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Government and People
Appendix A: Research Projects and Related Information
Non-Tax Revenues in the District of Columbia: Current Practices
and Future Prospects.
Real Property Tax Relief in the District of Columbia
Triennial Assessment of Real Property in the District of
Tax Policy Review for the Electric and Natural Gas Utility
Industries in Washington, DC
Taxation of Telecommunications in the District of Columbia
A Distributional Analysis of the District of Columbia Tax System
The District of Columbia's Individual Income Tax: Structure,
Characteristics, and Policy Alternatives
Earmarking Tax Revenues in the District of Columbia: A
Description and Evaluation
Real Property Tax Appeals Process of the District of Columbia
Tangible Personal Property Taxation in the District of Columbia
The Changing Population of the District of Columbia, 1990-1996
Aspects of the Real Property Tax System of the District of
DC: A Capitalist City?
Taxes and Economic Development in the District of Columbia
Business Franchise and Insurance Taxes in the DC Tax System
An Analysis of the Graded Property Tax
Sales Taxes in the District of Columbia
Title VII of H.R. 2014
District Tax Comparisons
Appendix B: Criteria and Conceptual Framework
The Tax Revision Commission is committed to developing and recommending a comprehensive and integrated revenue system for the District of Columbia. To be successful, the Commission must make clear why its recommendations are being made and why they should be enacted. This requires establishing goals for the new proposed revenue system and using sound criteria to measure the achievement of those goals.
The current District of Columbia revenue system consists of a patchwork of diverse revenue sources, many with complex tax base definitions and multiple rate structures. In addition, the revenue system is strewn with exemptions, incentives, and tax relief measures that reduce revenues and add to complexity. In many instances, important measures to provide relief or incentives are not targeted properly and may even be counterproductive.
Many of the features that now clutter the revenue system were enacted because of strong constituencies -- constituencies that may now vigorously oppose change. The task of the Commission is to evaluate the claims of competing interests objectively against the criteria for a good revenue system and then make the trade-offs.
The Commission finds that a good revenue system should have the following characteristics:
The overall goal of the Commission is to provide the citizens of the District of Columbia a complete and systematic analysis of revenues that will complement the restructuring that is currently in the planning stage for expenditures. Without an intensive, comprehensive review of own source revenues, a coordinated solution to the District's financial problems will not be achieved.
Appendix C: Summary of the New Federal Tax Incentives for the District of Columbia
On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act of 1997. The Act provides a net tax cut estimated to be $275 billion over 10 years--the first significant tax cut since 1981. One component of this tax reduction package was a set of tax incentives uniquely available to District residents and businesses operating in certain impoverished areas of the District. According to official estimates, the Act provides the District federal tax relief totalling approximately $1.2 billion over the 10-year period from 19982007.* There are five parts to the District's tax relief package:
In addition, two tax benefits will become available to District businesses as a result of the District's new status as an empowerment zone:
* This estimate does not include tax benefits of allowing an immediate write-off of environmental remediation expenses (the so-called "brownfields" initiative) or temporary extension of the work opportunity tax credit. These benefits are available in many areas of the United States in addition to the District; no separate estimates for this provision's impact on the District are available.
Appendix D: Revenue from D.C. Taxes and Other Sources, Fiscal Years 1996 and 1997
Appendix E: Comparison of Proposed and Current Income Tax Forms
Appendix F: Potential Legal Challenges to the Business Activities Tax
The Home Rule Act (the federal law that serves as a city charter for the District) prohibits taxing any portion of personal income, "either directly or at the source thereof, of any individual not a resident of the District." Because the business activities tax includes compensation in its base, some may suggest that it violates this act. The Commission, however, believes that a legal challenge to the tax is unlikely to succeed.
In developing their recommendation, members of the Commission were mindful of the 1979 D.C. Court of Appeals decision in Bishop v. District of Columbia. The Court determined that "The nature and effect of a tax, not its label, determines if it is an income tax or not." Based on this conclusion, the Court prohibited the District from imposing its unincorporated business tax on the income of most professionals.
A ruling on the proposed business activities tax, however, likely would be different. The proposed tax, in nature and effect, is not a tax on income and therefore should not be subject to the Bishop interpretation. In addition, the 1991 U.S. Supreme Court decision in Trinova Corp. v. Michigan Dept. of Treasury set a relevant precedent. This case involved the Michigan single business tax, which has a tax base compensation, depreciation, and profits that is virtually identical to the one proposed by the Commission. The Court concluded that Michigan's tax was not a tax on the component pieces of the base, but was "an indivisible tax upon a different, bona fide measure of business activity, the value added," (emphasis added). The Court went on to say:
Based on this Supreme Court ruling, it seems clear that when interest and dividends are added to compensation, as they are in the proposed tax, the product is not a tax on compensation. It is on a bona fide measure of business activity, as legal under the Home Rule Charter as the taxes it would replace.
Appendix G: Federally Tax-Exempt Organizations Subject to the Business Activities Tax
Appendix H: Services Not Taxed in the District
*Based on sales level in 1992
Source: William F. Fax, Sales Taxes in the District of Columbia. A report to the D.C. Tax Revision Commission, September 1997.
Appendix I. Dissents and Additional Views from Commissioners
First, I wish to commend the members of the Commission, especially the Chairman, and the entire staff, for the many hours of hard work over the past many months devoted to improving our current D.C. individual, business, real property, sales, and other tax laws. The Commission's final recommendations, if implemented, would make D.C. a more attractive place to live and operate a businesses, while imposing more reasonable and fair taxes upon those persons and entities who utilize D.C. services. As a 28-year D.C. resident who has conducted a tax law practice here for most of those years, I appreciate the Commission's efforts to achieve these goals.
I wish to state my frustration as an active member of this Commission, feeling as if one hand were tied behind my back while I was expected to perform a two-handed task. I'm referring to the Congressional restriction upon the District's ability to tax the D.C. business income of individuals who work here but reside elsewhere. This restriction affected almost every D.C. tax topic reviewed by the Commission, and presented roadblocks in our efforts to create more desirable options or alternatives for consideration by the Council. This restriction seems especially inappropriate to me during this current period when the District's revenue system, expenditure habits, and budget process have come under so much deserved criticism and control.
I will not likely be elected to public office, nor am I a paid representative or lobbyist seeking to protect the interests of particular individuals or business associations. Therefore, my frustration may seem naive or uninformed. However, I believe that the obstacles created by this Congressional restriction have seriously limited the Commission's ability to carry out its mandate from the City Council. I therefore recommend that the Commission's report be amended to present the following questions to Congress, the Council, and the public:
Having said this, and with one hand tied behind my back, I wish to make the following brief comments and suggestions to supplement the report of the Commission:
Taxing business fairly
I support the Commission's recommendations to eliminate or phase out the varied and complicated current taxes imposed on many but not all of the business entities currently operating in the District, to be replaced with a broad based, low rate, business activities tax. The experts who testified before us, and the studies presented to us, indicated clearly that the greater portion of the current business taxes are being paid by a relatively small number of the entities subject to these taxes. As I have stated above, I cannot understand why our system should be allowed to permit some members of a particular profession to escape all D.C. income taxes, while other members of the same profession are fully taxed. On the other hand, I do not condone the current imposition of professional license fees or other charges imposed upon only particular professions or businesses, which are not uniformly imposed on all District businesses, and which bear no relationship to the administrative costs of the licensing function. I believe the Commission's recommendations meet the goal of similarly, fairly, and reasonably taxing all similar D.C. businesses.
Although the Commission approved exclusions from this new tax for businesses with gross incomes or tax bases below stated levels (the Commission recommends a $50,000 gross receipts minimum), I am concerned that this proposal would in some cases impose an undesirable or unreasonable cost of doing business upon entities with large gross incomes, and large labor or payroll costs, but with little or no real net income for any particular year (i.e., income earned by the business entity or as passed through by it in any form to its owners). I am not advocating that D.C. should continue to impose a business net profits tax, and I do support the concept of the low-rate business activities tax imposed on all business entities that derive benefits from the D.C. government while located within the city. However, I recommend that the Commission's proposal be modified to provide for only a reasonable and affordable minimum tax (such as exists with the current franchise taxes) for any year during which gross income or the new activities tax base exceeds the minimum thresholds, but where little or no net income is earned by the business entity or is passed through from the business to its owners.
Finally, current law (consistent with Congressional pronouncements and court cases) permits a D.C. resident to deduct from his or her individual income tax base, all income subject to the current D.C. franchise tax. With one hand still tied behind my back, I recommend that the Commission's new business activities tax proposal be modified to permit D.C. residents to deduct some part of the new business tax base from the same resident's D.C. individual income tax base. If the Council adopts the Commission's proposal to adopt the federal definition of personal "taxable income," this will presumably be accomplished since I believe there would be a federal deduction from income for the new D.C. business activities tax. If the Commission's income tax proposals are not adopted, however, then I recommend the Council should take the necessary steps to ensure that D.C. residents do not pay taxes twice for the same business income.
Reducing complexity and increasing tax fairness for individual residents
I support the Commission's recommendations to adopt the federal definition of "taxable income" and thereby eliminate an estimated 40,000 lower income taxpayers from the obligations of filing or paying taxes. This alone will greatly simplify the income reporting burdens of these citizens and I believe also greatly reduce the burdens upon the city's tax administration. I realize adopting someone else's definition of one's taxable income can include some undesirable and unforeseen consequences. However, for several years, D.C. has already adopted the federal definition of "adjusted gross income" for personal income tax purposes, and D.C. has conformed to most federal changes in this definition over the years. I sincerely believe that the disadvantages of adopting the federal definition of "taxable income" would more than be offset by the benefits of a higher threshold for individual filing, greater simplicity, increased compliance, and decreased burden of administration. One might even accuse me of contradiction since I have consistently criticized Congress for telling D.C. whom it may tax, but I am now advocating Congress telling D.C. what income it may tax. Our staff and consultants have informed us that this proposal will result in very little if any tax increase or decrease for most taxpayers still subject to the tax.
I would go further than the Commission. I support the so-called "piggyback" approach, wherein the D.C. personal income tax would be calculated as a percentage of the IRS income tax (flat percentage for all or graduated rates as the Council would determine), and if possible, would be collected, audited, and enforced by the IRS for the District. The Commission was informed that this approach was not feasible because: (1) the percentage-of-federal-tax plan as originally proposed in the 1970s and again in later years was coupled with a plan to have the IRS collect the D.C. taxes, but such IRS collection plan was never satisfactorily negotiated by D.C. and the IRS; and (2) the percentage-of-federal-tax plan would result in increased taxes upon upper income D.C. residents, due to the greater federal tax progressivity at the upper income levels, resulting from many factors such as the federal phasing out of certain itemized deductions and family member exemptions, and the application of the alternative minimum tax to certain higher income taxpayers.
Adopting the federal tax as a base upon which a graduated D.C. tax would be imposed would be the simplest approach to imposition of a local income tax, and could virtually remove the D.C. government from the business of administration of the personal income tax. With all of its faults and administrative problems recently publicized in the press and before Congress, I believe the IRS is better suited to enforce the income tax laws, collect the taxes, and more likely to inspire D.C. taxpayers to comply completely with filing and reporting requirements. I believe the complete conformity would greatly increase and improve taxpayer compliance, and that the current D.C. individual income tax enforcement personnel could be more productively reassigned to work in areas more suited to local tax administration, such as real property and sales taxes. The so-called "marriage penalty," which the Commission has attempted to reduce or eliminate in its proposal, would also be reduced though not eliminated under this recommendation since federal tax law now contains such a penalty as well. However, if (as anticipated) Congress soon addresses elimination of this penalty, then a similar benefit would automatically flow to D.C. taxpayers. Also the percentage-of-federal-tax approach would recognize the "head of household" status for unmarried parents, in the same proportion as the IRS rules now recognize such status. I also am convinced that the D.C. tax rates (upon the federal tax) could be adjusted to ensure that no D.C. taxpayers, especially in the upper brackets, would be unduly burdened or penalized by this simplification effort.
Residential property tax relief
I support the recommendations of the Commission to make residential property tax relief based upon ability to pay, rather than any other factor such as age, blindness, or disability. I especially support the idea of removing the homeowners entitled to the current so-called "circuit breaker" relief from the D.C.'s present income tax system, and giving such relief through the property tax system itself, similar to the relief provided currently for all owner-occupants regardless of income or ability to pay. I reluctantly agree to continue providing such relief to qualifying tenants as a refundable credit through the D.C. income tax system, since there appear to be no more desirable alternatives. I am troubled by my own experience in working with the present "circuit breaker" program, in which I believe there are many residents who are unaware of the possibility of relief at tax return time, and who might not otherwise be required to prepare or file a D.C. tax return. If the Commission's recommendations are accepted, I urge the Council and the tax administration to make every possible effort to educate all D.C. tenants (as well as all homeowners) on a regular basis as to the existence of this relief program, and to make information and forms available to all who might potentially qualify for such relief.
I am concerned, however, with the Commission's adoption of "household income" as a measure of one's ability to pay. I do believe "household income" can be an appropriate measure if properly and truthfully reported. However, I think the past several years' experience with the current "circuit breaker" has proven this is not a practical approach. Asking one property owner or tenant in D.C. to report for a non-income tax purpose the names and incomes of all other persons in the household is not realistic. More importantly, there is no practical method for the administration to monitor, verify, and enforce such rules for this purpose.
To achieve the Commission's intent to provide relief to individual homeowners or tenants who do not have the financial ability to pay the full real estate taxes (directly or through the landlord), I recommend we measure each claimant's ability to pay by his or her own gross resources for the past year. By "gross resources," I mean all financial resources including gross taxable income, plus nontaxable resources such as tax free bond interest, nontaxable portions of social security and retirement income, child support, etc. This is a similar approach to the current "circuit breaker" test, except that I recommend measuring only the claimant's resources, not the resources of others who may live in the same household. After having worked with lower income D.C. residents for over 25 years, and having claimed numerous "circuit breaker" benefits each year for such residents, I don't believe changing the test of ability-to-pay to "claimant's resources" will result in a substantial revenue loss, because I believe the present system has invited and encouraged misrepresentation which cannot be avoided or monitored by the administration, and which has in effect permitted claimants to report only their own resources anyway. I believe using only the claimant's information, especially when that claimant has filed an income tax return, will greatly assist the tax administration in monitoring and enforcing these provisions, and will greatly encourage claimants to file truthful and accurate information.
I also have a recommendation concerning who would be the proper claimant for the new real property relief measure. Presently, only one person or "head of household" is entitled to claim either the homestead exemption or the income tax "circuit breaker" present tax credit. The Commission's proposal does not address the issue of multiple homeowners or co-tenants occupying the same rental property. In the case of multiple or joint homeowners, and similarly in the case of multiple co-tenants, I recommend that the Commission proposal be modified to provide that each individual (owner or tenant) may claim relief for his or her portion of the real property taxes paid (directly or through the landlord), provided that each claimant must meet the ability-to-pay test for relief from the respective portion of the tax.
While I find myself in dissent on what I believe to be a central failing of the Commission's report, I want to make clear at the outset that I have the deepest respect for the members of the Commission, its Chairman, and staff. It has been an honor and an exciting learning experience to serve with my fellow Commissioners, persons whom I have found to be exceptionally dedicated, knowledgeable, and hard-working. Even in those areas where I reach a conclusion at variance with that of the Commission, I respect both the decision-makers and the decision reached.* Throughout our deliberations, it was always clear that Commissioners shared a common concern for the impact of various tax alternatives on the District, its residents, and businesses, and were united in their goal of creating a tax system that would fairly balance the interests of all three.
It is precisely because of the regard I have for my fellow Commissioners and all the effort that went into the Commission's final report, that I find it so distressing to file this dissent. Nonetheless, I feel compelled to go on record with my dissenting view in regard to a central tenet of the Commission's report. I believe that by submitting a report whose recommendations are, with one notable exception, driven by a goal of revenue neutrality the Commission fails in its responsibility to propose the best possible tax system for the District.
By this I do not mean to suggest that the Commission should have ignored the very real revenue needs of the District. Rather, because it is the local elected officials who must serve as the ultimate arbitrators between the often competing calls for tax reductions and increased services, the Commission's report needed to provide those officials with a description of the best tax system for the District. In devising the best tax system for the District, one would, of course, take into account those factors that are fixed beyond the control of local officials--i.e., the Congressional prohibition on a nonresident income tax, the inability of the District to support heavy industry, and the tax rates and burdens in surrounding jurisdictions.
Only after that best system was devised, would one calculate the amount of revenue it would generate. If that amount exceeded revenues from the current system, the Commission could point with pride to the bounty and leave the decision on how it would be spent to the local officials. If that amount produced less revenue than the current system, the Commission would have to continue work to identify the least harmful ways in which the best system could be adjusted to increase revenues to the current level and leave the decision on whether to adopt the best system or some adjustments thereto to the local officials. Not only would this approach have made it clear that the adjustments were moving the District further and further away from the best tax system, but it would have given elected officials a clear goal toward which to aspire.
As things stand, the tax system devised by the Commission is not based on a determination that the taxes and tax rates recommended are the best for the District. Rather, they are the best at generating the same amount of revenue as we generate under the current tax system. This is clearly illustrated by the Commission's recommendations; for example:
Do these actions result in the best tax rates? Would different rates place the District in a better competitive position to attract businesses and residents? If more revenue is provided as a result of some of the Commission's other recommendations (repeal of the prohibition on a nonresident income tax, a federal payment in lieu of taxes for tax-exempt property, adoption of a formula federal payment) or through other means, is there anything that should be done to revise the tax system?** Which taxes should be reduced further and in what priority order? For instance, is a reduction in the proposed business activities tax rate more important than a further reduction in the commercial real property tax rate? The Commission's report simply does not address these questions.
This lack of vision, this failure to see beyond the revenue needs of today and formulate a goal for the future is the direct, and regrettable, result of a focus on revenue-neutrality. One of the biggest obstacles to reforming the District's tax system and adopting a rational, equitable, and competitive tax policy has always been that the pain a revenue loss would be immediate, while the gain economic development and its attendant revenue growth--would come later in the "out years." The need to find the "up front" money to finance tax reform has, until recently, precluded a serious look at what shape that tax reform should take. The Council took the all-important first step out of this box by creating the Tax Revision Commission and mandating a comprehensive review of the District's tax system and recommendations for changes and policy directives.
Unfortunately, the Commission did not fully accept the challenge. Rather, it decided for the local officials that the city's revenue needs were too acute for there to be fundamental change. Thus, even if all of the Commission's recommendations are adopted, the District will maintain its dubious status as the nation's second or third highest-taxing jurisdiction. This can change over time, but not without a well reasoned plan. With the intellect, expertise, will, and commitment brought to bear, the Commission could have, and I believe should have, formulated such a plan. It now remains for others to do.
The Tax Revision Commission may have given the District a blueprint for a better tax system. It did not give the District a blueprint for the best tax system. And therefore I dissent.
* As other Commissioners have noted, many of us did not agree with everything in the final report. I did not dissent on the basis of any disagreement with one or more specific recommendations, rather my dissent speaks to a determination that colors the tenor of the entire report. However, I will note for the record that I recused myself from the vote on the business activities tax on the basis of a conflict of interest.
** The only nonrevenue-neutral proposal the Commission makes is to create a single commercial class of real property and apply a tax rate no greater than twice the residential real property tax rate of $0.96 per $100 of assessed value.
I thank [Tax Revision Commission Chair Robert Ebel] and my fellow commissioners and our staff for an outstanding effort with which I am proud to be associated. While I agree with the majority of the recommendations contained in our report, I must express my disagreement with the following four recommendations:
Recommendation: Property tax relief through a single circuit breaker
The Commission, after considering the current complex series of individual property tax relief measures, has recommended a much simpler single circuit breaker relief measure which applies to both homeowners and renters to replace existing property tax relief programs (page 71). I fully agree with this part of the recommendation. The present measures to relieve burdens of the real property tax are a hodgepodge of programs based on the owner's age, health and ability to pay.
The Commission, however, recommends that the "relief through the new circuit breaker should be accomplished on a revenue-neutral basis so the total amount of relief is the same, but the basis for allocating it is more equitable" (pages 7475). I believe that the examination of revenue neutral changes is a worthwhile analysis tool, however, I must dissent from the recommendation of a revenue neutral change. To recommend revenue neutrality assumes that the existing levels of benefits are appropriate. That is simply not the case, particularly with regard to the homestead exemption and the tax reduction for senior citizens.
The homestead exemption is based entirely on the fact of the owner living in the property. The District gives a tax reduction of $288 to every residence in which the owner principally resides, regardless of the value of the property, or the wealth of the owner. The same reduction is given for a $30,000 property as a $3 million property. Similarly, the benefit is the same whether the owner is unemployed or has annual income in the millions of dollars. I do not believe that any tax relief program is justified based solely on homeownership with no means test whatsoever.
The current senior citizen relief provision, while means tested, has an income level so high that it is nearly irrelevant. The current relief is provided to all residences owned by senior citizens living in households with incomes under $100,000 per year. Substantially all senior citizens meet the income requirement. In addition, once qualified by income, the relief is unlimited. Under the existing program, annual relief exceeds $1,000 for homes valued at over $238,333 owned, and exceeds $2,000 annually for senior citizen owners of properties valued at over $446,000.
In contrast to the current exceedingly generous current property tax relief for homeowners, under current law, no renter, whether young or old, with income over $20,000 per year receives any relief whatsoever, regardless of the amount of rent paid and the amount of tax payment attributed to that rent. It would appear almost axiomatic that a homeowner with identical income to a renter is likely to have a greater ability to pay than the renter who owns no real property. This is even more likely to be the case for homeowning senior citizens, who, for the most part, are likely to have no mortgages, or very small mortgages. The disparate treatment of otherwise equally situated owners and renters is unconscionable. The proposal by the Commission to combine all of the real property relief measures into one circuit breaker applicable to both owners and renters is certainly an improvement on current law.
As noted above, however, I believe that the current relief programs have been too generous at higher income levels, causing the total amount of current relief, $49.6 million, to be excessive. Maintaining neutrality perpetuates this excessive tax expenditure. Although the Commission proposal is means tested, the constraint of neutrality results in a maximum income level of $85,000 to qualify for some benefit. While less than the current $100,000 limit in the senior citizen program, $85,000 is still unreasonably high. Setting the level at $85,000 results in some relief being granted to 85 percent of all of the households residing in the District. Both that percentage and the absolute dollar amount is, I believe, unjustifiable.
I recommend that, in place of the Commission-recommended relief formula of 85 percent of real property tax for households with incomes under $5,000, declining by five percentage points for each $5,000 of household income above that amount (Figure 31, page 74), the formula should provide for the same starting point, but a 10-percentage-point reduction for each $5,000 of household income above the lowest $5,000. This formula will result in eliminating relief entirely to households with incomes over $45,000, and some reduction in relief to households with incomes between $5,000 and $45,000. The exact effect will be dependent on income and house values. I estimate that this reduction would cut the tax expenditure from the existing relief programs and Commission recommended circuit breaker approximately in half, while still providing relief to approximately 63 percent of all households in the District.
Although I recognize that this will result in an increase in real property taxes paid by homeowning households, and particularly senior citizen homeowners, I do not believe that as generous a homestead or senior citizen relief program as exist now should have ever been adopted. The benefits of the single recommended circuit breaker, even with my modification, for homeowners with household income between $20,000 and $45,000 will be greater than renters of the same income levels currently receive, since renters above $20,000 do not receive any relief whatsoever. Indeed, to the extent that the higher Class 2 rates are passed on to tenants, renters currently pay more real estate taxes than similarly situated homeowners.
The proposed single circuit breaker will, for the first time, grant relief to renters with household incomes over $20,000 per year. If my proposal were adopted by the District, the tax expenditure saving could be used to offset approximately half of the reduction in revenue which would be caused by the Commission's recommended establishment of a single residential property tax rate at $0.96, for which the Commission has not identified any revenue source (page 71).
Although I recognize that my proposal will result in some increase in tax payments for all homeowners with household incomes over $20,000, and senior citizen homeowners with incomes up to $100,000, if any class of citizens, whether younger or older, is able to absorb a slight increase in real property taxes, it is households who have sufficient assets to own their own homes, and particularly home owning households with incomes over $45,000 who are in the top third of all residents of the District by household income.
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