|District of Columbia Tax Revision Commission
Summary Report to the Mayor and Council of the District of Columbia
District of Columbia Tax Revision Commission
1755 Massachusetts Avenue, NW, Suite 550
Washington, DC 20036
Tel.: (202) 518-7275
Fax: (202) 466-7967
List of Figures
About the D.C. Tax Revision
Creation of the D.C.
Tax Revision Commission
Members and staff of the D.C. Tax Revision Commission
and conceptual framework
Summary of Recommendations
Introduction: A Time to Embrace Change
Chapter 1. BACKGROUND
Tax structure and rates
Chapter 2. RECOMMENDATIONS FOR CHANGING COURSE
Simplicity and Fairness
Abolish the four existing business
Enact a business
activities tax on value added at a rate of 1.50 percent
Introduce a single commercial
property tax rate
Simplicity and Fairness for Individuals
Reduce complexity by conforming
the District income tax to federal net taxable income
Residential Property Taxes More Equitable
Introduce a single 0.96 percent
residential property tax rate
property relief measures with a generous low-income tax credit (circuit breaker)
the Federal Government
Allow the District
to tax income at its source
Make a payment in lieu of taxes
for federally owned property
Adopt a formula federal payment
Ensure that the District
is compensated for GSEs' federal exemption from District business taxes
Chapter 3. RECOMMENDATIONS ON TAX REDUCTIONS
Chapter 4. TAXES TO MODIFY
Sales of Goods and Services
Repeal tax on
sales of manufacturing equipment
Enforce collection of sales tax
on goods sold by federal entities and nonprofits to nonexempt purchasers
Follow four principles in
addressing sales by electronic commerce
Continue to tax charges for internet access
Continue to exempt nonprofits from
Tax all functionally
equivalent services uniformly
Return to annual assessments
Improve assessments of
Change performance measures
Split-rate Property Tax
Do not impose a split-rate
property tax at this time
Reduce or eliminate earmarking
Recordation and Transfer Taxes
involving cooperative housing
Appendix A: D.C. Tax Revision Commission Reports
Appendix B: Criteria and Conceptual Framework
Appendix C: Summary of the New Federal Tax Incentives for the
Appendix D: Revenue from D.C. Taxes and Other Sources
Appendix E: Comparison of Proposed and Current Income Tax Forms
Appendix F: Potential Legal Challenges to the Business Activities
Appendix G: Federally Tax-Exempt Organizations Subject to the
Business Activities Tax
Appendix H: Services Not Taxed in the District
Appendix I: Dissents and Additional Views from Commissioners
Jacquelyn V. Helm
Matthew S. Watson
1 D.C. Population, 1900-1996
2 Changes in Federal Employment in D.C.
3 Percent Change in Earnings of D.C. Residents and
4 Percent Change in Federal Spending by Sub-State Area
5 Number of Households in D.C.
6 Migration Patterns Out of and Into D.C.
7 Change in D.C. Household Size Categories
8 Change in D.C. Household Income Categories
9 Changes in Property Tax Values
10 Property Values in D.C.
11 Difference in D.C. Revenues from Major Taxes
12 D.C. Operating Revenues Less Expenditures
13 D.C. Taxes as a Share of Family Income
14 Per Capita Personal Income
15 Real Property Tax Bases of Major U.S. Cities Compared
16 D.C. Region TANF Cases
17 Business Activities Tax Rates Required to Replace
18 Revenue Stability: Business Activities Tax Base
Compared to Corporate Income Tax Base
19 Change in Business Sectors Relative to Total D.C.
20 Business Income Tax Payments Relative to Share of
21 Service Sector as a Share of the D.C. Economy
22 Business Activities Tax Base and Existing Business Tax
23 Revenue Effect of a Single Commercial Property Tax Rate
24 Commercial and Residential Rental Property Tax Rates as
a Percent of the Owner-Occupied Rate
25 Total D.C. Taxes as a Percent of Family Income
26 Proposed D.C. Personal Income Tax Rates
27 Existing and Proposed Income Tax Rates Compared
28 Impact of Proposed Rates on Tax Burden
29 Effective Residential Property Tax Rates
30 Use of Existing Circuit Breakers
31 Proposed Sliding-Scale Circuit Breaker
32 Property Tax Relief: Proposed Circuit Breaker Compared
to Homestead Exemption
33 Property Tax Relief: Proposed Circuit Breaker Compared
to Homestead Exemption and Senior Citizen Relief
34 Federal Payments on Behalf of the District
35 Effect of Federal Property Tax Payment on Commercial
Property Tax Rate
36 D.C. Projected Total Local Revenues
37 D.C. Projected Local Revenues, by Type
38 D.C. Revenue/Expenditure Comparison
39 Nongovernmental Tax-Exempt Property
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This study of the District's economy and revenue systems relied heavily on the help of
others. Marcia Howard provided early staff assistance in planning and research. The
written reports of the consultants, who are listed in Appendix A, along with their oral
presentations to the Commission were of critical importance and are greatly appreciated.
The willingness of these consultants to provide continuing help and counsel during
Commission deliberations is especially appreciated.
The staff of the D.C. Office of Tax and Revenue, headed by Dr. Natwar M. Gandhi,
provided assistance that was essential to the Commission's work. Individual thanks are
especially due to the following staff: Arthur Chisley, Kim Coleman, Modibo Coulibaly, Mark
Gripentrog, Mohammed Hassan, Carolyn Lynch, David Meyer, Preston Niblack, Donal Parks,
William Henry Riley, Kathy Sternberg, Raun Soloman, Stephen Swaim, and Edward Wyatt.
Other people throughout the District government provided help. While it is not possible
to acknowledge everyone, we would like to extend special thanks to: the staff of the
Financial Responsibility and Management Assistance Authority, including John W. Hill Jr.
and Andrew Reece; the Chief Financial Officer, Anthony A. Williams and his staff including
Norman Dong, Beth Solomon, and Laura Triggs; and Councilmember Frank Smith, Jr. and his
staff including Anne Hargrove and Darrell Doss.
We would also like to thank the staff at KSA Group for their assistance with the final
report, including: Adam Kernan-Schloss, Andrea Sussman, Joanne Olson, and Kathy Ames. Our
thanks also go to Melinda Patrician for her help in arranging for the release of the final
In addition, the Commission was aided by the help of many private citizens and local
business leaders who testified at public hearings or who submitted written statements.
The studies of the District economy would not have been possible without the help of
John Ross and a grant from the U.S. Department of Housing and Urban Development.
The Commission appreciated the generous hospitality of George Washington University for
providing meeting space for most Commission meetings.
The final report and its recommendations are, of course, solely the work of the
Commission and its staff.
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The mayor and the District Council created the D.C. Tax Revision Commission in 1996 to
recommend comprehensive changes in District taxes and other revenues. The law establishing
the Commission, the Tax Revision Commission Establishment Act of 1996, was effective June
13, 1996. The Commission is composed of 20 members, nine appointed by the mayor, nine
members plus a chair appointed by the District Council, and an ex-officio member from the
Office of Tax and Revenue. It began deliberations in September 1996 and has held 19
meetings, all of them open to the public. The Commission also held three public hearings
at the beginning of its work. The law creating the Commission assigned six duties:
- To analyze the District's current tax system in terms of revenue productivity and
stability, efficiency, equity, simplicity of administration, and effect upon the
- To propose innovative solutions for meeting the District's projected revenue needs while
exploring possibilities for reducing general rates;
- To identify economic activities that are either beneficial or detrimental to the
District's economy and that should be either encouraged or discouraged through tax policy;
- To recommend changes in the District's current tax policies and laws;
- To establish criteria and a conceptual framework for evaluating current and future
- To conduct an analysis of a split-rate approach to real property taxation together with
a recommendation as to how it could be structured with minimal effect on the average
A small staff and several expert consultants performed the Commission's work.
Completing this work will cost about $900,000. This amount includes a $50,000 grant from
the Department of Housing and Urban Development for the Commission's studies of the
District economy, with the balance coming from the District government.
Members of the D.C. Tax Revision Commission
Robert D. Ebel, Chair
The World Bank Group
Timothy C. Coughlin
Riggs National Corporation
Institute for Real Property Studies
Bert T. Edwards
Retired Partner, Arthur Andersen, LLP
Julia Friedman, ex officio
Office of Tax and Revenue
Halberstein & Byrne
Jacquelyn V. Helm
Law Offices of Jacquelyn V. Helm
James L. Hudson
Offices of James L. Hudson
Iris J. Lav
Center on Budget and Policy Priorities
Rosemary D. Marcuss*
*Resigned February 28, 1998
MCI Communications Corporation
Jerome S. Paige
Information Resources Management College, National Defense University
Franklin National Bank
Carolyn L. Smith
Coopers & Lybrand LLP
George Washington University
Sterling Tucker Associates
Matthew S. Watson
Law Office of Matthew S. Watson
Metro Washington Council AFL-CIO
Philip M. Dearborn
Carol S. Meyers
Research for the Commission was carried out by both its staff and outside experts.
Eighteen separate reports and analyses were presented at the Commission's meetings. The
reports examine the District economy, each of the major taxes, and the federal
relationship with the District. (See Appendix A for a list of
the researchers and their reports.) This Summary Report from the Commission contains a
summary of the research findings and the Commission's recommendations. A full report of
the Commission's work and research will follow at a later date.
At the start of its work, the Commission agreed upon the characteristics of a good
revenue system and used these criteria to guide its actions. The six general
characteristics are summarized below. See Appendix B for the
entire Criteria and Conceptual Framework, which guided the Commission's work.
- The tax system must be fair in apportioning tax burdens and consistent in its
- The tax system must be easy for taxpayers to understand.
- The tax rates and tax structure must be perceived by District businesses and individual
taxpayers as a reasonable cost of locating in the District.
- The revenue system should have as its primary purpose raising revenues from the city's
overall wealth base to support required basic services.
- The District government must have the ability to administer and enforce all parts of the
recommended revenue system.
- The District's revenue system must be viewed in conjunction with the federal revenue
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- Abolish the four existing business taxes: corporate income, unincorporated business,
tangible personal property, and professional license fee.
- Enact a broad-based general business activities tax on value added (compensation,
interest, and dividends) at a rate of 1.50 percent. This tax will replace the four
existing business taxes and raise an equal amount of revenue.
Personal Income Taxes
- Use federal net taxable income to calculate personal income tax obligations, and enact a
new revenue-neutral tax rate schedule.
Real Property Taxes
- Repeal the four existing property tax relief measures: the $288 homestead exemption,
senior citizen exemption, general circuit breaker, and elderly and disabled circuit
- Enact a new circuit breaker that replaces the four existing property tax relief measures
and provides the equivalent amount of total property tax relief.
- Consolidate the five real property tax rates to two by (1) reducing the rental
residential rate to the owner-occupied rate and creating a single residential rate of 0.96
percent; and (2) combining the other three rates to a single commercial rate.
- Limit the commercial rate to no more than twice the residential rate. The $89 million
required to accomplish this recommendation is not currently available.
- Do not impose a split rate property tax (one with higher rates on land than on
improvements) at this time.
- At an early date, return to annual assessment for all properties.
- Repeal the special statutory treatment of cooperatives and assess them on a fair market
- Reform assessment practices by (1) using all qualifying sales to calculate ratios and
coefficients of dispersion; (2) reporting both the old and new methods of computation; (3)
calculating and publishing price-related differentials in assessment ratios; and (4) not
increasing assessments by a uniform multiplier.
- The Commission considered and rejected a proposal to require exempt nonprofit
organizations to pay property taxes.
Taxing Sales of Goods and Services
- The Commission considered and rejected proposals to broaden the sales tax base by adding
additional services or taxing food for home consumption. The Commission also considered
and rejected proposals to make purchases by all nonprofit organizations subject to the
sales tax and to eliminate sales tax on Internet access charges.
- For purchases over the Internet, (1) treat electronic presence similarly to physical
presence for determining whether the sale of a product is subject to the applicable sales
tax; (2) do not determine a sale's tax status based on the means of the sale; (3) apply
the tax on the basis of the destination of the sale; and (4) tax sales at the point of
- Enforce collection of sales tax on goods sold by federal entities and nonprofit
organizations to nonexempt purchasers.
- Exempt manufacturing equipment from the sales tax to prevent tax pyramiding.
Utility Services Taxes
- Tax all functionally equivalent utility services at the 10 percent gross sales rate by
(1) changing the statutory definition of "public utility services" in the D.C.
Code to an enumeration of services taxed; and (2) requiring providers to concede nexus as
a condition of market entry.
- The Commission considered and rejected a proposal to tax prepaid phone card use the same
as long distance calls that are billed.
Recommendations to the Federal Government
- Lift the ban on the District's ability to tax nonresidents' income.
- Make an annual payment in lieu of property taxes to be used to reduce the District
commercial property tax rate.
- Adopt a formula federal payment.
- Ensure that the District is compensated for Government Sponsored Enterprises' federal
exemption from District business taxes.
- Reduce or eliminate earmarking of taxes where legally possible, and discourage future
- Subject transactions involving cooperative housing units to recordation and transfer
- The Commission considered and rejected a proposal to subject nonprofit organizations to
recordation and transfer taxes.
The Commission was prepared to recommend additonal changes. Each of these, however, has
been rendered moot by one of the broader recommendations for change.
- Eliminate the notch problem of penalizing tax filers with incomes that are one dollar
higher than the eligibility amount for the low income tax credit. This recommendation is
superseded by the Commission's recommendation to use federal net taxable income to
calculate personal income taxes, which eliminates the need for the low income tax credit.
- Correct the unrealistic depreciation schedules used for calculating taxable values for
the personal property tax, particularly those for computer equipment. This recommendation
is superseded by the Commission's recommendation to repeal the personal property tax.
- Make treatment of net operating losses in calculating corporate income tax conform with
federal law. This recommendation is superseded by the Commission's recommendation to
repeal the corporate income tax.
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The District of Columbia is beginning to recover from a substantial financial and
administrative crisis. Real progress will depend on changing course, not making minor
adjustments and then reverting to business as usual. In short, this city must embrace
Members of the D.C. Tax Revision Commission welcome the opportunity to bring a fresh
perspective to long-standing tax practices. Commission members believe the tax system is
an expression of a relationship between the people and their government. Building on that
public trust, the Commission devised strategies to ensure that the fiscal system serves
the city well. The result is a range of recommendations: wholesale change for some
elements, slight revisions for others, and no changes at all for those parts of the
existing system that function effectively.
All decisions were guided by a straightforward set of principles: The District's tax
system should be easy to understand and manage, it should be fair to both residents and
businesses, and it should allow the District to attract and retain both
businesses and residents.
In recent years, the tax and revenue system has developed in a piecemeal fashion as the
government took small actions in response to specific concerns. The resulting tax system
is burdensome and repetitive and would require reform even if the District had no visible
economic problems. Moreover, in the 20 years since the last comprehensive review of the
District tax code, the city's economic, demographic, intergovernmental, and political
circumstances have changed dramatically. It is time to make the tax code fairer and
Commission members recognize that the District's problems have many causes unrelated to
taxes, and that changes to the tax structure no matter how significant are
only part of the solution; expenditures, management, and other issues also must be
addressed. The recommendations in this report will help the District build on its progress
and maximize its strengths. Implementing some of the recommendations may be challenging
because they will substantially change the existing system and inevitably cause some
redistribution of taxpayer burdens. Nevertheless, the Commission believes it is essential
to make changes to improve the District's overall economy and thereby maintain, and
advance, the city's recently improved, but still fragile financial health.
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