highest in the nation.
The Tax Foundation said last month that when ranked with the 50 states, the District in 1983 had the third-highest combined state-and-local tax burden on a per-capita basis. D.C. taxes -- an average of $2,132 per person -- and the average tax rate -- 14.5 percent of all personal income -- exceeded those of every state except Alaska and Wyoming.
The combined burden in Virginia was $1,094 per person, and in Maryland, $1,350 per person. The national average in 1983 was $1,216, and the average tax rate was 11.1 percent. Over the last 10 years, D.C. taxes have gone up 221 percent while the national average for state and local taxes has risen 111 percent. In Virginia, taxes went up 128 percent, and in Maryland, 115 percent.
"They the District have to compensate with those taxes for the lack of other revenue sources," said Bradley Seltzer, an attorney with Sutherland, Asbill & Brennan, who worked on a tax-revision task force a few years ago.
District officials explain those higher taxes by making the point that the capital is the only jurisdiction in the nation that is both a city and a state.
About 66 percent of the $1.7 billion in local revenue the District will collect next year will come from state-type sources: the income tax, franchise tax, excise taxes and sales taxes. Another 27 percent or so will come from real property taxes and personal property taxes, which tend to be collected by cities. The rest comes from various user charges.
Demographic reasons also account for the District's seemingly high burden. The city has a large proportion of working singles and few large families. That makes per-capita tax-burden figures, such as those used by the Tax Foundation, seem large.
And, District officials say, the weight of the city's tax burden depends on income level to a greater degree than in other jurisdictions. According to the mayor's fiscal 1986 budget document (whose figures differ from those in the Tax Foundation study), the tax burden in the District is almost exactly the same as in surrounding jurisdictions for taxpayers earning up to $17,000 per year.
A taxpayer making $50,000, on the other hand, would pay an 11.5 percent effective tax rate in the District and a 9.5 percent tax rate on average in the rest of the metropolitan area. According to the budget, the District tax burden is the area's heaviest only at incomes of $50,000 for a family of four and on up.
Alexandria families earning between $10,000 and $35,000 per year would pay the most proportionately in income, sales, real estate and auto taxes, according to city officials. Fairfax County ranked second-highest for low-income taxpayers, while Montgomery County was second-highest at incomes of between $17,000 and $35,000. The lowest-burden jurisdictions in general were Loudoun and Charles counties and Fairfax City.
"Our tax system is very progressive," said Billy D. Cook, associate director of the city's Department of Finance and Revenue.
A study by the Finance and Revenue Department found that, of the 50 largest U.S. cities, the District's total tax burden ranked it between eighth and 10th, depending on which income level was considered. The study, which included state taxes in its figures for other cities, found that Boston ranked first in every income level, followed by Newark, Bridgeport, Conn., New York and Milwaukee, the order depending on the income level.
No matter how the tax-burden question is examined, however, D.C. officials admit that theirs is a high-tax jurisdiction. Because of the need to provide services that are normally the responsibility of states, and because of the relatively large proportion of low-income residents, the city spends a lot of money.
It spends more, in fact, than projected revenue. The cumulative operating deficit is $270 million, and the city predicts deficits of $34.7 million in fiscal 1987, rising to almost $100 million in fiscal 1990.
"The structural gap between expenditures and revenues predicted in the future will not be eliminated until a shift in federal-local relations occurs and obstacles to broader-based taxes are removed. . . ," the budget says.
Sales taxes may not represent the best example of the city's tax-base problems, but they may be the one most noticed by consumers. According to accountants, lawyers and D.C. officials, legal avoidance of taxes for purchases of big-ticket items is quite prevalent.
"I would suspect that, because we're a small jurisdiction surrounded by large jurisdictions with lower sales taxes , that quite a bit goes on," said J. Walter Lund, associate director of finance and revenue.
The seemingly small differences in sales-tax rates can be significant in the purchase price of, say, a $2,000 stereo system or a $10,000 fur coat. If those items are purchased in a suburban store and delivered to the city, the buyer pays no sales tax. And if a D.C. buyer carries away his purchase, he pays a lower sales tax. Technically, someone who pays $80 in sales tax on a $2,000 stereo in Virginia owes the District another $40 in so-called use tax, the tax on the difference in sales tax rates. The District, however, almost never tries to collect.
"It's not even winked at. It's just not enforced," said attorney Seltzer. "The only way you can get at it is to go after sellers who have a nexus operations in the District."
As a result, such department store chains as Woodies and Hecht's operate under agreements with the District under which they collect taxes even on delivered sales. Unless the item is a gift being mailed out of the Washington-Baltimore area, for example, Hecht's collects District sales taxes on goods purchased in Maryland or Virginia and delivered to the District.
However, Hecht's divisional controller, Richard Obranovich, said the chain does not get involved with the use tax -- the differential between the suburban taxes and the higher D.C. taxes. District officials say they only try to collect use tax from individuals in the case of very large purchases.
"I don't follow up on the $29 shirts but I do follow up on the $5,000 furs," said Lund of the Finance and Revenue Department.
The city also cracks down on companies that violate the use-tax rules. A widespread audit of professional firms located in the District a few years ago, for example, yielded almost $1 million in tax revenue, Lund said. The audit, which covered such purchases as office furniture and equipment, surprised even some accounting firms that didn't know about the tax, Lund said.
Although confusion about sales taxes may be widespread, most Washingtonians know that a large proportion of the city's property is exempt from taxation. The ratios, however, are surprising.
Despite the widespread perception that tax-exempt foreign embassies chew up a big piece of the tax base, they occupy only 0.8 percent of the District's land area. Religious institutions, on the other hand, cover more than 2 percent of the city's land. Even cemeteries, which take up 1.1 percent of D.C. land, occupy more space than embassies.
Way ahead of the rest, of course, is the federal government. Not only does it occupy 41 percent of the city's space, it accounts for 46 percent of the District's assessed land value. If that land were taxed at full rates, the D.C. government asserts, it would add $320.8 million to local revenue.
That is less than the federal payment of $425 million. But Cook and other D.C. officials contend that other federal restrictions also cut into their tax take. The building-height limitations, for example, reduce assessed values, although no one knows by how much.
Officials also cite legislative restrictions that prevent them from imposing any kind of tax on those who work in the District but reside elsewhere. Efforts to impose a so-called commuter tax on nonresidents have subsided since the Supreme Court struck down a D.C. tax on professionals in 1980.
But D.C. officials still calculate the revenue they would gain if they could impose such a tax: $654 million in fiscal 1985, according to the mayor's budget. The District's estimates of revenue from a commuter tax may be unrealistic, however, as they assume nonresidents would be taxed on income at the same rate as D.C. residents.
Several U.S. cities, including New York and Philadelphia, impose various types of taxes on nonresident workers, according to the Advisory Commission on Intergovernmental Relations. In New York, a tax rate of less than 1 percent brings in $140 million per year, or 8.1 percent of total revenue from personal income tax.
"We think it works reasonably well," said Paul A. Crotty, New York commissioner of finance. "We get it right at the source." The tax may have caused resentment when it was first imposed in 1966, "but now it's an accepted part of the tax structure," Crotty said.
Despite the possibility of revenue gains, a commuter tax could have negative economic consequences, experts warn. Commuters may enjoy an undue advantage by not having to pay any D.C. taxes on the income they earn here. But they probably would find it easy to relocate if such a tax could be imposed (courts have said the authority to impose such taxes is not in the Home Rule Act).
"Obviously, there are many activities that now occur in the city that could move," said Anthony Yezer, professor of urban economics at George Washington University. "You'd have to look at whether they would or wouldn't."
Yezer pointed out that the District also has a few tax advantages because of its unique situation. An 8 percent tax on restaurant meals and 10 percent on hotel bills bring in relatively more revenue in the District than similar taxes in other jurisdictions because of the heavy tourist traffic. He also said that the District could get a better handle on its tax problems if it got a better handle on spending, which increased by an average of 9.4 percent per year between 1982 and 1985, while revenue rose 8.9 percent.
There is one more good thing to say about the D.C. tax system: It will send refunds to its taxpayers more than twice as quickly as the troubled Internal Revenue Service this year.
"We're far ahead of the IRS," Jones said. District filers can get their refunds in three to six weeks, whereas the federal government's time lag is more than 10 weeks.