An important local story in Washington, D.C. this week is the D.C. City Council’s proposed tax overhaul package. The package would restructure the tax code and reduce revenue by $67 million a year. Unfortunately, special interests may be poised to defeat generally good, pro-growth reform.
The proposal passed 11–2 on its first reading. It was the byproduct of months of study and debate. Under the plan, income tax rates would be cut, which would benefit middle-income residents. The standard deduction would be increased, particularly benefiting lower-income residents. The DC Fiscal Policy Institute estimates that middle-income families with incomes between $50,000 and $75,000 would save an average $400 annually.
It also would lower the corporate tax rate from 9.975 percent to 8.25 percent by 2019, while cutting the “death tax” and eliminating some wasteful tax credits.
These changes would provide much needed relief to D.C. residents and businesses, and make D.C. a little more competitive with its neighbors.
To partly offset the loss in revenue, the city council decided to expand the sales tax base to include some currently untaxed services, such as carpet cleaning, beautician services, and storage facilities. It would keep the sales tax rate at 5.75 percent, lower than Maryland and Virginia.
However, one particular service industry is trying to sink the entire deal. The sales tax base expansion would include fitness services, such as gym and yoga studio memberships. One gym, Vida Fitness, is leading the charge against the “D.C. Fitness Tax,” urging customers and D.C. residents to sign a petition opposing treating fitness services like most other retail goods and services. Contrary to what Vida Fitness and others say, this isn’t a new tax only affecting their industry; it is simply the expansion of the general sales tax base to include their industry’s products.
I’m not in favor of new taxes, but it is also not fair that gyms are exempt from sales taxes that hit most other retailers and their customers. As Wes Rivers of the DC Fiscal Policy Institute described it, “D.C. residents already pay sales tax on exercise equipment, running shoes, and yoga mats.” Twenty-two states include fitness services in their sales tax bases.
Middle-income residents will save more in income taxes than people will pay in increased sales taxes on gym memberships. Many of those taxpayers likely belong to gyms and yoga studios, so Vida Fitness’ opposition may hurt its customers more than it helps.
The city council should go further in cutting tax rates, but this package is a good first step. It moves D.C.’s tax code a little away from the income tax and towards the consumption tax, which is a more fair and efficient tax structure. Hopefully, policymakers won’t let special interests derail a generally pro-growth reform in D.C.