Income Tax Cuts in DC? Yes, They‘re Real

Believe it or not, the District of Columbia is moving closer to passing a positive tax reform package that would slim the City’s fattened coffers by $67 million each year while cutting income taxes for the vast majority of DC residents. It would also lower the death tax. It’s not a perfect plan, but it’s far superior to what we’re accustomed to seeing in DC. The District’s government needs to be put on a diet, and this proposal would help.

By now, most DC residents have probably heard about the “fitness tax” scare that some local gyms have ginned up to squash support for the proposed reforms. This line of argument deserves closer scrutiny.  

Health clubs are currently excluded from the 5.75 percent DC sales tax, as are carpet and upholstery cleaning services, car washes, tanning studios, bottled water home delivery, bowling alleys, and billiard parlors. The sales tax would be expanded to each of these services. As the DC Fiscal Policy Institute explained, “The Council’s tax package doesn’t create a special tax on health clubs but instead includes them in the basic sales tax.”

Raising taxes on businesses and their customers – without lowering other taxes by a greater amount – would be a bad idea. That’s especially the case if a product or service is being targeted with high rates. Taxpayers and businesses should likewise beware of big-government tax collection schemes masquerading as “fairness” or “reform,” like the misguided Marketplace Fairness Act.

But that’s not quite what’s happening here. The net result of the tax package would be less for the DC Taxman overall. Sure, gym members might pay an extra four bucks a month to go to the gym, but on average, they would also save a cool $400 per year on their income tax tab. It’s a tradeoff similar to what we saw last year, when North Carolina enacted its historic, pro-growth tax reform plan, which featured income tax cuts made possible by expanding the sales tax base. Given the choice, I’d gladly pay a little more in sales taxes if it means the government took a smaller bite out of my paycheck, leaving me with more money in my pocket than I’d have under current tax laws. Nearly everyone I know living in the District feels the same. And in the end, a lower income tax bill leaves consumers with more to spend at local businesses anyway.

While the DC package wisely broadens the sales tax base and treats more goods and services equally, it moves in the wrong direction on vapor products. The plan would miscategorize e-cigarettes as “other tobacco products” (OTP), even though they contain no tobacco. It would then tax OTP products at the same rate as traditional analog cigarettes, which frustratingly means that vapor products, which are a safer alternative to smoking, will become much pricier. This could lead District “vapers” to stick with traditional cigarettes (which doesn’t bode well for public health).

While higher taxes on e-cigarettes would be disappointing if it remains in the final proposal, other elements in the overall package (the income tax cuts) would provide a nice boost for nearly all DC residents. Taxpayers in DC should carefully examine the claims about the gym tax  by heading over to the Tax Foundation’s blog, getting informed, and speaking up in favor of pro-growth reform done the right way.