Government of the District of Columbia Muriel E. Bowser Mayor Jeffrey S. DeWitt Chief Financial Officer District of Columbia Tax Expenditure Report Produced by the Office of Revenue Analysis Issued September 2018 (this page intentionally left blank) District of Columbia Tax Expenditure Report Office of the Chief Financial Officer ________________________________________________________________________________________________ District of Columbia Tax Expenditure Report Table of Contents ACKNOWLEDGEMENTS ............................................................................................ II INTRODUCTION........................................................................................................... III SUMMARY DATA ON DISTRICT OF COLUMBIA TAX EXPENDITURES .... XII I. FEDERAL CONFORMITY TAX EXPENDITURES ............................................................................. XIII II. LOCAL TAX EXPENDITURES ....................................................................................................... XX III. LOCAL INDIVIDUAL TAX EXPENDITURES .................................................................................. XXXI PART I: FEDERAL CONFORMITY TAX EXPENDITURES ................................. 35 INCOME TAX ................................................................................................................ 36 EXCLUSIONS ..................................................................................................................................... 36 ADJUSTMENTS ................................................................................................................................ 134 DEDUCTIONS ................................................................................................................................... 144 SPECIAL RULES .............................................................................................................................. 188 PART II: LOCAL TAX EXPENDITURES ............................................................... 195 INCOME TAX .................................................................................................................................... 196 REAL PROPERTY TAX .................................................................................................................... 251 DEED RECORDATION AND TRANSFER TAX ................................................................................ 293 SALES TAX ....................................................................................................................................... 312 GROSS RECEIPTS TAX ................................................................................................................... 332 INSURANCE PREMIUMS TAX ......................................................................................................... 334 PERSONAL PROPERTY TAX .......................................................................................................... 337 LOCAL TAX EXPENDITURES (unknown if used) ............................................................................. 345 UNUSED LOCAL TAX EXPENDITURES (not taken) ........................................................................ 348 UNUSED LOCAL TAX EXPENDITURES (implementing regulations not yet written) ....................... 360 District of Columbia Tax Expenditure Report Page i Office of the Chief Financial Officer ________________________________________________________________________________________________ District of Columbia Tax Expenditure Report Acknowledgements This report is a product of the District of Columbia Office of Revenue Analysis (ORA). Charlotte Otabor and Lori Metcalf, ORA fiscal analysts, researched all the tax expenditures, drafted the report, and estimated the federal conformity tax expenditures. In addition, the following ORA staff members estimated the forgone revenues from local tax expenditures: Norton Francis, the director of revenue estimation; Betty Alleyne, fiscal analyst; Peter Johansson, fiscal analyst; Robert Zuraski, fiscal analyst; and Sharain Ward, fiscal analyst. I also thank the individuals from other D.C. government agencies who provided important information on many local tax expenditure provisions. Jeffrey S. DeWitt Chief Financial Officer District of Columbia Tax Expenditure Report Page ii Office of the Chief Financial Officer ________________________________________________________________________________________________ Introduction D.C. Law 13-161, the “Tax Expenditure Budget Review Act of 2000,”1 requires the Chief Financial Officer to prepare a biennial tax expenditure budget that estimates the revenue loss to the District government resulting from tax expenditures during the current fiscal year and the next two fiscal years. The law defines “tax expenditures” as “the revenue losses attributable to provisions of federal law and the laws of the District of Columbia that allow, in whole or in part, a special exclusion, exemption, or deduction from taxes … or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.”2 The Chief Financial Officer prepared the first required tax expenditure budget as part of the proposed fiscal year 2003 budget. This report, which estimates the revenue forgone due to tax expenditures in fiscal years 2018 through 2021,3 covers more than 250 separate tax expenditure provisions. Several tax expenditures were also removed since the previous tax expenditure report, because they are no longer applicable. Additionally, this tax expenditure budget expands on the summary data of the District’s tax expenditures in prior versions to include a section on individual tax provisions, which are granted to specific firms, and organizations. Presenting these individual tax provisions, in addition to the categorical tax provisions reported in the past, provides a more comprehensive view of the District’s tax system. Understanding Tax Expenditures Tax expenditures are often described as “spending by another name,” or “disguised spending.” Policymakers use tax abatements, credits, deductions, deferrals, exemptions, and exclusions to promote a wide range of policy goals in education, human services, public safety, economic development, environmental protection, and other areas. Instead of pursuing these objectives through direct spending, policymakers reduce the tax liability associated with certain actions (such as hiring new employees) or conditions (such as being blind or elderly) so that individuals or businesses can keep and spend the money, often for some purpose. Unlike tax expenditures, direct spending programs usually receive an annual appropriation and the proposed funding levels are reviewed during the annual budget cycle tax expenditures, on the other hand, remain in place unless policymakers act to modify or repeal them; in this respect, they are like entitlement programs. Also, direct spending programs are itemized on the expenditure side of the budget, whereas revenues are shown in the budget as aggregate receipts without an itemization of tax expenditures. For example, a program to expand access to higher education could offer tax deductions for college savings instead of increasing student loans or grants. Regardless of which approach the government uses, there is a real resource cost in terms of forgone revenue or direct expenditures. There are two types of tax expenditures: (1) federal conformity tax expenditures, which apply U.S. Internal Revenue Code provisions to the D.C. personal and corporate income taxes, and (2) local tax expenditures authorized only by D.C. law. By conforming to the federal definition of adjusted gross income (with several exceptions), the District adopts most of the exclusions and deductions 1 D.C. Law 13-161 took effect on October 4, 2000 and is codified in § 47-318 and § 47-318.01 of the D.C. Official Code. 2 See D.C. Official Code § 47-318(6). 3 Although the law requires the tax expenditure budget to estimate the revenue loss for the current fiscal year and the subsequent two fiscal years, this report covers the current year and the subsequent three fiscal years. See D.C. Official Code § 47-392.01(b). District of Columbia Tax Expenditure Report Page iii Office of the Chief Financial Officer ________________________________________________________________________________________________ from income that are part of the federal personal and corporate income tax systems. Most states with an income tax use federal adjusted gross income as the basis for their income tax. An example of the federal conformity tax expenditure is the home mortgage interest deduction: The District follows the federal practice of allowing taxpayers to deduct home mortgage interest payments. In addition to the 107 federal conformity provisions covered in this report,4 there are 169 tax expenditures established by local law. An example of a local tax expenditure is the homestead deduction, which allows all D.C. taxpayers who live in their own home to deduct a certain amount ($73,350 at the time of this writing) from the taxable value of the home. Both federal conformity and local tax expenditures warrant regular scrutiny to make sure they are effective, efficient, and equitable, and to highlight the tradeoffs between tax expenditures and other programs. The District took a major step in scrutinizing local tax expenditures with the passage of D.C. Law 20-155, which requires the Office of the Chief Financial Officer (OCFO) to review