Following nearly a year-and-a-half of deliberations and almost 30 public hearings, the D.C. Tax Revision Commission last week issued preliminarily detailed city revenue reform recommendations unanimously adopted for approval by D.C. Council members and Mayor Gray. A full report is scheduled for early January.
While disappointing in its modest magnitude — particularly in mitigating the negative business taxation environment and D.C. anti-enterprise reputation — the proposed reforms offer some improvement.
The compromise plan represents a mere $48.8 million in net revenue reductions out of local tax collections in excess of $6 billion. Mayor Gray’s initiative earlier this year, approved by the Council, setting aside $18 million in the current budget toward underwriting tax revisions slashes the bottom-line cost to $30.8 million, less upwardly revised tax collections.
In fact, outgoing District CFO Natwar Gandhi issued his final projections last week indicating $19.8 million in additional revenue this fiscal year and an estimated $42.7 million surplus the next.
Any tax modifications would be incorporated in the District’s FY2015 budget, effective beginning next October. The narrowed list of proposals, whittled down due to lack of agreement among commissioners, are designed to “provide for fairness in apportionment of taxes, broaden the tax base, make the District’s tax policy more competitive with surrounding jurisdictions, encourage business growth and job creation, and modernize, simplify, and increase transparency in the District’s tax code.”
Former Mayor Anthony Williams, credited with restoring D.C.’s fiscal footing during two terms in office ending January 2007, chaired 10 appointed tax policy experts, business community representatives and advocates from liberal policy groups. Divergent perspectives culled an initial 63 recommendations to only about a dozen measures comprising a balanced plan thought within the realm of political viability.
Unfortunately, these consensus recommendations are expected to encounter opposition by politicians longing for more money to toss around in an election year. Frustrated by spending constraints requiring expenditure prioritization, Council members have taken to creating an annual budget “wish list” well in excess of potential revenue surpluses to pay for them.
Williams was quoted last week as saying, “to be the competitive city we want to be, we’ve got to have government within the proper bounds in terms of the private-public sector relationship, and I don’t think we’re really cognizant of that.” In other words, officials still don’t “get” it.
While the Commission proposes to reduce the business franchise tax from an astounding 9.975 percent of net income to 8.25 percent, this merely matches high-tax Maryland. While arguing that cutting the tax is “a signal that D.C. is ‘open for business’,” it doesn’t lower it to be competitive with Virginia’s 6 percent rate. D.C. business taxes are worst in the region and among the highest nationwide and this proposal is an inadequate remedy.
Worse, a reduction in business taxes is partially offset by levy of a local services fee to be imposed on all employers – including non-profits and other tax-exempt entities – by assessing a quarterly payment of $25 per employee for those with more than four. While the intent to generate revenue from tax-exempt organizations not currently contributing to city service benefits is a good thing, it diminishes the lessening of the business tax burden.
In addition, instead of preserving the general sales tax rate when expanding taxable businesses to include those currently exempt – such as hair salons, health clubs, bowling alleys, carwashes, construction and carpentry contractors, upholstery cleaners and storage facilities – the current 5.75 percent rate is recommended for return to 6 percent.
And while the vast majority of revenue reductions, totaling nearly $100 million, originate from a laudable cut in the income tax rate for low and middle-income earners by adding new tax brackets, the existing too-high rates for taxpayers earning more are untouched.
A first step in reducing D.C. business and personal tax rates is long overdue, if inadequate, and is deserving of support – and does offer enterprise a modicum of relief.
At least it’s a start.