A House republican has proposed a hearing on whether the District should implement a commuter tax.
Rep. Darrell Issa (R-Calif.) brought up the idea to "a surprised" D.C. Del. Del. Eleanor Holmes Norton at the end of a subcommittee hearing about D.C. building heights Thursday, reports the Washington Post.
"I think we should, after the election, start thinking about how we're going to deal with the only place that doesn’t have the ability to tax people who earn their income in that place," he said, according to the Post.
The District of Columbia is the only jurisdiction in the United States that is prohibited from taxing income at its source. In every other jurisdiction or state, income taxes are paid in the jurisdiction where the income is earned.
However, when the District was granted limited Home Rule in 1973, Congress made certain in the authorizing legislation that the District must have a reciprocity agreement with Maryland and Virginia. It states that the District would not tax commuters, nor would the suburban states tax D.C. residents who work in the neighboring states.
About 450,000 commuters from the suburbs come into the District each day, but far fewer travel to the suburbs. The result is an imbalance in which Maryland and Virginia collect about $2 billion in income taxes -- money that's kept out of the District.
Although there have been efforts to eliminate the "commuter tax" ban in the District in the past, Maryland and Virginia use their power in the Congress -- a total of four U.S. Senators and 19 members of the House -- to block any reconsideration of this imbalance.
Why? Because if the District were able to tax the income of a Maryland or Virginia resident working in the city, then that resident could deduct the city taxes from his or her state taxes. That would result in a significant loss to Maryland and/or Virginia.
Some in Congress say the city should present this argument to change the status quo: By blocking traditional income tax rules in the District, the other 48 states are actually subsidizing Maryland and Virginia.
If D.C. could tax all the income earned in the city, Congress could reduce the amount of money it spends on the city and the city could reduce its overall tax burden.
Many commuters, however, fear that if the city were to tax their income, then the states of Maryland and Virginia would raise rates to make up for the lost income, and as a result, the suburban citizens would pay higher taxes.
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WHAT KIND OF MONEY ARE WE TALKING ABOUT?
In 2011, commuters earned an estimated $44 billion in income in DC. A 3 percent tax on that income would generate an estimated $1.2 billion in revenue for the District.
But if D.C. taxes Maryland and Virginia residents, then presumably D.C. residents earning income in Maryland and Virginia would be taxed in those states.
In 2011, District residents earned $6.5 billion in income outside of the city. Assuming that the bulk of that was in Maryland and Virginia, and that Maryland and Virginia would now tax that income, DC would lose an estimated $455 million in revenue.
The net additional income to the District from commuter taxes would be about $800 million.