The District of Columbia Council yesterday approved, by an 11-2 vote, a budget that includes nearly all components recommended by the 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. Revision Commission back in February. As we noted last month, the recommendations balance competing priorities to improve the simplicity, fairness, neutrality, and economic competitiveness of the District’s tax system. Their implementation by the District represent a major improvement for its tax system.
The Tax Revision Commission had concluded that the District’s current tax system has three major shortcomings: (1) middle-class residents pay a relatively large share of their income in District taxes; (2) business taxes are too high; and (3) the District’s 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. is too narrow. The Commission’s recommendations seek to address these issues with reforms to the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , business taxes, sales tax, and estate tax (see Table below). All told, it is a net tax cut of approximately $67 million per year (out of a $10.6 billion budget).
The Council’s action is also a bit of a rebuke to lame duck Mayor Vincent Gray (D), as Gray had mostly ignored the Commission’s recommendations. (The Council also reduced the speed of construction for the District’s yet-to-open streetcar system.) Credit seems to go to council Chair Phil Mendelson (D), who apparently revived the Commission’s recommendations in the 24 hours before the vote. The two leading candidates for Mayor, Councilwoman Muriel Bowser (D) and Councilman David Catania (I), both supported the plan as well.
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Commission Recommendation (February 2014) |
Budget Proposal by Mayor Gray (April 2014) |
Budget Approved by D.C. Council (May 2014) |
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Income Tax: Reduce the top income tax rate from 8.95 percent to 8.75 percent. Add a 6.5 percent income tax bracket, reducing tax for those earning more than $40,000. |
Add a 7.5 percent middle-income income tax bracket. |
FY 2015: Add a 7 percent middle-income tax bracket, reducing tax for those earning more than $40,000. FY 2016: Reduce middle-income tax bracket from 7 percent to 6.5 percent. Add new lower 8.75 percent tax rate for income between $350,000 and $1 million. The 8.95 percent tax bracket will remain but only for income above $1 million. |
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Income Tax: Raise the standard deduction and personal exemption to match federal levels. Phase out itemized deductions for high-income taxpayers. Phase out personal exemption for high-income taxpayers (above $150,000 single or $200,000 married). |
No proposal |
Increase standard deduction to match federal level by FY 2017 (interim of $5,200 for single and $8,350 for married in 2015 and 2016; federal level in 2017). Increase personal exemptions beginning in FY 2017 ($2,200 in 2017 and $3,200 in 2018) to match federal level by FY 2019. Personal exemption phaseout takes effect FY 2015. |
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Income Tax: Eliminate some unused credits (Eliminate the low income tax credit, District employee homebuyer tax credit, long-term care insurance deduction, and government pension exclusion.) |
No proposal |
Implement Commission recommendations as of FY 2015 |
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Income Tax: Expand Earned Income Tax Credit for single childless workers to 100 percent of federal EITC. |
No proposal |
Expand Earned Income Tax Credit for single childless workers to 100 percent of federal EITC. |
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Business Tax: Reduce the District’s franchise taxes (corporate income tax and tax on unincorporated businesses) from 9.975 percent to 8.25 percent, equal to Maryland’s 8.25 percent rate and closer to Virginia’s 6 percent rate. |
Reduce from 9.975 percent to 9.4 percent |
Reduce from 9.975 percent to 9.4 percent (FY 2015), 9.0 percent (FY 2016), 8.5 percent (FY 2018), and 8.25 percent (FY 2019). |
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Business Tax: Adopt single sales factor apportionment. |
Adopt single sales factor apportionment |
Adopt single sales factor apportionment as of FY 2015. |
| Business Tax: Impose a “local services fee” of $100 per employee per year on all non-governmental employers with five or more employees, to collect some revenue from commuting employees exempt from D.C. tax. | No proposal | No proposal |
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Sales Tax: Raise the sales tax rate from 5.75 percent to 6 percent, returning the rate to where it stood prior to October 2013 and matching the 6 percent sales tax rates in Maryland and northern Virginia. |
No proposal |
No change |
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Sales Tax: Expand tax to certain services (construction contractors and other construction-related services, storage of household goods and mini-storage, water for consumption at home, barber and beautician services, carpet and upholstery cleaning, health clubs and tanning studios, car washes, and bowling alleys and billiard parlors) |
No proposal |
Implement Commission recommendations as of FY 2015 |
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Sales Tax: Instruct taxpayers to pay use tax on income tax form. |
No proposal |
Implement Commission recommendation |
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Excise Taxes: Replace an array of taxes on non-cigarette tobacco products (chewing tobacco, smokeless tobacco, snuff, and roll-your-own tobacco) with a single excise tax of 80 percent of the wholesale price, equivalent to the $2.50 per pack cigarette tax rate if it were expressed as a percentage of wholesale price. |
Implement Commission recommendation |
Implement Commission recommendation |
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Estate Tax: Increase threshold level ($1 million) to match federal level (currently $5.25 million) |
Implement Commission recommendation |
Implement Commission recommendation |