Neither rain, nor sleet, nor a foot of snow can stop the District’s Dime from reporting on critical budget, tax, and policy issues in the District of Columbia! We hope everyone is staying warm and safe in the aftermath of “Snochi.”
Yesterday, the DC Council heard more about the recommendations of the DC Tax Revision Commission from its chairman, former DC mayor Tony Williams, and commission staff. The session revealed interesting insights into the tax thinking of council members.
INCOME TAXES
The largest number of recommendations involves the personal income tax. DC Council Chairman Phil Mendelson pointed out that the wealthiest DC residents pay a smaller share of income in DC taxes than almost any other group. Given the commission’s focus on creating a fairer tax system, he asked why the commission recommended lowering the top income tax rate from 8.95 percent to 8.75 percent, starting at $350,000. Williams explained that this was a compromise; some commission members supported maintaining the current rate, while others wanted the top tax rate to return to 8.5 percent starting at just $40,000 of taxable income.
DCFPI supports maintaining an 8.95 percent rate for our highest-income residents. When this was proposed in 2011, a poll showed that it was supported by the vast majority of DC residents.
Several council members expressed support for a cluster of recommendations to assist low- and middle-income residents, including a lower rate for income between $40,000 and $80,000, a higher standard deduction and personal exemption, and expanding DC’s Earned Income Tax Credit (EITC). The EITC provides substantial tax help to working poor families with children, but very little to the large number of working poor residents without children in the home. DCFPI supports these changes.
BUSINESS TAXES
The commission made several recommendations on taxes that impact businesses, including a $25 fee for each employee per quarter and sizable reductions to the franchise tax and unincorporated business tax. Some council members expressed support for the commission’s recommendation to cut the business income tax rate to be in line with Maryland, although Council member Anita Bonds questioned the steepness of the cut.
Chairman Mendelson and Councilmember David Catania wondered whether a cut in the commercial property tax would be better, given the greater suburban competition that will come with the opening of Metro’s Silver Line to Tysons Corner and Dulles. The commission staff cited research showing that DC’s economy has outpaced the suburbs over the past decade, but that a cut in the business income tax would send a signal that the District is business friendly. Staff also noted that a cut in the business income tax rate would not reduce revenues as much as a cut in the commercial property tax. DCFPI does not support a reduction in the franchise and unincorporated business tax.
The Council also discussed the commission’s proposal for the employee fee. The commission staff noted that this was a way to collect revenue from a variety of businesses that use DC services but pay no income taxes (and in some cases no property taxes), including nonprofit hospitals and universities and law firms organized as partnerships (where partners pay income tax to Maryland or Virginia if they live there).
PROPERTY TAXES
The commission did not recommend changes to either residential or commercial property taxes, but there are two property tax bills currently before the DC Council. When asked about those bills, Mayor Williams said the commission prioritized other tax changes, since DC’s residential property tax is the lowest in the region. DCFPI agrees that a five percent cap on annual residential increases is ill-advised, and that there are better ways to help seniors who are challenged by high property taxes.
Another line of questioning came in regard to DC residents who claim permanent residency elsewhere, which by law means they spend more than half of the year living outside DC. These homeowners benefit from DC’s very low property tax rate. Several councilmembers wondered whether the commission considered a higher property tax rate for those not claiming DC as their homestead. The commission hadn’t, but DCFPI thinks it may be worth exploring.
SALES TAXES
Several members questioned the recommendation of expanding the sales tax to more services, such as construction contractors. Chairman Mendelson pointed out that the sales tax is regressive, meaning it takes a bigger bite in the budget of lower-income families than higher-income ones. The commission staff noted that expanding the sales is sound tax policy recommended by tax experts and that the new revenue would help pay for other tax cuts targeted on low-and middle-income households. DCFPI agrees that broadening the sales tax base makes sense.
Some council members asked why the commission did not seek bolder tax cuts. The commission’s recommendations would cost $40 million — not small change but not huge, either. Mayor Williams answered that the commission’s job was to shape tax policy, and that deep tax cuts would be wading into “fiscal policy” issues such as the size of the city’s budget. DCFPI agrees.
The hearing revealed that the council is eager to see the commission’s work move forward, with the hope that tax changes will be included in the upcoming DC budget for fiscal year 2015. Stay tuned to the District’s Dime as we follow these tax policy discussions!
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