Can Our Middle Class be Saved by DC Tax Revision Commission?

During over 50 years spent living in Washington, DC, I've seen very clearly that there are a large number of barriers preventing the poor, especially the black poor, from gaining Middle Class economic security.  Four years serving on a Mayor's Task Force on Street Vending was especially frustrating as I watched big business and our city administration cooperate to make Street Vending much harder for the poor to attempt.  We pro vending people who attended these weekly 3 hour meetings struggled to prevent the total elimination of street vending, but still were only able to save about half the available slots.  In the late 1990s one only needed $35 to register, and paid sales taxes on goods sold.  Then during the Kelly administration it was decided that vendors were not paying enough taxes, and a $1500 annual Fee in Lieu of Taxes was approved.  Many small neighborhood vendors did not have $26,000 in annual sales that made this a fair tax rate, and thus were forced out (see Issue 5 and 6). Ignorance of tax law should not be used as an excuse to oppress the poor.

In 2014 I will probably be running for public office as a DC Statehood Green Party candidate.  Our Party has decided that concern for "Returned Citizens" will be a major issue.  With over 60,000 mostly black DC citizens who have served time in prison, plus their families, this issue has major impact.  Paul Zuckerberg raised the issue of marijuana arrest records harming the future of young people.  There are 2 1/2 times as many of those arrests as graduates from high school each year.  Our own 2013 At Large Council candidate Perry Redd strongly supported the decriminilization of marijuna arrests during his campaign.  It looks as if our Council may actual adopt this stance with a new law.  For many jobs you have to check a box regarding a criminal record. Street Vending was one work possibility that did not have this barrier to employment.  In my own campaigning I will stress the importance of encouraging basic entrepreneurship as a path from poverty to the middle class.

Testimony before DC Tax Revision Commission (TRC), Nov. 12, 2013 

by G. Lee Aikin

First let me thank you for all your hard work on this complex topic. My testimony will emphasize two issues—harm from failure to index, and saving the middle class. The middle class is in serious trouble, you are in a position to help. People hate taxes and ignore them if possible. Therefore serious inequities creep into DC and the Federal tax codes with little public notice. Often by failure to index, as is true of several DC tax problems. I am most familiar with the D-40 and D-30 forms, but urge that others be examined carefully. Three minutes allows little time to present other concerns--Class 2, 3, and 4 taxes; the $1500 Fee in Lieu of Taxes for street vendors; the Basic Business License; Homestead property tax deductions; and hardship exemptions--so I hope you will read my entire testimony and attachments. These inequities and other factors locally and nationally have seriously diminished the middle and lower middle class. Without much possibility of achieving middle class status, the lower classes can loose hope and respect for the Social Contract. This can have dangerous results.

Issue 1)  Most distressing is failure to preserve the equality of Deductions and Exemptions when Home Rule was achieved in1973-4, and they were comparable to the Federal rates. Federal rates have annual COLAs. DC changes had to be voted annually, but were not. By 1991 taxpayers had lost 50% of this benefit. In 2004 my DC taxes had doubled relative to Federal taxes, I discovered NO added change had been made in 13 years. David Catania agreed it made sense to “couple” our D&E's with the Federal rate. But, no Council actions took effect until 2006 and 2008. Since then nothing.  [I am gratified to report that the Tax Revision Commission has recommended using the Federal Deduction and Exemption rates.  This would keep about $85 million in the pockets of our taxpayers.]

In 2012, a family of 4 would typically subtract $10,700 in D&E's from Adjusted Gross Income (AGI) on the D-40 form. If our D&E's were coupled with the Federal rate, they could have subtracted $27,100 in D&E's from AGI. This is a difference of $16,400. Thus, the family would have paid $786 on D-40 Taxable Income of $16,400. Using the Federal D&E's they would have paid ZERO. A similar family with $56,400 income would pay $1,394 less in D-40 taxes. Others have testified about serious inequities with Schedule H, used to help low income renters and homeowners.

Issue 2)  The D-30 needs major overhaul. Instructions are opaque [i.e. DC Apportionment Factor: “Multiply the total income by a fraction. The numerator is the property factor plus the payroll factor plus the sales factor. The denominator is three, reduced by the number of factors without a denominator.] I'm told this is a tax attorney make work project. To change that, examples should be given as they are in the Federal 1040 instructions. Many very small Unincorporated Businesses only have a little rental income, or sell a few things. If all income is DC earned, why not allow inclusion of the Federal Schedule C and/or E, and skip filling out redundant facts in D-30 Schedules A,C, E, and G, not to mention most of the rest of the form. In 1986 the D-30 became required of all Gross Income above $12,000 with a $100 fee even if there was a NET LOSS. Now a $250 fee is required. To be fair, the Gross Income should rise to at least $30,000. [A $5,000 deduction is allowed, and up to 30% for personal labor to operate the business, so an adjustment could be made in the D-40 to allow these benefits with an increase to $30,000.]

Issue 3)  The idea that D-40 should add “taxed Social Security” to income is unconscionable. SS, first taxed in 1983 under Reagan, had a tax calculator “benefits worksheet” allowing singles a $25,000 deduction, and couples $32,000. This is unchanged in 30 years. According to the CPI calculator, the 2013 figures should be $58,427 and $74,787. Unadjusted a person with $20,000 SS and $40,000 AGI will pay tax on almost half their SS; $50,000 AGI and above, on 85% of their SS, another assault on the middle class. DC's current D-40 deduction for Federally taxed SS helps rectify this gross unfairness.

Issue 4)  The Class 2 Business Property tax and Class 3 and 4 Vacant Property taxes need serious changes.  Reducing the $1.85 Class 2 rate to $1.65 for property assessed under $3 million is a help, but really does not fix business in blighted areas. Businesses in Anacostia and upper Georgia Ave. often minimally improve their property. Taxes in PG Co. are much lower, and Montgomery Co. has variable rates. Why can't DC have variable rates or considerably smaller rates on low assessed properties?

 The Vacant Property tax rates are outrageous, far greater than any in the US, and violate at least the spirit of DC Code 47-817 Comparison of rates and burdens, “...it is the intention of Congress, that the tax burdens in the District be reasonably comparable to those in the surrounding jurisdictions...” [See attachment] The one month vacancy registration rule is way outside the one year vacancy norm elsewhere. [In addition, as soon as you register, your tax is immediately jumped 6 or 12 times the old rate. One 60+ person I know lost her row house because she didn't realize she should file for an exemption and thus received a $105,000 tax bill.]

Issue 5)  The $1500 Fee in Lieu of Taxes is an outrage against street and truck vendors. It is far above the tax small part-time neighborhood vendors might pay on sales. And some highly successful truck vendors are probably not paying their fair share. A half day of tax training upon licensing should solve this problem and be much fairer. This would be similar to the kind of training certification provided for food handlers in restaurants and on food trucks. In the late 1980s one could get a vending license for $35 dollars and pay actual income taxes and 6% on sales. The $1500 has to be paid even when one has almost no income such as in January, February and March. There is also a moratorium on renewing a dropped license. Here too, poor and middle class entrepreneurs are being harmed and disincentivized.

Issue 6)  Another unfair and counterproductive tax related matter is the Basic Business License. Requiring licensing of all businesses is another serious disincentive to business formation by our younger and poorer potential entrepreneurs. The BBL should not be required below a certain gross income level, such as $100,000.. A rule could be made that businesses below that would also take a half day of tax training on how to prepare their business taxes including the Federal Schedules C and E that pertain to business income. A simple registration fee of $25 could cover this cost. This could exempt them from the BBL and improve tax collection. In addition, the “clean hands self-certification” that says one does not owe the city $100 or more in taxes or fines is big problem. I know people who in 2010 used the Tax Amnesty to clean up their tax situations, and then the following year received OTR bills in the $hundreds and even $thousands saying they owed taxes which in fact had been resolved. Sometimes it takes months to clear up these OTR errors, to finally allowing the BBL to be granted.

More on Issue 1)  Regarding the Deductions and Exemptions issue I would like to add the following. As pointed out above, with “coupled” rates a family of 4 would pay taxes on $16,400 less income. Thus no tax would be paid unless the Adjusted Gross Income was above $27,100. [$27,100 IRS1040 D&E - $10,700 D-40 D&E's = $16,400] Without this $16,400 reduction, the 2012 tax is $786. A family of 4 with Taxable Income of $26,400 or with $36,400 would save $984 with coupling. At $46,400 the saving is $1,144. At $56,400 and above the savings are $1,394.

An educated guess suggests that around $100,000,000 might remain in the pockets of taxpayers with coupling. [The TRC's estimate is $85 million.]  Imagine what this would do to our local economy where it could be spent on food, housing, clothing and other merchandise. These “high velocity dollars” would then generate additional sales and income taxes for the city, considerably lowering the initial loss. Moreover, with recent tax income surpluses ranging near $300 to $500 million we can afford to do this. A small increase of top tax rates could rectify any revenue problems created. [The top earning bracket rate of 8.95% is due to expire 12/31/15 and drop to 8.5%.  The TRC recommends lowering to 8.75% in 2016 permanently for singles above $200,000 and marrieds above $350,000.  Since they calculate the total revenue given their recommendations will have a $30.8 million shortfall, should there be a slightly higher rate for the very well off, perhaps those above $1 million?]  Has all this inequity and tax neglect helped drive lower middle class families out of the city to PG County? This should be studied and analyzed.

Issue 7)  Another concern involving COLA's is Homeowner exemptions. While there have been increases in the Homestead Exemption amounts over the years, this too seems not to have kept up with inflation. Analyzing several cases known to me, it appears that the Homestead Exemption percent is only about 2/3rds what it was years ago. The 50% Property Tax reduction allowed for senior citizens is now threatened by the maximum allowed Household Income. A $100,000 maximum was established in 1992. For 2013, the CPI calculator shows $166,892. However, The Age-in-Place and Equitable Senior Citizen Real Property Act of 2011 only increased it to $125,000. If children with good incomes come to live and care for Mom and Dad in their failing years, they are seriously penalized if they still have to maintain their original home. Once again, the middle class is being hurt.

Issue 8)  Another concern, also related to D&E's is the Exemption for “over 65” or “blind.” After caring years for my husband who died of Alzheimers, I can tell you blind care would have been much easier. Let us lead the nation by allowing an exemption for anyone who is medically certified as being at least as handicapped as a blind person, i.e., wheelchair bound, dementia, etc.

While studying posts by the TRC, I was thoroughly puzzled by inclusion of Figure II-h showing “Current Law and Changes Recommended by the D.C. Tax revision Commission as Shares of 1998 Family income for all Taxpayers” and 3 more related Figures. This seemed to be part of a recent report of TRC recommendations, and I wondered why you did not use the 1-30-13 ITEP Table 1 which is also attached. If the 1998 Recommended total taxes is what I saw, then it is clear it recommended that the middle 89% should pay the most, ranging from 10.1% to 11.3%, while the richest 1% would pay 9.4% and the poorest 20% pay 8.9%.

If this is actually the current thinking, that is even worse. The Institution for Taxation & Economic Policy (ITEP) uses 2010 income levels which shows (after a Federal deduction offset) that the middle 20% paid the most—11%. On either side 9.8% and 9.4% was paid. Thus the middle class again paid the most. The poorest 20% paid 6.6%, but the richest 1% were the winners, paying only 6.3%. Surely this Commission can do better.

In sum, I strongly urge you to do your best to reverse national and local efforts causing the systematic evisceration of Middle Class prosperity and hope for those even farther behind economically.

ITEP 1-30-13 Release, Table 1 of 2010 tax rates by Quintiles

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I have covered a number of these issues in detail in earlier blog articles here.  See the Sept. 3, 2013 post: INDEX of all Posts, Recent to Oldest, Dates, Titles

Articles related to taxes are dated in red, and the articles in early 2012 are related to DC taxes. There is an October 21, 2012 post on saving Social Security, which also is oriented toward saving the Middle Class.

G. Lee Aikin, DC Statehood Green Party