All this week, the District’s Dime blog is featuring entries that highlight some of Mayor Gray’s proposals to raise revenue in the FY 2012 proposed budget.
Mayor Gray’s proposed FY 2012 budget includes $160 million in new revenue increases as part of a balanced approach to address a $322 million budget gap. (The cuts are a different story which we wrote about last week.) The revenue proposal getting the most attention would add a new tax bracket to DC’s income tax and limit itemized deductions for those with income above $200,000. The proposed changes would raise $35 million to help prevent even deeper cuts to programs and services that keep our city moving forward.
The proposal to raise income taxes on high-income earners is a reasonable way to raise revenues to address the budget shortfall. It would help make DC’s tax system more progressive, provide a steady stream of revenue to help meet the city’s growing needs, and help modernize DC’s income tax to keep up with changes in the city.
The Mayor’s budget proposes to make two changes to DC’s income tax system:
- The addition of a new income tax bracket of 8.9 percent for taxable income (income after deductions) above $200,000. DC’s current top tax rate of 8.5 percent starts at $40,000 of taxable income. It’s important to keep in mind, however, that Mayor Gray’s proposal only makes changes to the way DC taxes income above the $200,000 bracket. So, for example, if you earn exactly $200,000 you will pay no additional tax under the plan. Moreover, not even all families above $200,000 would be affected, because DC allows two-earner households to split their income on their tax return ‘ allowing each person to be taxed on their individual earnings and not at their combined earnings. In fact slightly under half of DC families with income between $200,000 and $350,000 would see no tax increase from the rate change.
- A limit on the amount of itemized deductions that can be claimed by those with incomes above $200,000. The disallowed amount would be equal to 5 percent of the income above $200,000. DC had a similar provision in place until just a few years ago, as did the federal income tax code. President George W. Bush eliminated limits on itemized deductions as part of the tax cuts he passed and since DC was coupled to this part of the federal tax code, the limits were also eliminated for DC.
The overall impact of these changes is relatively modest. Those who earn between $200,000 and $350,000 , for example, would pay about $400 in additional taxes a year as a result of both changes ‘ or less than one-fifth of one percent of income.
When considering a revenue increase, three key issues should be addressed:
Does the revenue proposal provide sustainable funding for DC’s budget? It is important for DC’s long-term fiscal health that any proposed revenue increase is sustainable and that it provides some increase in funds year after year so that DC can keep up with growing needs. Recent Census data showed that DC is growing, and that means that each year we have more public school students, restaurants that need food inspections, residents who need drivers’ licenses issued or renewed, and on and on. Mayor Gray’s proposed changes to the income tax meet this goal because it would provide additional resources each year for our growing, dynamic city.
Does the proposed revenue increase make DC’s tax system more progressive? Some argue that creating a new high-income tax bracket and limiting itemized deductions unfairly targets one group of residents. If this sounds convincing to you (and even if it doesn’t!) let’s take a look at how much different groups pay in DC taxes right now. According to the recent DCFPI analysis, DC residents who earn between $33,000 and $57,000 pay the most taxes in combined DC taxes as a percent of their income. These folks, who are DC’s middle-income earners, hand over 10.5 percent of their income in local sales, income and property taxes. What about those who make up the top five percent of District earners? Well, they pay an average of 7 percent of their income in taxes. And if you make above $1.5 million, putting you in the top 1 percent of earners? You pay only 6.4 percent.
You might conclude that DC unfairly targets middle-income earners right now. It’s also worth noting that recent tax increases passed in DC — general sales, gas, cigarettes, and soda taxes — fall squarely on the middle class.
Mayor Gray’s proposal not only helps level the playing field but also moves the District toward a more progressive taxation system. In a progressive system, the tax rate increases with ability to pay. So those who earn more pay a bit more.
Does the revenue proposal help modernize or strengthen DC’s tax system? DC’s current top income tax bracket starts at $40,000 of taxable income (income after deductions) which is way out of line for where we are today as a city. DC’s median income is just over $60,000 and the city is adding more and more high-income households. In fact, according to a Brookings Institution analysis of Census data, from 2000 to 2009, DC added 39,000 households with incomes of $75,000 or higher but lost nearly 38,000 households with incomes below $50,000. These proposed changes to our income tax system would better reflect where we are as a city and help to better capture the true range of DC residents’ incomes.
Stay tuned tomorrow for a look at Combined Reporting”¦..
