DC Tax Revision Commission summary recommendations

Over the past 18 months, the District of Columbia Tax Revision Commission (the Commission) has developed a slate of tax reform measures designed to broaden DC’s tax base, promote competitiveness, encourage business growth, and simplify the tax code. The summary report on these recommendations can be found at the Commission’s website. The package is expected to be presented to the DC Council for consideration in early 2014.

Included in these recommendations are two controversial proposals. The first is to levy a service fee on all employers. Such a fee could essentially be viewed as a backdoor commuter tax being imposed on the employer rather than the employee. The second is a proposal to subject construction contractors, carpenters, and other construction-related service providers to the DC sales tax.

The following is a brief summary of the Commission’s reform recommendations.

Individual income tax reform recommendations

  • Create a new individual tax bracket of 6.5 percent for income levels between $40,000 and $80,000 (between $40,000 and $60,000 for single taxpayers); currently, these income levels are taxed at 8.5 percent
  • Permanently lower the top marginal tax rate to 8.75 percent from 8.95 percent
  • Raise the DC standard deduction and personal exemption to federal levels
  • Phase out personal exemptions for high-income earners starting at $150,000 of adjusted gross income
  • Eliminate the low-income tax credit, the DC employee first-time homebuyer credit, the deduction for long-term care insurance, and the deduction for DC and federal government retiree pensions

Business tax reform recommendations

  • Lower the business franchise tax rate to 8.25 percent from 9.975 percent
  • Exempt investment funds from the unincorporated business franchise tax
  • Shift to a single-sales factor apportionment formula
  • Levy a $25 per employee per quarter “local service fee” on employers
    • $25 per employee quarterly fee would be imposed on each employer doing business in the District
    • Unemployment filings would be used to determine the number of employees each quarter
    • Employers with four or fewer employees would be exempt from this fee

Estate tax reform recommendations

  • Raise the estate tax exemption to $5.25 million from $1 million, with future inflation adjustments

Sales tax reform recommendations

  • Raise the sales tax rate to 6 percent from 5.75 percent
  • A report to the Commission made the following recommendations concerning services and activities on which to impose sales tax:
    • Adding services, including construction contractors, carpenters, other construction-related services, and barber and beautician services
    • Adding activities, including storage of household goods, mini-storage facilities, water for consumption at home, carpet and upholstery cleaning, health clubs and tanning studios, car washes, bowling alleys, and billiard parlors
    • Taxing services provided to the ultimate consumer, i.e., not business-to-business transactions
    • Considering any expansion of the sales tax to services on a case-by-case basis
  • Add a use tax line item to the individual income tax return

At this time, it is unclear whether any or all of these recommendations will become legislative proposals in the DC Council. However, we will continue monitoring any developments closely in order to keep you informed.

For more information or any questions you might have on this topic, please contact your Baker Tilly advisor or send an e-mail to tax@bakertilly.com.