It is conventional wisdom that the District’s high business taxes keep firms from locating in the city. This was evident in an April 10 Post editorial, which stated: “The District, according to a report prepared by Ernst & Young in conjunction with the Council on State Taxation, is tied for last place in the nation as the least competitive place for new investment because of its taxes.”
That study, “Competitiveness of State and Local Business Taxes on New Investment: Ranking states by tax burden on new investment,” ranked the District and the states on attractiveness for new investments. In a hearing of the D.C. Council’s Finance and Revenue Committee, this study and a similar one by the Small Business & Entrepreneurship Council were cited as evidence that high taxes are hurting the District’s competitiveness.
These last-place rankings conjure up an image of a District in decline, with fleeing businesses leaving behind empty office buildings, undeveloped lots and boarded-up storefronts. Except that is not true. Today, the District’s private sector is vibrant and growing. D.C. businesses are recovering from the recession much faster than businesses are anywhere else.
Bureau of Labor Statistics figures show that private-sector employment in the city is now virtually the same as it was at its pre-recession peak (in the D.C. suburbs and the United States as a whole, private-sector employment is off its peak by 2.3 percent and 6.5 percent, respectively). The Bureau of Labor Statistics figures show that from 2005 to 2011, the District’s private sector had a net gain of 20,300 jobs — about the same as the gain in the suburbs — while the United States as a whole lost 2.6 million jobs.
In addition, occupied office space increased in the January-March quarter just ended by 4.85 million square feet from a year earlier, and the District has one of the lowest vacancy rates in the country (8.4 percent in the quarter ending in March 2011, compared with 12 percent in the D.C. metropolitan area overall). And, it is not just U.S. investors who find the District attractive. Foreign investments are key components of many property sales and projects — the convention center hotel and City Center DC, to name two.
So what is going on here? Why do these studies rank the District dead last as a place to invest, despite such strong evidence to the contrary?
First, the studies’ narrow focus on taxes as a driver of business investments excludes more important factors, including the built-in advantages of the federal presence, population demographics and residents’ education levels.
Many businesses locate in the District for access to the federal government (e.g., lobbyists, federal contractors). They are also here because of the District’s unique amenities, such as the national institutions and cultural attractions. National and local retailers are attracted to a significant growing population of younger, wealthier and well-educated residents. While high taxes certainly can affect competitiveness, we cannot forget the District’s strong competitive advantages.
Second, the studies have a methodological flaw. They take a “representative firm” and apply statutory tax rates, ignoring the reality of aggressive tax planning by businesses, which reduces what they actually pay. In the District, almost two-thirds of businesses pay only the minimum of $100 a year. When actual business taxes paid are ranked, the District falls in the middle of the pack.
Another Ernst and Young/COST report, from March 2010, showed that D.C. business taxes as a percentage of private-sector gross state product were slightly below the national average, with the District at 4.2 percent vs. 4.7 percent for the United States as a whole. The District ranked the same as Maryland, but below Virginia. This is consistent with our own 2009 study comparing the District’s household tax burden with that of 50 other U.S. cities. For a hypothetical family of three with income of $150,000, the District’s tax burden ranked in the middle (22 out of 51) with a tax burden of 9 percent, a bit higher than the average of 8.1 percent.
Finally, it must be recognized that the federal government’s restrictions on the District’s ability to tax commuters and property create a constricted tax base that leads to an additional tax burden on the individuals, families and businesses that choose to live and operate here. It is my hope that the business community will use its significant voice to help us deal with these issues.
The writer is chief financial officer of the District of Columbia.
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