KAUTTER: Balancing budget on fragile backs of workers

Raising taxes on middle class and entrepreneurs will hold back job growth

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The District of Columbia faces daunting financial challenges. Mayor Vincent C. Gray’s proposal for $127.8 million in taxes and fees to balance the budget was adopted in large part by the D.C. Council. A final vote is scheduled for June 18.

At the Kogod Tax Center at American University, we are concerned about the impact of several proposed taxes in the District affecting small businesses, middle-income taxpayers and entrepreneurs.

Why? It is estimated that most job creation and innovation in the economy occurs within small businesses. During the past 15 years, small businesses created two out of every three new jobs. Startups and small businesses hire the unemployed, buy new equipment and provide health insurance for their employees. Small businesses are clearly the growth engine of the economy for the country. The District is no different.

Some of the proposals under consideration could have unintentional, adverse impacts on small businesses in the District and their employees. In particular, four notable proposals in the budget would have a disproportionate impact on small businesses and their job-creating ability. First, the budget increases the minimum business-franchise tax. This is a direct hit to an affected business’s bottom line and would raise the cost of operating in Washington. Entrepreneurs and existing businesses face this tax even before opening their doors and earning their first dollar of revenue. Some won’t even bother to put up the “open” sign, discouraged by the upfront cost.

Second, the budget proposal includes two transportation levies that will fall on the backs of employees - the struggling middle class and those trying to enter the middle class. In particular, the proposal to double the Circulator fare to $2 might seem small, but it’s particularly egregious, given it’s a 100 percent spike for employees of small businesses and others who are earning modest incomes. The increase will seem anything but small for an employee who rides the Circulator to and from work every day, facing a $500 annual increase in commuting costs. Employees will seek to recover some of that increase through a raise in wages, thereby increasing the cost of doing business in the District.

Similarly, the 50 percent increase in the parking garage tax from 12 percent to 18 percent will be disproportionately borne by workers. If someone is paying $200 a month currently to park in the District, his annual cost will go up approximately $150 a year. Again, employees will seek to recover some of that increase through a raise.

Finally, the proposal to increase withholding on D.C. residents is simply a way to compel Washington workers to provide an interest-free loan to the city. Affected taxpayers will be over-withheld and will be entitled to refunds when they file their returns the following year. For low-income workers especially, however, it is much more than a timing difference. It represents real dollars that they will be unable to use to support their families, and it will undoubtedly cause hardships for some having to forgo groceries and other daily essentials, which are all rising as inflation increases. Adding challenges to workers’ lives won’t help struggling small businesses.

Washington has witnessed strong growth, especially over the last two decades. The economy is showing the first signs of expansion since the recession. We urge the mayor and the D.C. Council to tread cautiously when it comes to proposals that might hinder growth among our job-creating small businesses and entrepreneurs and could cause real harm to employees who live in the District, particularly middle-income wage earners.

David J. Kautter is managing director of the Kogod Tax Center at American University’s Kogod Graduate School of Business.

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