This week the DC Council will be hearing tax reform recommendations from the experts they appointed to study the District’s tax system. While far from perfect, the DC Tax Revision Commission’s suggested changes include many sensible reforms. Here’s a quick overview of what’s being discussed.
The Commission recommends expanding the District’s Earned Income Tax Credit (EITC) for workers without children—the one group for whom this important anti-poverty and pro-work program currently provides little benefit.
Some middle-income taxpayers would benefit from lowering the middle tax bracket’s rate from 8.5 to 6.5 percent. And both lower- and middle-income families would benefit from a substantially increased personal exemption and standard deduction.
In order to partially fund these targeted low- and middle-income tax cuts, the Commission also recommends phasing out (PDF) the District’s personal exemption for high-income taxpayers, and making permanent the city’s temporary top tax bracket on incomes over $350,000 (albeit at a reduced rate).
And as with many tax reform efforts, the DC Commission’s plan also includes a long-overdue expansion of the District’s sales tax to include more personal services. Haircuts, tanning studios, car washes, and various other services (PDF) would finally be included in the sales tax base.
Among the more troubling aspects of the Commission’s plan is its price tag. The Commission wants to cut into the District’s revenues by $48.8 million, despite the fact that the DC Council only set aside $18 million to fund the Commission’s recommendations. And not all of the tax cuts contained in the Commission’s proposal are justified. A $15.8 million estate tax cut is unlikely to benefit (PDF) the District’s economy, and a $57 million corporate and business tax rate cut won’t do any good, either.
Against this backdrop, the Commission’s decision to recommend increasing the sales tax rate from 5.75 to 6 percent is an odd one. The $22 million in revenue raised by this regressive tax increase could easily be generated in a fairer way by scaling back the estate and corporate tax cuts, and/or by retaining the 8.95 percent rate on incomes over $350,000, as opposed to the lower 8.75 percent rate the Commission suggests.
Overall, the Commission’s proposal is a good starting point, but there’s still plenty of room for the DC Council to improve upon it before enacting any reforms into law.