A blue-ribbon commission tasked with reviewing the District’s tax structure is recommending that city officials lower income taxes on low- and middle-income residents, broaden the application of sales tax and lower some business taxes — but assess employers a new quarterly fee of $25 per worker.
The proposal, a year and a half in the making, will be forwarded to Mayor Vincent C. Gray (D) and District lawmakers next month for possible inclusion in the city’s next budget, which will take effect next October.
But it remains unclear how much of an appetite city leaders will have to upend the tax structure, with some already questioning the wisdom of raising the sales tax and assessing employers — the latter a measure that would apply to some of the largest nonprofit employers, including hospitals.
The D.C. Tax Revision Commission considered 63 separate recommendations, reviewing academic research and hearing testimony from policy experts. There were sharp debates among panel members about how to balance goals of making the city’s tax structure fairer to residents while more competitive with its neighbors.
The options were ultimately whittled to about a dozen — ranging from a proposal to add a line on income tax returns for residents to pay sales tax on purchases made out of state (raising an additional $1 million in yearly revenue) to a multifaceted reworking of the District’s individual tax brackets.
Former mayor Anthony A. Williams (D), the commission’s chairman, acknowledged that not all members — who ranged from business community representatives to tax experts to liberal-leaning policy advocates — were necessarily pleased with all of the recommendations.
Williams said, for instance, that he would have preferred eliminating the top 8.95 percent income tax bracket and reducing commercial property taxes. “To be the competitive city we want to be, we’ve got to have government within the proper bounds in terms of the private-public sector relationship, and I don’t think we’re really cognizant of that,” Williams said. “But the point is, it’s a compromise, and compromises have elements that aren’t exactly acceptable to individuals.”
The individual income tax recommendations would reduce city revenue by nearly $100 million yearly, according to estimates. But they won broad panel support by addressing widely recognized fairness issues. The District would raise its standard deduction and personal exemption to federal levels for the first time while rejiggering tax brackets and creating a new lower rate — 6.5 percent — for mid-level earners who previously paid 8.5 percent.
Recommended changes to the District’s sales tax would generate an additional $58.2 million yearly by raising the rate on most purchases from 5.75 percent to 6 percent (the prevailing level in Maryland and Northern Virginia). It would apply to a broader range of services not currently taxed, potentially including home-improvement contracting, barber and beauty shops, health clubs and storage units.
Some of the most sweeping proposed changes would apply to businesses, not individuals. A cut in business franchise taxes — from 9.975 percent of net income to 8.25 percent, the Maryland level — would cost the city $57 million in yearly revenue. But the commission proposes offsetting that loss with a new “local services fee” on employers — $25 per employee per quarter — that would generate $45 million yearly.
That fee, the commission found, would secure revenue from nonprofit entities that use city resources but do not, in general, pay taxes. It is likely to prove among the most politically thorny of the panel’s recommendations: Those nonprofits include hospitals and universities that are among the city’s largest employers.
Past attempts to squeeze revenue out of large nonprofit employers, typically through payments in lieu of taxes, have rarely progressed past the drawing board, and the organizations representing the District’s hospitals and universities are again on the record against them. But the employee tax could be a more politically palatable way for the District to recoup some additional revenue from those institutions and their many out-of-town employees, whose income the District is congressionally prohibited from taxing.
Underscoring the political hazard of the issue, Gray, who has committed $18 million to funding the commission’s recommendations next budget year, declined to endorse the fee Wednesday. “When you start talking about taxing nonprofit organizations, those historically that haven’t paid taxes, it’s a very controversial area,” he said. “I’d want to hear what people think about it before we take any position on it.”
But in a hopeful sign for the proposal, D.C. Council member Jack Evans (D-Ward 2), chairman of the tax-writing committee, didn’t dismiss it earlier this month — particularly if were paired with an offsetting business tax cut.
The commission ultimately backed away from more costly proposals, including a commercial property tax cut and more aggressive business tax cuts. But it did endorse changing the District’s estate tax to match the federal standard, assessing the tax only on estate assets above $5.25 million.
That decision earned the scorn of one advocacy group that monitored the commission’s deliberations. The Fair Budget Coalition said the move would “give deep cuts to the super wealthy” while draining funds from programs for the needy and homeless.
The debate over the recommendations now turns to the John A. Wilson Building, where officials will have to identify an additional $30.8 million in revenue above the $18 million already identified to accommodate the full range of proposals.
Gray suggested that he would not take extraordinary steps in his 2015 budget proposal to find those funds. “We know we have some priorities that need to be addressed in this upcoming budget,” he said. ”I think that there are lot of people who would do it at the sacrifice of some kind of tax reduction.”
And it is unlikely that lawmakers will wholeheartedly embrace the commission’s full panoply of recommendations. Evans, for instance, gave his personal veto to the proposed increase in the sales tax rate.
“We’re not going to raise taxes,” he said. “We want to head in the other direction.”