DC Tax Revision Commission’s Impressive Tax Reform Recommendations

On February 12, 2014, the District of Columbia Tax Revision Commission submitted its recommendations for overhauling the District’s tax system. The Commission, established in September 2011, had conducted dozens of meetings and hearings to develop its package of reforms, and the package as a whole received unanimous support from the Commission’s members.

The Commission 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 base is too narrow. The Commission’s recommendations seek to address these issues with reforms to the individual income tax, business taxes, sales tax, and estate tax. Taken together, the recommendations balance competing priorities to improve the simplicity, fairness, neutrality, and economic competitiveness of the District’s tax system.

Among other recommendations, some of the highlights from the Commission’s report include:

• A combination of new middle income tax brackets, a reduction in the top individual income tax rate, and an increased standard deduction for single and married filers which would result in almost all taxpayers seeing lower income tax bill. The most significant reductions occur for low-income workers and middle-income married taxpayers.
• Recoupling the District’s estate tax exemption level with the federal government exemption level, thus increasing the estate exemption from $1 million to $5.25 million and adjusting it annually for inflation.
• Reducing 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.

We have released a summary and analysis of the recommendations found in the Commission’s report. In addition to listing of all the reform recommendations and their estimated impact on revenue, our analysis includes a comparison of what seven hypothetical taxpayers’ tax bills would be under the Commission’s proposal versus their current tax bill.