As we wrote about yesterday, the Mayor’s proposed budget cuts are deep, painful, and highly concentrated in the human services. Under the proposal, affordable housing development would be ground nearly to a halt, despite DC’s widespread gentrification and rising housing costs. 7,000 vulnerable families with children would see TANF benefits reduced to just $257 a month. The District’s homeless services system — so strained already that the largest shelter for families has stopped accepting new families, even if they have no other place to go — would be cut even further.
Even harder to imagine is what these cuts would look like in the absence of a few key revenue measures that the Mayor has proposed — including a relatively modest income tax increase on income over $200,000. The new 8.9 percent rate, compared with the current top rate of 8.5 percent, would apply only to income over $200,000. This means that for an individual earning exactly $200,000, the change in income tax is zero. Income tax for someone earning $300,000 would increase by $400, or one-eighth of one percent of income. At $500,000, the increase would equal one-fourth of one percent of income.
| Income | $200,000 | $250,000 | $300,000 | $500,000 |
| Marginal tax increase | $0 | $200 | $400 | $1,200 |
| as percent of income | 0% | 0.08% | 0.13% | 0.24% |
This new tax bracket will help protect District services against even deeper cuts, and it just good, sound tax policy. Here’s why:
- It would make the District’s tax system more progressive. DC earners making $40,000 currently pay approximately 10 percent of their income in combined property, income, and sales tax. In contrast, those earning above $1.5 million pay just 8 percent. As new high-income earner bracket would make this contrast less stark. To learn more about who pays, check out this report.
- It would raise much-needed revenue while keeping rates below 2000 levels. DC’s income tax rates have been cut over the past decade, and income tax collections as a share of household income have fallen as well. With the new 8.9 percent rate, high-income households would still pay a lower rate than a decade ago.
- It would not hurt the local economy. Prominent economists have shown that raising revenue during a recession is better for the local economy than an over-reliance on budget cuts, since cutting services takes money out of the economy. Small tax increases on high-income households, by contrast, are unlikely to affect consumer spending much.
- It would preserve the District’s attractiveness as a place to live and work. In recent years, the District has made investments in schools, libraries, and neighborhoods — the types of services that attract residents from other jurisdictions and keep them around. Studies have shown that the concept of “rich flight” — in which wealthy residents flee to surrounding jurisdictions after a tax increase — is a fallacy. On the contrary: people decide where to settle based on a combination of convenience, lifestyle, and services. The District’s ability to continue attracting and retaining high-income earners rests upon its ability to continue to make smart investments.
