- The Washington Times - Thursday, May 12, 2011

When Mayor Vincent C. Gray’s budget team sifted through revenue-generating ideas for the coming fiscal year, they placed them in “yes” or “no” piles and let the executive choose among concepts “on the bubble,” his budget director said.

The result was 13 new or increased taxes and fees expected to contribute $127 million toward closing the $322 million budget gap in Washington, D.C.’s 2012 spending plan. They range from the simple — raising the alcohol tax and expanding the sales tax to live theater — to more complex maneuvers such as combined reporting and apportioning taxes to give greater weight to sales, both of which affect corporations with entities in and out of the city.

Tax experts gave mixed reviews to the mayor’s a la carte approach. They note that the plan employs common tactics used in other parts of the country but also say it raises questions about the reliability of expected outcomes and the District’s ability to remain competitive versus neighboring states.

It is good policy to expand the sales-tax base, but picking and choosing from subsections of the economy “doesn’t make a lot of sense,” said Mark Robyn, an economist with the Tax Foundation, a nonprofit D.C.-based tax research group.

“Broad-based and low rates are the way to go,” Mr. Robyn said.

Mr. Gray’s budget director, Eric Goulet, says the mayor has, in fact, taken a broad approach, spreading the pain across numerous facets of business and everyday life.

David Kautter, managing director of American University’s Kogod Tax Center, saw the mayor’s plan as “equal-opportunity tax increases, from culture to vice.”

“The one thing you cannot say is it is a pro-growth or pro-job series of proposals,” said Mr. Kautter, noting “you have to worry about the impact on small businesses and entrepreneurial business.”

His comments echo the concerns of D.C. Council member Jack Evans, Ward 2 Democrat and chairman of the Committee on Finance and Revenue, who lambasted several tax proposals in the mayor’s budget from the moment they were announced. Notably, he objected to raising the income tax from 8.5 percent to 8.9 for income above $200,000, making it the highest in the region, as well as taxing live theater and making the temporary 6 percent sales tax permanent.

Observers said the District has to tread warily when it comes to lifestyle-oriented taxes and fees, especially if it wants to remain financially stable during the recession and to compete with Virginia and Maryland.

Raising the parking garage tax, from 12 percent to 18 percent, and increasing the Circulator bus fare from $1 to $2 are significant leaps, they said.

These and other tax measures can have deleterious effects on the D.C. business climate, and it is quite easy for individual residents to move across the Potomac.

“It’s sort of one of the things D.C. has to be careful of,” Mr. Robyn said.

Among so-called vices, raising the off-premises alcohol tax from 9 percent to 10 percent would represent a game of cat-and-mouse with Maryland. The Old Line State recently increased its alcohol tax to 9 percent, citing the level in the District. Now, the mayor’s plan would move the city one notch higher.

It is not a good policy “if you’re trying to be competitive,” said Mr. Robyn, who noted that taxes on vices usually are based on quick-and-ready revenue, not morality. “I haven’t seen any numbers that say 9 is too low but 10 percent will better control the number of alcoholics.”

On behalf of the mayor, Mr. Goulet said the alcohol-related measures strike a balance. Although the proposal increases the tax,it would allow liquor storesto stay open two hours later, until midnight.

Several revenue initiatives in the mayor’s plan involve tax procedures that are not as easy for the layman to digest.

At least one change, an adjustment in withholding expected to generate $19 million, amounts to a “one-year, interest free loan” to the city that will be paid back in refunds, Mr. Kautter said.

“That one, to me, is just a gimmick,” he said.

Combined reporting is a relatively new and popular trend around the country that requires multistate corporations to allocate their tax obligations based on their percentage of activity in each jurisdictions.

However it raised an eyebrow at the Greater Washington Board of Trade. Its president and CEO testified Monday that a corporation’s lagging entities outside the District will weigh down gains made by branches within the city.

“It is true that under combined reporting businesses with out-of-state losses would water down income from a profitable D.C. business,” the mayor’s office said. “But this is unlikely the case for most District businesses.”

The mayor’s office projects $22.6 million in revenue from combined reporting in fiscal 2012, noting it would prevent D.C. businesses from transferring income to out-of-state entities.

“Combined reporting would prevent businesses from manufacturing transfers to affiliates in this manner to offset income generated in the District,” the budget office said.

Across the nation, actual results from combined reporting have been “a little bit mixed,” with some areas not getting as much as they thought, Mr. Robyn said.

Mr. Kautter said it is hard to know whether the revenue estimate is solid or not, but he trusts the District used good formulas. The method appears to be successful, he noted, or else it wouldn’t be a trend.

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