The voices of Tax Policy Center's researchers and staff
This week, the District of Columbia City Council approved a major tax reform bill. And, as it happens, some important—but unspoken-- issues of race and class are underlying key changes to the revenue code.
Earlier this year, the DC Tax Revision Commission proposed a broad rewrite of the city’s tax code, including two modest but well-designed reforms. One would rationalize taxation of tobacco, where different products are taxed in different ways at different rates. The second would expand the city’s sales tax base to include some widely used services including health clubs and yoga studios, and barber shops and beauticians.
But once the reform plan got to the D.C. City Council both of these proposals were changed—and in interesting ways that reflect class and race in the nation’s capital.
First, the tobacco tax. As in many jurisdictions, the current law is enormously complicated.
Cigarettes are subject to a per-pack excise tax of $2.50 plus a wholesale-level sales tax of 36 cents—effectively an 80 percent rate. Products such as chewing tobacco, smokeless tobacco, and snuff are subject to a 75 cents per ounce excise tax. Premium cigars and pipe tobacco are taxed at the regular sales tax rate of 5.75 percent. Little cigars are taxed as cigarettes and non-premium cigars are taxed at a 12 percent rate.
The reform commission sensibly proposed taxing all tobacco products at the 80 percent rate that cigarette buyers now pay. And the city council agreed—with one exception: Premium cigars would continue to be taxed at today’s low rate.
Exactly what deal was cut to make this happen is not clear but it is hard to get the image of the proverbial smoke-filled room out of my mind. When it comes to local politics those high-end cigar shops—and their well-heeled customers—don’t just blow smoke.
The second change is even more interesting. The council accepted most of the commission’s base-broadening proposals for the sales tax. But while it ended up taxing health and yoga club users, it exempted customers of barber shops and beauty parlors.
What happened? Here’s a guess: For generations of African-Americans, barber and beauty shops have been second only to the church as a community institution. They are where people go to collect the latest neighborhood gossip, argue about sports, and—not incidentally--talk politics.
On the other hand, health clubs, yoga studios, and the like are popular with the young, affluent, and largely white young professionals who are rapidly gentrifying the District. They are far less politically active—at least when it comes to local elections-- than many middle-class black residents. And, they seem much less price sensitive when it comes to things they want. $12 martini anyone?
The yoga studios didn’t take this, umm, lying down. In 2010, they got the city to back away from a similar tax and this time they fought hard for another exemption.
But they lost. The council agreed to tax the denizens of health clubs and yoga studios but not the customers of barber shops. At the same time, it voted to tax tobacco products that are used by poor and middle-class people, but not the high-end cigars enjoyed by the wealthy.
Race and class were not the only factors in these decisions, but like much of what happens in D.C., they weren’t irrelevant either.
One lesson from all of this: A better approach might be a tax on sales of all goods and services—with no exceptions. The rate could be low and the system could be made progressive with a credit for low-income households. As we have learned once again, when lawmakers start granting exceptions, the politics of winners and losers is inevitable.
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