On July 20, 2021, the Washington, D.C. City Council voted 8-5 raise taxes on high-earning individuals. The additional revenue will be used to fund child care, homeless programs and set up a pilot basic monthly income program. The measure will adjust tax brackets and marginal rates beginning with incomes over $250,000 as follows:
- Income over $250,000, but not over $500,000 will be subject to a tax of 9.25%, an increase between 0.0% and .75% on current incomes over $250,000
- Income over $500,000, but not over $1,000,000 will be subject to a tax of 9.75%, an increase of 1% on current incomes over $500,000
- Income over $1,000,000 will be subject to a rate of 10.75%, an increase of 1.8% on current incomes over $1,000,000
The sponsors say the tax increases will affect about 5% of taxpayers with most of the additional burden falling on those earning more than $1 million a year. The Council will vote on the measure again in August. It will be presented to Mayor Muriel Bowser if it passes.
RSM state and local tax policy experts offer their views on the tax increases approved by the City Council.
I may not be a gambler, but eight members of the District of Columbia’s City Council are. With rapidly increasing domestic out-migration of individuals with income above $250,000 and a declining rate of new household formation, the District’s engine for personal income tax revenue growth is on the verge of stalling out. To add to the problem, commercial property vacancies are up and daily commuters and tourism are down, yielding significant real property tax and sales tax collection pressures. It is the quintessential bad deal with little room for upside. In fact, there is a real possibility that the District could be headed for a fiscal crisis. Yet, instead of addressing systemic issues, cutting spending, or broadening the District’s revenue sources, the Council has decided to go all-in on increasing personal income tax rates for the highly-mobile people the District most desperately needs to come back, or at least stop leaving. This strikes me as the type of hubris that leads an intoxicated high-roller to draw for an inside straight.
The likely tax increase is a terrible policy idea. Back in 2014, the District of Columbia Tax Revision Commission, on which I served, recognized the danger of imposing income tax burdens greater than other states. People can and do move. Taxing the wealthy in the District is a particularly bad idea. People can move to Virginia and Maryland without leaving their jobs, friends, or social network. It is interesting that the council decided to impose very high taxes at this time. The city is running a budget surplus of over a half billion dollars. Moreover, if the pandemic has taught us anything about economics it’s that people can work remotely. The wealthier you are the more likely you will have options to work remotely. And many people will choose to live in tax friendlier climates. People may not move to Virginia but to Florida. Other states understand this. More than a dozen have reduced income taxes this year. And no state, including those that are politically inclined to do so, have raised taxes. Why would the city be the outlier?
However well meaning, state and local governments are poor vehicles for redistributing wealthy. People who have studied fiscal federalism largely agree that redistribution efforts should be performed at the federal level. When states tax the rich and give their money to the poor, they inevitably end up with less of the former and more of the latter.
I’m not in the habit of telling my colleagues they are wrong, but my hands are tied. The District of Columbia is a wonderfully vibrant and exciting place to live filled with culture, history, culinary delights and a federal government which, sometimes, functions well enough. That is to say, people want to live here. I’ve lived downtown for about seven years and have never once considering moving to Montgomery County, Maryland, or Alexandria, Virginia. That said, and ignoring federal politics, the city does have problems. Wealth inequality is a major issue as is homelessness. The high cost of living has made it impossible for the middle class to reside in large areas of the city. In some residential areas, important city services are scarce, food desserts blanket square miles, metro stops are scattered and child poverty is obvious. So why not work on curing the problems in a city we call home?
Opponents have called it a ‘wealth tax.’ That seems harsh. I would characterize it as an almost routine rate adjustment that, assuming 24 paychecks a year, will be a $31.25 tax increase per check for an earner of $350,000 per year, $62.50 for an income of $500,000 per year or $271 for an income of $1,000,000. Is that really a wealth tax? One proposal in California would have added 3.5% to some high-earners in addition to a 13.3% top rate – now that’s a wealth tax. Additionally, a handful of states in 2021 reduced individual income taxes with minor rate adjustments on the heels of unexpected revenue collections due to a waning pandemic. Those states may need to second guess those actions given a year or two as tax revenues return to normal patterns. The fact is, no state, other than Arizona, is offering significant broad-based individual income tax reductions and that is because individual income taxes are the largest driver of state tax revenue followed closely by sales taxes. It is how states and cities are funded.
Will the new tax cause urban flight to surrounding areas to escape high taxes? Let’s examine. A 2019 analysis by the District’s Office of the Chief Financial Officer found that a hypothetical family earning $150,000 per year had the lowest tax burden in the city compared with two adjacent Maryland counties, one Virginia county, and four Virginia cities. Perhaps that is a disingenuous comparison because incomes of $150,000 would not experience the tax increase. Okay then. A 2019 Tax Foundation State and Local Tax Burden analysis ranked Maryland at six, the District at 22 and Virginia at 24. Admittedly, the District’s highest marginal individual rate is high, but focusing solely on that number ignores the true tax impact of the jurisdiction. I’m not sure anyone in the District is fleeing the current or proposed tax regime to save tax dollars in Maryland, perhaps for larger yards and more bedrooms, but not necessary to save tax dollars.
In full disclosure, I would not be subject to the increase, but I would gladly pay another $375 per year if it meant more sustainable housing for the city’s homeless, a chance to help increase pay for certain educators and additional assistance to workers. Are there other, better, mechanisms to address the city’s issues through ‘good tax policy?’ Almost certainly. Targeted tax credits could be one mechanism. I hope the city explores those too. If anything, I’m much more concerned about the city’s recent increase in crime and violence eroding the tax base than a few, unnoticeable, dollars from paychecks.