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D.C. Proposes Sales Tax Increase, Other Tax Changes

4 min readBy: Joseph Bishop-Henchman

This week the District of Columbia Council unveiled its proposed budget for Fiscal Year 2019, which starts July 1, 2018. The total spending plan is $14.509 billion, a 3.3 percent increase over FY 2018’s $14.034 billion in approved spending. Of the $14.5 billion, $11.125 billion is generated by local taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es and fees, and $3.384 billion from federal funds, making D.C. about average on the proportion of its budget coming from federal funds.

Major spending changes include a 3.9 percent increase in per-pupil K-12 funding; an additional $178 million per year for the WMATA regional transit system, which is being matched with $167 million from Maryland and $154 million from Virginia; $30 million in dedicated funds for community arts and humanities; $15.6 million in additional funds to provide 957 more housing units and vouchers for those experiencing homelessness; rental and foreclosure avoidance assistance for seniors; funds to offset new tax abatements for grocery stores east of the Anacostia River; eight new building permit processors to expedite permit reviews; $250,000 to find a location for an intercity bus station; and $250,000 to study the effect of autonomous vehicles in D.C.

The Council draft proposes the following tax changes:

  • Raise the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. from 5.75 percent to 6 percent, matching neighboring Maryland and Northern Virginia. D.C.’s sales tax was 6 percent from 2010 to 2013, when it dropped to 5.75 percent.
  • Increase the commercial property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. rate from $1.85 per $100 to $1.89 per $100, with 3 cents of the increase partly offsetting the increased WMATA contribution and the remaining 1 cent funding the increased arts and humanities funding.
  • Replace the current lower $1.65 per $100 commercial property tax rate on the first $3 million of assessment with a $1.65 rate for property less than $5 million, and a $1.89 million rate for the entire assessed value of property worth more than $5 million. 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. David Brunori of the D.C. Policy Center discusses this change in more detail.
  • Provide a commercial property tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. for small businesses (with less than $2.5 million per year in gross revenue), refunding an amount equivalent to 10 percent of its commercial lease up to $5,000 per year.
  • Increase the alcohol tax from 9 percent to 10.25 percent.
  • Increase the user tax on ridesharing (Uber, Lyft, and similar services) from 1 percent to 6 percent. Mayor Muriel Bowser (D) had proposed a 4.75 percent rate. The tax would raise about $21 million per year.
  • Increase the hotel tax from 14.8 percent to 14.95 percent. Mayor Bowser had proposed a 15.05 percent rate. The hotel tax was increased last year from 14.5 percent to 14.8 percent. (Some sources may cite lower rates, because they forget to include a 4.45 percent hotel tax to fund the Convention Center.)
  • Reject the mayor’s proposal to increase the meals tax from 10.0 percent to 10.25 percent.
  • Decouple from the recent increase in the federal estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. threshold. Prior to the recent tax bill, D.C. coupled to the federal estate tax threshold of $5.6 million (single) and $10.9 million (married). D.C. will remain at that level; the tax bill doubled the federal thresholds.
  • Otherwise preserve the recent tax reform package, which was enacted in steps between 2015 and 2018. The tax package increased the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. , reduced income and business tax rates, and expanded the sales tax to certain consumer services.
  • Add a one-time refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit (EITC). for child-care expenses up to $1,000 for children 3 or under, for 2018 expenses only.
  • Extend a property tax abatement for an IHOP restaurant located at 1523 Alabama Avenue SE. The restaurant in 2010 received a retroactive tax abatement from 2007 to 2009; this reenacts it from 2018 to 2027.
  • Establish a new tax credit for any new grocery store, new retail store, or sit-down restaurant in Ward 7 or 8, which will waive real property tax, possessory interest tax, recordation tax, transfer tax, license fees, personal property tax, corporate franchise tax, and sales tax used in construction or renovation for 30 years.

During committee debate Tuesday, the Council voted 10 to 2 to add a cigarette tax increase to the budget. The increase would raise the $2.50 per pack tax to $4.50 per pack.

The sales tax increase, rideshare tax increase, hotel tax increase, and commercial property tax increase are designed to partly offset (~$77 million) the costs of the increased WMATA contributions.

There’s also an interesting tax factoid in the Council’s report: “Twenty-one percent of District residents earn more than $100,000 per year, but their contributions make up 75 percent of the District’s total personal income tax revenue. In contrast, 40 percent of District residents earn less than $25,000 per year, but their personal income tax contributes make up just 1.4 percent of the District’s total personal income tax revenue.”