Legislation now before the DC Council would update a property tax deduction for seniors that has not been adjusted for inflation for 20 years. It sounds like the kind of proposal the DC Fiscal Policy Institute normally would support — and indeed we support the concept behind it. But DCFPI testified this morning that the bill should not be the top priority for tax relief.
Currently, DC law gives homeowners age 65 and older, with incomes of up to $100,000, a 50 percent property tax break on their principal residence. Today, the Council’s Finance and Revenue Committee held a hearing on legislation that would increase the income eligibility for this deduction to $125,000 per year.
DCFPI believes that it makes sense to adjust tax benefits regularly to account for inflation. Without periodic adjustments to income eligibility and the size of tax benefits, the value of those benefits decrease over time as the cost of food, utilities, and everything else we buy increases. Failing to adjust income thresholds also means that the number of residents eligible for them will decrease.
We thus support the intent of updating the senior property tax deduction, but it is not so clear why this particular tax benefit is a top priority for a makeover. There are several prominent parts of the tax code that are not adjusted for inflation, and many of these affect low and moderate income District residents. The legislation to update the senior property tax deduction on the other hand, would benefit residents with incomes between $100,000 and $125,000. Yet half of all DC households headed by an elderly resident have incomes below $40,000, and 80 percent have incomes under $100,000.
If the DC Council wants to focus on addressing tax benefits that have diminished due to inflation, we recommend focusing on “Schedule H”, which offers a tax credit to households with incomes below $20,000 when property taxes are high relative to income. The Schedule H income eligibility limit has not been adjusted for 35 years, and neither has the maximum credit amount. DCFPI testified last fall at a hearing on legislation to update Schedule H.
Tax benefits such as the personal exemption and standard deduction in the income tax also are not indexed for inflation. These tax benefits affect a broad range of District residents, but have remained stagnant for several years.
The issue of how and when to index tax benefits for inflation may be best addressed by the forthcoming Tax Review Commission, which has been tasked with making comprehensive changes to the District’s tax system. While the problems with Schedule H clearly warrant immediate change, the issue of indexing a broader range of tax benefits for inflation merits further study, in order to set priorities and determine their costs, which could be substantial.
