District of Columbia Accelerates Tax Reform

There have been several big legislative changes and proposals from D.C’s lawmakers over the past week. On June 30th, Washington D.C’s legislative council voted to allow several tax cuts to take effect in September ahead of schedule and authorized an emergency measure to deter synthetic drug use. Additionally, Mayor Muriel Bowser’s 2016 budget now includes a proposal to increase the excise tax rate on vaping products to 70 percent.

The tax cuts, adopted last May, were set to be phased in gradually over the following five years provided that the city’s revenues continue to grow. Following 18 months of research, the independent D.C Tax Revision Commission recommended several tax reforms, including estate tax cuts, corporate tax cuts, an increase in sales tax, and a tax cut for middle and low income residents. Council Chairman Phil Mendelson successfully pushed for a tax reform plan last summer that sought to incorporate most – but not all – of the recommended reforms.

The most recent Council vote authorized the income and business tax cuts to take effect this September, when they were originally set to take effect on January 1st of 2016. Six of the Council’s 13 members sought to delay the tax cuts past this scheduled implementation date to facilitate further discussion and, arguably, reconsideration of the plan adopted last year. These members wanted to delay the decision until after revenue projections are released in February of 2016, a position endorsed by Mayor Bowser. However, Council Chairman Phil Mendelson – who initially wanted the accelerated cuts to begin in June – contended that there was no reason to postpone the tax cuts, and seven Councilmembers voted to approve the second phase of tax cuts now rather than later. The table below summarizes the tax changes.

Following the vote, the office of the District’s Chief Financial Officer released its monthly revenue report: city revenues increased by $117 million for the month of June. Professor David Brunori, a member of the committee that drafted the tax recommendations and deputy publisher at Tax Analysts, has stated that, ultimately, the “tax cuts are necessary, since the city is bringing in more revenue. It makes sense to give some of that money back.”

Opponents have made several arguments for delaying the tax cuts until a later date. Mayor Bowser, who originally voted for the tax cuts, now believes it may be better to put the revenues toward education and other social initiatives depending on the revenue projections released between now and next February. Councilmember Yvette Alexander argued that the agreed-upon schedule should be postponed, to be revisited once further revenue estimates are released. Councilmember Elissa Silverman, who favored delay, stated that she is “not interested in changing the package but in having discussion about it.”

However, Councilmember Mary Cheh expressed concern that Councilmembers who voted to delay the cuts may want do away with the future tax cuts altogether. Phase two survived by the narrowest of margins. Only time will tell whether, with regard to subsequent phases of the 2014 reform plan, Councilmember Cheh’s concerns will prove prescient. The recent action still grants the Council further opportunity to review the revised revenue estimates before the changes take effect in September.