Tax hikes may be in D.C.’s future.
Against the backdrop of a darkening economic outlook and looming fiscal cliff, the D.C. Council weighed seven ideas to raise taxes during a marathon hearing Friday, including a new business activity tax and others primarily affecting wealthier residents.
Next spring, with a new mayor at the helm eager to fund her policy vision, city leaders will have to contend with a budget hole estimated to fall somewhere between $660 million and $837 million. At the same time, federal jobs cuts have cratered job growth, interest from investors to build in the city has declined and the commercial real estate market — once a reliably lucrative revenue source — remains sluggish.
Depending on whom you ask, those are either compelling reasons to raise taxes — or to not.
With cuts to education and human services hovering over next year’s budget, “we face an enormous challenge,” said council member Matthew Frumin (D-Ward 3), adding the council is likely to have to raise revenue to “make things work, even just to preserve the status quo.”
He and other lawmakers also acknowledged the need to look for cuts in the budget, along with concerns about whether tax hikes could drive business away — something outgoing Mayor Muriel E. Bowser (D) had been vocal about in warning against new taxes. “The decisions that we make in D.C., we have ensure that we’re still remaining competitive” in the region, said council member Christina Henderson (I-At Large).
Whether tax officials could implement large changes in time for next spring’s difficult budget season, however, is a different question. Chief Financial Officer Glen Lee said even if one or multiple proposals passed this fall, officials could need more time.
Over 10 hours, the council heard from experts, critics and supporters about the potential tax proposals. Here’s what they had to say.
A new business activity tax
The idea: Federal law bars D.C. from taxing the profits of business owners who live outside of the District. A business activity tax, or BAT, would hit certain law firms, lobbying firms and nonprofits currently exempted by taxing business activity, rather than profits.
The idea drew some of the most animated debate Friday. Council member Janeese Lewis George (D-Ward 4), the presumptive next mayor, has floated the tax as a way to fund a signature campaign promise. D.C. has to take a “hard look” at who’s paying into the pot and “who we let off the hook right now,” Lewis George said. “We must consider closing this tax loophole to fund universal child care.”
To lessen the burden on existing paying businesses, lawmakers also considered tax credits that would lower their overall business tax liability and offering a $200,000 exemption that could help smaller businesses.
In favor: Proponents argue it would “advance tax fairness,” said Nick Johnson, a senior fellow at the Institute for Taxation and Economic Policy. It would also capture “prosperous large corporations where the owners and top executives are making a lot of money and relying in part on D.C. public services to do so, but are minimizing the taxable income that they report.”
In a report Johnson co-authored with the DC Fiscal Policy Institute, it was estimated a 2 percent BAT could bring in over $500 million per year.
A note of caution: Former mayor Anthony Williams, president of the business and civic group Federal City Council, warned against any new business taxes given the city’s economic climate. “I think we’re making it harder for some firms that are a key component of our commercial office economy to stay in D.C.,” he said. “I think that’s a risk not worth taking.”
Yesim Sayin, director of the D.C. Policy Center, said she used to support a business activity tax, but not anymore. In recent years, D.C. has increased the paid family leave payroll tax — which affects all businesses — and swept millions from that revenue into the general fund. “The argument that these entities are not paying is no longer true, or as true,” she said.
A wealth proceeds tax
The idea: Introduced by outgoing council member Brianne K. Nadeau (D-Ward 1), the tax would set a 3 percent surcharge on profits from wealth holdings, such as gains from the sale of stocks or bonds, dividends from investments in stocks, and rental income, among other sources. “That in my mind makes the tax code a bit more equitable, making sure we’re asking wealthier residents to pay a more on their passive income while others hustling in their 9-to-5’s pay a higher marginal tax rate,” Nadeau said in an interview.
The proposal is modeled after the federal net investment income tax, and, if enacted, D.C. would be only the second jurisdiction behind Minnesota to enact a state-level version. A brief from Nadeau’s office estimates it would bring in between roughly $115 million to nearly $200 million per year.
In favor: Erica Williams, director of the left-leaning DC Fiscal Policy Institute, said the overwhelming majority of people paying this tax would have incomes over $1 million — the same demographic benefiting the most from federal tax cuts when programs like Medicaid and food aid are being cut. “The wealth proceeds tax can help us recoup some of that money for public investment and vulnerable … people in D.C.,” she said.
A note of caution: Katherine Loughead, vice president of state tax policy at the Tax Foundation, said the tax could turn people away. “For those who would otherwise consider moving to D.C., this tax could give them one more reason to choose Maryland or Virginia instead,” Loughead said.
Sayin also cautioned revenue from this tax could be volatile since it “largely depends on how well the stock market performs.” Proponents argued the volatility could be dealt with in other ways, such as only using the generated revenue for one-time costs or putting it in reserve.
‘Pied-a-terre’
The idea: Recently championed by New York Mayor Zohran Mamdani (D), this so-called “pied-à-terre” tax would hit wealthy out-of-towners who have multimillion-dollar second homes in D.C. The second homes would be taxed at higher rates — twice as high as primary residences if they are valued at more than $2.5 million.
In favor: Katharine Landfield, senior advocacy strategist at the liberal Fair Budget Coalition, advocated broadly for proposals that would increase taxes on wealth at a time when the city is dealing with social services cuts she said need to be reversed. But a pied-à-terre tax alone won’t do that, she said. “We would happily accept a high-yield pied-à-terre tax on top of the wealth proceeds tax, but never in place of it. The pied-à-terre tax is insufficient on its own, given our current structural fiscal challenges.”
A note of caution: Loughead said such a proposal “would shift a disproportionate share of D.C.’s tax burden on a very narrow segment of the tax base who, as a group, demand less of D.C.’s schools, roads and other amenities.”
Property tax hikes
The idea: D.C.’s elected leaders have long avoided broaching property tax hikes, which tend to be politically unpopular. But now that’s on the table too. Lawmakers are weighing raising property taxes by one cent or an increase of 10 cents across all property types, except for vacant or blighted lots.
D.C. has the lowest residential property tax rates in the region, but already has one of the highest commercial tax rates.
In favor: There wasn’t a ton of support among witnesses. At one point, council member Elissa Silverman (I-At Large) questioned, why not?
A note of caution: “If you’re going to do something outrageous, why would you start with the people who have been here paying taxes all along?” asked Gregory McCarthy, a vice president with the Washington Nationals who previously served on the Tax Revision Commission. “These are the neighbors we want to keep and retain.” Other critics said landlords would be likely to pass down commercial property tax hikes to tenants.
Income tax increases
The idea: The council will also weigh increasing income taxes on wealthier residents. In 2021, the council increased income taxes on the rich to fund social programs such as housing vouchers and subsidized child care educator salaries.
The latest proposal calls for a 0.5 percent increase in the marginal tax rate on households with incomes over $250,000, with the rate progressively increasing for higher income brackets.
In favor: Landfield said her organization supported increasing income taxes on the rich — but that the proposals did not go far enough. It “fails to meet the moment,” she said. “There ought to be new rates for incomes above $3 million and above $10 million,” she said.
A note of caution: Critics worried about the risk of millionaires either not wanting to move to D.C. or leaving. Officials in the Office of the Chief Financial Officer suggested lawmakers keep in mind that even modest migrations from this group could impact revenue: The city’s 12,000 richest people make up 3 percent of filers but pay 42 percent of individual income taxes, contributing $1.4 billion.
Sales tax increase
The idea: D.C. previously passed an increase to the sales tax from 6 percent to 7 percent that was supposed to go into effect this month, but was frozen by lawmakers until next October. Now they’ll take a closer look at whether to allow it to happen.
In favor: There wasn’t much enthusiasm for the sales tax increase.
A note of caution: Williams, of the DC Fiscal Policy Institute, called the tax regressive. “We would urge the council to reject a sales tax increase given the way it’s going to hit our lowest income households,” she said.
Land value tax changes
The idea: Nadeau is also proposing splitting the property tax to tax land separately from improvements on the land. Improvements would be taxed at a lower rate.
In favor: Proponents say property owners would be incentivized to develop vacant land or making other improvements to their property. “The split-rate property tax would encourage the redevelopment of higher density by not penalizing the improvement of structures,” said John E. Anderson, an economics professor at the University of Nebraska at Lincoln.
A note of caution: There was some concern about how to implement the plan. “How do you calculate the value of land? It seems like it’s a straightforward question, but it’s a difficult one,” said Joe Bishop-Henchman, executive vice president of the National Taxpayers Union Foundation. The CFO’s office warned it doesn’t currently have the framework to carry out a split-value tax, and would have to come up with a way to redo the land values of every parcel in the District.
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