WASHINGTON – While DC’s tax code ranks as the least regressive in the nation, the top 5 percent of District families pay a lower effective tax rate (11.2 percent) than the bottom 95 percent (11.6 percent).
That’s according to the latest edition of the Institute on Taxation and Economic Policy’s (ITEP) Who Pays?, the only distributional analysis of tax systems in all 50 states and the District of Columbia.
A progressive tax system is one in which upper-income families pay a larger share of their incomes in taxes than those with lower incomes. The relative progressivity in DC’s tax system is largely driven by the expansion of the Earned Income Tax Credit (EITC) and 2021 income tax increase on the District’s highest income residents, as well as other progressive changes over time. Still, DC’s tax code still protects and grows income and wealth concentration among a small share of families. Just 1,500 households in DC with a net worth over $30 million hold nearly half of all wealth in the District, most of which goes untaxed.
To make the tax code more progressive, DC lawmakers should institute a local child tax credit, expand the property tax circuit breaker, raise taxes on multi-million-dollar homes, and strengthen taxes aimed at concentrated wealth, like those on investment income and inheritances.
“Tax advantages for residents at the top disproportionately privilege white residents–who account for the vast majority of DC’s richest residents–and serve to further concentrate their wealth. This comes at the expense of public investments in underserved communities that advance racial justice,” says Erica Williams, Executive Director of the DC Fiscal Policy Institute (DCFPI). “DC has modeled that tax policy is a strong tool for tackling inequity, but we must go further. Improving our taxation of wealth would help correct centuries of racist policy and practice that built and concentrated wealth among white families, while also raising resources to help us fulfill our promises like ending homelessness, making DC housing affordable, and ensuring equity at birth for every child.”
The report’s key findings for D.C.:
- The average effective state and local tax rate is 4.8 percent for the lowest-income 20 percent of individuals and families and 10.6 percent for the second 20 percent. This is largely due to expansions of DC’s Earned Income Tax Credit for workers with children.
- Despite its relative progressivity, D.C. taxes the top 5 percent less as a share of income (11.2 percent) than the bottom 95 percent combined (11.6 percent). And, the bottom 80 percent (11.4 percent) while now paying less after tax changes in 2021 are still neck-and-neck with the top 20 percent (11.6 percent).
- Middle income families and those at the lower end of high incomes pay the highest effective tax rates. For example, the effective tax rate is 11.5 percent for the middle 20 percent ($55,900 to $107,500) and 12.4 percent for the fourth 20 percent, both of them higher than the top 5 percent (11.2 percent for those between $399,400 to 1,039,100) and even the top 1 percent (11.4 percent for those with incomes over $1,039,100).
Nationally, tax systems in 44 states exacerbate inequality by making incomes more unequal after collecting state and local taxes, while systems in six states plus DC reduce inequality, the report finds. On average across the country, the lowest-income 20 percent of taxpayers face a state and local tax rate nearly 60 percent higher than the top 1 percent of households. The nationwide average effective state and local tax rate is 11.4 percent for the lowest-income 20 percent of individuals and families, 10.5 percent for the middle 20 percent, and 7.2 percent for the top 1 percent.
“When you ask people what they think a fair tax code looks like, almost nobody says we should have the richest pay the least. And yet when we look around the country, the vast majority of states have tax systems that do just that,” says Carl Davis, ITEP’s Research Director. “There’s an alarming gap here between what the public wants and what state lawmakers have delivered.”
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About the report:
Who Pays? is the only distributional analysis of tax systems in all 50 states and the District of Columbia. The comprehensive 7th edition of the report assesses the progressivity and regressivity of state tax systems by measuring effective state and local tax rates paid by all income groups. No two state tax systems are the same; this report provides detailed analyses of the features of every state tax code. It includes state-by-state profiles that provide baseline data to help lawmakers and the public understand how current tax policies affect taxpayers at all income levels. Over 99 percent of all state and local taxes, measured by their revenue contribution, are included in the analysis.
About ITEP:
ITEP is a non-profit, non-partisan tax policy organization. We conduct rigorous analyses of tax and economic proposals and provide data-driven recommendations on how to shape equitable and sustainable tax systems. ITEP’s expertise and data uniquely enhance federal, state, and local policy debates by revealing how taxes affect people at various levels of income and wealth, and people of different races and ethnicities.
About DCFPI:
The DC Fiscal Policy Institute shapes racially-just tax, budget, and policy decisions by centering Black and brown communities in our research and analysis, community partnerships, and advocacy efforts to advance an antiracist, equitable future. DCFPI seeks to not only dismantle the racist policies and systems that hold us all back, but to build a future in which every person, no matter their race or ethnicity, has what they need to live to their fullest.