D.C. Moves to Tax Food Truck Sales; Considers Repealing Discriminatory Bond Tax

May 02, 2012

The District of Columbia began the process of requiring food trucks to collect the city's 10 percent meals tax (fourth highest in the country) or pay $1,500 a year, whichever is greater, by passing legislation that if approved again in June, would take effect October 1. (Presently, food trucks just have to pay the $1,500.)

Restaurants have claimed unfair competition and DC officials sought to stop the rapidly growing high-end food truck industry in the nation's capital, although all sides are now reportedly cooperating on proposed regulations, including the tax collection obligation.

Interestingly, Tax Analysts reports (subscription req'd) that D.C. Council member Jack Evans (D) proposed using the additional sales tax revenue to eliminate the tax on out-of-state municipal bond interest. All states allow taxpayers to exclude from taxation any interest they earn on that state's government bonds, but taxpayers must pay tax on interest earned on other states' government bonds. (Indiana was the last state to exclude from tax all bond interest from any state, but instituted the discriminatory exclusion recently.) In 2007, we argued (as did Alan Viard of AEI) to the U.S. Supreme Court that this practice is discriminatory and unconstitutional, but the Supreme Court disagreed with us 7-2, holding that a state can condition its bond sales however it likes.

The discriminatory tax exclusions has led to the rise of state-specific municipal bond funds which exist only because of the tax benefits. The Securities Industry & Financial Markets Association has admitted that "[i]f the municipal bond tax incentive evaporates, the demand for such bonds may likewise vanish, thus drying up a major source of funding for State projects." If these investments are non-viable except when given a discriminatory tax benefit, it's probably poor tax policy.

Council members Marion Barry (D) and Vincent Orange (D) objected to tying the two proposals together, so it was tabled. However, Council member Muriel Bowser (D) says it might have to come up again. It ought to: D.C. could lead the way on good tax policy in this regard.

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