Taxation in DC, The Unofficial 51st State

By Katherine Toran :: February 7th, 2013

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I recently had a conversation with a friend who was moving and said she preferred to live in Maryland than in DC because DC residents pay higher taxes. She wasn’t the first local to tell me that. But is this claim true?

It appears in this case, conventional wisdom is out of touch with the facts. The DC Fiscal Policy Institute compared hypothetical families earning $50,000, $100,000, or $200,000 and found that, in most cases, DC residents have lower combined income and property taxes than Maryland or Virginia residents. The primary reasons cited are lower property tax rates and benefits such as the homestead deduction, which combine to limit homeowners’ taxable assessment.

However, the DC Fiscal Policy Institute’s study focuses on middle-class families, and notes that for low-income families, taxes are higher in DC than in Maryland and are similar to Virginia. The DC Chief Financial Officer’s most recent comparative tax study confirms that DC taxes are lower relative to neighboring jurisdictions for families earning $50,000, $75,000, $100,000, and $150,000. This does not hold true at the $25,000-income level, where DC taxes are middle-of-the-pack.

So, it would appear that whether it is preferable to live inside DC or just outside of it depends on your income level.

A report from the Institute on Taxation and Economic Policy, comparing tax systems in all 50 states, finds that taxpayers in DC with incomes of $20,000 to $252,000 pay about 10 percent of their incomes in property, sales, and income taxes. Conversely, the top 5 percent pay about 8 percent of their income. On the upside, those earning below $20,000 pay the lowest rate, 6.2 percent.

The reason for this regressive taxation on moderate-income families is DC’s reliance on sales and excise taxes, which fall heaviest on low-income families. Low-income tax benefits, particularly DC’s earned income tax credit, offset this regressivity for the poorest families, but not for those of low to moderate income.

Conventional wisdom and the current US tax code suggest that Americans on both sides of the aisle favor a progressive tax system, even if they disagree on the extent. Regressivity creeps into the tax code through taxes other than the income tax. DC is not alone in this problem, or even an egregious example: the Institute on Taxation and Economic Policy report finds nearly all state and local tax systems take a greater share of income from middle- and low-income families than from the wealthy. In DC, the sales, excise, and property taxes are regressive enough to overbalance a progressive income tax.

Not only DC but other state and local jurisdictions could stand a comprehensive review of how taxes are collected and who pays. However, in neither quantity nor quality is DC remarkably different from its neighbors in taxation.

1Comment

  1. Time To Debunk The Myth That D.C. Residents Pay Higher Taxes Than Their Neighbors | The Las Angeles Times  ::  10:36 am on February 8th, 2013:

    [...] pos' original appeare' on da Urban Institute’z MetroTrendz blog, an Atlantic partna [...]