Raising Revenue by Creating a New Tax Bracket for Top Earners: A Progressive Approach to Addressing D.C.’s Budget Shortfall

A D.C. Councilmember has proposed increasing the income tax rate on the District’s wealthiest residents. The revenue-raising idea has been met with some skepticism, including the belief that this will push the well-off to leave the city.

This proposal should be taken seriously. A number of states, including California and Maryland, have recently raised taxes on high earners, and about 10 states are now considering such a measure. In fact, the new rate in DC would remain below the top rate in the Maryland suburbs. It  would not only generate needed revenue, but also shift the District in the direction of a more progressive tax system.

This approach stands in contrast with several revenue provisions in the FY 2010 proposed budget, which would make DC’s tax system more regressive. In particular, proposals to eliminate the cost-of-living increase for the standard deduction and personal exemption for the income tax and the homestead deduction for the property tax-  as well as charging a $51 a year “streetlight maintenance” fee-would hit low-income and working families in the District the hardest.

The Equitable Income Tax Act of 2009, introduced by Councilmember Jim Graham, is a progressive alternative. The bill would create a bracket of 8.9 percent for those with taxable income above $500,000. Currently, D.C.’s top rate is 8.5 percent. The increase would raise $11 million in revenue next year.

Even with the proposed new rate, DC’s top income tax would remain lower than in neighboring Montgomery and Prince George’s counties. Affluent residents in communities such as Bethesda and Potomac now pay a combined state and local income tax rate of 9.45 percent for taxable income above $1 million.

What about Northern Virginia? Though the state’s top income tax rate is 5.75 percent, Virginia suburbs have far higher property taxes, including the annual car tax. A September 2006 study by DCFPI found that when both income and property taxes are added up, D.C. residents at many income levels pay the lowest overall taxes in the region. 

But is it reasonable to raise taxes on anyone during this downturn?

A simple answer: Yes. Many economists say that raising income taxes on higher-income households is a sensible approach to addressing budget shortfalls because it has a very limited effect on the economy.  And researchers found that when New Jersey raised its top income tax substantially in 2004, the state lost less than 1 percent of its high-income households.

For more information, see DCFPI’s policy brief on this subject.

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