I'm calling to order this hearing.

This is a public hearing of the Committee of the Whole of the Council of the District of Columbia.

I'm Phil Mendelssohn.

I'm Chair of the Council and Chair of the Committee of the Whole.

Today is Thursday, March 19th, 2026.

The time is 2.29 in the afternoon.

We are in room 500 of the Council Chambers of the Johnny Wilson Building.

This hearing is being recorded and will be available on the Council's website, which is WW.dccouncil.gov.

The subject of this hearing is Bill 26-324 entitled Pass Through Entities Income Tax and Tax Credit on Certain S Corporations and Partnerships Amendment Act of 2025.

The stated purpose of Bill 26-324 is to amend Chapter 18 of Title 47 of the District of Columbia Official Code to allow a pass-through entity to elect to be taxed at the entity level for income taxes on certain S corporations and partnerships and to provide a tax credit for pass-through entities.

Similar legislation has been adopted in 36 states, including Maryland and Virginia.

To say a little bit more about this, I'm reading from a background paper by the D.C.

Tax Revision Commission.

State and local taxes sometimes referred to as SALT for individuals at $10,000 per year, that has been revised last year by HR1 to be $40,000 per year.

But the SALT is not capped for firms because state and local taxes count as a deductible business expense.

The IRS is allowing states to introduce pass-to-entity taxes, otherwise known as PTE taxes, pass-through entity taxes, whereby partnerships and other businesses who aren't required to pay taxes directly at the entity level can do so voluntarily, with the state then reducing owners' individual tax liability by an equivalent amount.

The DC business tax system already requires some pass-through entities, such as many S-Corps and sole proprietorships, to pay entity level taxes through the business franchise tax, which makes this kind of workaround unfeasible or unnecessary.

But many other entities, such as law and accounting partnerships, are exempt, and there is currently no provision for them to pay such taxes, even if they wanted to.

So their owners cannot take advantage of the IRS allowance.

So in short, this legislation, which is in its intent consistent with that of three dozen states, is a workaround from the limitation on state and local tax deductions for federal tax returns, and the intent of this legislation would have no fiscal impact on the districts, district government's revenues.

The record in this matter will be open for two weeks.

That is, it will close at 5 p.m.

on Thursday, April 2nd, 2026.

Why do I say that?

Because we're required to file a record and we have a cutoff for when a cutoff for documents to be submitted for the record.

That doesn't mean something that comes in after that wouldn't be considered.

Not clear to me when the committee will mark this legislation up, but it is my intent that we will make some modifications to this legislation to reflect testimony and then mark it up.

With that, I have six witnesses who've testified before we get to the uh government, the government being a representative from the Office of Tax and Revenue.

I think what I'm going to do is call the four individuals who are here in person, and then the um I'll go to the two virtual witnesses.

But we'll let the two virtuals in.

So Salvador Zambri, who is a member of the Trial Lawyers Association of Metropolitan Washington, D.C., uh Shinery Hubbard, who is President CEO of the D.C.

Chamber of Commerce.

Uh participating virtually will be Diana Mubarak.

Also participating virtually will be Joe Bishop Henchman, who is Executive Vice President, National Taxpayers Union Foundation.

Nicholas Johnson, who is Senior Fellow at the Institute on Taxation and Economic Policy, and Michael Hilkin, who is a partner at McDermott Will and Schulte.

The um hearing notice had uh four minutes, but given that we don't have a lot of witnesses here, I'm not going to hold you strictly to that.

But if it's we will have a clock, and if it starts to be a lot of time, I will ask you to wrap up.

Uh let's begin with Mr.

Zambry, and good afternoon.

Good afternoon.

I need to hit this button.

Hit the button.

I think is that working?

Good afternoon, Chairman Mendelssohn.

I appreciate you allowing me to speak today.

Uh on behalf of the Trial Lawyers Association of Metropolitan Washington, D.C., we are very much in favor of this legislation.

As you pointed out, there are at least three dozen states that have gone ahead and implemented legislation like this.

DC has been disadvantaged.

The business owners here who would qualify have been disadvantaged by not having this kind of law in effect.

So we applaud you and the council for considering this.

What I would like to do, and by the way, we we believe to the extent possible it should be on an emergency basis because every tax year that goes by there's just a greater uh loss to business owners.

I would like to address some points made by the District of Columbia Office of Taxation and Revenue.

Uh they raised about nine points, I believe, in their submission to you.

And I think that these are not policy problems, these are drafting problems that are really quite simple to resolve.

And there's some points and concerns I want to address.

The first was uh that DC's unincorporated business franchise tax, the UB FT and the corporation franchise tax, the CFT, already create a salt workaround.

Well, in some sense it does, but these are very different things.

That's an entry-level sort of you get to do business in the District of Columbia tax.

That is not a workaround for uh the owner's distributive share.

So this is a massive savings.

This new legislation would create massive savings from Federal deductions for the business owners that would qualify.

Uh the concern about double taxation, again, that's a drafting problem.

It's not a policy objection.

And language can very simply be put into the uh bill to make it very clear that PTE taxable income shall exclude amounts subject uh to UBFT or CFT for that same year.

And there can be a credit provision as well that can simply say any duplicative tax shall be credited to prevent double taxation.

Uh the issue about home rule and the prohibition against taxing non-residents.

Uh Chairman, we're not that that the council, I don't believe has to worry about that at all.

This is an entry-level tax at the business.

This is uh not a tax on a non-resident.

The non-resident is going to get a benefit as the resident would who owns the business, but that's the that's the great consequence of it.

It's not a violation of any uh home charter uh provision.

Next, uh the bill the point was made that the bill needs to be clarified as to whether non-residents can claim a credit and whether it's refundable.

Yes, they that I think that's a great point, and simple language can go in there to say something along the lines of each member shall be allowed a credit against their DC individual income tax liability equal to their distributive share of PTE tax.

And then there could be a separate statement for non-resident members where it says credit may be refundable to the extent exceed it exceeds DC individual income tax liability, and uh the credit applied first against liability and excess will be refunded.

Um I say I have one minute left.

I have just a few more points.

As to increasing the number in dollar amounts of refunds, uh well, you know, unfortunately the uh refunds are normal, they're expected, they're happening at every jurisdiction in the country.

Uh to try to minimize that, uh, it might make sense to have the PT payments applied against members' quarterly estimated tax obligations, so that there's not a greater disparity of what what should be paid.

I think that can be done easily.

As to the ad back uh provision, that's that's required.

Uh the IRS is going to require that.

Uh it's a standard uh requirement, and we can simply put language in that ensures that owners report distributive income on federal returns while uh the entity deduction remains fully deductible.

That's happening throughout the country.

Uh just a few more points here.

The bill needs to clarify the PT election is one-time or annual.

It should be annual election, it should be irrevocable once made, but it should be uh the enforced every year.

So uh there's flexibility on that.

And the last point I'm I'm not following that.

Um did it should be an annual election, you choose to do it this year and next year you choose to do it, or maybe you choose don't choose to do it.

Correct.

Right.

And that will be just a business decision that's that's that's made at the business level.

And my last point uh treating exempt members and making clarity about how they should be treated.

Again, that's a simple drafting issue.

Just simply need to say that uh uh exempt members are not subject to PTE tax.

The election applies to non-exempt members only.

And uh and that resolves that problem.

So for all those reasons, I I think that these are simple.

I understand that the implementation requires coordination administratively, but this this can be done, I think, with some simple straightforward tweaks.

I'm happy to provide you and the council with some some language that I think does the trick of getting this done so that this law can be implemented right away.

And again, we request that it be done on an emergency basis.

Thank you for your for allowing me the time to speak.

Uh thank you, Mr.

Zambry.

Um, Ms.

Hubbard.

Good afternoon.

Good afternoon, Chairman Mendelson and members of the Committee of Whole and staff.

My name is Chiny Hubbard, President and CEO of the DC Chamber of Commerce, and on behalf of our 1,000 members across all eight wards, employers large and small, thank you for the opportunity to testify today.

I am pleased to appear on behalf of the district's business community to express the Chamber's strong support for the introduction and swift passage of B 2634.

The pass-through entities income tax and tax credit on certain S corporations and Partnerships Amendment Act of 2025.

This measure is urgently needed to provide immediate federal salt cap relief to district-based pass-through businesses and to restore competitive balance with our neighboring jurisdictions.

I would first like to thank you, Chairman Mendelson, for introducing this legislation and for convening today's hearing.

The Chamber strongly supports your effort to bring the district in conformity with the 36 states and New York City that have already adopted a pass-through entity tax.

And as we've heard, both Maryland and Virginia have enacted pass-through entities relief, and those businesses are realizing substantial federal tax benefits today.

As a result, district firms, particularly law firms, professional services, real estate partnerships, and perhaps most importantly, a large number of small businesses that are typically organized as S corporations, partnerships, or limited liability companies are now operating at a significant competitive disadvantage because the district has not yet implemented a comparable mechanism.

The policy is revenue neutral for the district.

The election does not reduce district tax collections.

It simply allows federal deductibility at the entity level.

The measure does not alter the district's tax base, and the benefits accrue exclusively to local employers seeking to remain grow and thrive within the city.

This change would also make the city more attractive to firms, considering doing business here.

District businesses incur financial harm for each tax year without this option.

Firms competing regionally face a structural disadvantage relative to their Maryland and Virginia counterparts.

At the same time, those competing nationally face a competitive disadvantage against the 30-plus states that have also adopted this meaningful tax benefit.

There is no fiscal or political downside for the district.

A well-drafted elective pass-through entity tax would reduce federal tax liability for district resident owners of pass-through entities without having any impact on the district's revenues.

I would also urge you to take note of the written testimony of John Michael Olson, Assistant General Counsel of the Office of Tax and Revenue.

That testimony reflects correctly, we believe that any proposed pass-through entity tax will need to be conformed with the district's existing tax provisions.

Most importantly, the district's unincorporated business tax.

This is noteworthy because the legislation should address potential double taxation of the same item of income.

Any legislation creating an elective pass-through entity tax should codify the DC Office of Tax Revenues previous guidance confirming that district residents may claim a credit against their personal income tax liability for other states' pass-through entity taxes.

This is of particular concern to district residents who have an ownership interest in entities that do business in other jurisdictions and are therefore subject to taxation in those jurisdictions.

Fortunately, these issues were addressed in detail in response to a request a few years ago by the DC tax revision commission for legal input on the best way to structure district pass-through entity tax relief.

And I believe that another person here in witness, uh Michael Hilkin from the law firm of McDermott, Will and Schultz, LLP, and a member of the DC Chamber of Commerce will also testify today to a legislative approach that fully conforms PTE relief to the district's existing tax regime, while ensuring the district resident owners are treated fairly with respect to their liability for pass-through entity taxes imposed by other states.

So thank you for your consideration and for your continued leadership on policies that strengthen the district's economic competitiveness.

Thank you and happy to answer any questions.

Thank you.

I have one question offhand, and that is can we have a copy of your statement?

Yes, we'll rescind that over to you.

Thank you.

We love technology.

So you did submit it, but we can't upload it, so that's on us.

Okay.

All right.

We'll make sure you have to do that.

It's not on us, actually.

It's on the system.

On the system.

We've got to love technology.

Nicholas Johnson.

Good afternoon, Chairman Mendelssohn, members of the Committee of the Whole, thanks for the opportunity to testify on this bill.

I'm Nick Johnson.

I'm a senior fellow at the Institute on Taxation and Economic Policy.

I'm a tax policy consultant for the D.C.

Fiscal Policy Institute and a Ward 6 resident.

Most of us agree in concept that so long as the Federal Government allows residents and businesses in other states to reduce their federal tax liability via SALT CAP workarounds, DC residents and businesses should be able to do the same.

The question is how to get there.

The legislation as submitted is modeled on Maryland's PTE statute.

This was one of the earliest attempts to draft a PTE statute back in 2020-20.

It's designed to fit with uh the circumstances of that time and Maryland's code.

As drafted, as described in more detail in my written testimony, the bill is too complex.

Uh it might not meet IRS requirements today, and it actually might be drafted in such a way that it loses DC revenue.

Uh we need a path forward that is already grounded in DC's tax structure, and the logical starting place is the UBT, the unincorporated business tax.

I think it's not widely recognized that the UBT is already a de facto SALT CAP workaround for the businesses that pay that tax.

So businesses that are subject to it pay tax at the entity level, so it's federally deductible, and then resident owners get a compensating tax benefit on their individual returns.

So that's a good place to start.

And one might imagine then that you could just let non-UBT payers pay the UBT and get the tax benefits.

The problem is that the existing UBT has a built-in flaw, a built-in inequity.

UB owners are taxed only at a flat 8.25% rate, regardless of the owner's income, rather than being taxed under DC's graduated personal income tax rate structure on that income.

And that's the structure that applies to all other residents of the district at all income levels.

So if our approach to the SALT CAP workaround is to simplify is to simply open up the UB to other businesses, we're just going to replicate and magnify this inequity.

We cannot and we should not open up the UB to other businesses unless and until we fix this flaw in the UB.

Fortunately, there's a very straightforward solution.

We can replace the personal income tax exemption for UB income in favor of a dollar-for-dollar tax credit and make it apply both to current UB taxpayers and to prospective elective UB taxpayers.

This maintains tax progressivity.

It preserves the existing SALT CAP workaround built into the UBT.

It raises new revenue for the district because the savings that would be received by lower income taxpayers, lower income UB taxpayers in lower brackets as a result of paying a lower rate would be more than offset by the revenue gains from eliminating the current discounted rates provided to the highest bracket taxpayers.

And I think that's been estimated to raise perhaps about 14 million dollars a year for the district.

So with that modest change to the interaction of the UB and P and UB and the PIT, it then becomes really simple to allow non-UBT partnerships, professional services firms, for example, to elect to pay UBT on behalf of their owners.

This effectively extends the work around to the businesses the bill is primarily trying to help without creating a new separate tax structure or a different set of rules for different businesses.

So under this approach, the same rules would apply to non-elective and elective UBs and the resident owners.

So this approach gives DC business owners the federal tax break they deserve in a simple way that should be simple and speedy to implement.

It addresses the issues flagged by the OCFO in his written testimony, because I do think those are largely drafting issues.

It fixes a long-standing equity problem in the tax code.

It raises some new revenue for the district while reducing taxes for lower income bracket business owners, and it avoids some legal vulnerabilities.

So I urge the committee to pursue this path.

Happy to answer any questions.

Thank you very much.

Thank you, Mr.

Johnson.

Mr.

Hilkin.

Chairman Mendelson and members of the committee of the whole.

Like the others you have already heard from today, I agree that the establishment of a pass-through entity tax that would be available to all entities in the district would bring the district into conformity with the states of Maryland, Virginia, and virtually every other state that already has a personal income tax.

The reason I am here is because my close colleague Diane Smith was a resident of the district and had previously prepared model draft legislation to offer a district-level elective pass-through entity tax.

This legislation was reviewed during the district's most recent tax revision provision commission proceedings.

Sadly, that Diane passed away in January of this year.

And since then, I've been reviewing her previous work with the intent of getting some of her pet projects over the finish line.

You have already heard from other witnesses that the district already imposes an entity level tax applicable to many unincorporated businesses through the unincorporated business franchise tax and also covers S corporations, of course, through the corporation franchise tax.

And I agree that these taxes generally operate as a federal salt cap workaround, which is what we're really looking at today, for those entities subject to those taxes.

But the framework solution prepared by my colleague Diane would take advantage of the pre-existing district tax structure under the unincorporated business tax to allow those currently non-taxable entities to elect into the unincorporated business tax.

Diane's expectation was that by using a pre-existing district tax, rather than creating a brand new pass-through entity tax on top of the current district tax structure, would just simply be easier and more efficient for the district and the OTR to implement.

Separately, Diane's proposal had the additional benefit of clarifying and codifying the Office of Tax and Revenues Guidance in Notice 2022-03 to provide the full benefits of other states' pass-through entity taxes that operate in intent or in effect as a federal salt cap workaround.

Now, uh like Nick, I understand that the current language of Bill 26324 uses Maryland's pass-through entity tax as a model.

But I believe that Diane's proposal, which already takes the district tax law structure into account, would likely be a much easier starting point for everyone, even if there are some minor adjustments that would be necessary.

And hopefully that would make it easier for the district and the and the OTR to implement this tax for the companies that haven't been able to take advantage of it for the last six years and do it more quickly.

So with that, I appreciate the opportunity to testify, and I am happy to answer any questions you may have.

Thank you.

Diana Mubarak.

She may not be here.

No, we can't hear you yet.

We cannot hear you.

Can you hear us?

Raise your thumb if you can hear us.

That is not a good sign.

All right, you can't hear us, and we can't hear you.

Uh we're gonna text her and ask her to uh log out and uh log back on.

So let's go to um Mr.

Bishop Henchman.

Thank you, Mr.

Chairman, for the opportunity to testify today.

My name's Joe Bishop Henchman, and I am executive vice president of the National Taxpayers United Foundation.

Sorry, my dog barking, you mean uh here in Washington, DC, and also a word five residents.

Uh I'm pleased to testify on this issue, which is um to be honest, one that I've sometimes considered to be a little bit of a um well, it's a workaround, that's the word that's used for it.

But uh at this point in time, 36 states in New York City have adopted it.

Maryland and Virginia have adopted it as has been mentioned.

The IRS has blessed it, and uh the Republicans who mostly don't like it because it shifts the cost of the salt cap back to the federal government.

Uh they were half expected to uh make them out to outlaw them in the tax bill this last year, and instead they uh enshrine them in in tax law.

So I think these pastor entity tax salt cap workarounds are here to stay.

Um and DC has a real opportunity to improve its competitiveness at no revenue cost to the district uh by shifting the cost of the salt cap back to the federal government in adopting it.

So I want to thank you for introducing this bill as well as your staff for working on it.

Um I've read the testimony of the the other individuals and who were testifying, and they all raise uh very important points of um the uh the difficulty of modeling after Maryland is that Maryland doesn't have an existing pass-through tax that we have in the form of the UBIT.

So uh maybe it makes it a little harder in that we have to draft something unique that's not just what Maryland adopted, but it also makes it a little easier because we already have an existing tax structure that can be built upon in order to create an effective salt cap workaround.

And I just want to uh uh add another highlight to or add another plus one to the um excellent work that uh Diane Smith did in drafting of a proposed version of it for DC that was uh considered and reviewed by the tax revision commission as part of their work, and that uh make sure that it's an optional election and that it interacts correctly with the UBT and is not duplicative of it.

Um in doing these testimonies all over the country, I'm often uh testifying alongside and opposite to Mr.

Johnson, and so uh it's always a little unusual when we're uh singing for the same tune, but I did want to kind of echo everything he said as well in in terms of some of the changes and I read through the things that he he noted and the things that OTR noted and reread the draft that uh that Diane Smith had prepared, and I think it doesn't quite address all of them, but it addresses I think most of the concerns that have been raised in that draft language.

So I hope the committee will take a good close look at it.

And um, you know, uh I always try to make a plug-in for other changes to the tax code to consider if we're opening things up.

Just as Mr.

Watson noted the um the um the the issue with the progressive the lack of progressive brackets on the uh the UBT.

I'll note the lack of double tax brackets we have generally for the personal income tax.

Every year when I help people do their taxes, there are people who don't know this fact about DC and don't know that you can do the married filing separately on the same return workaround to that, which uh you know, instead of DC doubling the tax records, we have people do that, but not everybody does everybody does it.

And so people overpay like 30 million dollars a year, uh at least according to the tax revision commission.

So if we could double tax brackets if you're looking for more things to do in the code.

But uh thank you again for your leadership on this, Mr.

Chairman.

Uh thank you.

Um I didn't know I was looking for more things to do in the code.

Uh so there seems to be a Oh, oh uh Ms.

Mubarak, are you here?

I don't think she can hear me.

I can hear you.

Can you hear me?

Yes.

All right, perfect.

Thank you.

Sorry about that.

I'm not very tech savvy.

Uh good afternoon, Chairperson, a member of the council.

My name is Diana Mubara, and I'm a small business owner in Washington, DC.

On a proud member of the board of the Adams Morgan Partnership Business Improvement District.

I'm here today to strongly support the B 260324 bill.

As a pass-through business, my income is taxed on my personal return.

And because DC has not adapted a PTE election, I am unable to access the same federal tax benefits that businesses in nearby states already receive.

Businesses in Maryland and Virginia already benefits from this tax relief.

This puts DC small businesses like mine at a real competitive disadvantage.

This issue directly impacts my ability to grow, reinvest, and continue operating in the DC district.

This policy is revenue neutral and has no downside for DC.

Every year without it, small businesses lose money unnecessarily.

I urge the council to pass this legislation and move it forward as an emergency action so businesses can benefit this year's tax.

Thank you.

I'm glad we were finally able to get you.

So I'll be honest, I don't feel completely expert in this or sufficiently expert in this.

My impression is that uh several of you are taking the same approach, which is that we um instead of as the bill is drafted that we look to modify the unincorporated business tax and build on that.

Am I understanding correctly?

In essence, yes.

Yes.

Yes.

Um is the opening up the unimcorporated business tax UB tax the only approach we can take?

I don't know if it's the only approach you can take.

I'm sorry if I I I'm I'm sure I could come up with other approaches if I had had to think about it.

Uh the the the advantages is is the ease, right?

Uh one of the things that is if you create another pass-through entity tax, uh you're you're going to have one tax in place that has to take into account the existence of two other pass-through entity taxes effectively on S corporations and on unincorporated businesses, and uh make them all work together.

So you'd be creating yet another level of tax to administer when what you can just do is take advantage of the regime that exists already.

It's it's more of the simplicity that I think uh uh makes using the pre-existing UBT structure uh attractive, but I'd happy to hand it over to others to give their opinions on that.

Yes, Mr.

Zambry.

So for the Tri Lawyers Association Metropolitan Washington, DC.

As I uh for for our from our perspective, we're not tax experts either.

So we're not we're not telling you that uh you should do it one way or the other.

Uh we're not capable of giving you that advice.

I proffered in my testimony, I think some simple language where you can do it outside of that and do it do it as a standalone piece of legislation and simply say um that the uh say that the language you could exclude income already taxed under the the franchise tax from PTE estimated tax obligations and indicate that the PTE tax rate designed to approximate each member's estimated marginal rate and make notation that it uh uh that it let me see that I don't want to get this correct for you.

That boy, I'm sorry I'm not finding it in front of me.

I had some appropriate language, but simply say that you're not doubling.

There's not going to be a double taxation.

And you uh you get a credit for any taxation any place else.

I think is another easy way to do it.

And I apologize, I don't have the exact language, but I can I can provide it to you.

What do other states do?

Do they have uh does every do 36 states all have an unincorporated business tax?

They have 36 different approaches, which is one of the reasons that makes this area very difficult.

But one of the things that strikes me is that actually the what a lot of states do, probably a majority of states have a pass-through entity tax at the entity level, and then a dollar-for-dollar credit to all the business for all the businesses who pay that tax, a dollar for dollar credit to the individual owners at the individual level.

And so uh I think the approach that that I've put forward is probably in my view, most similar to what most other states ended up with.

Might be most similar.

Um I think I heard in your answer that 36 states don't have an unincorporated business tax.

Right.

They're not starting from the same point, but by slightly changing the way the UBT and the personal income tax interact, you end up with a result that looks surprisingly similar to what other states have.

Nick, this might be a good place.

Uh yeah, I'm I'm actually visiting from uh New York City.

We happen to have an unincorporated business tax like the district does.

My understanding historically, the reason that these unincorporated entity-level taxes historically existed in New York City and in the district is because of limitations on those jurisdictions when it comes to imposing personal income taxes on non-residents.

So other states that don't have those other jurisdictions, most states that don't have those limitations that we face in New York City and you all face in the district, uh generally speaking, tax through entity owners through their pre-existing personal income tax structure.

Uh the city and the district to make sure that they're taxing businesses in in the city in the district that don't that happen to have non-resident uh members, owners have these uh unincorporated business taxes to tax the income earned by those entities.

So that's what kind of makes uh you all here in the district uh different than say Maryland or or Virginia.

But what it means is that you already have long before uh the uh TCJA was passed in what late 2017 uh pre-existing pass-through entity taxes, whereas a lot of these other states had to create them in response.

Is that I think that's right.

Thank you.

Thanks for clarifying.

So let me ask this.

Uh there's a rate for the UB tax.

Um is that the same as is I'm not sure how to ask this.

Um if we don't create this pass to an PTE mechanism.

Is the rate different?

Did that make sense what I because I didn't phrase it very well.

Right.

The UB under current law, UBT is an eight eight and a quarter percent flat rate, both um paid at the entity level, so in effect is paid by non-resident and resident owners, and then resident owners don't count that income when it comes to calculating their personal income tax.

Um what I've suggested is instead um for current UB owners, they would continue to pay at that 8.25 percent flat rate at the unincorporated business level, and then residents would be able to claim the tax that they pay as of dollar-for-dollar credit against their personal income tax.

But the earned personal income tax um would be calculated under the district's graduated personal income tax rate structure as everyone else's does.

Does that make sense?

Well, I am confused.

Well, may I jump in on that?

I mean, I I think I think maybe the confusion is that there are different things.

In my view, again, not as a tax expert, but it seems to me you have a franchise tax.

It's tax you pay to do business in the District of Columbia.

That is not a tax on the distributive owner's share, which is the K-1 payout, for instance, to each owner.

And without this new legislation, the payments that are made for SALT taxes based on the distributive share taxation level will not be deducted against Federal gross income for taxation purposes.

So you need this new legislation to have that part, which is a substantial part to bring about great savings to business owners in D.C.

But you have to have that first you have to have that initial tax rate.

What other states do is they typically have a flat tax 8 percent 9%, something that roughly corresponds to one of their top income tax rates.

That's the rate of their PTE tax, and then that gets credited back against their personal income tax.

That makes sense.

So what we're proposing is to simply adopt the current UB tax rate of 8.25 percent.

You could set it at a different amount.

Well, I was kind of going to go there because that's sort of what is in your testimony.

In your written statement, is to create create some progressivity with the UB tax.

Didn't I read that correctly?

Right.

Because the U the current UB tax is a flat rate tax.

Yes.

But before I go there, it bruises the question.

So right now we get X amount of revenue from a taxpayer who can't do the pass-through entity.

Um I realize that the in temp pain this legislation is entirely about federal taxation.

Um but if we shift the um the um the the incidence of the tax to the UBT, are we having the effect of changing the rate that we're imposing?

Do you follow what I'm saying?

Yes, and that's that's a little bit of my concern if you simply if all you do is let um entities that are not currently paying the UB tax, if you simply let them move over to the UB regime, then you are moving them from the graduated rates system to the flat.

Because we're income.

Because we're moving them from the personal income tax brackets to the UBT tax?

Yes, essentially.

Nick, may I uh interject?

I I I do want to point out, though, and and and I hope that I think we talked about this and and you agree, the draft legislation prepared by Diane does not create the problem that the the that you are highlighting.

It avoids this concern that if a company elects into the pass-through entity tax regime, a company, a business that doesn't have the ability to get taxed under one of those regimes today, what what would happen is A, they would pay the corporate entity, I'm saying corporate, we'll say entity level tax.

The 8.25.

That that sure, yes.

And they would get a credit against their personal income tax liability based upon uh the amount of entity level tax that was effectively paid on their share of the business's income.

So I think your concern that I I think you are are highlighting that uh a PTET regime uh in artfully drafted could have a negative effect on the district fiscal is avoided under the proposal as as drafted by by Diane.

And I know you have a couple tweaks.

We could get into those details now.

I don't know if that that's worth it.

But but bottom line, net net, your your problem is fixed by by Diane.

Largely, yeah.

I mean, I think I think we have the add back issue that we have to resolve, but those are drafting issues.

And the problem is fixed because it's a credit on the individual's tax.

That's who pays it now, and they're not getting the salt because it's capped.

And um, so but they would they would if if the income put them into a higher bracket, they would still be in that higher bracket because all this is a credit.

So maybe maybe think about this.

Oh, I'm sorry, I apologize.

Did I get that right?

Um I think so.

I'm gonna try and reframe it to see if this if if we're on the the same the same page.

Let's say uh I own a half, one or one half of a pass-through entity based in the district, and my share of that uh entity's income is 100.

Uh under Diane's legislation, uh the entity would pay tax, we'll just make it simple.

Uh say $10 of tax under the entity UBT tax.

Uh the entity would pay $10 of tax, say on my behalf.

And that $10 of tax paid would be applied as a credit against my personal income tax liability, while at the same time that $100 of income that was earned through the entity would be brought into my base.

So effectively, there's no uh risk that the income would go taxed by the district at a lower rate.

Right.

Does that did I make that simpler or did I make it even more confusing?

I didn't like your framing, but I didn't hear you disagreeing with me.

Or I didn't feel like I was had a different interpretation.

Great.

Did you want to add anything more?

Um.

If we well, but so how do you get to your progressivity?

Yeah.

So I think Michael and Diane's solution avoids the progressivity problem for those or we're calling elective UBs, those these pass through entities that are not now part of the UB system, and we're bringing them in.

The problem then is now all of a sudden you have two different UB systems.

So you have the UB system you have just created, which is Michael explained, the UB tax is paid by the entity, and then a credit for the taxpayer.

But that's still sitting side by side with the existing UB system, which is the UB tax paid by an entity, and then the taxpayer gets to fully exempt that income from his or her tax base, and so it does not get taken into account for purposes of the district's progressive income tax system.

If you bring those two back together, what you end up with is a system that taxes all income, whether it's for a system, uh business that's currently part of the UB system or a business that's not part of the UB system, or frankly, any other kind of income earned in the district, and puts it all in the context of the district's graduated personal income tax rate system.

I did not completely follow, but we'll leave it there for the moment because there can be some follow-up.

Oh give me just a second.

Do you want me to reminisce I don't have any other questions?

I do not have any other questions for any of you.

Testimony's been helpful.

I appreciate that you all are here in support of what we're trying to do.

Um as I said uh before, the record is going to be open for two weeks, but I don't know how quickly we'll be able to get to markup on this.

I am going to ask the um Office of Tax and Revenue about the timing.

And uh so I'm not insensitive to that issue.

So thank you all very much.

Thank you.

And thank you, the two of you who are online.

John Michael Olson.

When you're ready.

All right.

Uh good afternoon, uh Chairman Mendelson and members of the committee of the whole.

Uh my name is John Michael Olson, and I am an assistant general counsel for the Office of Tax and Revenue for the District of Columbia.

Uh thank you for the opportunity to provide testimony on behalf of uh the Office of Tax and Revenue regarding bill uh 260324, the pass-through entities income tax and tax credit on certain S corporations and partnerships amendment act of 2025, um, which I will refer to as the bill going forward.

Now the bill amends Chapter 18 of Title 47 of the District Code to impose a pass-through entities tax, which I will refer to as the PTAT.

Uh the PTAT would be a new tax imposed on the distributive share of income that is distributed uh from a pass-through entity, also known as a PTE to its members.

Now, since 2018, 36 states have enacted a similar PTAT to provide a quote unquote workaround to the federal limit on state and local tax deductions, uh which is globally known as the SALTCAP workaround.

Uh that is found under the Internal Revenue Code as amended under the tax cuts and uh jobs act and later amended uh under the one big beautiful bill act.

Uh this bill would provide a similar benefit to district residents who earn income from distributions uh from PTEs.

The bill imposes the PTAT through two methods.

First, the PTAT is imposed on the on the distributive share of the PTE's quote unquote non-resident taxable income distributed to the non-resident individual and non-resident entity member.

For this method, uh uh um as written, the PTAT is considered a tax imposed on the non-resident individual slash entity members.

Or alternatively, a PTE may elect to pay the PTAT on the distributive share of all of its members, regardless of district residency.

For this election, the PTAT is deemed a tax imposed on the pass-through entity.

The bill further provides a tax credit to individual members against district income tax equal to the num to the members' proportional share of the PTAT paid on their behalf.

Uh and finally, the bill has a retroactive applicability date to tax years beginning after December 31st, 2023.

Now implementing the PTAT as proposed raises certain issues and certainly presents certain administrative challenges.

First, as has been uh mentioned many times previously by uh by the astute uh uh uh presenters before, the proposed PTAT may provide limited additional benefit given that the district already imposes an entity level tax for unincorporated businesses and S corporations through the unincorporated business franchise tax and the corporation franchise tax.

These taxes provide a similar salt cap workaround benefit to it to its uh district members by allowing its members to fully exclude from district taxation the income that has already been taxed at the entity level that is subsequently distributed to them.

The proposed PTAT and its associated credit operates in a similar fashion while providing a similar SALT CAP workaround benefit.

However, if enacted, uh the proposed PTAT will need to be conformed with those existing tax provisions regarding those entities to address issues such as the potential double taxation on the same item of income and the effect of the income exclusion, which is found in the UB, uh the unincorporated business tax, and then pair that with a PTAT credit on and how and the effect on that on district revenue.

Uh finally, OTR has identified several technical uh issues and areas for clarification in the proposed bill and has made a number of suggested amendments.

Should the council decide to proceed with a pass-through entity tax, OTR is prepared to work with council to implement the tax.

Attached to this testimony are OTR's recommendations and the issues identified for the council's consideration.

Thank you for their opportunity to testify.

This concludes my testimony, and I am happy to answer any questions you may have.

Uh thank you, Mr.

Olsen.

So I'm a little bit confused.

Um page two of your statement, you say um that raises certain issues and presents certain administrative challenges first, and then you have a paragraph that goes on, and then the next paragraph says finally there's some technical issues.

So the I'm led to believe that there are a number of issues, but I'm only seeing one, which is um this uh I don't want to say duplication, but uh parallelism with existing uh pass-throughs, and then there's some technical issues.

Am I understanding correctly?

Correct.

Uh uh I didn't want to elongate the um my testimony any further, uh, but I did list those issues that that could uh that can arise if if we do implement the pastor entities tax as proposed.

Um and if you would like I could go through them.

Well, I'm gonna ask you about a couple of them because they're attached.

Uh that's the uh attachment that's a suggested amendments and issues raised.

Yes.

So let me just for the um the fact that the district already imposes an entity level tax for all unincorporated businesses and S corporations.

Um I mean, you heard the testimony, the previous testimony.

It sounds like we can work that out.

I think we would need to look into it, but uh but but yes, uh uh uh there are similarities between the proposed PTAT and the um unincorporated business franchise tax, as well as the corporations franchise tax, which affects S corporations.

There are similarities, um, and and I have listened to the testimonies, and I think um I think what I'm hearing is why reinvent the wheel when we already have it.

So it in a way perhaps we could take a look and see how we can mesh those two tax regimes together and see if they can work.

Yes, and I think the statement was made by one of the witnesses that the bill is introduced by me as modeled after Maryland, which is unnecessarily complicated.

And there might be a simpler approach.

There could be, and that is something that we will work with council should we continue with this priority text.

Give me a second.

So the um the bills introduced had a retroactivity to uh the um I think it's tax year 23.

No, tax year 24.

Yes.

Um which I suspect would have a uh maybe not.

Um would do you think that would have a fiscal impact on us?

Uh we haven't looked at the fiscal impacts yet of this of this bill.

Uh um, so at this point, I uh um I don't know yet, uh, Mr.

Chairman.

Okay.

Um I think that it would be important for us to get a sense, recognizing that um it's a more um detailed process if I ask for a formal fiscal impact analysis, but if we could get a sense of whether there's a fiscal impact for any retroactivity, I said any retroactivity.

Um but my other concern here is that you are proposing that this would not be applicable or would not begin for three years.

That is to tax year beginning January 1st, 2028.

Uh so right now we're in tax year 2025, meaning the return is being filed right now are for tax year 25.

Um so you would have us wait three years.

Why does it take so long?

Uh Mr.

Chairman, um, as you have heard, this is a rather complicated new tax as proposed.

Let's say we we don't uh deal with the UB tax and really implement this as as as as proposed.

Um and what we have noticed from other jurisdictions, namely Maryland and Virginia, was that um they had to create an entirely new tax form, um, an entirely new tax booklet.

And even though this proposal is mirrored after Maryland, uh there are certain important differences that does not apply here in the districts, and so we would have to take a look at that as well.

Um and it also concerns programming our systems and uh and and frankly also staff training, perhaps even staff hiring.

And and this is something that I alluded to in one of my points is that this actually might lead to an increased amount of refunds, not just in the dollar amounts, but also as well as in the number.

And that is not based on any sort of assumptions.

Uh that is something that we saw that happened in Maryland and Virginia when they first instituted their pass-through entities tax.

Uh we actually have some employees who worked in those departments uh at that time, and what was noted was uh because the pass-through entities tax uh um allocated a credit um and also with regards to the um um the fact that the quarterly payments do not take into account the pass-through entity tax credit.

Uh uh there were a large number of refunds that were going out the door, and here in the districts, uh, when it hits a certain threshold amount, it has to do uh we have to do a manual review.

And so not only uh do we foresee an inundation of uh tax refund claims, but uh we may see an increased workload in terms of actually reviewing manually each and every refund if they get high enough.

Um and then um and then at the same time also we want to make sure that we implement this uh past your entities tax in the way that council intended, and we want to make sure that it's done the correct way.

So uh that is why I requested uh uh an additional time, and that was based on my discussion with OTR again with that concern.

So this is gonna sound rude, but I'm not feeling any of it.

So if we were to pass this bill tomorrow.

We're still in the month of March.

I'm not saying we're going to, in fact, we're not meeting tomorrow, but if we were to pass it tomorrow, you would have all of the month of April, May, June, July, August, September, October, November, December, to write the forms.

It's pretty clear from the testimony that we're probably not going to uh adopt the language that uh Maryland has.

Um so we might go the direction of just um looking at the existing UB tax.

Uh but still you would have, I forget how many months I counted.

I have nine fingers showing.

You have nine months to write the forms.

I think the vote was November 3rd, although I think it was enacted in December.

So I'm just not seeing how you need three years to do the forms to do the systems.

So how many um how many entities do you think we're looking at?

I'm not sure.

I haven't uh done an actual count, but I um but again that was based from our observation in other jurisdictions.

And well, you didn't give me a number.

Uh so I'm guessing it's not a hundred thousand.

I'm guessing it's maybe in the tens of thousands, maybe less than twenty thousand.

I don't know.

Uh I don't know, Mr.

Chapter.

Okay.

Um but the manual review is not something that happens between now and January 2029.

If you want it applicable beginning with January 1st, 2028, those are returns, at least for personal income tax that are filed in 2029.

That's why I said three years.

Um so between I mean, you're going to be reviewing the form re manually reviewing in 2029.

I I'm just not getting this why it takes three years to be able to implement this.

Right.

And you know the chamber wants this adopted last month on an emergency basis.

And I think Mr.

Sambri uh testified that they would like this adopted right away.

Um we are behind other stakes, which is actually another interesting point, because it's not like we would be alone new territory here.

So I guess I would have to say I'm dissatisfied with this notion of taking three years to implement this.

And if I may, Mr.

Chairman, um uh we also have to be cognizant that OTR also has its current responsibilities for each filing season, including now and the next filing season seasons as well.

And this will be another um assignment, if you will, that will be on top added on top of what OTR is already doing in terms of implementing the upcoming whatever changes there will be in the Budget Support Act that will be coming as well as other tax uh provisions that will be coming down the line as well.

So uh we to say that uh uh to say that if this pass through entities tax is passed uh as you as you hypothesize or maybe next month, um it will be a lot to uh for OTR to lift and and what OTR is is merely asking is perhaps to push it further just to make sure that we do not rush this to make sure that we implement it correctly and that we uh implement it in the way that council intended it to be, and that is to benefit the district residents in the correct and appropriate manner.

Uh again, I'm just thinking the to the tax decoupling, which is very complicated.

There were 85 provisions in OB3 or the HR 1 bill.

85.

We decoupled 13.

You have to so a lot of I think it was a 20-page bill.

Um I don't think this is we're talking about anything that long here.

Um and that was uh enacted by the council in December and uh implemented in January.

Yeah.

Just noting that, um let me ask you this.

The um the other than that there might be a fiscal impact, is there an issue to retroactivity?

No.

Um or at least not that I can think of, other than the fiscal impact and and of course the um implementing this, no.

I uh I cannot think of any other reason or concern.

Give me a second.

Uh so I appreciate your your testimony and um the suggested amendments.

This is part of what we will work through with your office.

And um I I think just the one issue that I've flagged is the um applicability date.

And I'd like us to do it as quickly as we can, although I will note that we're supposed to get the budget in two weeks, less than two weeks.

So that's going to impact our ability to work on this legislation.

But we're going to try to do this as quickly as we can.