Meeting DC’s Challenges, Maintaining Fiscal Discipline: Creating a Healthy and Progressive Tax Structure

| February 1st, 2007 |

Summary

A healthy tax system is critical to providing the revenues needed to fund public services.  A tax system should generate a reliable flow of revenues that keeps pace with growth in the economy, and it should be easy to administer, easy to understand, and widely perceived as being fair.

DC’s tax system raises over $5 billion in revenue per year from a variety of taxes and fees, but primarily from income, property, and sales taxes.  A review of DC’s tax system and recent trends reveals these key findings:

  • Substantial tax relief has been implemented in recent years.  According to the Chief Financial Officer, tax collections in 2007 will be more than $300 million lower as a result of tax cuts adopted in recent years.  The largest tax relief has been in DC’s personal income tax ($154 million) and property taxes for homeowners ($115 million).

    The rates for all of DC’s major taxes – income, sales, and property – either have been reduced or remained the same since 1990.  Some smaller tax sources — on utilities, hotels, and restaurant meals — have increased. 

  • Taxes on DC families are now the lowest in the region.  As a result of recent cuts, the income and property taxes paid by DC households are lower in most cases than taxes in suburban Maryland or Virginia.  A DC family of four earning $100,000 pays about $1,000 less than similar families in Northern Virginia and over $1,500 less than families in the Maryland suburbs. This is driven largely by the fact that DC’s property taxes are far lower than in either suburban Maryland or Virginia.  Income taxes on DC families generally are lower than in Maryland but higher than in Virginia.  Virginia has an annual tax on cars, but DC and Maryland do not.

  • DC’s tax system is regressive:  As in most states, low-income DC households pay a higher percentage of their income on taxes than higher-income families.  DC’s lower-income households pay as much as 11 percent of income toward taxes, compared with its highest-income families that devote less than six percent of income toward taxes.  This stems from a significant reliance on sales and excise taxes that are highly regressive — because low-income families spend much of their income on taxable items.   Recent income and property tax cuts are unlikely to have made DC’s tax system less regressive and may have made it more regressive.

These findings lead to a few conclusions.

  • Broad-based tax reductions are not warranted at this time.  Because taxes on DC families are now the lowest in the region, further broad-based tax reductions could reduce DC revenues significantly without addressing a clear policy need.

    Given this, the Mayor and Council should consider eliminating an automatic property tax rate-reduction mechanism that was adopted in 2005.  The "calculated rate" automatically reduces the tax rate for residential properties when property tax revenues rise above a specified level.  The calculated rate triggered a cut in DC’s residential tax rate for 2007 — from 92 cents per $100 of assessed value to 88 cents — worth $17 million.  Given the city’s relatively low property taxes for homeowners, it is not clear that further reductions in the tax rate are warranted.

  • Targeted low-income tax relief measures should be considered.  A tax system can be made more progressive by adopting tax relief that targets low- and moderate-income households.  Targeted tax reductions also are advantageous because they have limited cost in terms of lost revenues.  The District could consider raising its standard deduction and personal exemption to match the federal levels, modifying its credit for child care expenses to allow more low-income families to use it, or updating its property tax credit for low-income renters and owners.
  • Tax relief should include renters: Renters, who represent nearly 60 percent of DC households, have not benefited from the substantial property tax cuts adopted in recent years.  If the District considers tax relief, a focus on renters may be warranted.  Both increasing the standard deduction and updating the low-income property tax credit would provide substantial relief to renters.

For more information, see the following DC Fiscal Policy Institute reports:

Taxes on DC Families Are Now the Lowest in the Washington Region
September 2006 (http://dcfpi.org/?p=41)

Property Tax Relief Issues
May 2005 (http://dcfpi.org/?p=47)

The DC Tax System Is Regressive and Tax Burdens on Near-Poor Families Have Increased Since 1989
April 2004 (http://dcfpi.org/?p=75)

Trends in Tax Rates in the District of Columbia
April 2004 (http://dcfpi.org/?p=74)

 

Issue I:  Taxes on DC Families are Now the Lowest in the Washington Region

The District of Columbia has a reputation as a high-tax jurisdiction.  The conventional wisdom is that DC households pay more in taxes than their neighbors in suburban Maryland and Virginia — and that DC’s tax levels are a hindrance to its ability to retain and attract residents.

A review of area taxes, however, shows the conventional wisdom is not correct.  Rather than the highest taxes in the region, taxes paid by middle-income families and individuals in the District are lower in most cases than in either the Maryland or Virginia suburbs.  DC has now met, and in most cases exceeded, the much-discussed goal of “tax parity” with its neighboring jurisdictions, in significant part because of income and property tax cuts implemented in recent years. 

These findings come from an analysis by the DC Fiscal Policy Institute that calculated the taxes paid by hypothetical families at three income levels — $50,000, $100,000 and $150,000 — in the District and in Montgomery, Prince George’s, Fairfax and Arlington Counties in 2006.  It included the major taxes that households pay based on where they live — income and property taxes, including the annual tax on cars in Virginia.

  • The income and property taxes paid by a married-couple with two children and income of $100,000 is $1,900 lower in DC than in Prince George’s County, $1,500 less than in Montgomery County, $1,300 less than in Fairfax County, and $1,100 less than in Arlington County.
  • For families and individuals with incomes between $50,000 and $150,000 — the broad middle class — taxes paid by DC residents consistently are lower than in suburban Maryland.  DC taxes are lower than taxes in suburban Virginia for many families, and roughly equal to Virginia taxes for other families.
  • DC’s lower overall taxes result largely from low property tax levels.  For example, DC homes worth $600,000 face an average 2006 property tax of $2,900, compared with $3,800 in Montgomery County, $4,500 in Arlington County, $4,700 in Prince George’s County, and $4,900 in Fairfax County.  In addition, Virginia levies an annual property tax on cars, while DC and Maryland do not.
  • DC income taxes are higher than in Virginia but lower than in the Maryland suburbs.  Although DC’s top income tax rate of 8.5 percent is somewhat higher than the 7.95 percent top rate in Maryland (including both state and county rates), the top Maryland rate applies at a much lower income level than in the District.  For this reason, most households — including those with incomes of $150,000 — pay less in income tax in DC than in Montgomery or Prince George’s counties.  In contrast, income tax liabilities on middle-income families in Virginia, where the top marginal tax rate is 5.75 percent, are lower than in both DC and Maryland.

These findings show that further tax cuts are not needed to meet the goal of “tax parity.”  Because taxes paid by DC residents are thousands of dollars lower than in the suburbs in some cases, this analysis raises the question of whether all of the tax cuts adopted in recent years were warranted.  Prior to implementing these tax reductions, DC’s household tax liabilities were roughly similar to those in suburban Maryland and moderately higher than taxes in suburban Virginia.  This is an important issue for two reasons. 

  • While the income and property tax cuts adopted in recent years have benefited a broad range of DC taxpayers, a large share of the cuts has gone to high-income households.  For example, income tax cuts implemented over the past three years resulted in $220 in tax relief for a family of four earning $25,000, $750 for a family earning $50,000, and $1,970 for a family earning $150,000.  In addition, more than half of the relief from a 10 percent property tax cap adopted in 2005 goes to owners of homes worth more than $500,000.
  • Tax cuts reduce revenues that otherwise could be invested in infrastructure or service enhancements.  Just the income tax reductions implemented since 2004 will reduce revenues by $141 million annually in 2007 and beyond.  There could be alternative ways to invest these funds in improving schools, encouraging affordable housing, strengthening health care, expanding recreational facilities, or other ways to improve the quality of life and address major problems that could benefit both residents and businesses in the District.  

For more information, see the following DC Fiscal Policy Institute report:

Taxes on DC Families Are Now the Lowest in the Washington Region
September 2006 (http://dcfpi.org/?p=41)

 

Issue II:  Recent DC Tax Cuts Total $300 Million

The District of Columbia has implemented substantial tax relief in recent years, as a response to the city’s strong finances and also to address the impact of rising property assessments on DC homeowners.  Together, the tax reductions total $300 million this year — that is, tax collections will be $300 million lower in 2007 as a result of tax cuts implemented in recent years.

Effect in 2007 of Recent DC Tax Reductions
   
Income Tax $154 million
Property Tax $115
Earned Income Tax Credit $10
Utility Tax (gross receipts) $21

The bulk of the tax cuts were in the city’s income tax and homeowner property tax.  As discussed in another section of this report, combined income and property taxes paid by DC households now are lower than in either suburban Maryland or Virginia.

The following highlights the impacts of the major revenue reductions implemented in recent years.

Income Tax ($154 million):  Income taxes have been reduced substantially in the District since 1999 as a result of the Tax Parity Act.  This multi-year tax cut lowered marginal tax rates and expanded tax brackets.  The Tax Parity Act reductions represent $141 million of the recent income tax cuts.  The remaining $13 million in relief comes mostly from a modest increase in DC’s standard deduction and personal exemption. 

While the Tax Parity Act resulted in lower income taxes for all DC households, the largest benefits are going to DC’s high-income households. For example, the income tax cuts implemented over the past three years resulted in $220 in tax relief for a family of four earning $25,000, $750 for a family earning $50,000, and $1,970 for a family earning $150,000.

Property Tax Relief ($115 million):  The District has adopted a number of property tax reductions in recent years to address the dramatic increases in assessments faced by most homeowners. The reductions include an increase in the Homestead Deduction from $30,000 to $60,000 and a reduction in the property tax rate from 96 cents per $100 of home value to 88 cents.  In addition, the Council established a cap on the amount that taxable assessments can increase each year.  The cap is now set at 10 percent per year.

These reductions have provided substantial relief:

  • For 66 percent of DC homeowners, property tax bills in 2007 are smaller than 2005 bills.  An additional 24 percent of DC homeowners face an increase of no more than 10 percent in their bill over the two-year period, or less than five percent per year.
  • In 33 of DC’s 57 property tax neighborhoods, the median 2007 tax bill is lower than the median 2005 bill.

The property tax reductions benefited all homeowners, and some provisions targeted the greatest relief on low-income homeowners, particularly the Homestead Deduction increase. But other provisions gave substantial tax cuts to owners of high-value homes.  Over half of the benefits of the 10 percent cap, for example, go to owners of homes worth $500,000 or more.

Earned Income Tax Credit ($9.8 million):  In 2005, the District expanded its EITC from 25 percent of the federal credit to 35 percent.  The EITC is a credit for low- and moderate-income working families, particularly those with children.[1]  The expansion made DC’s EITC the largest state-level EITC in the U.S.  As a result of the increase, the maximum DC EITC benefit to low-income working families with children increased from about $1,100 to $1,540.  The EITC also was extended to non-custodial parents who are paying full child support obligations.

 

Issue III:  Options for Low-Income Tax Relief to Make DC’s Tax System More Progressive

As in most states, the overall DC tax system — including sales, excise, property, and other taxes — is regressive.  Lower-income DC residents pay a greater share of their income in DC taxes than higher income residents do.  Households with incomes between $15,000 and $42,000 pay nearly 11 percent of their income in DC taxes, compared with 5.8 percent of income for the top one percent of DC households.  (This issue is discussed in more detail in another section of this report.)

Moreover, the District has implemented about $300 million in tax relief in recent years.  While some of these measures targeted lower-income families — particularly an expansion of the Earned Income Tax Credit — by and large the reductions did not make the tax system more progressive.

DC’s tax system can be made more progressive by adopting tax relief that targets low- and moderate-income households.  Targeted tax reductions also are advantageous because the revenue loss often is less than the loss from broad-based reductions. Some possible targeted tax relief measures include:

  • Raising the standard deduction and personal exemption to match federal levels;
  • Improving DC’s low-income property tax relief credit; and
  • Making the DC Dependent Care Credit refundable.

 

Increase DC’s Standard Deduction and Personal Exemption to Match Federal Deduction

The standard deduction and personal exemption exempt a specified amount of earnings from taxation and, if set at sufficient levels, they can eliminate income tax liability entirely for many low-income households.  The standard deduction is particularly important for low- and moderate-income households.  In DC, three-fifths of taxpayers claim the standard deduction, and more than 90 percent of them have adjusted gross income under $50,000.

 

Household income*

Tax Relief Under Standard Deduction/ Personal Exemption

Tax Relief

As a Percent of Income

$15,000

$260

1.7%

$25,000

$730

2.9%

$50,000

$938

1.9%

$100,000*

$612

0.6%

$150,000*

$612

0.4%

* assumes these households itemize deductions

At the federal level, the combined standard deduction and personal exemption for a married couple with two children is $23,500.  (This stems from a $10,300 standard deduction and a $3,300 personal exemption for each of the four household members.)  Households with incomes below this level pay no federal income tax. Under the DC income tax, by contrast, the standard deduction and personal exemptions for a family of four total just $8,500.  (DC’s standard deduction is $2,500 and the personal exemption is $1,500.)  Partly as a result of these small deductions, taxes on some lower-income DC households are relatively high.  A family of four with income of $30,000, for example, pays more in income tax in DC than in all but eight states.

Raising the DC standard deduction and personal exemption to match the federal levels would reduce taxes most notably for lower-income households, while providing some relief to all households because all households claim the personal exemption.  It would provide $730 in tax relief to a family of four earning $25,000, or nearly three percent of income.  For a family of four with income of $100,000, the relief would be roughly $612 (assuming the family does not claim the standard deduction), or 0.6% of income.

Another advantage of tying DC’s personal exemption and standard deduction to federal provisions is that it would ensure that these critical tax provisions do not lose ground to inflation.  The DC standard deduction of $2,500 has been increased only once since 1987, and the personal exemption has been increased only once since 1991.  Federal tax provisions, by contrast, are adjusted for inflation each year.

 

Improving DC’s Low-Income Property Tax Credit

The District has a property tax credit for low-income households that pay high property taxes relative to their income.  The Homeowner and Rental Property Tax Credit, known as the Schedule H credit, is available to renters as well as homeowners because it assumes that renters pay property taxes indirectly through their rents.  This is important because renters represent nearly 60 percent of DC households and have not benefited from the substantial property tax relief provided to homeowners in recent years. 

The Schedule H credit has not been adjusted for nearly three decades, however, and is outdated in key ways.  The maximum income eligibility level for the credit is $20,000 and has not been adjusted since the credit was created in the late-1970s. The current maximum credit amount of $750 has been unchanged since 1979.  If the credit’s features had received cost of living adjustments since then, the maximum credit now would be over $2,100 and the income eligibility threshold would be over $55,000.

A bill introduced in the DC Council in 2005 would have replaced the Schedule H credit with a new credit.  The proposed new credit, based in part on a recommendation from the District’s 1998 Tax Revision Commission, would have raised the maximum credit to $1,000 and raised the income eligibility to $85,000.  The amount of the credit would have phased down as income rises.  If adopted, this credit would provide substantial relief to many low- and moderate-income households.  For example:

  • A renter with income of $20,000 paying $500 in rent currently qualifies for $98 under Schedule H.  The credit amount under the new proposal would be $630.
  • A homeowner with income of $40,000 with a home assessed at $150,000, currently not eligible for Schedule H, would receive a tax break of $356, or 45 percent of the full tax bill.
  • It should be noted that the substantial relief provided by this credit would have a large cost in terms of lost revenue — over $100 million per year.  This suggests that it may be difficult to implement the credit fully in the near term and that it might be necessary to modify the proposal or phase it in over a number of years.

 

Making the Dependent Care Credit Refundable

The District’s tax system includes a tax credit to help families meet child care expenses for children up to age 13.  The DC credit is set at 32 percent of the federal dependent care credit, which is available to families at all income levels but covers a larger share of expenses for lower-income families.  The maximum federal credit is $2,100 for families with incomes below $15,000, phasing down to $1,200 for families with incomes above $43,000.  The maximum DC credit is thus $672.

While the DC dependent care credit has the potential to offset some child care expenses, the structure of the credit limits its ability to do so for very low-income residents.  This is because the credit is non-refundable, which means it can be used only to offset income taxes owed.  Families with little or no income taxes may qualify for a substantial credit but not be able to benefit from it.

For example, a parent earning $16,000 per year who pays $300 per month in child care would qualify for a credit of $391.  Because the family’s tax liability is $325, however, it can use the dependent care credit to eliminate its tax liability but cannot benefit from the full credit.

The DC dependent care credit could be modified to make it refundable, which would mean that families would get the full benefit regardless of their tax liability.  If the credit amount exceeds tax liability, the family would get the excess as a refund.  The DC Earned Income Tax Credit is an example of a refundable credit.

Making the DC dependent care credit refundable is likely to have only a modest cost in terms of lost revenues.

 

Issue IV:  Eliminate the Property Tax “Calculated Rate” to Preserve DC Revenues

The District has taken a series of steps in recent years to address the impact of rapidly rising home assessments on DC homeowners.  This includes raising the Homestead Deduction, reducing the property tax rate, and setting a cap on annual increases in a property’s taxable assessment.  The cap is now set at 10 percent per year, which means that a homeowner’s tax liability can grow no more than 10 percent, regardless of the increase in their home’s value.

The DC Council also adopted a provision, known as the “calculated rate,” that could provide continued property tax reductions in the future.  Under the calculated rate, the residential property tax rate (which covers both rental and owner-occupied properties) is reduced automatically if total property tax revenues are expected to rise more than a specified amount.  The calculated rate resulted in a property tax cut for 2007 worth $17 million that reduced the residential rate from 92 cents per $100 of assessed value to 88 cents.  For FY 2008, the calculated rate will trigger another drop in the rate if property tax collections rise more than eight percent.

For a number of reasons, the District should consider eliminating the calculated rate mechanism.

  • DC’s property taxes on homeowners are the lowest in the region.  This was true even in 2006, before the recent rate cut.  For homes worth $400,000, the average 2006 property tax in DC was $2,900, compared with $3,800 in Montgomery County, $4,700 in Prince George’s County, $4,900 in Fairfax County, and $4,500 in Arlington County.
  • Most DC homeowners are paying less today than two years ago.  2007 property tax bills will be lower than 2005 property tax bills for 66 percent of DC homeowners, despite the nearly 50 percent increase in median assessed values since then.
  • DC’s budget situation may not be healthy even if property taxes are rising.  The DC Chief Financial Officer has identified over $200 million in spending pressures for FY 2008.  This could mean that the District will need to find substantial savings — and perhaps service cuts — to balance its budget.  A property tax cut would exacerbate this gap.
  • Revenues devoted to property tax relief could be used for other purposes instead:  The $17 million property tax cut in 2007 equals nearly half of the local budget for the DC Public Libraries and for the Department of Parks and Recreation.  Without the property tax cut, the District could have used $17 million to enhance a number of services such as these.

These findings also suggest that further property relief is not warranted at this time and that the calculated rate should be eliminated.  As noted, a rate reduction will be triggered automatically for 2008 if residential property tax revenues grow more than eight percent. There is a reasonable chance that this level of revenue increase could occur.  The residential housing stock is growing, particularly as a result of substantial condominium construction.  In addition, since most homes currently are taxed well below their full assessed value, most will face a 10 percent increase in their tax bill in 2008 under the property tax cap.

Even if the calculated rate is eliminated, the District can still consider property tax relief in the future.  As noted above, the Mayor and Council have adopted substantial tax relief in recent years and could do so again.  Rather than allowing the rate to drop automatically, policymakers could assess the need for tax relief annually, and consider the need for property tax relief in light of the city’s overall budget situation and other possible budget priorities.

For more information, see the following DC Fiscal Policy Institute report:

Taxes on DC Families Are Now the Lowest in the Washington Region
September 2006 (http://dcfpi.org/?p=41)

 

Issue V:  Trends in DC Taxes

The District supports its public services by raising roughly $5 billion per year from a variety of taxes and fees.  The major sources of DC revenues are the property tax, income taxes, and the sales tax.  (See chart.)

A review of DC’s tax trends shows that rates for the District’s major tax sources — the individual income tax, the real property tax, and the sales tax — have been reduced or remained stable over the past two decades, and that a number of deductions, credits, and other forms of tax relief have been adopted.  Tax rates for some smaller revenues sources have increased.

 

Income Tax

  • DC’s top marginal tax rate was cut from 11 percent to 9.5 percent in the late 1980s.  The rate was reduced further over several steps since 2000, reaching 8.5 percent in 2007.
  • In recent years, the District also enacted a substantial Earned Income Tax Credit for low- and moderate-income workers.  The DC EITC equals 35 percent of the federal credit, making it the largest refundable state-level Earned Income Tax Credit in the nation.
  • On the other hand, DC’s personal exemption and standard deduction have been adjusted only once since the early 1990s and are far lower in value today, after adjusting for inflation.

 

Property Tax

  • The tax rate for homeowners fell from $1.83 per $100 of assessed value in 1975 to $1.22 by 1989 and then to $0.96 in 1991.  The tax rate remained at this level until 2006.  Since then, it has been reduced further — to 88 cents per $100 of assessed value.
  • The tax on residential rental properties fell from $1.83 per $100 of assessed value in 1975 to $1.54 by 1999.  The tax was then reduced in the early 2000s to match the rate for homeowner properties.  The tax on rental residential properties is now $0.88 per $100 of assessed value.
  • The property tax on commercial properties has fluctuated, but the current rate — $1.85 per $100 of assessed value — is basically the same as the rate of $1.83 in 1975.
  • The District’s homestead deduction now shelters the first $60,000 of home value from taxation. Since 2001, the District has set a cap on annual property tax increases for homeowners.  Increases are limited to 10 percent per year, regardless of the change in a home’s assessed value.
  • The District offers a 50 percent property tax break for seniors with incomes below $100,000.

 

Sales Tax

  • The general sales tax rate was set at six percent in 1980 and was reduced to 5.75 percent in 1994; the rate has not been changed since then.
  • Over time, the sales tax base has been expanded gradually to cover a greater share of retail purchase, such as newspapers and dry cleaning.

 

Tax Rates That Have Increased

  • The tax on restaurant meals has risen from eight percent to 10 percent since 1989, and the hotel tax has grown from 10 percent to 14.5 percent.  In both cases, a portion of the increase was dedicated to fund the new Convention Center.
  • The District’s gross receipts tax — a tax on utilities that is passed through to consumers — has increased from 6.7 percent in 1992 to 10 percent today for residents and 11 percent for businesses.
  • Deed recordation and transfer taxes were set at one percent in 1976, raised to 1.1 percent in 1989, and to 1.5 percent in 2007.  The recent increase was recommended by a mayoral task force to fund a range of housing needs.

 

For more information, see the following DC Fiscal Policy Institute report:

Trends in Tax Rates in the District of Columbia
April 2004 (http://dcfpi.org/?p=74)

 

Issue VI: The DC Tax System Is Regressive

One way to evaluate tax systems is to consider whether the system is progressive or regressive.  In progressive tax systems, the percent of income devoted to taxes increases as income rises.  In regressive systems, tax burdens decrease as incomes increase, which means that higher income residents pay a smaller portion of their incomes in taxes than poorer residents.

The most recent analysis of the progressivity of DC’s tax system is from 2002, although it reflects recent income tax reductions that had been adopted — but not yet implemented — as of 2002.  The analysis finds that while DC’s tax system has both regressive and progressive elements, the overall system is regressive.  Recent tax reductions have included some measures targeted on low-income families, but tax the cuts as a whole have not made the tax system more progressive.

  • The one percent of DC residents with the highest incomes, $422,000 or more, pay 5.8 percent of their income in DC taxes. [2]    This is lower than the tax liability for any other DC income group.  The taxes paid by families with incomes between $166,000 and $422,000, the next highest four percent, total 7.4 percent of income, or lower than for any group in the bottom 95 percent of DC’s income distribution.
  • The second and middle fifth of DC families, with incomes between $15,000 and $42,000, paid 11 percent and 10.8 percent of their income on DC taxes, respectively.  This is almost double the share of income paid by the highest income one percent.
  • Taxes paid by the poorest fifth of DC families stood at 8.4 percent of income, which was lower than for all income groups except the top five percent.  The relatively low tax liability reflects DC’s refundable Earned Income Tax Credit (EITC) for low- and moderate-income workers.

 

The District’s Tax System has Regressive and Progressive Elements

Like most states, the District relies on a mix of both regressive and progressive taxes — the sales and excise tax, property tax, and income tax.

  • Sales and excise taxes, from which the District derives about 20 percent of its revenue, are heavily regressive, with low-income families paying the greatest share of income on these taxes.  It is the most regressive among major tax sources because low income residents spend a greater portion of their income on goods and services than higher income residents.
  • The property tax, from which the District gets 27 percent of its revenue, is mildly regressive.  The poorest fifth of residents — with a property tax burden of 1.5 percent — have a burden that is equal to or higher than almost all other income groups.
  • The income tax, from which the District gets 24 percent of its revenue, is solidly progressive.  The District’s income tax uses graduated rates — that is, it has a series of tax rates that increases as income rises.  The District’s tax system is also made progressive by inclusion of a refundable Earned Income Tax Credit, modeled on the federal EITC.

 

Recent Tax Changes Have Not Made the Tax System More Progressive

As discussed elsewhere in this report, the District has adopted substantial tax relief in recent years, but these tax reductions are unlikely to have made the system more progressive.

  • The major progressive tax change was an expansion of the DC Earned Income Tax Credit, from 25 percent of the federal EITC to 35 percent, making it the largest state-level EITC in the U.S.
  • Other income tax cuts implemented over the past three years provided the greatest benefits to high-income families — $220 in tax relief for a family of four earning $25,000, $750 for a family earning $50,000, and $1,970 for a family earning $150,000.
  • Homeowner property tax relief has primarily benefited middle and upper-income DC families, since most low-income households are not homeowners. In addition, the majority of relief under the 10 percent property tax cap has gone to owners of homes worth $500,000 or more.


End Notes:

[1] For more information, see DC Fiscal Policy Institute, The District Earned Income Tax Credit: Helping Working Families Escape Poverty (http://dcfpi.org/?p=59).

[2] Institute for Taxation and Economic Policy, Who Pays? A Distributional Analysis of the Tax Systems in all 50 States, 2003 (http://www.itepnet.org/whopays.htm). This analysis considers taxes paid directly by non-elderly DC families — income, sales, and property taxes — as well as taxes passed on by businesses. It also takes into account the reduction in federal income taxes households receive when they itemize deductions on their federal taxes and deduct the state and local income and property taxes they pay.  This reduces the net effect of the state and local taxes.