The Middle Class Squeeze: DC’s Tax System Falls Most Heavily on Moderate-Income Families

by Ed Lazere | December 1st, 2009 | PDF of this report

Families in the District with incomes of $20,000 to $60,000 pay one-tenth of their incomes in DC property, sales, and income taxes, according to a new study by the Institute on Taxation & Economic Policy.1 This is much higher than the share of income the city’s richest families pay in DC taxes.  The study found that families with incomes of $1.5 million or more pay 8 percent of income in DC taxes.

The main reason for the unfairness of DC taxes is the city’s reliance on sales and excise taxes.  These taxes fall most heavily on lower-income residents, who spend a greater portion of income on goods and services than higher-income families do.  DC’s property tax also falls more heavily on lower-income residents.  DC’s income tax is progressive, with rates that get higher as income rises, but not enough to offset the unfair impact of other taxes.  (The study found that most state and local tax systems are regressive.)

The new analysis has one important bright spot, finding that the city’s poorest families face the lowest combined DC taxes — largely due to a targeted low-income tax benefits.  But for all other families, taxes as a share of income get smaller as incomes get larger.

This information is important as the District continues to struggle with a weak economy and falling tax collections.  With a projected budget shortfall of $300 million for fiscal year 2011, revenue increases may be considered over the next year.  The tax increases adopted earlier this year to address DC’s fiscal problems — primarily sales, gasoline, and cigarette taxes — added to the tax rates that DC’s lowest income families pay.  Given the new findings that tax rates already are highest for DC’s moderate-income families, it will be important to consider whether any proposed increases would make DC’s tax system more regressive.

1 Institute on Taxation and Economic Policy, Who Pays?:A Distributional Analysis of the Tax Systems in All 50 States, 3rd Edition, November 2009.