Tuesday, the DC Council voted to increase income taxes on residents who earn more than $350,000, while restoring an income tax break to residents who have invested in out-of-state bonds. The move essentially was a swap, replacing one revenue source with another.
The debate was especially heated, and in some ways it lost sight of the rationale for a tax increase in the first place. The District faced its fourth consecutive bad-news budget as a result of the recession, and residents were faced with cuts in public safety, social services, and public works. The income tax increase helped preserve some of these important services, a balanced approach to budgeting in tough times that is consistent with the views of most DC residents, according to a Hart Poll.
While the Council voted for the income tax, they decided to make it only temporary. It will expire at the end of the city’s required financial plan in four years, resulting in a $30 million revenue loss in future years. This is fiscally unwise, because it is not clear how the city will be able to maintain funding for education, health care, and other services, when the tax expires.
As many in the press have noted, the debate on and off the dais yesterday was especially, ah, colorful. Here are a few important points to keep in mind:
The income tax rate increase was largely revenue neutral, because it was a swap for the tax on out-of-state bonds. The Council vote yesterday created a new income tax bracket, but it also largely reversed the Council decision in June to eliminate DC’s income tax exemption for interest earned on out-of-state bonds. Under the new law, residents will retain the tax break for bonds they already own, but out-of-state bonds purchases starting next year will be taxed. The net effect of the Council’s actions is largely revenue neutral; over four years, the income tax raises an additional $8 million.
The tax increase is modest. The new law increases the tax rate from 8.5% to 8.95% on income above $350,000. The tax increase passed yesterday differed from Mayor Gray’s initial proposal, which would have started an 8.9% rate at $200,000. Anyone with income below $350,000 will see no change in taxes. Here’s an idea of the impact on those who earn greater than $350,000: A DC resident with income of $400,000 will pay $225 ‘ 0.06% of income ‘ more per year, while a family at $500,000 will pay $675 more ‘ 0.14% of income. Once again, pretty modest.
Combined income and property taxes are lower in DC than in the Maryland or Virginia suburbs. DC’s residential property taxes are far lower than in either the Maryland or Virginia suburbs, while our income taxes are comparable with Maryland’s but higher than Virginia. Put together, DC’s combined income and property taxes are the lowest in the region, and the modest tax increase on high-income households will not change this trend noticeably.
Revenues were needed in the DC budget to help maintain services. The District faced another year with a large budget gap, due to the recession and the drop in expected city revenues. Even with the income tax increase and other revenue measures, the adopted FY 2012 budget still includes cuts in areas such as child care, disability assistance, permanent supportive housing, and libraries. If the income tax increase had not been adopted, it is likely that even deeper cuts would have been needed.
