It’s Tuesday, which means another installment in our weekly series looking at the important research generated by DC’s Tax Revision Commission. Today, we look at how DC’s tax system affects residents at different income levels and how DC’s tax rates compare with rates in other jurisdictions. Three highlights from the report include:
- DC’s tax system falls most heavily on low-and moderate-income families. These households pay a higher share of their income in taxes than residents who earn more.
- Taxes on DC residents are the lowest in the region. And DC taxes are average for a large city.
- Business tax rates are higher in DC than in the rest of the region.
Low- and Moderate-Income Residents Face the Highest DC Tax Liabilities
There is broad consensus that taxes should be based on ability to pay and that higher-income families should pay higher rates than lower-income families. Yet, the District’s taxes fall most heavily on households with income between $22,000 and $62,000 — the middle of DC’s income distribution and families just below the middle. They pay between 10 percent and 11 percent of their income on property, sales and income taxes combined, after federal offsets (see Figure 1). This is far higher than the 6 percent of income paid in taxes by the highest-income one percent of DC households’who pay the lowest of any income group. Moreover, DC’s taxes as a share of income on the middle 20 percent of DC households are higher than in all but three states.deduction offset.
DC’s Taxes Are the Lowest in the Region
The average family in DC pays taxes that are the lowest in the region and are average when compared with other large cities, based on research from both DCFPI and the Office of the Chief Financial Officer. The biggest reason for DC’s low taxes in the region? Its residential property tax, which at $0.85 cents per $100 of assessed value, is the lowest when compared with surrounding counties.
Business Taxes Are Higher in DC than in Surrounding Jurisdictions
Lastly, the paper found that both the corporate income tax rate and the commercial property tax rate are higher than when compared to other regions. In fact, of the states that have a corporate income tax, DC’s is ranked third highest. The commercial property tax rate is also higher than our surrounding jurisdictions, including when other business office taxes are factored in.
Implications for Changes to DC Taxes
While the Commission’s paper did not make recommendations, the findings suggest that fixing the tax system to reduce taxes for low- and moderate-income residents should be a top priority for the DC Tax Revision Commission. Not only is that consistent with progressive tax principles, it also is important in an increasingly expensive city that is putting pressure on lower-income families.
Do these findings mean that DC needs to lower its taxes on businesses? Not necessarily. The question is whether the higher taxes are hurting DC’s economy, and there is little evidence of that. For example, while our corporate income tax rate is among the highest, most companies do not pay it. In fact, two-thirds of corporations pay the minimum tax, which is now just $250 for smaller companies and $1,000 a year for the largest. And the commercial vacancy rate consistently is lower in DC than in the suburbs, suggesting that the commercial property tax rate is not hindering business location in the city.
These findings show that comparing tax rates is important, but that being the lowest shouldn’t necessarily be the goal.
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