Every ten years, the District of Columbia government establishes an advisory Tax Revision Commission to make recommendations on tax changes. The D.C. Council sometimes shelves them and sometimes enacts them nearly in their entirety. Back in October, I reviewed the discussions commissioners had been having.
The discussions have now become a first draft of 39 recommendations, labeled a “Chairman’s Mark.” This first draft is reviewed by commissioners at a series of public meetings on January 8, January 17, and January 19, with whatever emerges becoming the final report going to the Council. So while there are many opportunities for change between now and then, the final draft may include much of what is in the first draft.
Business Taxes:
Adopt a new $275 million business activity tax (BAT), described as a 1.4% value-added tax on gross receipts minus the sum of purchases from other businesses, rent, and capital expenditures. The BAT would be creditable against the corporate franchise tax (top rate of 8.25%) and individual income tax (top rate of 10.75%). An accompanying memo states that the tax would be on for-profit firms, mentioning “law firms, lobbyists, and consultants” as a “significant gap in the DC tax base” that do not currently pay franchise tax or unincorporated business franchise tax but would pay this tax. The BAT as described does not exist anywhere else, although New Hampshire’s 0.55% Business Enterprise Tax (BET) is closest. Other states without an income tax (Nevada, Texas, Washington) have some form of business gross receipts tax; DC would join only Delaware and Ohio in having both a business gross receipts tax and an income tax.
$275 million in business tax reductions:
$77 million: Eliminate the personal property tax on business equipment ($77 million, plus an enormous compliance burden as over 60,000 businesses and non-profits fill out the return but only 1,500 owe anything)
$13 million: Repeal outright basic business license fees, which are currently $70 for 2-years plus additional fees based on type of business. The Council has adopted, but not yet enacted, the BEST Act to standardize the basic business license at a flat $99 for a 2-year license; this proposal would go beyond that (BEST Act revenue loss to implement is $7 million).
$84 million: Repeal the unincorporated business franchise tax, as the BAT would be used to reach this income instead.
$94 million: Reduce the commercial property tax rate by 10 cents per $100 in assessed value, and intriguingly, “move to system of split-rate ‘land value’ taxation when values stabilize.”
$7 million: end denial of occupation and business licenses for non-DMV clean hands debts up to $5,000. Currently, other DC agencies cannot issue business licenses until the CFO certifies no taxes or debts are owed. However, even business owners who want to clear their debts have difficulty getting the government to timely do so and communicate with other agencies.
Enact a data tax on businesses who extract data from over 50,000 D.C. residents, at $4 per participant per year. (+$7 million).
Adopt “Finnigan” rule of taxing corporations, shifting taxable activity into DC from related entities that do not have nexus in DC. (+$17 million).
Individual & Property Taxes
Further limit itemized deductions to 7.5% of adjusted gross income, up from current 5% of adjusted gross income. (+$26 million)
Increase residential property taxes from the current 85 cents per $100 in assessed valuation, either by raising the rate on property value in excess of $2 million to $1.04, or by raising the rate on all property to 95 cents and increasing the homestead exemption from $87,050 to $225,000. (+$42 million)
Enact a $1,000 refundable child tax credit, phasing out for filers above $150,000 (single) or $200,000 (married) (-$77 million). Also, double the child and dependent care tax credit (-$4 million).
Index income tax brackets for inflation beginning in 2025 (-$5 million).
Allow homestead deduction to claim retroactively up to three years.
Replace current 2 percent seniors’ assessment increase cap with the general 10 percent assessment increase cap (+$5 million).
Expand the Schedule H circuit breaker for homeowners and renters (-$20 million).
Reforms to the Earned Income Tax Credit (EITC) to make seniors and young adults eligible, and end the marriage penalty for childless workers. (-$7 million).
Eliminate deed recordation tax for qualified first-time homebuyers (-$6 million).
Tax interest on non-DC municipal bonds (+$15 million).
Move income tax filing deadline extension date to November 15, and allow automatic extensions for those who don’t owe.
Update tax classification for commercial-to-residential conversions at time of permitting, instead of occupancy.
Other
Raise cigarette tax to $5.50 per pack. This compares to Maryland’s $3.75/pack and Virginia’s 60 cents/pack. Due to high cross-border evasion and declining overall use, cigarette tax revenue is likely to continue to decline year-over-year; the tax has declined over the past ten years from over $35 million a year to under $20 million a year even as the rate has gone up.
Tax electric vehicles at the same rate as other vehicles (+$20 million).
Grant more powers to the Taxpayer Advocate. A staff fact sheet mentioned changing the reporting structure to give the Advocate more independence, allow them to waive up to $10,000 in penalties and fees in cases of government error, and create a small business liaison.
Require economic, small business, and distributional analysis statements for tax legislation.
Altogether, the list is revenue-neutral, and the cover letter from former Mayor Anthony Williams urges that it not be treated “as a menu” but rather together as “a package of proposals in which the individual elements work together as a coherent whole.”
More problematic is what is not included. Some of the visionary concepts discussed over the past year have only tentative steps at best: commercial-to-residential conversions, growing in the post-pandemic, taxing land instead of property, attracting tech and biotech firms, innovative transportation funding. And as Williams acknowledges, the package does not address major current revenue-related concerns such as additional funding for WMATA, tax incentives for job creation, the loss of the Wizards and Capitals, and remote work. A Council facing a sluggish commercial property sector and a net to spend hundreds of millions of dollars more on transportation each year may have trouble acting on a revenue-neutral tax plan.
Stay tuned.