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Government and People
CITIZENS OF THE DISTRICT OF COLUMBIA, namely
THE DISTRICT OF COLUMBIA, 1350 Pennsylvania Avenue, N.W. Washington, D.C. 20004,
ANTHONY A. WILLIAMS, in his official capacity as Mayor of
the District of Columbia
THE COUNCIL OF THE DISTRICT OF COLUMBIA, 1350 Pennsylvania Avenue, N.W., Washington, D.C. 20004, and
EACH MEMBER OF THE COUNCIL OF THE DISTRICT OF COLUMBIA,
each in his or her official capacity as a Councilmember and each located
THE UNITED STATES OF AMERICA,
THE UNITED STATES DEPARTMENT OF JUSTICE; and JOHN
ASHCROFT, in his official capacity as Attorney General of the United States
Case Number 1:03CV01587
COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
SUMMARY OF THIS ACTION
1. The Plaintiffs ask this Court to declare unconstitutional a statute enacted by the United States Congress that prohibits the District from taxing income that is earned within its borders by non-residents. See D.C. Home Rule Act, Title VI § 602(a)(5), P.L. 93-198, 93rd Cong., S.1435, 87 Stat. 774, codified at D.C. Official Code § 1-206.02(a)(5) (2001) (referred to hereinafter as "the Prohibition"). Plaintiffs are residents and taxpayers of the District of Columbia who, like District residents generally, pay substantially above-average tax rates as a result of the Prohibition. The District of Columbia, Mayor Anthony Williams, and the Council of the District of Columbia join the action as plaintiffs.
2. The Prohibition departs from the universal rule, applicable everywhere else in the United States and in most of the world, that the jurisdiction where income is earned has the primary right to tax it. This rule is followed by Congress under the Internal Revenue Code with regard to the imposition of federal income taxes in this country. The rule is also followed by each of the forty-one states that has adopted an income tax. Each state with an income tax applies the tax to all income earned within the state's borders - whether earned by residents or non-residents (unless it chooses to enter into a "reciprocity agreement" with another state). Each jurisdiction avoids double taxation of its own residents by granting them a credit against its own income tax revenues for any income taxes paid to other jurisdictions.
3. The Prohibition severely damages the District's fiscal system, leaving it with a "structural imbalance." The General Accounting Office of the United States ("GAO") concluded in a report released June 5, 2003, that given the Prohibition, "even if the District's services were managed efficiently, the District would have to impose above average tax burdens just to provide an average level of services." "District of Columbia, Structural Imbalance and Management Issues," GAO-03-666 (May 2003), at 8. The GAO estimated the District's structural imbalance between $470 million and $1.1 billion annually. Id. at 8, 12. The GAO's estimate of the size of the structural deficit took into account all federal grants and aid given to the District.
4. Non-residents who work in the District impose substantial costs on the District. The Prohibition exempts these non-residents from any obligation to pay their fair share of these costs through income taxation. The burden of paying these costs falls on Plaintiffs and the other residents of the District.
5. As a result of the structural imbalance, residents of the District are, by most measures, subjected to higher state and local (i.e., non-federal) taxes than the residents of any state in the United States.
6. The Prohibition discriminates against the District primarily in favor of Maryland and Virginia. Moreover, the Prohibition effectively shifts the right to tax income earned in the District away from the District to states all over the country. Many law firms, accounting firms, and other partnerships with offices in the District also have offices in New York, California, and other states. The partners of these firms who live and work in the District pay income taxes to New York, California, and other states on income earned in those states. Because of the Prohibition, however, the partners who live and work in partnership offices in New York, California, and the other states pay no income taxes to the District on the income earned in the District.
7. Over 70 percent of all personal income earned in the District is earned by nonresidents. The total amount of income earned in the District by non-residents exceeds $30 billion each year. Thus, the Prohibition takes over $30 billion each year in taxable income that would be taxable by the District under the universal "income-source" rule, and instead gives it to Virginia, Maryland, and other states to tax. Depending on the tax rate that the District might impose on this non-resident income earned within its borders, the Prohibition costs the District every year from approximately $530 million (assuming a 2% rate) to approximately $1.4 billion (assuming imposition of the same rates currently applied to District residents). This lost revenue is a substantial cause of the District's structural deficit and requires District residents to pay higher taxes than they otherwise would pay. Through those higher taxes, District residents pay not only for their own share of District services, but also for the non-residents' share of District services.
8. Congress has singled out the District as the sole jurisdiction where it precludes a tax on non-resident income. In doing so, Congress has discriminated against the District and its residents, who lack voting representation in Congress, in favor of residents of the several states, particularly Maryland and Virginia, who have such voting representation in Congress.
9. Our Nation's founders had a profound distrust of any taxation without representation - a distrust they expressly set forth in the Declaration of Independence. The Supreme Court has permitted taxation of citizens who are unrepresented in the taxing legislature, but only when the unrepresented citizens are taxed in a manner equal to citizens who are represented in the taxing legislature.
10. In Loughborough v. Blake, 18 U.S. 317 (1820), the Supreme Court sustained a tax imposed by Congress on the District, even though the District was not represented in Congress. The Court recognized the "great principle which was asserted in our revolution, that representation is inseparable from taxation." However, the Court permitted Congress to tax the District's unrepresented residents because they were to be taxed in the same way as the residents of the states who were represented. Thus, the Court said, "the principle of uniformity established in the Constitution secures the District from oppression in the imposition of indirect taxes." Id., at 325.
11. Here, the Prohibition discriminates against the unrepresented residents of the District. It treats them differently from the residents of all other taxing jurisdictions. It leaves the District with a structural deficit and subjects its residents to unequal and oppressive taxes. The Prohibition violates the Uniformity Clause, the Privileges and Immunities Clause, and the Equal Protection Clause of the U.S. Constitution, and deprives the residents of the District of property without due process of law. The Prohibition is therefore unconstitutional.
JURISDICTION AND VENUE
12. This Court has jurisdiction pursuant to 28 U.S.C. § 1331 or 28 U.S.C. § 1343; this action arises under the Constitution and laws of the United States.
13. There is an "actual controversy" between Plaintiffs and the United States within the meaning of the Declaratory Judgment Act, 28 U.S.C. § 2201, empowering this Court to "declare the rights and other legal relations of [these] interested part[ies] seeking such declaration."
14. Venue is proper in this district under 28 U.S.C. §§ 1391(b) and (e), on the alternative grounds that (a) the Defendant, the United States of America, resides in the District of Columbia; (b) "a substantial part of the events or omissions giving rise to the claim[s] occurred" in the District of Columbia; and (c) each of the Plaintiffs resides in the District of Columbia.
15. Each individual plaintiff is a private citizen and taxpayer suing in his or her individual capacity, is a competent adult over the age of eighteen years of age, is a citizen of the United States, is a permanent resident and domiciliary of the District of Columbia, is a qualified voter in the District of Columbia, and pays personal income and other taxes to the United States and to the District of Columbia. No individual plaintiff has a voting representative in the United States Congress. The individual plaintiffs with such characteristics are:
16. Each individual is subjected to substantially higher taxes because of the Prohibition. Each individual is discriminated against in favor of non-residents who earn income in the District.
17. Plaintiff District of Columbia (the "District") is a municipal corporation. Its address is 1350 Pennsylvania Avenue, N.W., Washington, D.C. 20004. The District is injured because it is deprived of the right to determine whether to tax non-residents on their income earned in the District, and if so, at what rate, and because it is unable to deliver the level of services needed for its residents because it is unable to raise the funds necessary to support that level without overtaxing District residents.
18. Plaintiff Anthony A. Williams is the Mayor of the District of Columbia and joins this action in his official capacity as Mayor of the District. His address is 1350 Pennsylvania Avenue, N.W., Washington, D.C. 20004.
19. Plaintiff Council of the District of Columbia (the "District Council") is a governmental entity of the District of Columbia. Its address is 1350 Pennsylvania Avenue, N.W., Washington, D.C. 20004.
20. Each individual member of the District Council joins this action in her or his official capacity. The address of each Councilmember is 1350 Pennsylvania Avenue, N.W., Washington, D.C. 20004. The Councilmembers are:
21. But for the Prohibition, the District Council would enact an income tax on all income earned within the District, whether earned by residents or by non-residents. See attached Resolution of District Council, made a part of this Complaint. But for the Prohibition, Mayor Williams would approve such an enactment. The District Council and Mayor Williams, therefore, seek a determination regarding the constitutional validity of the Prohibition.
22. Defendant United States of America is responsible, through the United States Congress and the President, for passing and enforcing the Prohibition at D.C. Official Code § 1-206.02(a)(5). That statute is, as set forth herein, unconstitutional and injurious to the Plaintiffs.
23. Defendants United States Department of Justice and John Ashcroft, in his official capacity as Attorney General of the United States, are responsible for enforcing the Prohibition at D.C. Official Code § 1-206(a)(5). That statute, as set forth herein, is unconstitutional and injurious to the Plaintiffs.
A. Only The District Is Barred From Taxing Non-Resident Income Earned Within Its Borders
24. Congress has prohibited the District, and the District alone, from taxing income earned within its borders by persons who reside elsewhere. When it granted home rule in the 1973 "Home Rule Act," Congress included the Prohibition, which bars the District Council from imposing income taxes on income earned by non-residents in the District. Title VI § 602(a)(5). The Act provides that the District Council "shall have no authority to ... impose any tax on the whole or any portion of the personal income ... of any individual not a resident of the District ...." Id., codified in D.C. Official Code § 1-206.02(a)(5).
25. The Prohibition discriminates in favor of residents of the states, who are represented in Congress, and against residents of the District, who are not represented in Congress. Through the Prohibition, the Members of Congress exempted their constituents from income taxation and effected a substantial transfer from the treasury of the District to the treasuries of the states they represented. Congress also created a special rule of interjurisdictional taxation applicable only to the District.
26. The Prohibition departs from the universal rule that income may be taxed by the jurisdiction in which it is earned. The rule follows from the fact that the jurisdiction where the income is earned provides services that permit or facilitate the earning of the income. All forty-one states with an income tax have the power to impose that tax on income earned within their borders by both residents and non-residents. All forty-one states, in fact, impose their income tax on residents and non-residents alike (unless they reach a voluntary "reciprocity agreement" with another state not to tax each other's residents). Similarly, the United States imposes its income tax on income earned within the United States by non-residents. Indeed, the United States imposes its income tax on income earned in the District of Columbia by foreign citizens who earn income here. Other federal territories, such as Guam and Puerto Rico, do the same.
27. Double taxation at the state level is avoided by a system of credits granted by the jurisdiction of residence for taxes paid to other jurisdictions in which income is earned.
B. As A Result Of The Prohibition, The Majority Of Income Earned Within The District Cannot Be Taxed By The District
28. Non-residents earn over seventy percent of all personal income in the District.
29. Non-resident workers also constitute over seventy percent of all workers in the District. These non-resident workers number about 500,000.
30. The amount of income earned annually in the District by non-residents exceeds $30 billion. Virginia, Maryland, and the other states currently enjoy a significant financial benefit from fully taxing over $30 billion in income earned within the District by their residents, which the Prohibition forbids the District from taxing. Thus, most employment in the District generates income tax revenue for Maryland, Virginia, and the other states, even though this is contrary to the universal principle, and even though the District provides significant services to non-residents that help make such income possible.
C. Because Of The Prohibition, The District Cannot Even Tax All The Income Earned By Its Own Residents In The District
31. Because of the Prohibition, the District cannot effectively tax all of the income earned by its own residents in the District.
32. As already described, the Prohibition departs from the universal system of interjurisdictional taxation under which the primary right to tax income is enjoyed by the jurisdiction where it is earned, and double taxation is avoided by credits granted by the jurisdiction of residence. The result of this departure is that all of the states with income taxes follow the universal system, while the District alone is required by Congress to follow a different system. This lack of uniformity leads to irrational results.
33. For example, many large law, accounting, and other professional partnerships have offices and earn income both in the District and in other states. The partners of these firms who reside in the District pay income taxes to the other states on the portion of their firms' income attributable to their firms' offices in those states; and, through the system of credits, these District partners reduce their tax payments to the District by an equivalent amount. But the partners in the partnership offices outside the District of Columbia pay no income taxes to the District on income attributable to the offices here.
34. Therefore, in the case of a two hundred-partner law firm with half its partners residing and working in the District, and the other half in New York, taxes on approximately three-quarters of the firm's income effectively would be paid to New York state, and income taxes on approximately one-quarter of the firm's income effectively would be paid to the District of Columbia.
35. This is so for the following reasons. The District partners would pay taxes on half of their income to New York, because half their income is deemed earned in New York. They then receive a credit on their District tax return for the taxes paid to New York, cutting their District taxes approximately in half. The New York partners, however, effectively pay taxes on 100% of their income to New York, even though half of it was deemed earned in the District, because the District is not permitted to tax non-residents. So New York collects taxes on all the income of the New York partners, and half the income of the District partners, or three-fourths of the total. The District collects taxes on only half the income of the District partners, or one-fourth of the total. Thus, in this representative example, the District cannot fully tax even its own residents without denying them their credit for taxes paid to New York, and subjecting them to unfair double taxation. This is an irrational result.
D. Non-Residents Impose Significant Costs On The District
36. Approximately 500,000 non-residents travel into the District every work day, effectively doubling the population of the District. This influx imposes significant uncompensated costs on the District, including costs for mass transit, police and fire protection, trash collection, and road and bridge maintenance.
37. Because of the Prohibition, however, the non-resident workers contribute nothing in the way of income taxes to bear their fair share of the costs of services they receive.
E. The Prohibition Is The Substantial Cause Of The District's Structural Deficit
38. The GAO issued a report on June 5, 2003 that confirms the District suffers from a "structural imbalance" preventing it from providing an average level of services at average tax rates. The GAO Report defined "structural imbalance" as follows: "A fiscal system is said to have a structural imbalance if it is unable to finance an average (or representative) level of services by taxing its funding capacity at average (or representative) rates." GAO Report at 3.
39. The GAO concluded that the District faces a "substantial structural deficit" ". . . in the sense that the cost of providing an average level of public services exceeds the amount of revenue it could raise by applying average tax rates." Id. at 8, 12, 31. The GAO estimated the structural deficit to be $470 million to $1.1 billion annually. Id. at 31. This structural imbalance exists even after taking account of all "federal grants" to the District each year. Id. at 8, 9, 114.
40. The GAO also concluded that no matter how efficiently the District government operates, it cannot overcome the structural deficit given its current revenue constraints. "The existence of this structural deficit means that even if the District's services were managed efficiently, the District would have to impose above-average tax burdens just to provide an average level of services." Id. at 8. "[M]anagement improvements will not offset the underlying structural imbalance because it is caused by factors beyond the direct control of District officials." Id. at 14-15.
41. Thus, given the Prohibition, if the District were to tax its residents at average tax rates, its revenues would fall short of the amount needed to provide an average level of services to its citizens by $470 million to $1.1 billion each year. Id. at 8, 12. Given the urban character of the District, as compared with states, the structural deficit is at or greater than the high end of the GAO's estimate. Furthermore, in making this estimate, the GAO did not take into account "the various public safety demands and costs associated with the federal government's presence," such as the unique costs imposed on the District for crowd control associated with demonstrations drawn to the nation's capital. Id. at 11, 27, 31. If these unique District costs were taken into account, the structural deficit would be even higher.
42. The Prohibition is an important cause of the structural deficit. GAO states: "Unlike that of any state, the District's government is prohibited by federal law from taxing the District-source income of nonresidents." Id. at 43. "Without changes in the underlying factors driving expenses and revenue capacity, the structural imbalance will remain." Id. at 15.
43. The lifting of the Prohibition would allow the District to substantially if not totally eliminate its structural deficit and reduce taxes on its overtaxed residents. The average income tax rate imposed on District residents is approximately twice the national average. If the District were permitted to tax non-resident income, as all the states can do, it would be able to lower its rates on its residents to at or near the national average and still substantially increase its total revenues.
44. Income taxes currently contribute a little over $1 billion towards the District's annual budget of approximately $7 billion. But for the Prohibition, the District would tax income earned within its borders by non-residents. If the District were to impose an income tax on residents and non-residents at half the current District income tax rates, it would increase the District's total income tax revenues by approximately $600 million. The structural imbalance, estimated by GAO to be between $470 million and $1.1 billion, would thereby be greatly reduced and might well be eliminated.
F. Federal Contributions Do Not Cure The Structural Imbalance
45. The structural imbalance caused by the Prohibition is not cured by grants and aid that the federal government gives the District.
46. For many years prior to 1997, Congress made an annual payment to the District (the "federal payment"). The purpose of the federal payment was to compensate the District, in part, for the costs and burdens placed on the District by the federal presence. Congress abolished the federal payment in 1998. Since then, Congress has funded directly certain specific "state-like" functions previously funded through the District's budget, such as the courts, the prisons, and the obligations created by the pre-Home Rule portion of the pension fund for former federal (now District) employees.
47. Neither the federal payment, when it existed, nor the direct funding of specific "state-like" functions cured the structural imbalance. For example, wholly apart from the Prohibition and the District's uncompensated costs of serving the federal government, the District loses over $500 million each year in rental property taxes because 42 percent of the real property in the District (by value) is tax exempt (largely because it is owned by the federal government).
48. The GAO found that the District is burdened with a structural imbalance of from $470 million to $1.1 billion per year, even after taking account of all federal grants and aid to the District.
G. Plaintiffs Are Injured By The Prohibition On A Non-Resident Income Tax
49. As a direct result of the Prohibition, the Plaintiffs suffer unique and substantial injury in the following ways.
50. First, because of the Prohibition, District residents must pay higher taxes in order to cover the costs of services to non-residents. As a result, District residents bear substantially higher than normal tax burdens.
51. Second, as a result of the Prohibition, the District perennially suffers revenue deficiencies. Without adequate revenue, District services must be curtailed. This harms District residents in many ways, including restrictions in services offered by public schools, health facilities, and public welfare agencies. Non-resident commuters likewise are harmed by the resulting inadequate services, such as street maintenance.
52. Third, as a result of the Prohibition, the District perennially suffers an inability to fund critical infrastructure improvements. The District must "continue to defer infrastructure improvements" because of its structural deficit, including needed repairs to streets and schools. GAO Report at 10, 14, 71.
H. Lifting The Prohibition Would Redress These Injuries
53. Allowing the District to tax non-resident income earned within its borders would provide hundreds of millions of dollars in needed revenue for the District. This, in turn, would enable the District to (a) ease the burden on overtaxed District residents; (b) provide more and better services to residents and nonresidents alike; and (c) proceed with critical infrastructure improvements.
54. The District would adopt a non-resident income tax in the absence of the Prohibition. The District Council has unanimously passed a Resolution, attached hereto and made part of this Complaint, demonstrating that it wishes to pass a non-resident income tax and would do so but for the Prohibition.
55. Under current law, all non-residents that ultimately would pay income tax to the District would receive a credit on any income tax returns filed in their states of residence.
|John W. Nields, Jr., D.C. Bar #328955
HOWREY SIMON ARNOLD & WHITE, LLP
1299 Pennsylvania Ave., N.W. Washington, D.C. 20004
(202) 383-6610 (facsimile)
Gary Thompson, D.C. Bar #435315
Lois G. Williams, D.C. Bar #365894
Carolyn Lamm, D.C. Bar #221325
Co-Counsel for Plaintiffs Citizens of the District of Columbia
|Walter Smith, D.C. Bar #238949
D.C. APPLESEED CENTER FOR LAW AND JUSTICE
733 Fifteenth St., N.W., Suite 300
Washington, DC 20005
(202) 393-1495 (facsimile)
Co-Counsel for Plaintiffs District of Columbia, Mayor Anthony Williams, District Council, and Members of the District Council
1. 2 Annals of Congress, 378 (1792) (quoted in 3 Max Farrand, The Records of the Federal Constitution of 1787, at 365 (1966). See also United States v. Ptasynski, 462 U.S. 74, 81 (1983).
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