A Business-Minded Tax Commission Tuesday!

October 22nd, 2013 |

Today’s Tax Commission Tuesday looks at proposed changes to business taxes under consideration by the Tax Revision Commission. Earlier this year, the Commission heard presentations and reviewed research on business taxes that made two significant conclusions:

  1. DC’s business economy is doing well compared to surrounding jurisdictions.
  2. The total taxes paid by DC businesses are not all that different from our surrounding jurisdictions, and, in some cases, DC’s taxes are more favorable.

One study for the Tax Commission found DC’s taxes are not significantly different from our neighbors for most corporations. While DC’s basic tax on corporate income is higher than in Maryland or Virginia, businesses in Virginia pay additional taxes that don’t exist in the District, such as tax on gross business receipts. The study also found that some types of companies, particularly high-technology companies, receive significant tax breaks from the District that could result in much lower tax liabilities than suburban high tech firms.   

Another research paper done for the Commission recommended against cutting DC’s corporate income tax. The paper pointed out that small business growth in DC has been higher than surrounding jurisdictions and that overall DC’s business economy has done well relative to our neighbors, even though our corporate tax rate is higher. The study concluded that cutting DC business income taxes would reduce revenues without enhancing economic activity.

Yesterday, the Commission deliberated several proposals, most notably to reduce or eliminate the business franchise or the unincorporated business franchise tax and to reduce the income tax rate for investments made in high-technology companies.

The unincorporated business franchise tax applies to partnerships, such as contractors, and other businesses that do not incorporate. Most states do not have a tax specifically for these kinds of businesses, because the business income can be taxed as individual income of these partners. The District, however, can’t tax the income of partners who work in DC but live elsewhere, as part of the congressional ban on taxing non-residents who work here. DC thus levies the unincorporated business franchise tax to collect taxes on businesses that operate in our borders, just as all states do. The current tax rate for unincorporated businesses is the same as that for incorporated businesses. One change the Commission deliberated yesterday was to reduce the unincorporated business franchise tax rate to match DC’s personal income tax rates which would help it to better align with what the tax is intended to capture.

The Commission also discussed a proposal to reduce the income tax rate for investments made in high-technology companies. DCFPI disagrees with this public policy approach for several reasons. First is an issue of tax fairness:  investors in high-tech companies would pay the lowest income tax rate of any DC resident, 3 percent, lower than the income tax rate paid by residents who earn the minimum wage. Second, DC already gives a significant set of tax breaks to high technology companies that locate in DC. Third, the cost of providing deep tax breaks to tech companies that have taken off could be dramatic. If DC wants to encourage more investment in technology companies it should look at other states which have used targeted tax credits to try and incentivize investment in small tech companies.

The tax category that was not tackled in yesterday’s deliberations was the commercial property tax, which makes up the largest share of taxes collected from businesses in DC. That will be discussed, along with other proposals, at a meeting scheduled October 30 at 3 p.m. Stay tuned!

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