Like a sickly stepchild scorned by out-of-town relatives, the District of Columbia's tax on professionals was born unwanted and doomed to die young.
The fate of the tax was sealed last week when the Supreme Court let stand a lower court ruling that the controversial tax violated the city's home rule charter. The charter prohibits the city -- unlike many of other jurisdictions -- from taxing the personal income of nonresidents -- in this case Maryland and Virginia suburbanites who work in the city.
"We are uniquely denied this taxing authority," says Ed Meyers, deputy director of the D.C. Departement of Finance and Revenue. "That's why we sometimes have to resort to these other odd taxing devices [like the professional tax]."
When the new home rule City Council first considered the professional tax in 1975, "we were in a fiscal bind; we had to have the money," recalled a former District Building official close to then Mayor Walter E.Wahington.
"We were desperate," said another official who asked not to be named.
Now five years later, the tax has left a trial of fiscal disruption, administrative headaches and political irony.
Under terms of the court ruling, the already financially strapped city must refund an estimated $56.8 million collected since late 1975 from thousands of doctors, lawyers, architects and other white-collar professionals who work in the city.
The bulk of the refund -- about $40.1 million -- will go to professionals who live in the suburbs. Much of the rest will be recaptured from professionals who live in the city but who will lose the income tax credit granted them under the professional tax struture.
City finance and revenue department officials are still trying to figure out how to distribute the refund. There are estimated 4,500 unincorporated firms and partnerships of lawyers, doctors and other professionals in the city, but city officials say it is impossible to say now exactly how many individual professionals there are or how much each will get.
Meanwhile, Mayor Barry and his advisers are looking at alternative revenue sources, not only to make up for the tax but also to help cover the city's ever-widening budget deficit, estimated at at least $170 million.
The birth, brief life and now the death of the professional tax reflected a classical struggle between city and suburban interests. It involved a host of powerful players, ranging from Capitol Hill and the District Building to the state houses in Richmond and Annapolis and, perhaps most important, it helped determine the political fortunes of Walter Washington and Marion Barry.
How did it all happen?
The home rule charter held the federal payment for that fiscal year to a maximum of $254 million, and Congress appropriated even less -- $248.9 million.
The charter also prohibited the city from levying a so-called "commuter tax" on the personal income of people who lived in the suburbs but worked in the city. The provision was the price demanded by the Virginia and Maryland congressional delegations for their support of the home rule charter -- the fact that every state and more than 50 cities have the authority to tax the incomes of people who work, but do not live, within their boundaries.
As an alternative, Mayor Washington proposed a 1 percent gross receipts tax on retail businesses -- a move that many observers now say was politically fatal for Washington.
In quick order, the business community, through the Metropolitan Washington Board of Trade, registered strong objections to that proposal, and the City Council finance committee, controlled by then Council member Marion Barry, jettisoned the measure. Walter Washington, longtime friend of business, was in deep trouble.
"In the cold light of history," says one close observer of the scene, "that was the point when Walter Washington lost significant support in the business community . . . and when Barry began picking up the slack."
Barry, the erstwhile street militant and harsh critic of business, began pushing a professional tax as a partial alternative to the gross receipts levy. It offended fewer business leaders, especially those in the crucial retail market, and Barry was able to enlist the support of central figures like John Hechinger, prominent lumber yard owner, local Democratic Party kingpin and a former City Council chairman under the old appointed government.
Three years later, in 1978, Barry went on to defeat both Washington and City Council Chairman Sterling Tucker for the mayor's seat. The business community, with its sizable financial and political resources trace that support back to Barry's opposition to the gross receipts tax.
The alternative professional tax, passed by the City Council in mid-1975, originally would have levied a 12 percent tax on the net income of unincorporated professional firms, that is, what was left after subtracting ordinary business expenses, a straight, $5,000 deduction and 55 percent of gross income as salaries for employes.
The measure also permitted professionals living in the city to credit the professional tax they paid against their personal income tax. Virginia and Maryland law did not have a similar provision. Nonresident professionals thus ended up paying a relatively larger share of the tax to city, a deliberate -- and admittedly risky -- strategy by the city.
The mayor signed the tax measure "reluctantly," according to one District Building insider, even though his top legal advisers were fairly confident it could survive a review by Congress and an attack in the courts.
The tax did, in fact, run into opposition on Capitol Hill when it was submitted in late 1975 for the required 30-day review period. It was predictable opposition -- mostly from Virginia and Maryland members of the House District Committee, who contended the tax was confiscatory, inequitable and violated the home rule ban on commuter taxes.
It was more a battle of words, however, with the suburban congressmen describing the tax as a levy on "personal income" specifically prohibited by the home rule charter and city leaders arguing it was a permissable "franchise tax" on professionals for the privilage of doing business in the District of Columbia.
The bill, in fact, extended an unincorporated business tax, imposed in 1947, to include previously exempted professionals.
While there was pro-forma opposition to the bill on the Hill, recalls House District Committee staff director Ed Sylvester, "the tone" of the business community and the surrounding suburbs was that "they were willing to do something" to help the city's revenue problems.
"They objected to the 12 percent rate and the low 55 percent)$ salary allowance," Sylvester said. "They really wanted about 6 percent on the rate, for example, but were willing to accept 9 per cent."
Also, he said, Congress customarily has been reluctant to question the legality of City Council legislation or get into a "judicial role."
"If [the legislation)$ is a close call legally," he said, "then Congress is in poor shape to say it's illegal or not. That's up to the courts . . . and that was the position of the ]House District)$ Committee on the professional tax."
After some dickering, the City Council agreed to reduce the tax rate to 9.9 percent and to increase the salary allowance to 70 percent.
With that concession, the House District Committee leadership easily beat back a formal resolution to block the tax, despite the protests of tax officials from both Richmond and Annapolis. There was only a ripple of opposition in the Senate, and the bill became law.
Two years later in 1977, a group of suburban professionals challenged the tax in D.C. Superior Court -- the legal action that ultimately led to the death of the tax last week.
After several preliminary rounds, the full D.C. Court of Appeals sided with the suburbs last February and ruled, 9 to 1, that the measure did violate the charter provision barring the city from taxing the "personal income" of non-residents. The Supreme Court let that ruling stand last Wednesday, leaving the city no recourse but to start refunding the collected revenues.
In a final irony noted last week by city tax officials, the majority opinion of the Court of Appeals quoted Maryland Sen. Charles McC. Mathias (R) as saying during home rule hearings for the District of Columbia in 1971: "The increased federal payment to the District)$ also compensates for the Congress' refusal to permit the District to levy taxes on the income of nonresidents."
In fact, the federal payment has shrunk since home rule was instituted, both in absolute dollar amounts and a a percentage of the city's operating budget.