If the D.C. Council and incoming Mayor Vince Gray don’t act soon on a corporate tax shelter-busting initiative the city’s budget gap could grow by an additional $22 million, said the District’s Chief Financial Officer Natwar Gandhi. Gandhi’s budget numbers for the next fiscal year already rely on the dollars that would be raised from combined reporting, a tax-restructuring measure that prevents multistate companies like Home Depot, CVS and Starbucks from hiding profits earned in the District in states that won’t tax them. If the cash doesn’t come through, an estimated $400 million budget shortfall could grow to more than $422 million.
In 2009, the council approved the idea of requiring combined reporting for calendar year 2011, but they need to pass legislation to officially allow the city’s tax collectors to gather the cash. That legislation hasn’t been introduced yet, although Gandhi’s office wrote a draft bill in June.
“A year ago the council agreed that we should close the tax shelter,” said Ed Lazere, executive director of the D.C. Fiscal Policy Institute. “Now it appears they’re not ready to move ahead on preventing companies from getting around paying their taxes to D.C., and that could make a terrible budget situation worse.”
Although combined reporting has been passed in 23 of the 45 states that have corporate income taxes, it has been met with resistance in some jurisdictions. A Maryland commission that was called together to examine business tax reform studied combined reporting for two years. In November, the commission recommended to state lawmakers that they not move forward with it, saying they feared the tax restructuring would make the state less competitive. Lazere argues that the restructuring would make the city’s business environment more fair for District small businesses that can’t shift their profits elsewhere.
“This legislation is a fair and equitable revenue source for the District,” Gandhi said in a statement to The Washington Examiner. “It is being adopted by many states and we estimate that it will bring in $22 million in fiscal year 2012 [which starts Oct. 1, 2011].”
Ward 2 Councilman Jack Evans, who heads the committee on finance and revenue, said the council doesn’t need to pass the bill before the end of the year for it be effective. It could be passed early next year and still bring in the cash to keep the budget gap from widening.
Evans said he’ll likely support the measure if “we decide to move forward with it. It comes down to what the new mayor wants to do.”
