Greg Jaczko: Welcome to the Capital Commonsense Podcast. I’m Greg Jaczko. On this episode, we’ll hear from Joe Bishop-Henchman, executive vice president at the National Taxpayers Union Foundation. He’s a lawyer specializing in federal and state tax policy, litigation and DC local government. Joe recently wrote a piece for Capital Commonsense about a new tax concept, the business activity tax. He examines how the proposal would work, how it fits with the taxes DC businesses already pay, and the legal and economic questions it raises. This is a complicated tax policy question, and Joe is here to explain it and offer his thoughts on what the District should weigh as it considers the idea. Welcome, Joe. Joe Bishop-Henchman: Thank you, Greg. Great to be with you. Greg Jaczko: Before we start, maybe you could tell us a little about yourself, your work in DC and why you’re part of the DC community. Joe Bishop-Henchman: Sure. I’ve lived in DC for over 20 years. I’m originally from California, but I’m proud to be a Washingtonian and to participate in local government as an advisory neighborhood commissioner in Ward 5. My day job is as a lawyer advising federal and state governments on tax policy. Much of the year I’m hopping on planes to state capitals all over the country, blue states, red states and everything in between, suggesting good ideas and warning against bad ones. Last time I counted, I’ve testified or presented in 38 states. So I joked at the hearing that it was good to finally put this skill to use at home, where the DC Council is debating revenue measures. DC’s tax framework Greg Jaczko: That’s great, and we’ll talk at the end about your testimony and what the DC Council and the mayor can do on these issues. But before we get into the details of the business activity tax, it might help to set the stage with some of the unique aspects of the DC tax system. The Home Rule Act limits what the DC government can tax. Could you talk about that, and then about the kinds of taxes businesses already pay in the District? Joe Bishop-Henchman: Sure. The Home Rule Act prohibits any tax on the whole or any portion of the personal income of nonresidents of the District, either directly or at the source. In other words, no taxing Maryland and Virginia commuters. Congress wrote that into the city charter. It was not handed over to the city as part of the grant of home rule, and it’s not an accidental restriction. DC lobbied very hard in the 1970s to be able to tax Maryland and Virginia commuters, and the idea popped up again in the 1980s, the 1990s and more recently. Congress didn’t budge. It’s still in there. Then there are a number of court decisions. The most significant is the Bishop decision, no relation to me. It held that the restriction applies even to creative workarounds. The Home Rule Act says you can’t tax Maryland and Virginia commuter income. Bishop says that even a tax supposedly on business, if it hits Maryland and Virginia income, is also not allowed. You can’t do it directly, and you can’t do it indirectly. That’s the framework a lot of these new proposals have to operate in. Greg Jaczko: And what kinds of taxes do DC businesses pay right now? The business activity tax would not be the only tax on DC businesses. Joe Bishop-Henchman: Right. When people started talking about a business activity tax a couple of years ago, it left me confused more than anything. First, I work in states all over the country and I’d never heard of a business activity tax. So what is this idea, and why does it have traction here in DC? That’s what led me to research the Bishop situation, which is the why. Second, we tax business a lot in DC. Businesses pay a lot of money in taxes. We have the corporate franchise tax, which is essentially a corporate income tax, a tax on profits: if a C corporation has more revenue than expenses, it pays. Partnerships, sole proprietors and LLCs pay the equivalent, the unincorporated business tax, or UBT. We also have a payroll tax that came in when we adopted the paid family leave program a few years ago, and it has tripled since we originally adopted it. There’s the property tax on commercial properties. At one point, commercial property, about 2% of the properties in the city, generated 37% of all DC property tax revenue. It was a huge cash cow. It’s really been hurting in the last few years, and that’s probably a driving factor in DC’s slow revenue growth: the hit to the commercial property sector. On top of all that, we’ve got a tangible personal property tax, essentially a business inventory tax. It’s not a huge dollar amount, about $80 million a year out of our $21 billion budget, but it’s a huge pain compliance-wise. Every business and nonprofit in the city has to fill out this form. About 60,000 forms a year go to the DC Office of Tax and Revenue, but only about 1,500 of them actually owe anything, and most of the revenue comes from 300 firms. I’d love to see that last one restructured and fixed, because that’s the kind of thing that drives me mad: a tax that raises money from a very small number of firms but inflicts huge compliance costs on a whole lot of people. I’ve had clients who couldn’t get their Clean Hands certification because they made a mistake on this form, and OTR doesn’t really do anything with the forms because only a couple hundred firms actually pay. On top of all that, there are license fees, the bag fee and the ballpark fee, and businesses collect the sales tax. Businesses pay a lot more here than in Virginia, certainly, and probably more than in Maryland. So I do get my back up when somebody says business needs to pay its fair share in DC, because I think it does. How the business activity tax would work Greg Jaczko: So let’s turn to the business activity tax. Can you explain what it is, how it’s intended to work, where it’s coming from, who’s proposing it and the ideas behind it? Joe Bishop-Henchman: It first popped up in the late ‘90s. DC has a tax revision commission every decade or so that’s supposed to give the Council recommendations on improving the tax code. We had one in 1998, and some of its ideas were implemented. We had one in 2013, and almost all of its ideas were implemented. Then we had one in 2023 and 2024 that failed to produce recommendations. The business activity tax came up in all three. It was a recommendation in 1998. It was not a recommendation in 2013. And the reason the 2023–24 commission broke apart was disagreement over the business activity tax. The idea behind it is to do two contradictory things: tax the income of Maryland and Virginia commuters, while not violating the Bishop decision by not directly taxing that income. So how on earth do they do that? The concept, which has been very elegantly and carefully designed by the people who did it, is to tax all businesses on their receipts. It’s a gross receipts tax, not a profits tax, so unprofitable businesses would pay it. Any business with revenue would pay, minus certain subtractions: $200,000 per business, rent, purchases, capital investment, royalties and what you pay in franchise tax. The goal of the subtractions is to subtract everything out except the Maryland and Virginia commuter income. That’s the theory. The 1998 commission was very excited about it. The 2013 one, not so much. On the 2023–24 commission, some people were excited about it and some were very worried. I think the worry comes from this: if you tweak the BAT at all, it collapses. Say you decide to tax royalties, so you take out that subtraction. Or you want more revenue, so you take out half the subtractions. Or you don’t like that unprofitable businesses would pay it, so you limit it to profitable ones. Or you think nonprofits shouldn’t have to pay, so you exempt them. Once you start tweaking the BAT, the whole thing collapses, either in its ability to generate revenue, its ability to get around the Bishop decision, or maybe even as a flashpoint that provokes Congress. What I… This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit capitalcommonsense.com
