Middle class families don't, but low-income people might be better off in the suburbs.
I recently had a conversation with a friend who was moving and said she preferred to live in Maryland than in D.C. because D.C. residents pay higher taxes. She wasn’t the first local to tell me that. But is this claim true?
It appears in this case, conventional wisdom is out of touch with the facts. The DC Fiscal Policy Institute compared hypothetical families earning $50,000, $100,000, or $200,000 and found that, in most cases, D.C. residents have lower combined income and property taxes than Maryland or Virginia residents. The primary reasons cited are lower property tax rates and benefits such as the homestead deduction, which combine to limit homeowners’ taxable assessment.
However, the DC Fiscal Policy Institute’s study focuses on middle-class families, and notes that for low-income families, taxes are higher in DC than in Maryland and are similar to Virginia. The DC Chief Financial Officer’s most recent comparative tax study confirms that DC taxes are lower relative to neighboring jurisdictions for families earning $50,000, $75,000, $100,000, and $150,000. This does not hold true at the $25,000-income level, where DC taxes are middle-of-the-pack.
So, it would appear that whether it is preferable to live inside DC or just outside of it depends on your income level.
A report from the Institute on Taxation and Economic Policy, comparing tax systems in all 50 states, finds that taxpayers in D.C. with incomes of $20,000 to $252,000 pay about 10 percent of their incomes in property, sales, and income taxes. Conversely, the top 5 percent pay about 8 percent of their income. On the upside, those earning below $20,000 pay the lowest rate, 6.2 percent.
The reason for this regressive taxation on moderate-income families is D.C.’s reliance on sales and excise taxes, which fall heaviest on low-income families. Low-income tax benefits, particularly D.C.’s earned income tax credit, offset this regressivity for the poorest families, but not for those of low to moderate income.
Conventional wisdom and the current US tax code suggest that Americans on both sides of the aisle favor a progressive tax system, even if they disagree on the extent. Regressivity creeps into the tax code through taxes other than the income tax. DC is not alone in this problem, or even an egregious example: the Institute on Taxation and Economic Policy report finds nearly all state and local tax systems take a greater share of income from middle- and low-income families than from the wealthy. In DC, the sales, excise, and property taxes are regressive enough to overbalance a progressive income tax.
Not only DC but other state and local jurisdictions could stand a comprehensive review of how taxes are collected and who pays. However, in neither quantity nor quality is DC remarkably different from its neighbors in taxation.
This post originally appeared on the Urban Institute's MetroTrends blog, an Atlantic partner site.