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 said at the hearing was that it’s very elegantly designed, almost like a Jenga tower. And I think there was fear in the business community that it won’t be this elegant thing that subtracts everybody out and narrowly hits Maryland and Virginia income. The fear was that it would just be a sixth tax layered on top of the other five.
The legal risk
Greg Jaczko: Let’s assume it worked exactly as intended. How would it avoid or comply with Bishop if it is, in effect, an indirect way of taxing commuter income?
Joe Bishop-Henchman: That’s a good question, and one proponents try not to mention: there is legal risk with this approach. It’s possible that it doesn’t get around the Bishop decision. The answers I’ve gotten when I’ve asked are some variation of: Bishop was many decades ago, there are new judges, maybe they’ll reach a different result.
There is a sentence in Bishop saying that if the tax were on businesses as businesses rather than on income, that would be a different question. I think a lot of stock is put in that sentence. But I’ll note that the Home Rule Act says you can’t tax commuter income either directly or at the source, which is what this tax would do. So I don’t know if it would actually get around Bishop.
It’s not my first time talking to policymakers who really want to do something that carries high legal risk, so I’m used to people saying, “Whatever, the courts will figure that out.” But it’s important to note that the courts may not move very quickly.
The example I used at the hearing is what Maryland just went through. In 2021, Maryland passed the first-in-the-nation tax on digital advertising. It was another tax that someone somewhere had designed and said, “We’ve designed it so it will hit out-of-state companies and not anyone in Maryland, so it’s perfect for you, Maryland policymakers, to vote for.” They passed it, and it was challenged in court on several grounds: the Commerce Clause, due process, the Internet Tax Freedom Act and so forth. Two months ago, in August of this year, it was struck down. Now Maryland has to refund something like $500 million plus interest, which is a lot of money even for the Maryland budget.
That took five years: passed in 2021, struck down in 2026. All that time, people had to comply with it and pay it, and now Maryland has to refund all that money. That is a risk DC takes on if it passes a tax like this, one that’s untested legally and doesn’t really exist anywhere else. There’s a somewhat similar tax in New Hampshire, so there’s a lot of argument in these debates about whether we’re like New Hampshire or not.
Greg Jaczko: If you had to put a number on it, what’s the risk that it ultimately fails in the courts?
Joe Bishop-Henchman: If it’s designed exactly as the designers have laid out, applying to everybody including nonprofits, with the subtractions they have and the credit against the franchise tax, I’d say maybe a 30% risk. If they start adding things like “we’re only going to tax DC,” or someone says out loud, “This tax is designed to do what Bishop doesn’t let us do,” or it’s really designed that way, or they put things in that show that’s the intent, I think you get over 50%.
Why the Council is looking for revenue
Greg Jaczko: Obviously there are reasons for this. Can you talk about why the Council is looking at this idea, and at revenue ideas in general?
Joe Bishop-Henchman: Revenue growth is slow in DC, and people point to a lot of causes, some of them right. DOGE certainly reduced incomes in DC. A lot of people lost their jobs or had to move out of the city altogether. Interest rates are very high right now, which is stalling the building industry and the job growth that came with it for many years. And we’ve had the hit to commercial property I described, with more remote work. Since COVID, a lot of people no longer commute into downtown DC five days a week. Even if they come in three days, that’s a 40% reduction from what it used to be.
None of these are DC-specific trends. They’re national and global trends, but they’re heavily concentrated on us because of our geography and how our economy is structured, so it’s really hitting us. At the same time, costs are growing, so the spending side of the budget continues to grow. People in the know say there’s about a billion-dollar structural gap between what we spend and what we bring in.
Some of that comes from the federal money that went to the states, including DC, during COVID to launch new programs, expand existing ones, keep people at work, and keep them supplied with wages and food and their rent paid. As the emergency receded, that federal money receded too, and states, including DC, have had to decide which programs to keep and which to let lapse. The Emergency Rental Assistance Program, for example, is a debate in the Council every year: do we keep this COVID program going? Do we fund all of it, part of it or none of it?
That’s what has driven the growth of our budget from $15 or $17 or $18 billion to $21 or $22 billion, while revenue has grown much more slowly. So for the last couple of years, the Council has struggled to patch things with one-off tax increases on small items and by drawing down reserves, in the hope that if we just make it to next year, commercial property will recover, DOGE will be done, the tourists will come back and everybody will be back in the office five days a week. It’s been a hopes-and-dreams approach. I think everybody is coming to the realization that we actually need to make hard decisions about revenue and spending, probably next year, to balance the budget.
Greg Jaczko: How much revenue do proponents think the business activity tax would generate?
Joe Bishop-Henchman: Their estimate is $500 million a year. With a billion-dollar structural gap, that’s a big part of it. But it also means you’re not paying down the payroll tax or the tangible personal property tax or reducing any of the other business taxes.
That would be at a 2% rate. Proponents point to New Hampshire as the example, and New Hampshire’s rate is 0.55%, about a quarter of what they’re talking about for DC. New Hampshire also has no income tax and no sales tax at all, so it’s a very different competitive environment. This would be a fairly unique thing for DC to do. It’s a bit of a walk on the wild side, and it really has to be done right if they’re going to do it at all.
The hearing and the new Council
Greg Jaczko: That brings us to what happens with a new mayor coming in and a new Council. You recently testified for over two hours at a hearing where a number of ideas were discussed. What are your thoughts on what the Council is looking at, including the business activity tax, and which ideas have merit?
Joe Bishop-Henchman: As you mentioned, I testified for two hours. The whole hearing was about seven hours, and I was there for almost all of it; I had to leave before the last panel spoke. Where I was sitting, I was roughly opposite Councilmember Lewis George. There’s only so much you can read from body language, but I was trying to see what she was engaging with, nodding at or shaking her head at. I imagine other people were trying to pick up on those cues too.
She ran on the idea of a business activity tax. I don’t know if she ever called it that, but that’s what she was referring to when she spoke of closing loopholes for businesses that aren’t contributing to DC’s economic base and having them pay their fair share. In remarks during the hearing and afterward, she said something like, it sounds doable if we do it right. That’s what I was saying too: make sure you do this right.
We’ll see. The mayor only signs it at the end of the day; it’s the Council that drafts and designs these things. I think the votes are there in the new Council to do something like the business activity tax. I think the votes are also there for what’s called a net investment income tax. I don’t know why we rename things that already have names; that’s what it’s called at the federal level, but the DC name apparently is the Wealth Proceeds Tax. It’s a 2% or 3% surcharge on investment income, dividends and capital gains, taxed in DC.
There was a lot of discussion at the hearing about whether it would cause tax flight. Mainly it was Councilmembers saying it won’t cause tax flight and trying to get witnesses to argue with that.
Greg Jaczko: What’s your take?
Joe Bishop-Henchman: It will create a big tax differential. The only state in the country with a special tax like this is Minnesota, and they just enacted theirs, very recently, so we’d be number two. We already tax this income under the individual income tax. This would be a special tax that taxes investment income and capital gains more heavily than wage income in DC. Virginia’s income tax rate, for instance, is 5.75%. I think ours on this income would add up to 13-point-something percent, essentially double Virginia’s.
Is that going to cause people to move or shift income? I don’t know. Tax flight is real. California has a billionaire tax on the ballot, and seven of its roughly 200 billionaires have moved out of the state, saying they don’t want to risk having to pay it. So some people do move. It’s not as many as some argue.
But the unseen thing that’s really hard to measure is the business that doesn’t expand, the second location that never opens, the decision about whether to make your next investment here or somewhere else, and then it goes somewhere else. The only real evidence you see of that is when economic growth and revenue growth flatline, which is roughly the situation we have in DC.
The outlook
Greg Jaczko: Looking ahead six to 12 months, where do you think DC will be on tax policy? Will the Council enact the BAT or some of these other proposals? And where do you see revenue and spending? Will we be eating into that $1 billion structural imbalance, or will the District still be struggling with it?
Joe Bishop-Henchman: There was a lot of discussion at the hearing that we need to look at spending too. I hope so, but that’s what the budget process is supposed to be for: the mayor presents a budget, and the Council modifies it or presents its own alternative.
Anybody who interacts with the DC government sees the apathy from some employees, the duplication and the waste that’s out there. I hope that’s all on the table, but a lot of it means hard decisions about services and whether we need to be number one at everything. I love the articles Capital Commonsense has been doing, digging into questions like why our Medicaid spending is number one. Is it because we’re providing the highest-quality care? No. It’s because there are some goofy things in there that some people take advantage of. If you pick up a lot of rocks in DC agencies, you’ll find things like that underneath.
I wish we were able to do more of that and root it out, because the alternative is that whatever is left over, we’ll have to raise taxes to cover. I think you’ll hear a lot of debate about that in 2027. Even this year, in 2026, Mayor Bowser proposed closing something like $600 million of the gap, not quite all of it, through programmatic reductions: we’re just not going to do this anymore. The Council accepted some of that but put about $300 million back, paid for with one-time reserves, one-time tax increases and similar measures. That’s kicking the can down the road, and there’s only so much road left, because we’re running out of one-time measures.
Closing
Greg Jaczko: I appreciate your thoughts on this. As we wrap up, is there anything we didn’t touch on that you wanted to discuss?
Joe Bishop-Henchman: I’ve been very pessimistic, so I should say something optimistic. I live here, I love DC, and I think we have a lot going for us. Structurally, we have one level of government and a one-chamber legislature. In other places, you have to get the mayor to sign off, then the county, then go through the House and the Senate. Here it’s a lot flatter and more streamlined, or at least it could be. If we wanted streateries on every corner, or wanted to attract a football stadium, it’s a lot more streamlined and faster for us to do it.
We ought to think about what other things we want to encourage and make happen in DC. We have built-in advantages in tourism and hospitality. How do we leverage them, and treat them not as a cow to be milked or a golden goose to steal eggs from, but as something to build on? We have world-class transportation and a great location. Everybody wants to be in DC at some point in their lives. So what do we do to leverage those things?
Greg Jaczko: That all sounds like great fodder for future Capital Commonsense posts, so hopefully you’ll keep writing.
Joe Bishop-Henchman: And I’m excited that we’ll have a lot of new faces on the DC Council and a new face in the mayor’s office. Up in New York City, the new mayor said some things that maybe frightened some people, but I think the consensus is that in office he’s been doing what he can to make city services work, build on New York’s advantages and make things sustainable and fairer. I hope we can do that too in DC.
Greg Jaczko: Great. Thanks for those positive words to close out. This was Joe Bishop-Henchman on the proposed business activity tax and many other tax policy issues here in DC. Thanks for joining us. Remember to subscribe, share this episode and tell us what you think. I’m Greg Jaczko. Thank you for listening. This has been the Capital Commonsense Podcast.
