2. Even with the increase in salary allowance to 55%, the

3.

4.

tax will still yield $ 8.0 million over last year's level. of $4.3 million (when the tax did not apply to professionals). Thus, professionals will now be paying a heavy but fair share of the D. C. tax burden, whereas they were formerly excluded from paying the tax altogether.

The salary allowance increase applies to all unincorporated business, "professional" and "non-professional" alike.

The salary allowance is particularly needed for all unincorporated businesses, now that the tax rate has been raised to a one-year-only rate of 12%. It should be noted that corporations may take salary allowances up to any "reasonable"

level.

Suburban residing professionals who work in D.C. are liable for all D.C. unincorporated business net income on their home states' personal income tax (in addition to paying tax on the business income in the District). An increase in the salary allowance from 20% to 55% will ease alleged "overtaxation" problems, until such time as Maryland and Virginia are able to amend their tax laws so that income taxed in the District is not also subject to tax again in Maryland and Virginia. District resident professionals are not faced with the problem of paying tax on the same income under two separate taxes, since only the net taxable income which is not subject to the unincorporated business franchise

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tax is subject to the D. C. personal income tax.

Following is the Committee reasoning in support of the "District of Columbia Professional Corporation Revision Act of 1975": Corporations have no "salary allowance" restrictions. They may, for example, devote 80% of their income to salaries. However, unincorporated businesses are limited to a 55% salary allowance (under this Committee proposal). Thus, suburban-residing professionals who work in D. C. have an incentive to avoid paying D. C. taxes by incorporating. The proposed legislation treats "professional corporations" as unincorporated businesses for tax purposes, thereby removing the

incentive to incorporate.

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Alternatives Considered

Three alternatives to amend this tax were considered (see Attachment

"B"). (1) A 1-1/2% or 2% of gross receipts "cap" on net taxable income, whereby the amount of net income tax to be paid would not exceed a 1-1/2% or 2% of gross receipts ceiling, (2) The salary allowance increase, the subject of present discussion, and (3) a straight 1% gross receipts tax on professionals only.

The gross receipts "cap", alternative (1) above, was not considered by Corporation Counsel to be sufficiently defensible, legally, since it would provide for undue discrimination between firms with identical net incomes but different gross receipts. (Again, refer to the Attachment "A" memo).

Alternative (3), a straight 1% gross receipts tax just on professionals, was also considered by Corporation Counsel to be indefensible legally. The Corporation Counsel's office states that it is an unreasonable classification to have a gross receipts tax only for "professionals", while subjecting all other unincorporated businesses to a 12% net income tax.

The only other acceptable (for reasons outlined above) alternative

thus became the salary allowance increase.

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FY 76 Impact

Including professionals in the unincorporated business franchise tax, with a 55% salary allowance, brings in an added $8.0 million over FY 75

revenues.

Long Term Impact

The soon-to-be-form Taxation Revision Commission will study carefully the whole issue of professionals taxation, to see if modifications to this FY 76 proposal are in order.

58-281 O 75 pt. 1 30

Relative to comments expressed by some professionals that public notice was "inadequate" on the measure to remove the exclusion of professionals from paying the unincorporated business tax, the following points should be made:

1. The March 6, 1975 hearing notice (attached) indicates quite clearly that the March 18, April 3 and April 4, 1975 Revenue Hearings were not to address merely the Mayor's specific tax proposals, but new, alternative revenue ideas as well. As the Hearings record will verify, a wide array of tax issues were explored, and in fact, the tax on professionals clearly was an outgrowth of those hearings and of other discussions with the professional community.

2. The revised Revenue Act and amendments relating to professionals' taxation followed all Council public notice requirements.

3. Several meetings were held with professionals by members of my staff to explore this professionals taxation thoroughly, and I met with several representatives of the professional community in my office. Moreover, the Council Committee on Finance and Revenue's meetings of July 21 and July 22, 1975, in an unusual move, were thrown open to comments from the several professionals representatives who attended the meeting. It is clear to me that no other tax measure in the FY 76 tax package has received as much of my attention and my staff's attention than the tax on professionals.