On January 5, the DC Tax Revision Commission, or TRC, presented a comprehensive list of 39 suggested modifications to the tax system of Washington, D.C. The TRC believes that these revenue-neutral recommendations represent a fresh course of action to boost economic competitiveness, stimulate entrepreneurship, create new jobs, and specifically aid small and Black-owned businesses in the district by eliminating certain barriers to entry and tax liabilities.
Moving forward could, however, increase the number and variety of entities taxed under a proposed business activity tax, some of which have previously been tax-exempt. This could potentially lead some businesses to cease their operations in D.C. to avoid this new tax, opting instead to relocate to a lower-tax jurisdiction.
Included in these proposals is the implementation of a $1,000 per-child refundable child tax credit, the doubling of the child and dependent care tax credit, and the extension of childless worker earned-income tax credit benefits to elderly and young adults. Another proposal aims to expand the income range eligibility and heighten the property tax credit for both homeowners and renters.
The TRC suggests, for instance, scrapping the personal property tax on business equipment, the basic business license fees, and the unincorporated business franchise tax, or UBFT. These tax exemptions appear to ease the burden on those wanting to start a small business. The present fee schedule in D.C. has been described as “antiquated and obsolete” by the TRC.
However, the proposed business activity tax—a value-added tax of roughly 1.4% imposed on gross receipts—raises concerns. It seems this tax could actually increase the liability for businesses, particularly partnerships with low rent payments and limited capital expenditures. It’s expected to stir controversy and businesses affected may need to consult with their tax advisors to navigate the potential impacts.
Another provision that has generated opposition is the proposed data excise tax. This would affect businesses extracting data from over 50,000 D.C. residents, at a rate of $4 per participant per year. The Insights Association, a leading nonprofit trade organisation for the market research and data analytic industry, argues that this new tax could hamper small businesses, particularly insights service providers.
The proposed changes also point towards a shift from the Joyce method of combined reporting, currently used in D.C., to adopting the Finnigan rule. This proposed shift aligns with recent changes in New Jersey‘s tax legislation and is predicted to reduce opportunities for tax avoidance through the creation of profitable out-of-state subsidiaries.
Although the proposed changes still require further inspection, the TRC’s recommendations represent a significant attempt to stimulate economic growth and alleviate the tax burden on Washington residents—in particular families with children and seniors from Black and Latino communities who face the greatest economic struggles.