Many taxpayers in the District could be paying less tax in years to come if the tax reform proposals of the D.C. Tax Revision Commission are ultimately enacted. The recommendations include reductions in tax rates for both individual and business taxpayers.
The Commission, which finalized its recommendations on December 18, 2013, is an 11-member independent body appointed by the Mayor and the Chairman of the D.C. Council in 2011 in order to make recommendations that would broaden the District’s tax base, make the District more competitive with surrounding jurisdictions, encourage business growth and job creation, and simplify the District’s tax code.
The final recommendations attempt to address the most pressing issues with the District’s current tax regime – relatively high tax rates for low- and middle-income families and high business tax rates. First, the Commission has proposed a new 6.5% tax bracket for married individuals earning between $40,000 and $80,000 (between $40,000 and $60,000 for single filers). These individuals currently fall within the 8.5% tax bracket. In addition, the standard deduction and personal exemption would be raised to the federal level under the Commission’s proposal. However, to further the progressivity of the proposed brackets, the Commission would subject individuals earning more than $350,000 to an 8.75% rate on a permanent basis. Currently, income over $350,000 is taxed at 8.95%. This top rate is set to expire on January 1, 2016, which would cause the top rate to revert back to 8.5%.
For businesses, the Commission’s proposal would reduce franchise tax rates for corporations and unincorporated businesses from 9.975% to 8.25%. The recommendations also include replacing the current three-factor (i.e., property, payroll, and sales) income apportionment formula with a single-sales factor. A large number of states have implemented a single-sales factor apportionment formula in recent years. In theory, using only the sales factor to apportion income incentivizes companies to relocate to a jurisdiction, while offering potential increased revenue from business taxpayers not located in the state. These changes could make the District more attractive for corporate taxpayers in the region. Although the proposed rate reduction would make the District’s tax rate the same as Maryland’s rate, Virginia’s rate would still be the lowest of the three jurisdictions at 6.0%.
Another notable recommendation is the expansion of the sales tax to more services, such as construction and construction-related services, barber and beautician services, and health club memberships.
It is uncertain which recommendations the D.C. Council will give serious consideration. However, given the recent large revenue surpluses in the District, the potential adoption of one or more of the rate decreases discussed above is promising.
If you have any questions please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.
About the Author: Michael L. Colavito, Jr. is a senior manager in Aronson LLC’s Tax Services Group, where he provides multi-state taxation services pertaining to income, franchise, sales and use, and property taxes. Michael’s experience also includes representing clients at all stages of tax controversy, from audit through appellate litigation, and advising them on restructurings, state tax refund and planning opportunities.