Monday, October 3, 2016

DC Tax Justice for Low and Middle Income People, My 12 Year Fight

Ever since I saw in 2004 my DC taxes were more than my federal taxes, I have been working hard to learn how or why this is happening, especially as my income level adjusted for inflation had not changed.  In previous decades my DC taxes had been 1/2 the federal tax bill.  I testified regarding my findings at various Council hearings, and finally twice before the 2013 Tax Revision Commission chaired by former Mayor Anthony Williams.

[1/21/19 Update] - Because in April 2019 we will now be subject to the workings of the new Trump federal tax code for tax year 2018, I felt it important to see how that affects our DC personal income tax, the D-40.  I was distressed that eliminating the federal Exemptions and only allowing the Standard Deduction (if not using the Schedule A Itemized Deductions) might once again hurt us, the lower income tax payers.  Having now compared the IRS 1040 Standard Deduction rate with the DC D-40 Standard Deduction rate, I find good news.  
     At least for a single taxpayer, the rates for IRS and DC are now identical, this puts us one year ahead of schedule for complete comparability with the federal rates and means an unexpected additional amount of cash for taxpayers and community businesses.  Click the link below to see the actual savings for tax year 2018 (calendar year 2019).


https://gleeaikin.blogspot.com/2014/10/in-2019-dc-council-approval-of-2-tax.html

[2016] I am currently running for At Large Council member (DC Statehood Green Party) on Nov 8, 2016.  [While I did not win over the Democrat and Incumbent candidates, I did come in third (in a field of 6 candidates) thanks to your 29,000+ votes.]  Others have said I should focus more on the low income health, safety, and welfare oriented issues.  I agree these are tremendously important, but involve a number of complex factors which are hard to translate quickly into effective and winning laws.  For example I was shocked to be told that regarding just one of 5 federal Housing and Urban Development (HUD) programs we had returned $140million to HUD unspent over decades.  As a Council Member I would like to put together advisory groups that would help me and other allies make sure we use our federal grants and not return the money unused.  These could include housing, jobs, education, environment and energy, low income benefits, returned citizens, health and AIDS, transportation, etc.

Therefore, I have focused on Tax Justice because one way or another everyone pays taxes, whether it is sales tax, property tax (affecting rent rates), income tax, or business tax (and the cost of goods sold).  Once a good place is chosen to improve a tax rate, those numbers are voted and normally go into effect the next tax year.  Although the Council decided to slowly phase in the $85million benefit I started working on in 2004, already people are paying less DC income taxes than in 2012.  Failure to raise many benefits with cost of living increases is a major problem that needs watching.  [Finally for tax year 2018 we have a Standard Deduction identical to the more generous federal rate.]

An even larger benefit is possible with the revised Schedule H that helps renters and property owners.  For decades only Individuals and Family Units earning $20,000 or less could benefit.  As of tax year 2013 the limit was raised to $40,000 or less, and for seniors 70+, $60,000 or less.  Then for tax year 2016, the $40,000 figure was raised to $50,000.  Almost no one knows about this.  At a recent candidate forum with at least 150 lower income elderly, only 3 people had heard of this benefit when I spoke about it.  I calculate this roomful of people probably had from $150,000 to $200,000 in uncollected Schedule H benefits.  In all I suspect that for the 2013 and 2014 tax years from 1/4 to 1/2 $billion dollars have not been collected by the eligible.  Publicizing this benefit is a major goal of mine.  The maximum benefit is $1,000.  Please click this link to see if you are eligible.  You have 3 years to file an Amended Return and links to all needed forms are at the link above.  If you do not file the Amended Return for 2014 this year, you will loose the benefit for that year FOREVER.

This article by the Washington Post suggests that with more Millenials being voted to our Council that the Council is moving farther to the left.  This group is also susceptible to developer and big business payoffs, as is shown by recent votes regarding the NO-BID contractor whom we are paying $1million a year to turn McMillan Park into another Tyson's Corner rather than a benefit for us all.  One of this new group hiring as their chief of staff someone who had just left a job working for that development group.  All except Elissa Silverman voted to continue that $1million subsidy for another 5 years, while continuing to ignore the objections of the large number of community people who testified against this.  Also, just wait until they discover how various aspects of DC taxes impact their lives negatively.
https://www.washingtonpost.com/local/dc-politics/2016/11/01/61fe9c0a-9c7e-11e6-a0ed-ab0774c1eaa5_story.html

I have added some comments to the Testimony below in brackets [   ] to reflect additional or more recent information

Testimony at D.C. Tax Revision Commission on June 24, 2013 
by G. Lee Aikin

Thank you for hearing our testimony and for all your hard work to improve our tax laws. I wish to comment on several aspects of this issue: 
 1) Restoration of our Deduction and Exemption rates to those we had when granted Home Rule in the early 1970's; 
 2) Adjustment of the upper tax brackets and rates. 
 3) Improvements in the D-30 tax form which is currently a small business nightmare; and 
 4) Modification of the Business Tax rates to make us more competitive with surrounding jurisdictions;

1) Restoration of our Deduction and Exemption rates – In early 1970 these rates were roughly the same as those allowed by the IRS 1040 tax form. However, unlike the Federal rates which are adjusted for inflation each year, our rates fell to the tender mercies of our elected representatives who consistently failed to adjust them timely, so that by 1991 they were only ½ the Federal rates. After that they were not changed until I called Councilmember  David Catania in 2004 to look into the idea of “coupling” our rates with the Federal rates. After another year or two, small additions were finally made to these deductions. However, the current situation [including 2014 updates] is such that if a family of 4 were allowed to take the Federal rate for their DC D-40 D & Es, they would pay taxes on $16,400 less income. This is [will be] a significant tax reduction for our families and lower income taxpayers. If our D & Es were coupled, this would be an immediate benefit for every single DC taxpayer from lower middle income to the very rich.

2) Adjustment of the upper tax brackets and rates – Currently tax rates in the D-40 jump from $40,000 to several hundred thousand. There should be an additional step at the $100,000 to $125,000 level. To compensate for the coupling of our D & Es with the Federal rate, there will probably need to be a modest increase in the upper level tax rates.  [An additional step has been added, but top tax rates have been lowered, while the D & E benefit slowly phases in over 6 years.  The rate for top earners in California is 13%.  In DC I believe the top rate is 8.25%.  Here and elsewhere some concerned wealthy people are saying that they should be paying more taxes than they are being charged now.]

3) Improve the D-30 tax form – This form as currently constituted needs an unnecessary amount of information. For example, the portion related to general business income and rental income requires a lot of detail that could be provided with inclusion of the Federal Schedules C and E for DC income.   The form is also needlessly technical. For example Schedule F – DC Apportionment Factor which says “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.” No concrete examples [DC supplies no concrete examples] as the IRS 1040 instruction booklet gives us poor benighted taxpayers. FOR SHAME. Write this so a high school graduate can understand it or else admit this is a tax lawyer make work boondoggle. In fact I visited a tax preparation service where the resident tax attorney said he couldn't really be much help, but most people in my business income bracket submitted the $100 minimum and did not bother submitting the D-30. A $12,000 gross receipts requirement was placed in 1986, with a $100 minimum tax bill. Last year the minimum payment required was raised to $250. How about adjusting the gross receipts rate for inflation to at least $25,000 or $30,000. Give people with lower income the option of calculating their tax owed with the D-30, or else include it in the D-40.  [The tax rate has been reduced, which benefits bigger businesses, but the $250 minimum tax hurts small income businesses.  It even has to be paid if there is no actual income.  Also a $5,000 deduction was established in 1986.  That should also be increased to reflect inflation which would also be fairer to small businesses.]

4) Modify the Business Tax ratesOn the back of this page is a chart (admittedly several years old) which shows property tax rates in DC and surrounding jurisdictions. You can see that our $1.85 per $100 rate is much higher than most other jurisdictions. Why can't we have different rates in different parts of the city like Montgomery Co. does. Why should upper Georgia Ave. or Anacostia pay at the same rate as downtown. Also, high rates cause high rents and drive many desirable small businesses out of our neighborhoods leaving only high volume liquor stores, bars, and restaurants. Perhaps we should have an ANC petition mechanism for identifying valued neighborhood stores for special lower tax rates provided the building owner passes this on to the store owner.  [After reading this link from Walmart Realty, I realized one reason they picked their upper Georgia Ave. location is the row of 2 story stores across the street.  Walmart doesn't care if their stores succeed so long as there is valuable property nearby they can buy when small businesses are destroyed by Walmart competition.  A few years ago, the Class 2 tax rate for businesses of $1.85 per $100 assessed value, was reduced to $1.65 for property worth $3million or less.  I propose that rates be reduce further to $1.45 for property worth $1million or less, and to $1.20 for property worth $500,000 or less.  I interviewed at all the stores across from Walmart on Georgia Ave.  They all said their property was assessed at $500,000 or lower, and the $1.20 rate would help them survive Walmart.]

Thank you for hearing our concerns and good luck making everyone as happy as can be expected.

Testimony at DC Tax Revision Commission on 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--
Issue 4) Class 2, 3, and 4 taxes; 
Issue 5) the $1500 Fee in Lieu of Taxes for street vendors; 
Issue 6) the Basic Business License; 
Issue 7) Homestead property tax deductions; 
Issue 8) 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 in 1973-4, 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 [and introduced the possible change]. But, no Council actions took effect until 2006 and 2008. Since then nothing.  [I had spoken with Catania in late 2004, but I was caring for my dying husband in spring 2005 and could not help mobilize support for Catania's efforts.]

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.  [And I have added important details in the June 24, 2013 Testimony above.]

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, but this should also be increased to reflect inflation, 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 [Consumer Price Index] CPI calculator, the 2013 figures should be $58,427 and $74,787. Unadjusted a person with $20,000 SS and $40,000 [Adjusted Gross Income] 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, pages 5 & 6] The one month vacancy registration rule is way outside the one year vacancy norm elsewhere [in neighboring MD and VA].  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.  [Former Councilmember Muriel Bowser, now Mayor, held hearing at which a number of tragic cases were reported.  For example, the 95 year old woman who had be hospitalized for 5 months and now was in danger of loosing her home.  While exemption factors were added to the one month vacant property law, the ONE MONTH itself was not changed.  Imagine your relative has just died and our government demands that you provide a tenant in one month, or perhaps loose your inheritance.  Who needs that grief in the month after loosing a loved one.  We must demand that our government use the same ONE YEAR period approved in neighboring MD and VA.  I know people who are afraid to travel for the whole summer for fear of loosing their home.  We are now seeing cases where speculators are sitting on properties they scooped up from beleaguered home owners and heirs.  Their neighbors are complaining about this result the one month law was supposed to fix.]

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 $250,000.. 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. [Imagine the frustration of a highs school or college student who decides to get a mower and a few tools to have a simple summer property maintenance business.  They would never be able to get the BBL paper work done in time to do such a summer business.  Once a business has a year's gross income of  $250,000 or more, they could then get the appropriate license.]  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 [or years] to clear up these OTR errors, to finally allowing the BBL to be granted.  [The excessive traffic fines experience by many are often challenged in court, but if over $100 can also prevent getting a license.]

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 $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 actual figure calculated by the TRC was $85million.]  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. Has this inequity and tax neglect helped drive lower middle class families out of the city to PG County? This should be studied and analyzed.  [Our Council chose to lower high income taxes, and dribble in this low income benefit over six years.]

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.

* * * * * *
I have covered a number of these issues in detail in blog articles at: gleeaikin.blogspot.com.
[See the Dec. 28, 2015 post: INDEXof all Posts, Newest 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.  [Several tax articles have been added since this Testimony was given.]

G. Lee Aikin, 11-11-13, gleeaikin@yahoo.com
Att: Letter from Ted Walker to Councilmember Muriel Bowser [See link at Issue 4.]
See other side for two charts [See link for ITEP Table 1].

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