The District's current system is based on net income, or profits. Some states tax gross receipts of sales of goods and services. Taxing value added is the best way to make taxes proportional to the benefits derived from the District. For example, under the current profit-based system, large firms that place significant demands on city services often pay little in corporate income taxes. The business activities tax will generate more certain and predictable revenues than a profits-based tax.
Profits can vary widely with fluctuations in the economy.
The business activities tax base, however, has a stabler base because it is dominated by labor compensation, which tends to be stable over time. A business activities tax is easy to collect and will result in lower compliance costs for taxpayers and lower administrative costs for the District. A business activities tax would be fairly neutral with respect to decisions made by businesses. For example, absent other taxes, a firm that operated only in the District would find little tax advantage in changing its mix of inputs. In addition, the business activities tax eliminates the bias against investment inherent in a business income tax.