D.C. Council to Vote on Tax Reform Package Today

The District of Columbia Council enters into session today at 10:00 AM to vote on a budget package that includes a major tax reform. An initial vote on May 29 approved the package on an 11 to 2 vote; to become law, bills must be approved by the Council on two different occasions separated by at least 13 days. The Mayor then has ten business days to sign or veto the bill; if vetoed, the Council then has 30 days to override the veto.

The tax reform package is impressive, resulting from a blue ribbon commission’s conclusion 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 base is too narrow. The tax reform package seeks to address these issues with reforms to the individual income tax, business taxes, sales tax, and estate tax:

• 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 apportionment.
• The estate tax threshold will be recoupled to federal law.
• The District’s sales tax will be expanded to a number of services currently exempt due to historical accident.

This last feature has proven the most controversial, with some of the District’s gyms and yoga studios organizing a “stop the wellness tax” and “stop the yoga tax” campaign. This misleadingly suggests that a punitive tax will be imposed on just gyms and yoga studios, rather than just those businesses having to collect the same sales tax all other businesses collect. Councilman David Catania (I), a mayoral candidate, has taken up their cause and will propose an amendment to cancel some of the business tax cuts, using the revenue instead to restore the gym/yoga tax break (see Table 2).

Those special interests aside, the consensus is in favor of the tax reform package as good policy, including the sales tax broadening. Positive statements have been made by the Center on Budget and Policy Priorities (CBPP), Citizens for Tax Justice (CTJ), the D.C. Fiscal Policy Institute, the Cato Institute, the National Taxpayers Union (NTU), Americans for Prosperity (AFP), the Tax Foundation, and columnists Matt Yglesias (Vox.com), Josh Barro (NY Times), and Mark Lee (Washington Blade).

Added to that is an unprecedented letter sent yesterday, co-signed by the D.C. Chamber of Commerce, the D.C. Fiscal Policy Institute, and the Federal City Council:

We support the D.C. Council’s actions to endorse the recommendations of the D.C. Tax Revision Commission through wide ranging tax reform that makes District of Columbia tax policy fairer and more competitive. The expansion of the District’s sales tax to various services is just one part of an overall package that reduces tax rates across the board on District residents and businesses. Overall, a typical resident who pays the new health club service tax will benefit with eight to 12 times as much tax relief from tax reductions elsewhere in the tax cut package.

One of the primary tenets of good tax policy is that it should limit distortions to the economy and the best way to do this is through a broad base and low rates. Although it is tempting to use tax policy to achieve policy goals, there are almost always more effective ways to promote policy objectives. Case in point: by one measure, 67 percent of people who pay for gym memberships don’t use them; how will giving these residents a tax break promote health outcomes? Residents do pay for all sorts of things that promote their health that are subject to the sales tax already including sporting gear and sporting apparel. If we exempt everything with a health benefit from the sales tax, rates would be driven even higher.

If D.C. approves this sensible tax policy, we will be in good company. Among the 45 states that levy a sales tax, nearly half (22 states) already tax fitness club memberships. This list includes Minnesota, Connecticut, New Mexico, and Hawaii ‐‐ four of the 10 states with the lowest obesity rates in America.

A separate amendment by Council Chair Phil Mendelson (D), the reform’s lead sponsor, will clarify that the changes will be triggered by revenue thresholds (which will be easily met).

Table 2: Catania Amendment Raises Business Taxes to Pay for Gym/Yoga Tax Breaks