The DC City Council passed a budget last week that includes a variety of smart tax policy changes. Among them are a reform designed to limit tax avoidance by multi-state corporations, and a provision curtailing some of the generous tax breaks enjoyed by the city’s wealthiest residents.
One of the more notable tax changes contained in the Council’s budget is a provision implementing the "combined reporting" of income by corporations with income from more than one state. This reform will greatly reduce the ability of corporations to shelter their DC profits from tax by shifting them, on paper, to low- or no-tax states. Corporations paying little or no DC taxes will also be subject to a slightly higher corporate minimum tax under the Council’s plan.
Unfortunately, the Council also decided to return some of the revenue generated by these changes to multi-state corporations in the form of a new deduction, scheduled to take effect in five years (outside the city’s four year budget window).
Another positive provision in the budget limits the value of itemized deductions for taxpayers earning over $200,000 per year. This limitation closely resembles a recommendation The Institute on Taxation and Economic Policy made in a pair of recent reports.
Under the Council’s budget, DC’s income tax code will also be amended to eliminate the deduction for income earned on out-of-state bonds. No state offers such an exemption today, and the DC Fiscal Policy Institute has pointed out that the impact of this change will be generally progressive, since most out-of-state bonds are held by individuals with over $100,000 in annual income.
Finally, the DC budget also contains a number of less progressive revenue measures to help the city weather the lingering economic downturn. Among those changes are the permanent extension of a recent 0.25 percentage point sales tax increase, and an increase in the parking garage tax.
DC’s budget awaits the signature of Mayor Gray. Once signed by the Mayor, the budget can only be prevented from becoming law if the U.S. House, the U.S. Senate and President Obama all three agree to block it within 30 days.
Photo via Allison_DC Creative Commons Attribution License 2.0