After a year and a half of hard work and a unanimous vote, the D.C. Tax Revision Commission in February recommended a package of tax changes designed to broaden the city’s tax base and lower tax rates, with the ultimate goal of creating a fairer, simpler and more competitive system.
The commission’s proposals were intended to stand as a package. Several revenue-raising recommendations, amounting to approximately $125 million a year, would broaden the city’s tax base to pay for $185 million in tax relief for individuals and businesses, which in turn would encourage investment and job growth. The $60 million difference between the revenue and tax relief in the plan would be paid for by $18 million per year budgeted by the D.C. Council combined with future general fund revenue.
What has happened since the report came out? Two things:
First, D.C. Chief Financial Officer Jeffrey S. DeWitt projected $130 million in new revenue for the next four years. This provides some potential funding for the tax relief measures outlined by the commission. Second, Mayor Vincent C. Gray (D) included only six (and four of them only partially) of the commission’s 18 recommendations in his base budget proposal, though six other recommendations were included contingent on new revenue.
That’s the wrong approach. The mayor and council should enact a budget that includes all of the commission’s recommendations, which work best as a package. Certainly, the recommendations could be phased in over a few years, just as the Tax Parity Act enacted in 1999 phased in income tax relief. But whatever the timing, the plan should not be adopted in bits and pieces.
Consider the five major revenue increases in the commission’s plan: an annual $100-per-employee services fee; an expansion of the sales tax to several services, including barbers, health clubs and carpet cleaning; an increase in the sales tax rate on all tobacco products to the same level as cigarettes; a simplification of the formula for taxing the income of national companies doing business in the District; and an increase in the general sales tax from 5.75 percent to 6 percent.
These revenue raisers would fund 68 percent of the commission’s tax relief proposals. The tax benefits include a middle-income tax rate reduction to 6.5 percent from 8.5 percent; an increase in the city’s standard deduction and personal exemption; an increase in the D.C. estate tax threshold to the federal level, something recently adopted by Maryland; an exemption of the passive income of investment firms from the city’s unincorporated business franchise tax; and a reduction in the business income tax rate.
Three cases illustrate how the recommendations work as a package. Businesses that pay income taxes would find the $100-per-employee fee fully or, at very least, largely offset by the reduction in the business income tax rate. A District resident who provides a service newly subject to the sales tax could lower prices because business and individual income tax rates would be lower. Residents affected most by the sales tax increase would receive tax relief through the increased standard deduction and personal exemption, possibly along with a substantial increase in the earned-income tax credit for childless workers.
The District has come a long way since the enactment of the Tax Parity Act. With increased economic activity, new investment and healthy fund balances, declarations of victory and support for the status quo are understandable, as is a tendency to avoid hard issues such as the employee-services fee.
But this would be a mistake. It’s true the $100-per-worker fee would ask the many nonprofits based in the District and their workers to make a greater contribution to the fiscal health of the city. Around the world, nonprofits play an active role in moving local economies forward, and, under the commission’s plan, nonprofits would leverage the great work they do by contributing to a better tax regime, not to new spending.
To become truly competitive in the metropolitan area and to help promote the growth of the region in the global economy, the District must step up to the next level by expanding our tax base and lowering rates on the way to a leaner, simpler and fairer tax system.
The writer, D.C. mayor from 1999 to 2007, was chairman of the D.C. Tax Revision Commission.