The tax implications of the DC budget

Inside Deloitte

In this edition of "Inside Deloitte," authors Scott Frishman, Jennifer Alban-Bond, Kathleen Rudis, and David Vistica discuss how the District of Columbia Fiscal Year 2015 Budget Support Act of 2014 became law, as well as the resulting tax implications.

The District legislative process

The power to enact law

Although the District of Columbia has its own government, its power to enact law is limited to rights granted by Congress. Under the Home Rule Act,1 legislation enacted by the DC Council becomes permanent law only after it has gone through congressional review, and Congress thereby retains authority over how a District budget is adopted.2 Thus, the District’s budget process is lengthy and can be affected by various outside forces. As such, the District has the authority to temporarily implement fiscal year budgets—pending the permanent legislation—through emergency and temporary acts. Because the process is complex, understanding the distinctive interplay between Congress and the council is crucial for understanding the District’s budgets. Recent District budgets have contained significant tax law changes, which makes that understanding important in anticipating new tax legislation’s effective date.

This article seeks to clarify the District legislative process, focusing on the enactment and substance of the Fiscal Year 2015 Budget Support Act of 2014, enacted as permanent law on February 26, 2015.3

Home Rule Act

Congress enacted the Home Rule Act in 1973 to allow District residents more input into local government.4 Historically, District government was neither selected by popular vote nor allowed to legislate.5 The act was the catalyst for change. It allows District residents to elect the mayor and 13 council members.6 The act also grants authority to the council to enact laws—including the annual budget—within the limits granted by Congress.7 However, even with the rights conveyed by the Home Rule Act, the District remains expressly subject to congressional control.8

3 D.C. Act 20-0424 (B20-0750); Law L20-0155.
4 Council of District of Columbia, Home Rule Act.
5 Id.
6 D.C. Code Ann. section 1-206.02(c)(1).
7 Id.
8 As stated in D.C. Code Ann. section 1-206.01, ‘‘Notwithstanding any other provision of that Act, the Congress of the United States reserves the right, at any time, to exercise its constitutional authority as legislature for the District, by enacting legislation for the District on any subject, whether within or without the scope of legislative power granted to the Council by that Act, including legislation to amend or repeal any law in force in the District before or after enactment of that Act and any act passed by the Council.

Download the .PDF to learn more about the District's legislative process, as well as resulting tax implications of the DC budget

Summary of major legislative changes

The major elements of the District’s tax reforms are:

  • Reducing the unincorporated and incorporated business franchise tax rates from 9.975 percent to 9.4 percent (for tax years beginning after December 31, 2014), with cascading reductions to as low as 8.25 percent, subject to the availability of funding and inclusion of those reductions in future budgets.
  • Changing the business franchise tax apportionment formula to provide for customer- (market-) sourcing rules for sales other than sales of tangible personal property.
  • Changing the business franchise tax method of apportioning business income to the District from the traditional three-factor formula—including property, payroll, and double-weighted sales—to a single sales factor.
  • Creating an exemption for certain investment fund income from the unincorporated business franchise tax (UBT).
  • Reducing the personal income tax rate from 8.5 percent to 7 percent for taxpayers with income from $40,000 to $60,000 (for tax years beginning after December 31, 2014), with a phased-in reduction to as low as 6.5 percent.
  • Expanding the sales tax base to include additional services, such as bottled water delivery, fitness and recreational sports centers, and car washes.
  • Adding a use tax line in the individual income tax forms so residents can remit use tax on items purchased remotely where sales tax was not charged by the vendor.
  • Taxing all tobacco products and other premium cigars and electronic cigarettes at rates similar to cigarettes.
  • Changing eligibility requirements for claiming the qualified high-technology company (QHTC) tax benefits.

Based on the Fiscal Impact Statement: B20-750 Fiscal Year 2015 Budget Support Act of 2014, the tax reforms are estimated to reduce the District's tax collections by approximately $25 million annually for fiscal 2015 through fiscal 2018, excluding any revenue triggers, which are discussed in the full article.

35 D.C. Office of the Chief Financial Officer, the FIS report, June 24, 2014.

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