DC’s Tax Revision Commission is holding six marathon work sessions this September and October, reviewing staff write-ups on dozens of ideas for changing the District’s tax system. The Commission is an advisory body created every ten years by law to make recommendations for tax changes to the DC Council, which sometimes are then shelved and sometimes are then enacted nearly in their entirety. The Commission’s recommendations are due by the end of the year.
This iteration of the Commission is evidently taking an “all ideas are on the table” approach, with discussion drafts of 60 concepts so far, with more to come. Some significant ideas are under consideration:
Create a new business activity tax. DC currently has an 8.25 percent corporate income tax, a tax on unincorporated businesses, and income taxes that apply to residents who receive partnership or sole proprietor income. What these leave out is unincorporated business income that accrues to nonresidents. (DC is restricted by its Home Rule Act and caselaw from imposing income tax on nonresidents.) A gross receipts tax on businesses, intended to capture this untaxed activity, was a key ignored recommendation of the 1998 Tax Revision Commission. The 2013 Commission recommended a per-employee service fee on all DC employers (including non-profits) that was one of the few pieces of that report not enacted.
This time, Commission staff have acknowledged the academic and expert evidence that shows gross receipts taxes are economically damaging, and have focused on New Hampshire’s unusual Business Enterprise Tax (BET) as a model. The New Hampshire BET taxes businesses on their compensation plus interest and dividends paid, at a rate of 0.55 percent above $250,000 in gross receipts, with any tax paid credited against the general business tax. It would tax unprofitable businesses, as any business tax other than a corporate income tax would, but unlike the Ohio (no subtractions) or Texas (subtract either cost of goods sold or compensation, but not both) or Washington (no subtractions but every industry has a different tax rate, an unending picking-winners-and-losers lobbyist bonanza every legislative session) variations, New Hampshire’s subtractions are designed to avoid the economic distortion of “pyramiding” taxes on taxes by only taxing value-add that is not otherwise taxed.
Commission members sounded torn. On one hand, raising business tax burdens when downtown DC is struggling seems unwise, and anything other than a tax on business profits is going to be complex. But DC’s business taxes are already complex, and a New Hampshire style system could be part of a simplification.Tax land and buildings at different rates. DC, like most places, charges a property tax on the combined value of land and improvements. (DC property tax bills separately state the value of land vs. improvements, but that is not a calculation, rather it is a flat 30 percent of the whole assessment attributed to land.) Experts from Adam Smith onwards have long argued that taxing land is economically better than taxing improvements, or is a “least bad” tax, with some (followers of Henry George) going so far as to argue that the only tax should be a tax on land. Taxing buildings means fewer buildings, but since you can’t reduce land, a tax on underdeveloped land motivates more productive economic uses on it. Despite the lengthy historic pedigree, few places have tried such a tax policy, although Detroit is considering it.
Unique taxes on data, wealth, and electric vehicles. Only Maryland has adopted any type of data tax, and its legality remains mired in the courts for taxing digital advertising but not non-digital advertising, in violation of the federal Internet Tax Freedom Act. Commissioners also raised a key question about how such a tax could be administered due to sourcing: if an ad is shown in multiple states, which state gets to tax the transaction? Wealth taxes have not been adopted at the state level, are not administrable, and have been shown to harm entrepreneurship, and an electric vehicle tax would put DC in the position of taxing something they are also subsidizing.
Repeal taxes or tax requirements that only DC imposes, such as the unincorporated business franchise tax, the personal property tax on businesses (91% of the revenue comes from 300 businesses and only 1,200 businesses pay anything, but 60,000 businesses must file it), hefty business licenses on start-up small businesses including arbitrary license denials for running afoul of any DC agency, hefty commercial property taxes at a time when commercial vacancies are soaring (and continuing to charge it even if a building is converting to residential), paying 6 percent interest on refunds but charging 10 percent on late taxes, and the bizarre “married filing separately on the same return” filing status that tricks many married couples into paying too much. (Disclosure: that last proposal was submitted by yours truly.)
There is great variety in the ideas before the Commission, with some adopted already by essentially every jurisdiction except DC, while others are currently adopted nowhere. Some of the concepts even contradict others, and the Commission will have to square the interplay between them as it moves to a final recommendation package. While the 2013 Commission had a directive to reduce revenue somewhat while advancing competitiveness, fairness, and simplification, the 2023 Commission’s goals are different: revenue adequacy, racial equity, economic development, and efficient administration. Making the final report a vision and not a grab bag will be difficult.