For taxpayers living the nation’s capital, more of their hard-earned capital could be sent to the government if the D.C. City Council gets their way. In their recently unveiled budget, the Council has proposed spending $14.5 billion for FY19, whilst raising taxes on many goods and services as a pay-for. Their plan increases spending by 3.3 percent over this year’s $14.03 billion approved budget, and is nearly $5 billion higher than FY13’s $9.9 billion budget, a near 50 percent increase in spending.
Despite D.C.’s exponential rate of spending, the District has enacted major pro-growth, pro-taxpayer changes to its tax code. In 2014, D.C. passed comprehensive tax reform which reduced income taxes on middle-income earners, increased the Earned Income Tax Credit for low-income earners, and lifted the standard deduction and personal exemption for all taxpayers. It has been a success as D.C. and the area continue to benefit from a roaring economy, consistent population growth, and higher revenue.
The Council should be commended for their work to make DC more competitive and prosperous through tax reform, however, this budget increases taxes on many lower-income taxpayers and consumers that could undo much of the progress made. While there are numerous ill-conceived tax hikes in the budget, NTU believes it is important to highlight a few of these issues as you work on crafting a finalized version of the budget.
Raises Sales Tax Rate to 6 Percent: The current sales tax rate of 5.75 percent is lower than neighboring Maryland and Virginia, giving the District a competitive edge for attracting shoppers. Increasing the rate to 6 percent, which would match its neighbors, could reduce the number of consumers who go to DC for high dollar purchases in order to save some money. Further, a higher sales tax will burden many lower-income households as they spend a greater share of their income than higher-income households do on consumer goods. Since over 100,000 D.C. residents - almost one in seven - live below the federal poverty line, and many more struggling as it is, a higher tax burden could make it more difficult to escape poverty.
Higher Alcohol Taxes: The Council has proposed increasing the alcohol tax to 10.25 percent, up from 9 percent. There are significant problems with raising taxes on alcohol. First, as is often the case with tax, it will be passed along to consumers through higher prices who will inevitably pay more. Second, this will negatively impact D.C.’s burgeoning craft brewer and distillery industry, which not only contribute to the economy, but also to D.C.’s culture. An 11 percent tax increase will eat into the profitability of some small bars and restaurants who continue to be faced with higher labor and rent costs.
Sextupling the Ridesharing Tax: The Council has proposed a nearly 600 percent tax increase on ridesharing services like Uber or Lyft, increasing the fee that users pay from 1 percent to 6 percent. This would increase the tax on a $10 trip from ten cents to sixty cents. While not a bank-breaking amount, it is still an amount that could add up quickly. The tax is estimated to raise about $21 million per year and would be used to fund improvements to Washington’s Metro system. There are several problems with trying to fix Metro by taxing new transportation services. Most importantly, Uber and Lyft will not pay to fix Metro, Uber and Lyft riders will. According to Lyft, nearly 40 percent of Lyft rides begin or end in low-income areas. A tax increase on ridership will hit these customers especially hard.
Boosting the Property Tax Rate: The new rate would replace the current $1.65 per $100 commercial property tax rate on the first $3 million in assessed value with a $1.65 rate for property valued at less than $5 million, and a $1.89 rate for any property assessed over $5 million. This is very problematic. The Tax Foundation summarizes this problem perfectly by writing, “A property worth $5 million will thus pay $82,500 in property tax, while a property worth one dollar more than $5 million will pay $94,500 in property tax, a 12,000 percent tax rate on that additional dollar.”
These new taxes come on the heels of the Council’s vote to add a $2 cigarette tax increase into the budget. The increase from $2.50 up to $4.50 would be the highest tax rate in the United States and the increase would apply to all tobacco products, including vape products. A $4.50 tax rate is 15 times higher than Virginia’s 30 cent tax rate. As NTU has noted in the past, higher cigarette taxes increase the black market for consumers trying to evade higher taxes and these taxes disproportionately impact lower-income consumers. For a pack-a-day smoker, they would have to pay $700 more in tax annually because of this proposal.
These tax increases leave no one better off, particularly low-income people, and younger Americans who use large share of these goods and services. Council members should go back to the drawing board and craft a budget that prioritizes taxpayers without adding to their tax burden.