Report

No Relief for Working Families: Tax Cut Proposals Do Little For Low- And Moderate-Income DC Families

by Ed Lazere
PDF of this Report

“Looking at which tax relief should be considered as a priority for the fiscal year 2008 budget, I want to focus on progressive legislation that helps those most in need of relief”¦The CFO explained how the tax burden on low-income District residents is still significantly higher in comparison to our surrounding jurisdictions in Maryland and Virginia.”
– Council Chairman Vincent Gray, February 6, 2007

DC working families with moderate incomes pay income taxes that are among the highest in the nation.  A bill introduced in the DC Council this year would reduce income taxes for all DC taxpayers ‘ and especially for low- and moderate-income households ‘ by increasing the standard deduction and the personal exemption.  Yet this tax relief bill is not being considered seriously as the DC Council completes work this week on the FY 2008 budget.

Instead, the Council is considering two tax relief bills that largely would benefit higher-income DC residents ‘ a cut in the estate tax for households with estates worth up to $3.5 million, and a five percent cap on annual property tax increases for homeowners. Low- and moderate-income working families are unlikely to have estates of this size, and most are renters and thus would not benefit from property tax relief.

 

DC Income Taxes on Moderate-Income Families Are Among Highest in the National

  • A DC family of four with income of $40,000, for example, pays nearly $1,700 in income tax.  This is higher than in all but seven states ‘ Alabama, Iowa, Kentucky, Maryland, Michigan, Ohio, and Oregon.
  • In many states, income taxes on working families are much lower than this.  In 18 states, for example, a family of four earning $40,000 pays less than $1,000 in state income taxes.

 

DC’s Limited Deductions Contribute to High Taxes on Moderate-income Working Families

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.  DC’s deductions, however, are relatively low, which contributes to the income tax liabilities for moderate-income DC households note above.

  • DC’s standard deduction is $2,500 and the personal exemption is $1,500.  Combined deductions for a family of four total just $8,500.  This means that only a relatively small share of income is shielded from income tax in the District.

  • At the federal level, by contrast, the combined standard deduction and personal exemption for a married couple with two children is $23,500. 

 

Bill 17-87 Would Target Tax Relief on Low- and Moderate-Income Families

Legislation has been introduced in the DC Council that that would target income tax relief on low- and moderate-income working DC households, while also providing relief to all DC households.  Yet this bill ‘ bill 17-87, The Standard Deduction, Personal Exemption, and Homestead Deduction Increase Act of 2007 ‘ is not being considered seriously as a tax relief priority for FY 2008.  The bill would make the following changes:

  • Increase the standard deduction in DC’s income tax from $2,500 to $4,000
  • Increase the personal exemption in the income tax from $1,500 to $2,400
  • Increase the property tax Homestead Deduction from $60,000 to $64,000

The bill also would create an annual inflation adjustment for all of these measures.

Household income* Tax Relief Under Standard Deduction/ Personal Exemption Under Bill 17-87 Tax Relief As a Percent of Income
$15,000 $204 1.4%
$25,000 $306 1.2%
$50,000 $343 0.7%
$100,000* $306 0.3%
$150,000* $306 0.2%
* assumes these households use itemized deductions

Bill 17-87 would provide relief to households at all income levels, but the greatest benefits as a percentage of income would go to low-income households.  For families below $25,000, the tax reduction would be more than one percent of income, while the relief would equal 0.2 percent of income.

Tax Proposals Adopted by Finance and Revenue Committee Largely Ignore Low- and Moderate-income Working Households

On Friday, May 4, the Committee on Finance and Revenue approved two tax cut proposals that would cost nearly $30 million per year when fully implemented.  These tax cuts would provide almost no benefit to moderate-income working families.

  • Estate Tax Cut:  The committee approved increasing the threshold for the estate tax from $1 million to $3.5 million.  Even at $1 million, less than the wealthiest two percent of estates are subject to this tax.  The vast majority of individuals subject to this tax had income of $200,000 or more in the year before they died.
  • Property Tax Cap:  Only one-fourth of working DC household with incomes between $25,000 and $50,000 own their homes, which means most would get no benefit from property tax relief.  Among moderate-income working families that own their homes, 89 percent live in homes worth less than $500,000.  Yet two-thirds of the tax savings from the five percent cap would go to owners of homes worth $500,000 or more.

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