Washington D.C. Plans Tax Changes, Affected Businesses Protest

Last week, the Washington D.C. City Council approved various tax changes that would reduce income tax.  However, certain businesses affected by the tax changes are now protesting the planned changes.

The move by the City Council to reduce income taxes came as a surprise to many, as Mayor Vincent Gray had effectively squashed the tax cut package that was first proposed last December.  However, with passage of the tax cuts, beginning in January 2015, low-income residents will see tax decreases.  By the end of 2018, all except for the wealthiest income earners will benefit from the tax decreases.

To allow for the income tax decreases, the City Council reduced funding of two major projects proposed by Mayor Gray: a new hospital and a system of streetcars.  While those projects had benefits, the council believed reducing taxes to make the cost of living in the D.C.-area more affordable was a higher priority.

Several members of the council felt the slashed programs of outgoing Mayor Gray did not have appropriate long-term benefits that were in the best interest of the city.  With the tax reductions, the council hopes to stave off the outflow of residents into neighboring states with lower costs of living.

In total, the income tax cuts will reduce the effective tax rates of Washington D.C.’s residents from 4.9 percent to 4.5 percent.  The decrease will translate into a reduction in annual income tax revenue by approximately $225 million.  The tax changes offset almost $70 million of that revenue by imposing a 5.75 percent sales tax on various services.

Services Affected by Tax Increase that Offsets Income Tax Decrease Protest Decision

Two of the businesses that the sales tax increase on services will hit beginning in January are health clubs and tobacco shops.

“It doesn’t really make a lot of sense,” said David von Storch.  Von Storch owns several health clubs located in the Washington D.C. area.  “D.C. shouldn’t be taxing residents who want to be living healthier lives.”

Von Storch is lobbying members of his health clubs via Facebook and an online petition to let their congressmen know they are concerned about the sales tax on health clubs.

Phil Mendelson, Chairman of the City Council, defended the move as necessary in order to improve the overall tax level on residents.  Mendelson noted that those protesting the application of sales tax on services they use are ignoring the big picture, which is that the overall amount they pay in taxes to the city will likely decrease.

“The increase in the sales tax, if one has a gym membership, is insignificant to the reduction in the tax burden,” said Mendelson.

Owners of tobacco shops also expressed their dismay at the tax.  They fear the sales tax on loose tobacco used in pipes is the first step toward taxing pipe smoking at a level akin to taxes imposed on cigarettes.

Mendelson said that in spite of the protests he did not expect the city council to remove the sales tax on any of the proposed services.  The tax package is slated for a final vote on June 17.

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by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.