The Washington Post’s “Capital Business” published an op-ed this week by DCFPI’s Executive Director, Ed Lazere. That op-ed is reprinted here.
The District’s economic outlook is bright. More and more people are choosing to live in the city, and many neighborhoods are blossoming. This growth, which is creating new customers and tremendous opportunities for businesses, is due in no small part to public investments made over the past decade — in areas such as education, transportation, housing and recreation.
The recession put those investments at risk, however, as tax collections fell by hundreds of millions. Facing a large shortfall this year, Mayor Gray and the DC Council chose to take a balanced approach, one that relied mainly on spending cuts but also included tax increases, split between businesses and residents. They did so to keep education reform moving forward, to continue transportation investments like streetcars, and to maintain libraries and parks in tip-top shape.
These are the things that make a family-friendly and business friendly city — and that allow the District to continue its phenomenal renaissance. Taking a cuts-only approach would have put these important public investments at risk.
Moreover, a closer look at the business tax changes show that they generally make policy sense and are designed to protect small businesses, many of which should see no tax changes.
Three business tax changes are worth noting. First, the minimum income tax, which has been $100 for nearly three decades, will go to $250. That catches up for ground lost to inflation and is important given that a majority of DC businesses pay just the minimum. The minimum will rise to $1,000 for businesses with more than $1 million in receipts, because it makes sense to set a higher minimum for Giant and Safeway than for the corner grocery store.
Second, the budget adjusts the business income apportionment formula to put greater weight on a company’s sales in DC than on its DC property or personnel. This will increase taxes for companies that sell a lot here but have a small employment or physical presence, while lowering taxes for businesses located here that sell a lot outside of DC. That should protect many local businesses.
Third, the budget implements “combined reporting,” viewed by tax experts as the best way to prevent businesses from sheltering profits. Consider this example: Toys R Us licenses its logo in Delaware and requires stores to pay a royalty to this subsidiary. This sucks profits out of each store and into Delaware, which has no corporate income tax. While DC has closed this shelter, combined reporting ends all income-shifting shell games by requiring businesses to report income from all subsidiaries together.
The companies that pay more under combined reporting tend to be large multi-state corporations, which means that Frager’s or Brookland Hardware will be on a level playing field, tax-wise, with Home Depot. And combined reporting raises needed tax collections. Maryland, for example, found that it would have collected more from 2006 through 2008 if it had combined reporting.
These are not blanket business tax increases. They focus on tax compliance and making sure that multi-state corporations pay their fair share of taxes to DC. In fact, small businesses that now pay more than $250 in DC income taxes won’t see their tax bill change at all. And with the District’s economy recovering solidly, the District should be able to pay its bills without further tax increases. (Before this year, the city did not raise business taxes over the past decade, other than to finance the baseball stadium.)
The District’s economy is vibrant, with an envious office vacancy rate, a huge amount of foreign investment, and growing neighborhoods that are helping businesses flourish. Keeping DC’s momentum moving forward should be everyone’s top priority. That requires public investments in education, public safety, infrastructure and more. Reasonable increases in taxes to support these investments are better than a simple focus on keeping taxes down.
The op-ed as it appears in Capital Business can be found here.
