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Tax Revision Commission Summary Report
May 1998




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Appendix A: Research Projects and Related Information

Non-Tax Revenues in the District of Columbia: Current Practices and Future Prospects.
Examines the District's reliance on user fees compared to the neighboring jurisdictions. Also explores whether and to what extent the District should increase its reliance on nontax revenue sources. (Prepared by Michael E. Bell, MEB Associates, and James O'Keefe, Georgetown Public Policy Institute.) April 1998

Real Property Tax Relief in the District of Columbia
Discusses tax relief measures and how they are used in the District. (Prepared by John H. Bowman, Virginia Commonwealth University.) February 1998

Triennial Assessment of Real Property in the District of Columbia
Discusses the effects of the change to triennial assessments in the District of Columbia. (Prepared by John H. Bowman, Virginia Commonwealth University.) February 1998

Tax Policy Review for the Electric and Natural Gas Utility Industries in Washington, DC
Reviews the tax policy challenges that have arisen due to the ongoing transition of the electric and gas utility industries. Offers options for dealing with these challenges. (Prepared by Rodney D. Green and Daniel Muhammad, Department of Economics, Howard University.) January 1998

Taxation of Telecommunications in the District of Columbia
Addresses the challenges that arise from changes in technology and market structure in the industries that provide the goods and services taxed by the gross receipts and toll telecommunications tax. (Prepared by David Meyer, Tax and Economic Policy Administration, D.C. Office of Tax and Revenue.) January 1998

A Distributional Analysis of the District of Columbia Tax System
Analyzes the distributional effects of the District's existing tax system. (Prepared by Michael Ettlinger, Institute on Taxation and Economic Policy.) January 1998

The District of Columbia's Individual Income Tax: Structure, Characteristics, and Policy Alternatives
Reviews the personal income tax and related issues. (Prepared by Robert P. Strauss, Professor of Economics and Public Policy at Carnegie-Mellon University.) January 1998

Earmarking Tax Revenues in the District of Columbia: A Description and Evaluation
Describes the earmarking practices for the District taxes and their budgetary and revenue implications. (Prepared by Mark I. Gripentrog, D.C. Office of Tax and Revenue.) December 1997

Real Property Tax Appeals Process of the District of Columbia
Provides a preliminary report on the District's real property tax appeals process. (Prepared by John H. Bowman, Virginia Commonwealth University with the assistance of Michael E. Bell and Thomas E. Heinemann.) December 1997

Tangible Personal Property Taxation in the District of Columbia
Studies the personal property tax system in the District. (Prepared by John H. Bowman, Virginia Commonwealth University.) December 1997

The Changing Population of the District of Columbia, 1990-1996
Reports on District's household and population changes between 1990 and 1996. (Prepared by George Grier, The Grier Partnership.) November 1997

Aspects of the Real Property Tax System of the District of Columbia
Reports on the classification of property tax rates and the fairness of assessments. (Prepared by John H. Bowman, Virginia Commonwealth University with the assistance of Michael E. Bell and Thomas E. Heinemann.) November 1997

DC: A Capitalist City?
Provides a preliminary analysis of the new federal tax incentives for the District of Columbia. (Prepared by Martin A. Sullivan, Tax Analysts, Arlington, Virginia.) October 1997

Taxes and Economic Development in the District of Columbia
Discusses the effects of taxes and tax incentives on the District economy. Includes findings and recommendations based on the consideration of the current performance of the District economy, the effectiveness of tax incentives, and the effect of taxes on employment and population in the District. The findings and recommendations are based on two reports [“What Do We Know About the Effect of Taxes on Economic Development” and “The Effect of Taxes on Employment and Population in the Washington, DC, Area”]; both can be accessed by following this link. (Prepared by Therese McGuire and Stephen Mark, Institute of Government and Public Affairs, University of Illinois and Leslie Papke, Department of Economics, Michigan State University.) October 1997

Business Franchise and Insurance Taxes in the DC Tax System
Examines the business franchise tax and possible alternatives for taxing businesses. (Prepared by Joseph J. Cordes and Harry S. Watson of the Department of Economics at George Washington University.) October 1997

An Analysis of the Graded Property Tax
Analyzes the split-rate approach to real property taxation. (Prepared by Professor Robert M. Schwab and Amy Rehder Harris, Department of Economics, University of Maryland.) October 1997

Sales Taxes in the District of Columbia
Describes the current conditions and policy options for sales taxes in the District of Columbia. (Prepared by William F. Fox, Professor of Economics, University of Tennessee.) September 1997

Title VII of H.R. 2014
Text of Title VII, Section 701 — Tax Incentives for Revitalization of the District of Columbia, signed by the President. (The full text of H.R. 2014 is available from the Library of Congress Thomas legislative services website.) August 1997

District Tax Comparisons
Compares the District's taxes to those in neighboring jurisdictions, other major cities, and other states. (Staff report) April 1997

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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:

  1. The system must be fair in apportioning tax burdens and must be consistent in its application. Fairness means recognizing that there are differences in ability to pay and in the benefits residents receive and that taxes must recognize those differences both in terms of individuals and in terms of the overall system. An important aspect of fairness will be treating taxpayers in similar circumstances consistently and not favoring some individuals or groups over others without an explicit reason for doing so.
  2. The system must be easy for taxpayers to understand, must not impose unnecessary administrative burdens on the taxpayers or tax collectors, and must provide confidence that all those subject to the tax are paying it.
  3. The tax rates and tax structure must be acceptable to District businesses and individual taxpayers as a reasonable cost for locating in the District. While acceptance may take into account whether rates are competitive, other factors such as fairness, consistency, costs of compliance, and predictability may be more important.
  4. The revenue system should have as its primary purpose raising revenues from the overall wealth base of the city to support basic services required of the District. It should not be used for nonrevenue purposes without and explicit statement of the purpose and justification for using the revenue system.
  5. The District government's ability to administer and enforce all parts of the recommended revenue system must be a key consideration. The government's capability should be based on an assumed competent staff with sufficient equipment and resources to administer the system.
  6. The District's revenue system must be viewed in conjunction with the federal revenue system for evaluating the degree to which it satisfies the criteria for a good revenue system, but it remains the responsibility of local elected officials to design a local revenue system that citizens can understand and control.

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.

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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 1998–2007.* There are five parts to the District's tax relief package:

  1. Wage credit. A tax credit of up to $3,000 per employee will be available for wages paid to any District resident by businesses operating in areas of the District with poverty rates of 20 percent or more. Wages paid during calendar years 1998 through 2002 are eligible.
  2. Tax-exempt financing. The District will have the authority to issue enterprise zone facility bonds for businesses operating in areas of the District with poverty rates of 20 percent or more. These tax-exempt financing bonds can be issued during the period after December 31, 1997 and before January 1, 2003.
  3. Faster write-offs. Small businesses operating in areas of the District with poverty rates of 20 percent or more will have an additional $20,000 of first-year deductions for expenditures on capital equipment. The additional first-year deductions will be available for qualified taxpayers with taxable years beginning after December 31, 1997 and ending before January 1, 2003.
  4. Zero-percent capital gains rate. A zero-percent capital gains rate will be available to investors who have owned, for at least five years, business property used in areas of the District with poverty rates of 10 percent or more, or who have owned a business operating primarily in areas of the District with poverty rates of 10 percent or more. To qualify for the zero rate, an investment must be paid for in cash after December 31, 1997 and before January 1, 2003.
  5. Homebuyer credit. Since August 5, 1997, a tax credit of up to $5,000 has been available for couples with incomes below $130,000 (and singles with incomes below $90,000) making their first purchase of a home anywhere in the District. (An eligible taxpayer may currently own a home as long as it is not in the District.) This credit expires on December 31, 2000.

In addition, two tax benefits will become available to District businesses as a result of the District's new status as an empowerment zone:

  1. "Brownfields." Businesses operating in areas of the District with poverty rates of 20 percent or more will be able to deduct environmental cleanup expenses in the year these expenses are incurred. Under current law, these expenses often could not be deducted at all. (Urban sites contaminated with hazardous substances are commonly referred to as "brownfields.") These special deductions are available for expenditures incurred in the years 1997 through 2000.
  2. Work opportunity tax credit. District employers can earn a tax credit of up to 40 percent on wages paid to high-risk youths (ages 18 through 24) and qualified summer youth employees (ages 16 and 17) as long as these employees reside in areas of the District with poverty rates of 20 percent or more. In general, the credit is available for the first $6,000 of wages paid to each employee. This credit is available only in the District during the first six months of 1998.

* 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.

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Appendix D: Revenue from D.C. Taxes and Other Sources, Fiscal Years 1996 and 1997

Taxes 1996 Actual (in 000s) 1997 Revenue (in 000s)
Real Property, Class1, Homes $113,769 $617,694
Real Property, Class 2, Apartments 97,118
Real Property, Class 3, Hotels 27,244
Real Property, Class 4, Commercial 378,365
Real Property, Class 5, Vacant 7,886
Personal Property 65,201 60,392
Public Space 12,052 9,513
General Sales@5.75% 248,210 245,274
General Sales @10% (Restaurants 129,020 135,260
General Sales @13% (Hotel Rooms) 82,030 96,652
General Sales @12% (Parking) 24,150 25,093
General Sales @8% (Alcoholoic Beverages) 11,730 25,093
Alcohol 5,100 5,460
Cigarette 18,676 18.946
MV Fuel 31,842 31,020
MV Excise 31,668 30,271
Hotel Occupancy 7,420 7,612
Individual Income 689,408 753,475
Corporate Franchse 132,305 148,151
U.B. Franchise 31,863 39,919
Insurance 33,121 42,625
Public Utility 144,842 141,901
Toll Telephone Tax 45,464 52,994
Health Care Prov. Fee 11,530 0
Estate 32,175 27,314
Deed Recordation 33,099 30,821
Deed Transfer 26,711 27,162
Arena Tax 9,432 9,587

Total Taxes

$2,481,431 $2,569,324

Percent of Total Local Fevenue

90.9% 90.4%
Non-Tax Revenues:
Business Licenses and Permits $26,663 $28,268
Non-Business 19,737 17,221
Other Revenues 28,100 52,320
Fines and Forfeitures 40,792 51,664
Charges for Service 46,134 37,801
Lottery and Games 75,250 69,200
Interest 14,311 18,599

Total Non-Tax Revenues

$253,987 $275,073

Percent of Total Local Revenues

9.3% 9.7%
TOTAL LOCAL REVENUES $2,728,447 $2,842,457

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Appendix E: Comparison of Proposed and Current Income Tax Forms

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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:

One of the acknowledged advantages of value added as a measure of taxation is its neutrality. A VAT [Value Added Tax] is neutral in the sense that it taxes all business activity alike: Under a pure VAT, all forms of business organization (corporation, partnership, proprietorship), all types of financing (debt, equity), and all methods of production (capital intensive, labor intensive) bear the same tax burden.

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.

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Appendix G: Federally Tax-Exempt Organizations Subject to the Business Activities Tax

IRS Code and Organization Type DC Exemptions under Current Law Exempt under Proposed Business Activities Tax
Corporations organized by Acts of Congress
Corporate income, sales and personal property tax Depends on Act of Congress
Corporations organized to hold property and turn proceeds over to an exempt organization
Corporate income tax only Yes
Charitable, religious, scientific groups, educational organizations
Corporate income and personal property tax; sales tax if "benefits dispensed in D.C." test is mex Yes
Civic leagues or promotion of social welfare groups
Corporate income tax, sales tax, in some instances No
Labor organizations
Corporate income tax only No
Business leagues, chambers of commerce, trade associations
Corporate income tax only No
None No
Fraternal beneficiary societies
Corporate income tax only No
Voluntary employee beneficiary societies
Corporate income tax only No
Cemetary companies
Corporate income tax only No
A post or organization of past or present members of the Armed Forces
None No
Corporation or trust organized to acquire or hold real property, etc.
Corporate income tax only No

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Appendix H: Services Not Taxed in the District


Potential Sales Tax Revenues* ($ thousands)

Number of States Taxing this Service

Attorneys $133,154 5
Public relations, management consulting 41,775 7
Construction contractors 18,038 11
Physicians 13,849 4
Engineers 7,819 5
Accounting and bookkeeping 6,745 5
Carpentry, painting, plumbing 4,824 13
Dentists 3,211 4
Travel agent services 2,254 3
Advertising agency fees 2,171 11
Barber shops and beauty parlors 1,512 6
Admission to cultural events 1,187 31
Private investigation (detective) services 1,115 13
Secretarial and court reporting services 929 9
Interior design and decorating 815 9
Sewer and refuse, industrial 729 13
Personal instruction (dance, golf, tennis) 574 7
Medical test laboratories 373 4
Construction service (grading, excavating) 290 11
Membership fees in private clubs 189 22
Coin-operated laundry and dry cleaning services 126 8
Automotive washing and waxing 117 21
Automotive road service and towing services 99 15
Rental of films and tapes by theaters 71 45
Land surveying 32 7
Massage services 23 10
Carpet and upholstery cleaning 20 15

*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

Commissioner Richard Halberstein

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:

  1. Why should an attorney whose office is near mine, with the same annual net income, pay no D.C. business income tax solely due to residence outside D.C.?
  2. Why should that other attorney's salaried associate also totally escape D.C. income tax solely because of residence outside D.C., while my salaried associate, living a few blocks from the office, is subject to D.C. income tax withholding? All four (attorneys and associates) pay the same sales taxes on purchases in the neighborhood; we pay the same restaurant sales tax at lunch; and we pay the same gasoline tax when we stand next to each other at the local self-service station. We all utilize the same sidewalks and streets to get to and from these shops, restaurants, and gas stations, and I'm certain if there is ever a need, we would all call the same 911 number for police or other emergency assistance.

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.

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Commissioner Jacquelyn V. Helm

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:

  1. A 1.5 percent rate on the business activities tax "The business activities tax can have a far lower tax rate than the taxes it replaces and still raise the same amount of revenue because of a broader base." (Emphasis added.) (page 50)
  2. New rates and brackets in the individual income tax "District personal income tax rates will be changed to make the new tax base produce revenue that equals revenue from the current rates." (Emphasis added.) (page 66)
  3. A new circuit breaker program to replace the existing circuit breakers, and the real property homestead exemption and 50 percent tax reduction for senior citizens "The Commission's proposed property tax 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." (Emphasis added.) (pages 74-75)

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.

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Commissioner Walter Nagel

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:

  1. Recommendation: Enact a business activities tax on value added at a rate of 1.5 percent (page 50) A business activities tax or VAT is traditionally a foreign tax. It is highly unusual in the United States. Only two states have adopted modified VATs. Attempting to measure the value added to a product or service as it moves along the retail distribution chain creates undue tax compliance burdens. A complex tax structure may discourage the location of businesses in the District.
  2. Recommendation: Follow four principles in addressing sales by electronic commerce (page 96)  Electronic presence does not equate to physical presence. Remote sellers do not enjoy the same governmental benefits as local sellers, therefore, burdens to collect use tax should be different. Moreover, any attempt to expand nexus and thus use tax collection obligations to vendors transacting business over the Internet may violate the Commerce Clause of the United States Constitution and is at odds with the United States Supreme Court's decision in Quill Corp. v. North Dakota, 510 U.S. 859 (1993).
  3. Recommendation: Continue to tax charges for Internet access (page 97) Internet access provides a gateway for the District's residents to a wide array of education and information services. Generally,
    telecommunications services utilized to access Internet service providers are already heavily taxed. To tax Internet access would result in multiple layers of taxation.
  4. Recommendation: Allow the District to tax all income at its source (page 80) This recommendation calls for a tax on nonresidents. The District and surrounding states are closely interrelated. Businesses and employees have made economic decisions based in part on the taxation of income. A dramatic change, such as removing the present prohibition on taxation of nonresidents, could hinder the District's efforts to attract new businesses.

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Commissioner Matthew S. Watson

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 74–75). 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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