Capital Commonsense

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…

Introduction and how solar took off

Rini Sampath: Welcome, everyone, to Capital Commonsense. This is our first-ever podcast. I’m Rini Sampath. Earlier this year, I ran for mayor of Washington, DC, with a very simple message: fix the basics. That work continues through my writing and conversations. Greg Jaczko has spent his career working at the intersection of science and public policy, and he also ran for Congress here in DC.

In his recent piece for Capital Commonsense, he argues that DC could keep expanding solar while spending much less on the incentives that electricity customers help fund. I want to understand how those incentives work, who pays for them, and what changing them would mean for the people paying the bills. We’ll also get into the concern on the other side: if we reduce those payments, will fewer people install solar?

Greg, thank you for joining me. Before we get into the numbers, I really want to start from the beginning. Could you tell our listeners how solar went from a relatively unusual technology to something people install on their homes? And, especially for a total newbie like me, what made governments decide to help pay for it?

Greg Jaczko: The advancement of solar is really one of the dramatically underreported revolutions of the last 20 years. I’m dating myself here, but I remember when I was growing up, it was a big deal when President Carter put a few solar panels on the roof of the White House. I think those were quickly taken down in the next administration.

It was a technology that always seemed possible, but for many reasons it was just too expensive to be a viable alternative to the other ways we generate electricity. During the Obama administration, there were a lot of federal subsidies, and that drove down the price of solar very significantly. You had a stimulus for companies, utilities, and homeowners to put these systems on their homes or in fields across the country. That further drove down prices, to the point where solar became the cheapest way we could generate electricity in the country.

A natural extension of that is to put it on your roof and have a little mini power plant, where you generate your own power and offset power you would otherwise get from the electricity grid.

In DC in particular, and in other places across the country, governments decided they wanted minimum amounts of electricity to come from renewable power. In a place like DC, they also added a special caveat: not only should we get more and more of our power from renewables, but a certain percentage of that should come from rooftops all across the District. That’s really what brings us to the solar market we have today and what we’re going to talk about.

How DC’s solar credits work

Rini Sampath: That’s a great setup. I’m especially intrigued by this credit system. When I first read your article, I wanted to understand who developed this idea of paying for solar. You talked about the Obama administration and the history of incentivizing folks. What problem were they initially hoping to solve? And can you tell me more about how DC adopted that approach and customized it for our city?

Greg Jaczko: The credits are often a confusing part of the energy generation process. The idea didn’t really come from the energy space. It comes from what’s referred to as a cap-and-trade process: a regulatory system where you impose some kind of limit on something, or in this case encourage something, and then set up a mechanism to keep track of the thing you’re trying to credit or limit.

In this case, it’s solar power generated from rooftops in the District. Mostly that’s homes, but it could also be businesses or some large warehouses. Any time somebody installs one of these systems and generates electricity, they earn a credit. That credit keeps track of how much electricity they generate from the rooftop system.

It’s a way to track how that electricity was generated. Whether it comes from a natural gas plant, a solar plant, or a wind farm, it all gets thrown into the electricity system, and you can’t really tell it apart. As states and other jurisdictions wanted to keep track of that, they needed to create these credits. That way, somebody in Pennsylvania isn’t taking credit for renewables produced in Ohio at the same time as somebody in New Jersey. That’s what this credit does: it gives you a way to keep track.

Rini Sampath: Interesting. Could you make this concrete for us and walk us through the process in DC for someone who’s totally new to this and hasn’t even entertained the idea of solar panels? Someone installs solar panels on their DC home. What happens to them financially? Who pays for the installation? And what does someone have to generate to earn one of those credits? I read in your article that Pepco doesn’t ultimately pay for these credits, so I want to understand where that cost goes.

Greg Jaczko: Let’s take another step back. These credits don’t just track how much solar is generated from a rooftop. They also feed into a compliance requirement that everyone who sells power in the District has. The District requires that, over time, a minimum amount of electricity has to come from rooftop solar. We established that policy as part of a clean energy and climate change program to make our electricity cleaner and greener.

That obligation falls to the power providers. Pepco is the one most people are familiar with. Pepco doesn’t generate those credits itself, because it isn’t allowed to own power plants, or rooftop systems, in the District. So it has to buy them from someone, and it buys them from a homeowner who owns a solar system.

The homeowner puts the system on their roof, and every time it generates a certain amount of electricity, it generates a credit equivalent to that amount. Pepco has to buy these up at the end of the year and turn in a certain number to show it’s meeting the minimum solar requirement. That’s where we get the marketplace for solar credits. The law works through a mechanism that essentially establishes what the price of those credits will be.

Why the program costs too much

Rini Sampath: Interesting. So now that listeners understand roughly how the system works, I can get into what you argue in your article: that local solar is a benefit to DC, but the current program costs way too much. What led you to look at whether DC pays more than necessary? And can you walk us through the homeowner example, so we can see what that looks like in reality?

Greg Jaczko: These renewable credits, or solar credits, are fairly common in the renewable industry. Part of my career I spent developing utility-scale solar projects, so these credits were always part of the process, and I was familiar with them.

Then, while you were running for mayor, I was running for the DC delegate position.

Rini Sampath: That’s right.

Greg Jaczko: And one of the things my wife kept complaining to me about was that our electricity bills just kept getting more and more expensive. “You’ve got to do something about that.” So I said, I’m going to make it part of my campaign. I started looking into the system and the process behind our electricity to figure out whether there were ways we could save money.

That’s when I delved into the program a bit more. Having worked on utility-scale solar, I was generally familiar with what these credits typically cost. I was somewhat surprised to learn that in DC they’re much higher than in other jurisdictions. So I started to pull the thread to understand exactly how high they were, and why.

In principle, the why is to give people an incentive to put a solar system on their roof, because doing that is good for the District. There’s a variety of reasons why that’s the case. Some of it has to do with the fact that we have to buy.

Rini Sampath: And this is me really trying to translate for folks what these savings mean: you estimate that cutting the credit payments in half could save DC electricity customers more than $75 million annually. That’s …