Next Steps for the D.C. Tax Revision Commission

Much has changed in the year since D.C.’s Tax Revision Commission first met to begin preparing recommendations for an overhaul of the D.C. tax system. Robust future economic growth and tax collection projections have turned sour. Crime has spiked. Federal employees are still mostly remotely working, and pandemic aid can no longer patch the transit system’s enormous budget gap. The departure of FBI headquarters was followed by announcements from the Capitals and the Wizards, and now, Fannie Mae, that they are leaving as well.

These developments seemed to be weighing on the commissioners at their most recent meeting. Evaluating the proposed first draft of a revenue-neutral package of ideas, which included a reshuffling of business tax liabilities through an unusual business activity tax (BAT), a first-in-the-country tax on data collection, and tax increases on high-income earners and expensive residential property. Questions about the BAT’s workability and compliance burdens (as well as the unhelpful signal that a new and unique tax on business gross receipts sends) seem to have landed with a thud, and as it is the centerpiece of the current draft, dropping it to some extent means rethinking the entire approach.

The Commission in particular has been reluctant to embrace one D.C. success story that has been copied by jurisdictions all over the country: revenue triggers. The 2014 Commission recommended a series of tax cuts, but officials were worried about the revenue implications of pursuing them all immediately. Instead, they decided that any revenue that exceeded 5% growth per year - then about twice the rate of inflation - would be used to implement the recommendations sequentially. Revenue surged as burdensome taxes were eased, which was either a happy coincidence or cause-and-effect, depending on your politics. But it ensured D.C. didn’t bite off more than it could chew. Within a few years, 11 states also used revenue triggers, and more have since.

It’s not too late to come up with something promising. The Commission was charged with five goals: (1) promote fairness, equity, and progressivity; (2) broaden the tax base; (3) enhance competitiveness with Maryland and northern Virginia; (4) encourage business growth and jobs; and (5) tax code modernization, simplicity, and transparency. One could envision a giant chart of policies in the three jurisdictions, and recommendations that avoid anything that Maryland does but Virginia doesn’t, and embracing new ideas that clearly check four of the five goals. Some ideas could emphasize D.C.’s strengths (such as one layer of government instead of multiple jurisdictions, the presence of universities and national non-profits and airports, a highly-educated workforce, immense housing demand and rising population, and being a national gathering place for meetings and events). If there’s something D.C. can do and Virginia can’t, that the tax code can help with, that should be circled at the top with stars around it.

That this hasn't been the approach is reflected by the recommendations in the first draft. The data tax exists in no other state, although Maryland has adopted a version of a data tax that is now  destined to be tied up in court for a decade. The BAT as described exists in no other state, and the states that do have gross receipts taxes don’t have an income or a sales tax so D.C. would join only Delaware and Ohio in having both a BAT and an income tax (and Delaware has no sales tax). The business taxes proposed for repeal or reduction already don’t exist or are sharply lower in Maryland and Virginia. The child tax credit proposal and tax administration reforms check most of the boxes for good policy and competitiveness, but other imaginative ideas that might have done so didn’t make the cut. Even a half-hearted discussion about a new job creation tax credit revolved around playing catch up with Virginia.

• Allowing four-story residences citywide, with commercial by-right on the ground floor, to meet immense housing demand and bring in new taxpayers and new start-up businesses. 5% more housing means 5% more property tax collections, and 5% more people means 5% more income tax collections.

• Adopting 100% business expensing even as the federal version phases out, immediately making D.C. a top location for business investment and job creation.

• Overhauling D.C.’s confusing tax filing statuses, which do not match the federal government’s and lead to excess work by tax preparers and accidental overpayments.

• Something creative to speed up commercial-to-residential conversions downtown, such as waiving 10 years of property taxes for the first 10,000 units converted, along with applying the vacancy tax to vacant portions of properties as a stick.

• Recouple residential and business property tax rates, ending a problematic bifurcated approach that neither Maryland nor Virginia has copied.

• Negotiate service agreements with universities and large non-profits, as Boston has done.

• Congestion charges similar to tolls for Virginia’s on I-66 and Maryland’s on the ICC, perhaps only if there is no WMATA agreement.

• Authorize private-sector help (towing companies, or private bounties similar to the False Claims Act) to collect over $1 billion in unpaid parking and speeding tickets.

• Reforms to reduce DC’s unemployment payroll tax burden, which is the highest in the region, a literal tax on jobs and hiring.

• “One-stop shopping” with businesses able to work with one government official for all business licenses and permits, rather than agency-by-agency. This reform would build on the Commission’s current clean hands reform proposal and utilize a strength of D.C.’s lack of multiple government jurisdictions. The current necessity for private sector “permit expediters” shows the weakness to be addressed here. Estonia, as one example, has such a portal as part of their initiative to access 99 percent of government services online and eliminate standing in physical lines at government offices.

The Commission has the political independence to be creative, and look for transformative ideas that grow revenue by growing the economy, leverage strengths, and compensate for weaknesses. If D.C. wants its tax code to encourage more than just nonprofits and low-density residences, this is a once-in-a-decade moment to do it.