Decision Maker Response
Phil Mendelson
State Senator

Jun 1, 2014 — 
I understand the argument that adding sales tax to a service has the effect of increasing the cost of that service, and that there are some services, e.g., health-related, that we ought to be favoring and, therefore, not taxing. The recommendation to expand the District’s sales tax to health clubs, work-out facilities, yoga studios, etc. came from the D.C. Tax Revision Commission chaired by former Mayor Anthony Williams. The recommendation was based on analyses by tax experts as to how to best structure the sales tax. It was also part of a package of proposed reforms that included revisions to the individual income tax. The goal of the Commission was to recommend an overall tax structure that is fair, equitable, and reduces the overall burden on District residents.

If an individual’s health club membership is $75 per month, the tax will add $4.32 to the cost. On the other hand, the revised income tax (also part of the tax package) will save the average resident taxpayer in the $50,000-$75,000 adjusted gross income bracket about $36.33 per month ($436 per year).

The following rationale is excerpted from the Tax Revision Commission’s final report (available at www.dctaxrevisioncommission.org):

“The District’s general sales tax is 5.75 percent, lower than the 6 percent sales tax rate in Maryland and Northern Virginia. …In presenting a paper on sales taxes to the Commission, Professor William F. Fox, director of the Center for Business and Economic Research at the University of Tennessee, Knoxville, noted that … the District, like many states, faces an eroding sales tax base as consumers shift their spending from goods to services. …The Commission recommended changes that will broaden the sales tax base without hurting the District’s competitiveness relative to neighboring jurisdictions. …While a broad tax base is optimal, Professor Fox cautioned that the District must carefully choose any new services to tax in order to minimize the economic effect.” Professor Fox recommended eight types of services be added to the sales tax, including “health clubs and tanning studios.”

I want to emphasize that the goal is not to increase revenue. Indeed, when fully implemented the tax package will reduce annual revenue by about $165 million. The goal is to have a stronger tax structure. What has been adopted is a package of changes – some increases, but mostly cuts. For the District government, we will have a broader, and therefore better, sales tax base. For District residents, there will be a lower tax burden.

I hope this explains what happened. I appreciate your taking the time to petition.

-Phil Mendelson


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