DC Taxes as a Percent of Income by jameshardy


									capitolstreets news
                                                                                                      the N U M B 3 R S                27 906

                                                       To Tax or Not To Tax
                            That is the Question for DC’s Elected Officials This Budget Season

by Elissa Silverman and Jenny Reed

    ust like you and I, Mayor
    Adrian Fenty and the DC
    Council are trying to keep
the checkbook balanced during
                                                        DC Taxes as a Percent of Income
the economic downturn. On a
municipal level, this means the
                                                                                        By Income Group
city’s leaders are cutting back on
expenses by paring some services.
But they also are trying to find                        Top 1%                                                       5.8%
ways to keep money flowing into
District coffers to pay for vital
government services.
    Yep, we’re talking taxes.
                                                     Next 4%                                                              7.4%
    District officials face difficult
decisions putting together a bud-
get for next year. Projected rev-
enues have dropped about $800
                                                     Next 15%                                                                    8.5%
million, which means the city can-
not provide services to residents
and visitors the same way it did in              Fourth 20%                                                                             9.5%
fiscal year 2009 and keep its bud-
get balanced in fiscal year 2010.
    The mayor and his team have
looked for ways to reduce expens-                Middle 20%                                                                                    10.8%
es, including shrinking the city’s
workforce, freezing spending, and
cutting funding. Another way to
close the gap is to generate new                Second 20%                                                                                     11.0%
revenue, such as raising taxes.
    Fenty’s budget, which the DC
Council is currently reviewing,
proposes $120 million in addi-                  Lowest 20%                                                                       8.4%
tional revenues. But many of the
new revenue sources are regres-
sive and would disproportionately
impact lower-income residents.
The problem is that the District
already has a regressive tax system. In con-         Even in Taxes, the World is Not Flat                  mayor proposes to charge a $51-a-year “streetlight
trast, one councilmember has introduced a bill to        Fenty pledged no new taxes during his run for     maintenance” fee on top of the 10 percent utility
increase taxes on the District’s most affluent resi-   office. So when faced this year with a huge budget      tax District residents already pay.
dents. Another councilmember wants to cut taxes      gap due to falling revenues, he chose to raise rev-       On the surface, flat fee increases may seem
on businesses to spur economic development.          enue through a variety of fees and by not adjusting   equitable because everyone pays an equal amount.
    What’s the most sensible approach?               certain tax benefits for inflation. For example, the    But $51 out of the paycheck of someone who earns

50 ★ HillRag | May 2009
$10,000 a year is more burdensome than          found that when both income and prop-
for someone who earns $100,000. This            erty taxes are added up, DC residents at
makes the tax regressive, because it eats       many income levels pay the lowest over-
up a larger amount of a smaller paycheck.       all taxes in the region.
When you consider that many low-in-                  Moreover, many economists say that
come families already struggle to pay           raising income taxes on higher-income
utility bills – and that thousands face         households is a sensible approach to ad-
shut-offs each month – the regressive na-        dressing budget shortfalls because it has
ture of the new fee is even more stark.         only a limited effect on the economy.
     Fenty also has proposed to elimi-
nate the cost-of-living adjustment for          Cuts That Could Hurt More Than Help
the standard income tax deduction, the              While the mayor and council struggle
personal exemption and the homestead            over the right way to raise revenues, some
deduction. By doing so, District residents      believe taxes need to be cut to stimulate the
will face higher tax bills. And because         economy. One proposal introduced earlier
these tax benefits are most beneficial to         this year would cut taxes for District com-
low- and moderate-income residents,             mercial property owners and businesses in
the higher taxes will fall most heavily on      the name of encouraging development.
these families.                                     Yet a tax cut will reduce the amount
                                                of revenues the city collects, and in a tight
A Progressive Proposal to Level the             budget year, this means fewer funds for
Playing Field                                   important programs and services like ed-
    The Equitable Income Tax Act of             ucation or infrastructure that businesses
2009, introduced by Ward 1 Council-             also rely on. Research shows that tax cuts
member Jim Graham, is a progressive al-         for businesses have, at best, a small effect
ternative to raise revenue. The bill would      on the economy only if you do not cut
create a bracket of 8.9 percent for those       back on services at the same time.
with taxable income above $500,000.                 In short, the argument that cutting
Currently, DC’s top rate is 8.5 percent.        business taxes will boost the economy is
The Office of the Chief Financial Officer           based more on faith than fact. Research
estimates the bill would raise $11 million      actually shows that in an economic
                                                downturn, tax cuts to low-income resi-
in revenue next year.
                                                dents have the most stimulative effect on
    The idea has been met with some
                                                the economy because the money is spent
skepticism, including the belief that it will
                                                quickly and locally.
push the well-off to leave the city. Yet for
several reasons, the bill should be taken
seriously. DC is not alone in asking top        Raising Taxes Sometimes Is the Right
earners to contribute more to pay for vi-       Balancing Act
tal government services. California, New             No one can fault DC leaders for try-
York, New Jersey and Maryland have              ing to balance the budget through both
raised their top rates recently, and simi-      spending cuts and revenue increases.
lar plans are currently being considered        Relying on cuts alone could require re-
in Oregon, Delaware, Wisconsin, Hawaii          ductions in too many services that we all
and Illinois. Even with the proposed new        rely on and that make DC a place where
rate, DC’s top income tax would remain          people want to visit and live.
lower than in neighboring Montgomery                 In the name of avoiding “tax” increas-
and Prince George’s counties. As a result       es, the DC Council is now faced with a
of state income tax increases adopted           number of fee and other revenue increas-
last year, affluent residents in communi-         es that will make our poorest citizens
ties such as Bethesda and Potomac pay a         bear the greatest burden. That cannot be
combined state and local income tax rate        the right thing to do, economic downturn
of 9.45 percent for taxable income above        or not.
$1 million. And for residents with tax-              Raising income taxes on DC’s most
able income between $500,000 and $1             affluent households is not the only
million, the rate in Montgomery is 8.7          way to find additional revenues in a
percent, and the rate in Prince George’s        progressive way. But it certainly is
County is 8.6 percent.                          perfectly reasonable.
    What about Northern Virginia?
Though the state’s top income tax rate          Silverman and Reed are the staff of the DC
is 5.75 percent, Virginia suburbs have          Fiscal Policy Institute (www.dcfpi.org),
far higher property taxes, including            which conducts research on tax and budget
the annual car tax. A September 2006            issues that affect low- and moderate-income
study by the DC Fiscal Policy Institute         DC residents. ★
                                                                                                capitalcommunitynews.com ★ 51

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