Report

Trends in Tax Rates in the District of Columbia

By Idara Nickelson and Ed Lazere
PDF of this analysis

Summary

This report analyzes changes in DC tax rates and collections from the 1970s to the present.   It finds that over the past two decades, rates for the District’s major tax sources ‘ the individual income tax, the real property tax, and the sales tax ‘ have been reduced or remained stable, and that a number of deductions, credits, and other forms of tax relief have been adopted.  Tax rates for some smaller revenues sources have increased, while others have remained stable or declined. This analysis also finds that total tax collections as a share of the DC economy, which tend to fluctuate as the economy rises and falls, are at a relatively low level historically.

  • Income Tax: The top marginal tax rate was reduced from 11 percent to 9.5 percent in the late 1980s, and all tax rates were reduced further after 2000 under the Tax Parity Act.  In recent years, the District also enacted a substantial Earned Income Tax Credit for low- and moderate-income workers.  On the other hand, DC’s personal exemption and standard deduction have not been adjusted for inflation for more than a decade.  Overall, tax liabilities for low-income residents have fallen substantially since the early 1990s, primarily as a result of the EITC.  Income tax liabilities have remained relatively stable for middle-income families and have declined somewhat for higher-income families.
  • Property Tax: The tax rate for homeowners fell from $1.83 per $100 of assessed value in 1975 to $1.22 by 1989 and then to $0.96 in 1991.  The tax on residential rental properties was reduced from $1.83 per $100 of assessed value in 1975 to $1.54 by 1999.  The tax was then reduced substantially ‘ to the $0.96 rate applied to homeowner properties ‘ as a result of the Tax Parity Act.  The property tax on commercial properties has fluctuated significantly, but the current rate ‘ $1.85 per $100 of assessed value ‘ is basically the same as the rate of $1.83 in 1975.  In addition to rate reductions, the District established a homestead deduction, which now shelters the first $38,000 of home value for taxation. There also is a 50 percent tax break for seniors with incomes below $100,000; and a tax credit for low-income residents with significant property tax burdens.  Since 2001, a cap has been set on annual property tax increases for homeowners, which means that many homeowners are paying tax on less than the full assessed value of their home.  The cap is now set so that increases in taxes cannot exceed 12 percent a year.
  • Sales Tax:  The general sales tax rate was set at six percent in 1980 and was reduced to 5.75 percent in 1994; the rate has not been changed since then.  Over time, the sales tax base has been expanded gradually to cover a greater share of retail purchase, such as newspapers and dry cleaning.

In addition to the major tax sources, tax rates for some smaller revenue sources have increased, while tax rates for others have remained stable or declined

  • Tax rates that have increased:  The District’s gross receipts tax ‘ a tax on utilities that is passed through to consumers ‘ has jumped sharply.  Since 1992, the gross receipts tax rate has increased from 6.7 percent to 11 percent.  Deed recordation and transfer taxes were set at one percent in 1976, raised to 1.1 percent in 1989, and then to 1.5 percent in 2003.  The latter increase includes a trigger to lower the rate when overall revenue growth exceeds certain targets.  The tax on restaurant meals has risen from eight percent to 10 percent since 1989, and the hotel tax has grown from 10 percent to 14.5 percent since then.  In both cases, a portion of the increase was dedicated to fund the new Convention Center and the latter is paid in significant part by tourists.
  • Tax rates that have remained stable or declined: The corporate income tax rate is modestly lower today than at any point in the 1980s or 1990s, and the parking tax has remained unchanged since 1976.  The gas tax, which is set at a per-gallon rate, has increased since the 1970s, but at less than the rate of inflation.

Changes in tax rates and bases and other factors, such as changes in DC’s population and economy, have affected tax collections in the District.  Figure 1 shows that tax collections as a share of personal income have fluctuated in DC since the 1970s.  In part, the fluctuations reflect economic cycles.  Taxes as a percent of personal income rose during the economic recoveries of the 1980s and the late 1990s, and they fell during recession of the early 1990s and the recent downturn that started in 2001.  Nevertheless, it appears that the overall trend has been a decline in DC taxes as a share of the economy since the late 1980s.

  • Total tax revenues as a share of personal income peaked most recently in 2001 at 14.0 percent.  This stemmed from the strong economy of the late 1990s and the tremendous increase in capital gains resulting from the stock market boom.  Yet this peak was lower than the peak in previous economic recovery, from 1987 to 1989, when taxes reached 14.7 percent of personal income.  Tax collections in 2001 were nearly $200 million lower than if they had reached the late-1980s level as a percent of income.
  • Tax revenues fell from 14.0 percent of DC’s total income in 2001 to 13.3 percent in 2004 as a result of the recent economic downturn and the decline in the stock market.  Taxes as a share of income in 2004 are nearly as low as in the 1994-1997 period ‘ when the District’s faced a severe financial crisis ‘ and lower than in any other year since the early 1980s.

* Breaks in the sequence of the years reflects years where data could not be collected.

Click here for the full-text PDF of this analysis (13pp.)