District of Columbia Federal Tax Equity Act

Summary: District of Columbia Federal Tax Equity Act - Amends the Internal Revenue Code to exempt residents of the District of Columbia from Federal income tax. 
Exempts District residents from wage withholding requirements and limits the application of estate and gift taxes on such residents. 
Allows a general business credit for businesses operating in the District of Columbia. 
Directs the Mayor of the District of Columbia to report to the Congress on studies on:  (1) the effects of this Act on District revenues; and (2) the extent to which the revenues of the District are affected by Federal revenues.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``District of Columbia Federal Tax 
Equity Act''.

SEC. 2. EXEMPTION FROM TAX FOR INDIVIDUALS WHO ARE RESIDENTS OF THE 
              DISTRICT OF COLUMBIA.

    (a) In General.--Part III of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 (relating to items specifically excluded 
from gross income) is amended by redesignating section 137 as section 
138 and by inserting after section 136 the following new section:

``SEC. 137. RESIDENTS OF THE DISTRICT OF COLUMBIA.

    ``(a) Residents For Entire Taxable Year.--An individual who is a 
bona fide resident of the District of Columbia during the entire 
taxable year shall be exempt from taxation under this chapter for such 
taxable year.
    ``(b) Taxable Year of Change of Residence From District of 
Columbia.--
            ``(1) In general.--In the case of an individual who has 
        been a bona fide resident of the District of Columbia for a 
        period of at least 2 years before the date on which such 
        individual changes his residence from the District of Columbia, 
        income which is attributable to that part of such period of 
        District of Columbia residence before such date shall not be 
        included in gross income and shall be exempt from taxation 
        under this chapter.
            ``(2) Deductions, etc. allocable to excluded amounts not 
        allowable.--An individual shall not be allowed--
                    ``(A) as a deduction from gross income any 
                deductions (other than the deduction under section 151, 
                relating to personal exemptions), or
                    ``(B) any credit,
        properly allocable or chargeable against amounts excluded from 
        gross income under this subsection.
    ``(c) Determination of Residency.--For purposes of this section, 
the determination of whether an individual is a bona fide resident of 
the District of Columbia shall be made under regulations prescribed by 
the Secretary.''
    (b) No Wage Withholding.--Paragraph (8) of section 3401(a) of such 
Code is amended by adding at the end the following new subparagraph:
                    ``(E) for services for an employer performed by an 
                employee if it is reasonable to believe that during the 
                entire calendar year the employee will be a bona fide 
                resident of the District of Columbia; or''.
    (c) Clerical Amendment.--The table of sections for such part III is 
amended by striking the last item and inserting the following new item:

                              ``Sec. 137. Residents of the District of 
                                        Columbia.
                              ``Sec. 138. Cross references to other 
                                        Acts.''
    (d) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after the date of the 
        enactment of this Act.
            (2) Withholding.--The amendment made by subsection (b) 
        shall apply to remuneration paid after the date of the 
        enactment of this Act.

SEC. 3. LIMITATION ON ESTATE AND GIFT TAXES.

    (a) Estate Tax.--
            (1) Subchapter C of chapter 11 of the Internal Revenue Code 
        of 1986 (relating to estate tax) is amended by adding at the 
        end the following new section:

``SEC. 2210. RESIDENTS OF THE DISTRICT OF COLUMBIA.

    ``For purposes of this chapter, in the case of the estate of a 
decedent who is a bona fide resident of the District of Columbia at the 
time of his death--
            ``(1) the transfer of such an estate shall be subject to 
        tax under this subchapter (and not subchapter A) as if the 
        decedent were an individual to whom this subchapter applies, 
        and
            ``(2) the value of the gross estate shall not include 
        tangible property located inside the District of Columbia.''
            (2) The table of sections for such subchapter C is amended 
        by adding at the end the following new item:

                              ``Sec. 2210. Residents of the District of 
                                        Columbia.''
    (b) Gift Tax.--Section 2501 of such Code is amended by 
redesignating subsection (d) as subsection (e) and by inserting after 
subsection (c) the following new subsection:
    ``(d) Residents of the District of Columbia.--For purposes of this 
chapter, a bona fide resident of the District of Columbia shall be 
treated in the same manner as individuals meeting the requirements of 
subsection (c).''
    (c) Effective Date.--The amendments made by this section shall 
apply to estates of decedents dying, and gifts made, after the date of 
the enactment of this Act.

SEC. 4. CREDIT FOR BUSINESSES OPERATED IN THE DISTRICT OF COLUMBIA.

    (a) In General.--Subpart D of part IV of subchapter A of chapter 1 
of the Internal Revenue Code of 1986 (relating to business related 
credits) is amended by adding at the end the following new section:

``SEC. 45C. DISTRICT OF COLUMBIA BUSINESS CREDIT.

    ``(a) Allowance of Credit.--The District of Columbia business 
credit determined under this section is an amount equal to the portion 
of the tax imposed by this chapter which is attributable to the sum 
of--
            ``(1) the taxable income from--
                    ``(A) the active conduct of a trade or business 
                within the District of Columbia, or
                    ``(B) the sale or exchange of substantially all of 
                the assets used by the taxpayer in the active conduct 
                of such trade or business, and
            ``(2) the qualified District of Columbia source investment 
        income.
    ``(b) Qualified District of Columbia Source Investment Income.--For 
purposes of this section, the term `qualified District of Columbia 
source investment income' means gross income which--
            ``(1) is from sources within the District of Columbia, and
            ``(2) the taxpayer establishes to the satisfaction of the 
        Secretary is attributable to the investment in the District of 
        Columbia (for use therein) of funds derived from the active 
        conduct of a trade or business in the District of Columbia, or 
        from such investment, less the deductions properly apportioned 
        or allocated thereto.''
    (b) Credit To Be Part of General Business Credit.--Subsection (b) 
of section 38 of such Code is amended by striking ``plus'' at the end 
of paragraph (10), by striking the period at the end of paragraph (11) 
and inserting ``, plus'', and by adding at the end the following new 
paragraph:
            ``(12) the District of Columbia business credit determined 
        under section 45C(a).''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

SEC. 5. STUDY OF FEDERAL REVENUES IN DISTRICT OF COLUMBIA.

    (a) Effects of Amendments.--The Mayor of the District of Columbia 
shall conduct a study on the effects of the amendments made by this Act 
on revenues of the District of Columbia.
    (b) General Effects of Federal Revenues.--The Mayor of the District 
of Columbia (in consultation with the Secretary of the Treasury) shall 
conduct a study of the extent to which the revenues of the District of 
Columbia are affected by Federal revenues, including revenues 
attributable to direct Federal payments to the District of Columbia, 
other Federal Government spending in the District of Columbia, and 
income of District of Columbia residents which is attributable to 
Federal sources, and shall include in the study--
            (1) an estimate of the percentage of the revenues of the 
        District of Columbia which is attributable to such Federal 
        revenues;
            (2) recommendations for revisions in Federal law (including 
        the Internal Revenue Code of 1986 and the District of Columbia 
        Self-Government and Governmental Reorganization Act) in 
        addition to the amendments made by this Act which will increase 
        District of Columbia revenues attributable to such Federal 
        revenues and other District of Columbia revenues; and
            (3) such other recommendations as the Mayor considers 
        appropriate.
    (c) Report.--Not later than 1 year after the date of the enactment 
of this Act, the Mayor of the District of Columbia shall submit a 
report to Congress on the studies conducted under this section.