DC Council member Kathy Patterson has introduced a proposal to add $1 billion over the next decade to DC Public School construction and modernization efforts. This would essentially double the school construction budget during this period. Nearly two-thirds of the new funds ‘ $640 million — would come from a 10-year suspension of income tax cuts under the Tax Parity Act currently scheduled for 2007. The remaining funds would come from increases in hotel, parking, and cigarette taxes.
This analysis highlights the impact of the suspension of the Tax Parity Act on the income taxes paid by DC residents. It finds that:
- DC residents already have received significant income tax relief under the Tax Parity Act. As shown in Table 1, the relief has been larger for DC’s high-income households than for lower-income households. To date, annual income taxes have fallen $138 for a family of four earning $25,000, $822 for a family earning $100,000, and $1,052 for a family earning $150,000 as a result of the Tax Parity Act.
- A further step of the Tax Parity Act will go into effect in January 2006. A family of four earning $25,000 will receive an additional tax cut of $78 next year, while the tax cut will total $571 for a family earning $100,000 and $835 for a family earning $150,000.
- The proposal from Council member Patterson would suspend the final step of the Tax Parity Act, scheduled for 2007, but not the tax cuts scheduled for 2006. This means that income tax liabilities under this proposal would be lower in 2007 than today ‘ and far lower than in 1999. Suspending the last step of the Tax Parity Act would mean that a family earning $25,000 would forgo a tax cut of $121. The suspended tax cut would be $635 for a family earning $100,000 and $765 for a family earning $150,000.
The intent of the Tax Parity Act when it was adopted in 1999 was to bring DC taxes more in line with taxes in suburban Maryland and Virginia, so that the District’s effort to attract and retain residents would not be hindered by its tax burdens. For two reasons, this rationale is no longer as significant as it may have been in 1999.
First, the goal of “tax parity” largely has been achieved. A review of new tax return data and other research shows that taxes on DC households are effectively the same as in suburban Maryland, while taxes in Northern Virginia are modestly lower than in both DC and suburban Maryland.
- IRS data show that the average income and property tax burden for households earning $75,000 to $100,000 in DC was $7,464 in 2001. This was 13 percent lower than the similar tax burden in Montgomery County and 10 percent lower than in Prince George’s County. (See Figure 1.)
- The average income and property taxes paid by DC households with income between $100,000 and $150,000 were 6 percent lower than in Montgomery County and one percent lower than in Prince George’s County.
Similar data are not available for Northern Virginia counties. Nevertheless, estimates from the DC Chief Financial Officer suggests that household tax burdens in Northern Virginia generally are lower than in both the District or suburban Maryland, but that the differences are relatively minor.
For example, the income and property tax burden on a married couple with two children and income of $100,000 in 2003 was $634 higher in DC than in Fairfax County, an amount that equals 0.6 percent of household income. (See Figure 2.)
- The gap between taxes in Arlington County ‘ the lowest tax jurisdiction in the region ‘ is somewhat larger. For a family of four earning $100,000, the tax burden in DC would be $1,305 higher than in Arlington County, an amount equal to 1.3 percent of household income. (After taking into account federal tax savings that households receive based on state and local taxes, the difference is less than $1,000, or less than one percent of income.)
Second, the District has become increasingly popular as a place to live and do business. DC’s strong finances are tied in large part to its tremendously strong real estate market, with rapidly rising home prices and substantial new construction of high-cost housing. In addition, Census Bureau data show that the average income of the top fifth of DC households is higher than in any major city except San Francisco and San Jose. Finally, DC has the lowest commercial vacancy rate in the region.
Together, these findings suggest that DC’s income tax levels are not a hindrance to its economic progress and that further income tax cuts are not needed to attract businesses and residents. Suspending the Tax Parity would generate $64 million in revenues annually that could be devoted to other priorities, such as modernizing DC public schools, which would have a greater impact on the economic health and quality of life in the District.
 These figures are from data on state and local property and income tax burdens that residents report on their federal income tax returns. Households that itemize deductions on their federal income tax returns are allowed to include all income and property taxes paid to state and local governments. Since most middle and upper-income households itemize, the federal tax data provide a unique way to measure state and local income and property tax burdens. The figures on tax burdens in Montgomery County and Prince George’s County were generated by the Maryland Comptroller’s Office using federal income tax return data.
 Federal income tax data are made available to states for research and compliance purposes. Such data generally are not available to the general public, which means that independent analysis of federal tax returns from Virginia is not possible. The Virginia Department of Taxation has not generated county-specific data on state and local income and property taxes reported by Virginia residents on their federal income tax forms.