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D.C. Wants To Give You A Break On Income Taxes (And Tax Your Yoga Class)

Under a number of proposed changes to the tax code, most D.C. residents would pay less in income taxes.
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Under a number of proposed changes to the tax code, most D.C. residents would pay less in income taxes.

Update, 4:30 p.m.: The Council approved the budget and, by extension, the changes to the tax code.

If you think too much of your paycheck goes to D.C. coffers, you might have some relief coming — today the D.C. Council will debate a bevy of changes to the city's tax code, including an overall decrease in income tax rates.

Under the proposed changes, which were recommended last year by the D.C. Tax Revision Commission chaired by former mayor Anthony Williams, a new middle-income tax bracket will be created for residents making between $40,000 and $60,000 per year. They would pay a rate of 7 percent in 2015 and 6.5 percent in 2016; under the current tax code, anyone making between $40,000 and $350,000 per year pays a rate of 8.50 percent.

Higher earners would also see relief in 2016 — residents making between $350,000 and $1 million would pay a rate of 8.75 percent, down from 8.95 percent now. Anyone making over $1 million would remain at 8.95 percent.

All told, the changes to income taxes would mean that the effective tax rate for all residents would fall from 4.9 to 4.4 percent. Residents in tax brackets under $500,000 per year would pay less in taxes; only those making more than that would see slight increases. A resident making between $75,000 and $100,000 would see a decrease in yearly taxes from $4,105 to $3,503, while one making more than $1 million would pay $165,411, up from $157,063. (To see how you'd be affected, scroll down.)

The proposed changes, which would be phased in over five years, also include an expansion of the Earned Income Tax Credit for single workers, an increase of the standard deduction for single and married filers, a decrease in the business franchise tax, an increase in personal exemptions, and an increase in the estate tax threshold from $1 million to $5.25 million.

Proponents of the changes — including the liberal-leaning D.C. Fiscal Policy Institute — say that the changes would make the tax code more progressive. Business groups say they would allow the city to remain competitive for businesses, relative to Maryland and Virginia. A D.C. Council budget official called the proposals "the biggest tax relief" ever considered.

It's not all tax cuts, though.

The changes would include an expansion of the 5.75 percent sales tax to include certain services like water consumption for home, storage of household goods/mini storage, carpet and upholstery cleaning, health clubs and tanning studios, car washes, and bowling alleys and billiard parlors. (A similar proposal in 2010 met with angry protests from yoga fans and health club-goers.) The commission said that the city needs to diversify its tax base, especially as more people shift from spending on goods to spending on services.

Not all of the commission's proposals are being included, though. The sales tax won't be increased as the commission called for — last year it was dropped from six to 5.75 percent, below Virginia and Maryland — nor will the city levy a $25-per-head quarterly fee for all workers in the city, spare government employees. The commission said such a fee could make up for the fact that D.C. cannot tax non-residents who work in the city.

The changes were included in the 2015 budget by Council Chair Phil Mendelson, and will face debate as legislators sort through the $12 billion spending plan today. Mayor Vincent Gray only included a small number of the commission's proposals in his proposed budget, saying that the entire plan would cost too much. Mendelson said that he expects the proposals to cost $165 million per year.

How to pay for the changes to the tax code has spurred a war of words between Gray and Mendelson's offices. According to a plan circulated by Mendelson, the proposals would be paid for in part with funds Gray wants to set aside for the construction and operation of streetcars in the city. Mendelson said too much money was going to streetcars, while Gray's office said that Mendelson was sacrificing public transit for the sake of tax cuts.

The Council will start debate on the budget — and the tax change proposals contained in it — at noon.

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