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DC Tax Reform Package Starts Taking Effect

2 min readBy: Joseph Bishop-Henchman

In July, the DC Council approved a major 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. reform that cuts income and business taxes, expands the low-income 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. , and applies 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. to items exempt by historical accident, all based on the recommendations of a blue-ribbon commission. Effective today, consumers must pay the 5.75 percent sales tax on the following transactions:

  • Bottled water delivery
  • Storage rentals and leases, including self-storage
  • Carpet and upholstery cleaning
  • Health club and tanning services, including gym and fitness memberships
  • Car washes
  • Bowling alleys and billiard parlors

Ending the health club loophole proved the most controversial, with local gym Vida Fitness and a number of yoga studios launching a campaign to preserve their tax break that talked a lot about obesity and fitness and didn’t mention the income and business tax cuts that were part of the package’s tradeoff. (Vida itself will see a tax cut.)

Our map below, showing the 24 states that apply sales tax to fitness memberships and services, illustrates how there’s no discernible relationship between sales tax on gym memberships and obesity rates. On one hand, a lot of people have memberships and don’t go, and on the other, a lot of people exercise in ways that don’t involve high-priced membership payments.

Fun fact: if you compare the map with the United Health Foundation's 2014 America's Health Rankings report, only two of the top 10 healthiest states, Massachusetts (#5) and Colorado (#6), exclude gyms and fitness club memberships from their sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. s.

Despite winning mayoral candidate David Catania (I) to Vida’s cause, a broad coalition supported the tax reform package, and the DC Council approved it overwhelmingly. The rest of the package, which takes effect in 2015:

  • Middle-income taxpayers (those between $40,000 and $350,000) will see their tax rate drop from 8.5 percent to 7 percent next year, then 6.5 percent the year after that.
  • Those earning up to $1 million will see their tax rate drop from 8.95 percent to 8.75 percent.
  • All taxpayers will see more generous standard deductions and personal exemptions, as they will be increased to match federal levels.
  • Childless low-income workers will see a larger Earned Income Tax Credit (EITC), from 40 percent of the federal credit to 100 percent of the federal credit.
  • The District’s hefty business tax will drop from the current 9.975 percent to 9.4 percent (2015), 9 percent (2016-17), 8.5 percent (2018), and then to 8.25 percent (2019), and the District will adopt single sales factor apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. .
  • The 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 will be recoupled to federal law.