A FEE FOR A BENEFIT IS NOT A TAX

The District of Columbia Chamber of Commerce (“DC Chamber”) hosted a dialogue with Attorney General Karl Racine, Councilmember Mary M. Cheh and DC Appleseed Executive Director Walter Smith on August 22, 2017. The dialogue was moderated by Vincent B. Orange, Sr., President and Chief Executive Officer of the DC Chamber.

Nearly 100 DC Chamber members and invited guests attended including Phil Mendelson, Chairman of the Council of the District of Columbia. The topic of the dialogue was the District of Columbia Home Rule Act, Commuter Tax and Universal Paid Leave.

On December 20, 2016, the DC Council adopted D.C. Law 21-264, the Universal Paid Leave Amendment Act of 2016, which establishes a District-run paid leave program for individuals employed in the District. The Law provides for eight weeks of parental leave, six weeks of family leave, and two weeks of medical leave. This law is funded by imposing a 0.62% payroll tax on all District businesses which results in an annual two hundred fifty million dollar ($250,000,000) tax on the District's business community. Implementation of this Law requires a new government bureaucracy. Thus, the DC Government will be required to administer the $250 million Universal Paid Leave fund for all District covered employees for claims, approvals calculations, leave scheduling, payments and enforcements. To get this new bureaucracy up and running, the Chief Financial Officer, Jeff DeWitt, indicated that up to eighty million dollars ($80,000,000) must be budgeted to develop an IT system to operate this mandate. In addition, eighteen million dollars ($18,000,000) in annual personnel and administrative costs will have to be budgeted to cover the estimated 200 plus employees to implement this Law. Throughout the United States, this same paid leave benefit or variations thereof are generally funded through employee-paid contributions, or cost-sharing where both the employer and employee pay the cost of the program. But in the District of Columbia pursuant to the Home Rule Act of 1975, the Council shall have no authority to “impose any tax on the whole or any portion of the personal income, either directly or at the source thereof, of any individual not a resident of the District ….” What does this mean for the District of Columbia? This means the $250 million payroll tax utilized to provide eight weeks of parental leave, six weeks of family leave, and two weeks of medical leave cannot be paid by nonresidents of the District of Columbia. In other words, nearly one hundred sixty-five million dollars ($165,000,000) of the $250 million payroll tax will be utilize to provide these paid leave benefits to nonresidents of the District of Columbia (primarily Maryland and Virginia residents), “FREE OF CHARGE ”. Another interesting fact is a “District resident” working in Maryland, Virginia or any other State is not eligible for the DC paid leave benefit.

The Honorable Mary M. Cheh’s, Ward 3 Councilmember, Solution to the Home Rule Act and in particular the "Commuter Tax” prohibition Councilmember Mary Cheh has introduced B22-0325 entitled the “Universal Paid Leave Amendment Act of 2017”. This Bill would amend the current law and provide that covered employees would have to pay a fee of 0.42% of his or her wages into the Universal Paid Leave Implementation Fund, and the employer would have to pay a tax of 0.2% of its employees’ wages. What this could mean is covered employees would pay one hundred eighty million dollars ($180,000,000) or 68% of the cost for the paid leave benefits, and employers would pay a tax of seventy million dollars ($70,000,000) or 32% of the cost. Under Councilmember Cheh’s Bill, the employee cost would be considered a fee paid in order to receive a benefit. This fee would be paid by both District residents and non-District residents who work in District of Columbia. The foundation and legal precedent for CM Cheh’s Bill can be found in a United States Court of Appeals case entitled American Council of Life Insurers v. District of Columbia Health Benefit Exchange, No. 14-7206, argued January 8, 2016 and decided March 1, 2016. Karl A. Racine, Attorney General, was on the brief for the winning side.

As described by Walter Smith, Executive Director, DC Appleseed, and stated by the US Court of Appeals “the hallmark of a fee is at least a rough match between the sum paid and the (broadly defined) benefit provided, as seen from the payer’s perspective”. The Court of Appeals goes on to state the key question is “whether a charge raised revenue merely to cover the cost of offering a service to the payers of the fee-or-whether it also raised revenue for purposes that aren’t especially beneficial or useful to payers , or required for pursuit of their business.” Vincent B. Orange Sr., President and CEO, DC Chamber states that he can see under the Cheh Bill that “the fee is a trigger to a benefit of eight weeks of paid parental leave, six weeks of paid family leave or two weeks of paid medical leave. But for the fee, you cannot receive these benefits, and it’s a fee paid by both District and non-District residents employed in the District of Columbia. It’s no longer a benefit free of charge under Councilmember Mary Cheh’s Bill.”

The Court of Appeals goes on to say, “the fee is a reasonable estimate of the cost imposed (by the agency) by the person required to pay the fee, then it is a user fee. A close correlation between the payers’ burdens under the charge and their benefits from its application signals a fee.” Walter Smith has indicated on numerous occasions that the District of Columbia loses about $1.1 Billion annually because it cannot tax federal property located in the District or non-resident income sources. With over two-thirds of our workforce commuting each day from outside of our eight wards, how does the inability to tax the income of nonresidents impact our economy? "Severely," says the DC Chamber of Commerce.

Attorney General Karl Racine indicated at the DC Chamber dialogue that his office has reviewed DC Appleseed’s analysis and argument and agrees with that analysis. He further shared with the Chamber that the Mary Cheh Bill is defendable, and Walter Smith and Mary Cheh agreed. In fact, Councilmember Mary Cheh called on the nearly 100 participants at the dialogue to call upon their Councilmembers to support Bill 22-325 because it does not violate the Home Rule Act nor the prohibition against imposing a commuter tax.

On March 13, 2017, Walter Smith sent an email to the Council of the District of Columbia indicating the virtues of the Mary Cheh approach. He stated the following: 1.      It is simple. It changes only the funding mechanism in UPLA to something fairer to business and to the District. 2.      It retains universal coverage of all private employees in the District, including self-employed. 3.      It reinforces the prerogatives of Home Rule. Attorney Walter Smith states “when a government charge is assessed not on a general population, but on a specific group of people who are required to pay a fee in exchange for a defined benefit they are eligible to receive as a member of the assessed group, that fee is not a tax.” The Mary Cheh approach answers two major objections to the current law: it would lower the cost to District employers and, at the same time, would ask all covered District employees-including nonresidents- to pay a reasonable share of the benefits to be received. The Council of the District of Columbia now has a lot to ponder. The Cheh approach is worthy of major and critical examination. The Mayor and the Council along with the Attorney General must ascertain whether the virtue of allowing the District to assert its prerogative to exercise the same authority and discretion that other jurisdictions including California, New Jersey and New York have regarding the structuring of paid leave law, rather than being unfairly and uniquely hampered by the nonresident income tax ban. The DC Chamber of Commerce dialogue on the Home Rule Act, Commuter Tax and Universal Paid Leave was insightful, provocative and educational. The moderator, Vincent B. Orange, Sr. and the panel consisting of Attorney General Karl A. Racine, Councilmember Mary M. Cheh and Executive Director DC Appleseed Walter Smith all agreed that the Cheh introduced Bill 22-325, Universal Paid Leave Amendment Act of 2017 is more than worthy to consider as a strategy to move forward in retaining universal paid leave, creating a fairer Bill, and allowing the Council of the District of Columbia to assert its Home Rule prerogatives.

Members of the District of Columbia Chamber of Commerce what do you say? Email: governmentrelations@dcchamber.org.

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