All remaining 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. cuts from the District of Columbia tax reform package passed in 2014 will take effect on January 1, 2018. An updated revenue estimate projects a sufficient recurring surplus to permit the increase of 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. , personal exemption, and estate tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. level to federal conformity, and the reduction of the business tax from 9 percent to 8.25 percent.
Some people still don’t believe us when we say the District of Columbia passed bipartisan tax reform in 2014.[1] Income taxes went down for middle-income earners and those earning up to $1 million, and all taxpayers are seeing more generous standard deductions and personal exemptions that will eventually match the federal level (as will 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. exemption level). Childless low-income workers see a larger Earned 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. (EITC), from 40 percent of the federal credit to 100 percent of the federal credit. The District’s hefty business tax is dropping from 9.975 percent to 8.25 percent, and the District adopted 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. . Some services lost their exemptions and have to collect general 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. like all other businesses, and some little-used business credits were repealed.
Strange political bedfellows came together to make it happen. An Urban Institute panel featuring speakers from the D.C. Fiscal Policy Institute and the Tax Policy Center highlighted elements of the tax package, which were developed by a blue ribbon tax reform commission. The Institute for Taxation and Economic Policy (ITEP) praised it as a good progressive reform. The National Taxpayers Union (NTU) called it “pro-growth reform done the right way.” Grover Norquist’s Americans for Tax Reform called it historic and applauded the tax relief. Scholars from the Cato Institute, Vox.com, the Center on Budget and Policy Priorities (CBPP), and Citizens for Tax Justice (CTJ) chimed in with positive statements.
On the coming together of groups that often disagree, The Daily Caller said hell had frozen over but themselves said “hats off” to the D.C. Council for enacting the package. Moody’s, Fitch, and Standard & Poor’s said the package reduced revenue in a manageable way and was not a credit concern. We at the Tax Foundation gave an award to D.C. Council Chair Phil Mendelson for his leadership on the reform.
The package was broken up into 26 discrete parts, the first nine taking effect immediately and the remaining 17 to take effect in ordered stages based on recurring revenue growth.[2] This is because D.C. takes its fiscal solvency very seriously (a hangover of the District’s insolvency of the 1990s); D.C. does better than most states on the health of its reserve and rainy day funds. Each February, the Chief Financial Officer calculates a new revenue projection and compares it to the revenue projected when the budget is adopted; if it’s more, the surplus money is used to enact further items on the list, to take effect the following year. That report found that D.C. projects FY 2017 revenue of $7.355 billion, $221 million above the budget projection of $7.134 billion. Future year surpluses range from $175 million and up. The remaining tax reform package elements total $100.3 million, so the recurring surplus is sufficient for all remaining items to take effect next calendar year (with remaining money left over).
The table below shows the full list of implemented and not-yet-implemented provisions of the 2014 tax package:
| Provision | Status | Estimated Revenue Reduction ($millions, FY 2018) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Source: D.C. Code; D.C. Office of the Chief Financial Officer. FY 2018 reflect only three of four quarters in FY 2018, as the changes would take effect on January 1. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) Establish a new individual income tax bracket of $40,000 to $60,000, reducing rates from 8.5% to 7.0% | Implemented January 2015 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (2) Expand the local earned income tax credit (EITC) to childless workers | Implemented January 2015 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (3) Raise the standard deduction to $5,200 for singles and $8,350 for married residents | Implemented January 2015 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (4) Eliminate certain tax expenditures | Implemented January 2015 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (5) Expand the general sales tax to certain services | Implemented October 2014 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (6) Phase out the personal exemption by 2% for each $2,500 above $150,000 with a complete phaseout at $275,000 | Implemented January 2015 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (7) Exempt passive investment vehicles from the unincorporated business franchise tax | Implemented January 2015 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (8) Reduce the unincorporated and incorporated business franchise tax from 9.975% to 9.4% | Implemented January 2015 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (9) Change franchise tax apportionment to single-weighted sales formula | Implemented January 2015 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) Reduce the rate on the new individual income tax middle bracket of $40,000-$60,000 from 7.0% to 6.75% | Implemented January 2016 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (2) Create new individual income tax brackets of $350,000 to $1 million at 8.75% and in excess of $1 million at 8.95% | Implemented January 2016 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (3) Reduce the unincorporated and incorporated business franchise tax from 9.4% to 9.2%; | Implemented January 2016 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (4) Reduce the rate on the new individual income tax middle bracket of $40,000-$60,000 from 6.75% to 6.5% | Implemented January 2016 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (5) Reduce the unincorporated and incorporated business franchise tax from 9.2% to 9.0% | Implemented January 2017 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (6) Raise the estate tax threshold from $1 million to $2 million | Implemented January 2017 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (7) Raise the standard deduction from $5,200 for singles, $6,500 for Head of Household, and $8,350 for married to $5,650 for singles, $7,800 for Head of Household, and $10,275 for married | Implemented January 2017 | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (8) Increase the personal exemption from $1,775 to $2,200 | To be implemented January 2018 | ($10.89) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (9) Raise the standard deduction from $5,650 for singles, $7,800 for Head of Household, and $10,275 for married to conform to the federal level | To be implemented January 2018 | ($6.60) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (10) Increase the personal exemption from $2,200 to $2,700 | To be implemented January 2018 | ($12.34) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (11) Reduce the unincorporated and incorporated business franchise tax from 9.0% to 8.75% | To be implemented January 2018 | ($9.33) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (12) Increase the personal exemption from $2,700 to $3,200 | To be implemented January 2018 | ($12.00) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (13) Raise the estate threshold from $2 million to conform to the federal level | To be implemented January 2018 | ($12.02) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (14) Reduce unincorporated and incorporated business franchise tax from 8.75% to 8.5% | To be implemented January 2018 | ($9.33) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (15) Increase the personal exemption from $3,200 to $3,700 | To be implemented January 2018 | ($11.65) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (16) Reduce unincorporated and incorporated business franchise tax from 8.5% to 8.25% | To be implemented January 2018 | ($9.33) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (17) Increase the personal exemption from $3,700 to conform to the federal level ($4,000), and repeal the low income credit | To be implemented January 2018 | ($6.81) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The provisions taking effect in 2018 will benefit nearly all D.C. taxpayers, reducing income tax burdens especially for low-income individuals and lowering business and estate taxes. D.C.’s strong economic growth has permitted both a healthy budget and these tax changes. All taxpayers benefit, they preserve D.C.’s tax progressivity, and the changes enhance regional competitiveness.
Unfortunately, a coalition of groups has emerged to pressure the D.C. Council to cancel or postpone the tax changes (“pause” is their word), and instead spend both the saved surplus and the surplus set aside for the tax cuts. It is worth noting that the D.C. Fiscal Policy Institute has emerged as the organizers of the effort, as they were a leader of the 2014 tax reform effort that led to the tax changes being adopted. While the forthcoming tax changes (lower business taxes, recoupled estate tax, expanded standard deduction) may not align with the tax policy priorities of the DCFPI-led coalition, they were nevertheless integral to the 2014 package. Ending these reforms now, even temporarily, would be shortsighted. While we understand this coalition’s concern about federal policy uncertainty, what is certain now is that reduced income tax burdens in 2018 for low-income families and individuals will not be realized if the Council delays the provisions set take effect.
Spending D.C.’s accumulated surplus would mean using one-time available funding for annually recurring expenses. This sets up the District for a budget crisis down the line. D.C.’s rainy day fund and other reserves (about 15 percent of general fund expenses) is healthy but not above the level recommended (13 to 18 percent) to cover any economic downturn. Additionally, D.C. should adhere to the prudent policy of never spending rainy day funds outside of bad economic circumstances.
Tax reform is hard. Everyone agrees in theory that broadening bases and lowering rates is good, fair, and competitive, but states rarely have well-structured tax codes because interests lobby to protect their favored exclusions, exemptions, and credits, keeping the 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. narrow. D.C. was able to overcome it and enact an impressive, far-reaching reform. The package should be permitted to continue taking effect as agreed in 2014.
[1] The law, the Tax Revision Commission Implementation Amendment Act of 2014, was adopted as part of the District of Columbia FY 2015 budget. The tax provisions were adopted by the Council on first reading on May 28, 2014, and second reading on June 24, 2014, then enacted without the signature of the mayor on September 23, 2014. It was then referred to Congress for its review, per federal law applicable to D.C., and became effective on February 26, 2015. By its terms its applicability date was October 1, 2014, unless otherwise stated.
[2] See D.C. Code § 47-181; D.C. Law 20-155 (Feb. 2015); D.C. Law 21-36 (Oct. 2015); D.C. Law 21-160 (Oct. 2016); OTR Notice 2016-05 (Dec. 2016). For 2015 and 2016 only, the September revenue estimate was used to calculate provisions effective the following January. See D.C. Code § 47-181(a); D.C. Code § 47-181(b)(2). For more on tax triggers, read our 2016 report Designing Tax Triggers: Lessons from the States.
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