In July, the DC Council approved tax reform based on recommendations made by the District of Columbia Tax Revision Commission.  The shortcomings listed by the commission on DC’s tax code were the relatively large share of income that DC’s middle class had to pay, the high business taxes, and a narrow tax base.  Acting on the advice of the commission, the DC Council enacted tax reform that cuts income and business taxes, expands the low-income tax credit, and broadens the tax base through the sales tax. 

The base broadening aspects of the tax reform became effective yesterday.  Now, previously exempt items such as bottled water delivery, storage rentals and leases, carpet and upholstery cleaning, car washes, bowling alleys and billiard parlors, and among the most controversial, health club and tanning services, will be affected by the 5.75 percent sales tax.  It is important to note that no special fitness tax was included in the tax reform.  Rather, the local sales tax is now simply applied to yoga and gym classes, along with other previously exempt services.  The income tax cut amount will far exceed the higher sales tax collection that this base broadening measure will generate. 

The rest of DC’s tax reform will take effect in 2015. According to the Tax Foundation, here is what to expect from the rest of the reform:

  • Middle-income taxpayers (those between $40,000 and $350,000) will see their tax rate drop from 8.5 percent to 7 percent next year, then 6.5 percent the year after that. Those earning up to $1 million will see their tax rate drop from 8.95 percent to 8.75 percent.
  • All taxpayers will see more generous standard deductions and personal exemptions, as they will be increased to match federal levels.
  • Childless low-income workers will see a larger Earned Income Tax Credit (EITC), from 40 percent of the federal credit to 100 percent of the federal credit.
  • The District’s hefty business tax will drop from the current 9.975 percent to 9.4 percent (2015), 9 percent (2016-17), 8.5 percent (2018), and then to 8.25 percent (2019), and the District will adopt single sales factor apportionment.
  • The estate tax threshold will be recoupled to federal laws

Americans for Tax Reform has previously applauded the DC City Council for restoring this much needed tax relief for District residents.  By lowering the rate of taxation for both businesses and middle-income earners DC residents can finally get some much needed relief.  This will surely boost economic activity by leaving more money in the pockets of those that have earned it.  DC is moving in the right direction by lowering tax rates on individuals and business, as well as by broadening the tax base.  It is nice to see actual tax reform occurring in our nation’s capital.