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Is it Time to Put a New Commuter Tax in Drive?

D.C.'s Tax Revision Commission has suggested an unusual way to broaden the city's tax base -- and get around the federal government.

Many commuters ride the Washington, D.C., Metrorail.
Many commuters ride the Washington, D.C., Metrorail.
FlickrCC/DC Metro Tiltshift
Taxes, they are a-changin'. This winter, New York Gov. Andrew Cuomo asked for a complete restructuring of corporate franchise and banking fees. Ohio Gov. John Kasich is seeking a decrease in individual income taxes and a hike in taxes on tobacco, energy and businesses. Illinois Gov. Pat Quinn put out an ultimately doomed request for a progressive state income tax. In all, at least 30 states are considering some kind of tax change this year.

Washington, D.C., is entertaining a tweak as well. Last year, it set up the Tax Revision Commission, headed by former Mayor Anthony Williams, to consider ways to overhaul the city's tax code. The commission looked at, among other things, getting rid of counterproductive measures, substituting more up-to-date revenue raisers and making it easier for the city to compete for business with its Virginia and Maryland rivals.

D.C. Mayor Vincent Gray, who was recently defeated in the April 1 primary, included one of the commission's recommendations in his fiscal 2015 budget proposal that would create a new tax bracket and tax rate for residents with incomes between $40,000 to $60,000. Little else from the commission will likely be considered this year, but there are several other items that could surface in 2015 and beyond. One of those is a recommendation on how to rectify an issue that bedevils most cities: taxing commuters and nonprofits, both of which use city services but are exempt from many taxes.

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The solution the tax commission came up with is a quarterly $25-per-employee fee to be levied on all District employers. I caught up with Kim Rueben, a member of commission and a senior fellow at the Urban Institute, to talk about the approach and how it would work. What follows is a transcript of our conversation, edited for clarity and length.

Tell me more about what the Tax Revision Commission is trying to solve with the $25-per-employee fee?

D.C. has a couple of quirks. One is that the federal government doesn't allow the city to have any sort of commuter tax on the suburbanites who come into the city to work each day and use city services. The second is that a lot of industries and companies here are nonprofit or government and don't pay taxes. So if you think about who is paying local taxes and who is paying for services, much of the city's potential tax base is off limits. D.C. has higher business and property taxes because the percent of the population taxed is smaller. So part of what we are trying to do is acknowledge that other groups are receiving services. Something like a $25 fee seemed more transparent than a payment in lieu of taxes approach, or PILOT, for every nonprofit. It also acknowledges that businesses are receiving services.

How would it work?

It is set up so that it would be simple, transparent and not increase paperwork. The $25 fee-per-employee that a business would pay would be based on information that businesses already collect. In this case, information on unemployment insurance forms. The first four employees would be free, so small businesses and small nonprofits wouldn't have to pay for it. For others, they would pay $25 per person listed on the unemployment insurance form. The way we wrote it, you either would pay it per person per name or an average of the number of people employed each month. Businesses with a lot of turnover wouldn't necessarily have to pay for three times as many people if they actually had 100 percent turnover every month.

In the past, other commuter tax proposals have been shot down. How do you get around the legal issues?

Anthony Williams was very clear that there needed to be a legal opinion that this is not a commuter tax. Employees aren't paying it. Employers are paying it based on the number of employees they have -- not only on employees commuting into the city but on everyone. The fee recognizes that a lot of D.C. activity is done by nonprofits, so it applies to them as well. The Urban Institute would have to pay; so would large nonprofits that own property but don't pay property taxes or business taxes, such as George Washington University and Georgetown University. It wouldn't apply to federal government organizations because we can't charge them. We are using it to lower the business franchise tax and unincorporated business franchise tax.

Would the fee approach be applicable to other jurisdictions as well?

Many central cities, such as New York City, have commuter taxes. It would vary by city. Folks in New Orleans might be interested. Often states have reciprocal agreements, but places will sometimes have taxes where they offset other taxes against it.

How likely is passage?

Certain people like it and some don't. People who are not paying income taxes probably aren't big fans of it. Those paying some sort of corporate income tax probably like it because they end up winning. They'll pay less on income taxes. Part of it is to see how sustainable it is. If D.C. can pass something like this, you can also see about playing around with some other taxes.

We felt like it was important to come up with a whole package that was sustainable and would raise enough money to sustain services. We didn't want to do something where we included all the tax cuts and basically left a big funding gap.

Penelope Lemov is a GOVERNING correspondent. She was GOVERNING's health columnist and was senior editor for several award-winning features.
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