Regular readers of this blog have followed the DC 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. reform process, from the hearings of the Tax Revision Commission last year, to their final report this February, to Mayor Gray’s budget proposal, to the vote this week to implement most of the proposed reforms.
Generally, the proposal seeks to boost the District’s tax competitiveness by reducing tax burdens on middle-class young professionals, childless low-income workers, and businesses. All taxpayers see a more generous standard deduction. (In fact, nearly all taxpayers will see an income tax cut.) Estate taxes and excise taxes are rationalized to reduce compliance burdens.
The Tax Revision Commission also recommended two changes to the sales tax: (1) increase the rate back to 6 percent (it is currently 5.75 percent), matching Maryland and northern Virginia, and (2) eliminate 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. carveouts for 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). The D.C. Council did not increase the rate but adopted the tax expansion to services.
Enter the hysterical warning from Vida Fitness, which sells gym memberships in the District of Columbia:
Dear VIDA Members, Yesterday, during an initial vote, the DC Council voted to implement a 5.75% sales tax on health club memberships. The announcement of the vote came with less than 18 hours notice and on the heels of Washington DC being named the fittest city in America. VIDA plans to lobby against the fitness tax as we do not believe DC residents should be monetarily penalized for being healthy. The fitness tax would result in an increased cost to fitness-related services across the board. VIDA Fitness was founded with the goal of giving DC residents a superior fitness experience that they could use to create a healthier lifestyle for themselves. A healthier population means lower costs for everyone.
Some facts that Vida leaves out:
- The overall tax package is tax cut of $158 million over five years, including income tax reductions for many of Vida’s middle- and high-income customers. Vida knows many of their customers will like the tradeoff of sales tax on gym membership in return for lower income taxes, so they leave that part out.
- The sales tax expansion proposal has been on the table since February. The budget vote has been anticipated for some time. Vida’s executives should be reading this blog more if they were caught by surprise.
- The sales tax is being extended to a number of services, not just gym memberships. The real question for Vida is why they think everyone should have to collect sales tax on their sales except for Vida.
- The tax on gym membership sales will be the same as the tax on all other sales. This is not a special or higher tax.
There are two ways to do tax policy. One is to use taxes to reward things you like and punish things you don’t, picking winners and losers. The other is for taxes to be broad-based and low, applying to everything with one low rate. DC’s sales tax is not perfect; no state’s is. But DC’s failure to tax services is a historical accident – at one point, goods were most of the economy and services were non-existent. Now with two-thirds of the economy related to services, modernizing the sales tax to apply to services is needed. That DC was able to do it in a way to reduce tax burdens overall and for nearly all taxpayers is commendable. (And let’s be honest, the tax exemption for Vida is not helping low-income people.)
If Vida is concerned that people can’t afford their product, they should lower their price—not lobby for a tax carveout to benefit their business, at the expense of the DC economy. (They are getting a business tax cut, after all, as part of this bill.) Vida members shouldn’t let one company’s lobbying for a tax loophole cause them to oppose a major tax reform that will benefit nearly all District residents.
NOTE: Updated to correct the total net tax cut amount.
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