by Ed Lazere and Aleksandra Gajdeczka
PDF of this analysis (16pp.)
- The common perception is that DC residents pay the highest taxes in the region. This analysis shows that after three years of substantial income and property tax cuts, taxes on middle-income DC households are now lower than in either suburban Maryland or Virginia
- DC’s lowest-in-the-region tax status results from its relatively low property tax. For example, property taxes average $1,600 in 2006 for DC homes worth $400,000, compared with $2,400 in Montgomery County and $3,300 in Fairfax. DC has a relatively low tax rate, a homestead deduction, and a cap on annual increases. No other area jurisdiction has all of these.
- DC income taxes on middle-income families are lower than in suburban Maryland, but higher than in Virginia. Virginia has an annual tax on cars and is the only local jurisdiction to do so.
- This analysis raises the question of whether all of the tax cuts adopted in recent years were warranted. Before the cuts, DC taxes were similar to Maryland’s and only modestly higher than in suburban Virginia. DC Income tax cuts in particular have largely benefited high-income residents and resulted in annual revenue losses of $140 million. The tax cuts have reduced revenues that otherwise could have been used to improve DC services.
The District of Columbia has a reputation for being 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 these same families would pay if they lived 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. The question now is whether the District has struck the right balance between lowering taxes and investing in services that help residents and businesses.
This analysis calculates the taxes paid by hypothetical families of different sizes and compositions at three income levels ‘ $50,000, $100,000 and $150,000 ‘ in the District and in Montgomery, Prince George’s, Fairfax and Arlington Counties. It includes the major taxes that households pay based on where they live ‘ income and property taxes, including the annual tax on cars in Virginia. It finds that:
- 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 roughly $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 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.
- The income and property tax cuts adopted in recent years have provided benefits to a broad range of DC taxpayers, but a large share of the benefits have gone to 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. In addition, more than half of the relief from the 10 percent property tax cap 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 adopted 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.