As the District has struggled to balance its budget, a number of options to raise revenue have been proposed. One is to create new income tax rates for high-income households, as a number of states have done in recent years.
This proposal should be seriously considered. Creating new top income brackets is sound tax policy for several reasons:
- A high-income tax raises revenue without hurting the local economy. Raising revenue during an economic downturn helps avoid severe spending cuts which take money and services out of the local economy at a critical time. Prominent economists note that a new tax for high-income residents is healthier for the local economy than budget cuts because such tax increases are unlikely to affect local consumer spending.
- Many states recently have raised income taxes on top earners. Ten states, including Maryland, have raised top income tax brackets or added surcharges. For example, Montgomery County taxpayers with more than $1 million in taxable income pay a 9.45 percent rate, a 6.25 percent state tax and 3.2 percent county tax. The states of New York, New Jersey, California, North Carolina, Hawaii, Vermont and Oregon currently have higher top rates than DC. Studies have shown that most high-income taxpayers maintain their residence after these tax increases, refuting the argument such increases cause “rich flight.”
- The District cut income tax rates over the last decade. DC’s top tax rate has fallen from 9.5 percent to 8.5 percent, and income tax collections as a share of household income have fallen as well. Even with a new rate for high-income households, most DC families would face lower taxes than they did a decade ago. And high-income residents can claim DC income tax payments as a deduction on their federal income taxes, which would reduce the impact of an increase in their DC taxes. Finally, because DC’s top rate now starts at $40,000 of taxable income, creating a new high-income bracket would provide a way to separate taxes paid by very high-income residents from the taxes paid by middle-income households.
- A high-income tax would be more progressive than recent tax increases in DC. The creation of a new top tax rate would move DC toward a more progressive taxation system. In recent budget balancing, DC leaders have relied heavily on regressive taxes–such as increasing the sales tax–that take a bigger chunk of money out of those who earn less.