Mayor Fenty has triumphantly announced that his proposed Fiscal Year 2011 budget “solves a $523 million budget gap without increasing taxes on District residents.”
The credibility of this statement rests in part on a fine distinction between taxes and fees. Because many D.C. residents would most certainly be using more of their income to provide the District with revenues.
Based only on what’s been reported thus far, we know that:
- Everyone with phone service would pay a higher monthly charge for the privilege of having 911 emergency service.
- Parking meter rates would go up to $1.00 an hour and residential parking permits by $10.
- Fees for renewing licenses issued by the Department of Health would go up by an as-yet unreported amount.
- Various new fees would be imposed on health care organizations and other businesses, some of which might be passed through to us in price increases.
The proposed budget would also cut the Earned Income Tax Credit. Like the federal EITC, the D.C. credit reduces the income tax liability of low-income families and refunds to them any difference between the amount of the credit and what they owe. I’ll leave it to the mayor to explain how reducing the credit isn’t a tax increase.
There’s a more fundamental issue here than taxes versus fees–even than fees that would hit low-income residents hardest. More fundamental even than reduced taxes credits versus tax increases that would affect only low-income residents.
Why should we think it’s so great to preserve the current tax system?
As the DC Fiscal Policy Institute has been arguing for some time, there are strange anomalies in our sales taxes. For example:
- Theater and opera tickets aren’t taxed, but movie tickets are.
- Health club memberships aren’t taxed, but exercise equipment is.
- Pet shampoo is taxed, but pet grooming services aren’t.
Do we see a pattern here? Or in the nearly-unique provision that allows D.C. residents to pay no taxes on interest from out-of-state bonds? The District essentially gives $10 million a year to well-off residents who invest in projects that don’t do a thing for us.
And then there’s the matter of our personal income tax rates. They’re progressive only up to $40,000. So people earning a relatively modest amount pay the same 8.5% rate as people with incomes over $1 million.
Last year, DC Councilmember Jim Graham proposed a new top tax bracket for income over $500,000. The Council instead opted to make the income tax structure more regressive, by eliminating the cost-of-living adjustments for the standard deduction and the personal exemption. The former, of course, meant nothing to high-income filers, since they generally itemize deductions, and the latter much less as a percentage of income.
We may again see proposed legislation to establish a new tax bracket–or maybe a couple of brackets. The Save Our Safety Net campaign is calling for two new brackets–a 9% rate for residents with incomes over $200,000 and a 9.4% rate for those with incomes over $1 million. It’s got a statement of support that we can sign on its home page.
The new rates would not only raise an estimated $50 million that would mitigate the need for budget cuts. They would also make our entire tax system more progressive.
According to a recent report by the Institute on Taxation and Economic Policy, state and local tax systems tend to be regressive in part because they rely heavily on sales and excise taxes. It goes without saying that wealthy families pay a much smaller percentage of their income for these. Once they’ve satisfied all their worldly needs and desires, they sock the rest away in investments–some taxable at a lower rate, some temporarily shielded altogether.
ITEC looked at total state tax burdens and adjusted for the amount that filers who itemize can shift to the federal government. For the District, it found that:
- Residents with incomes less than $20,000 a year paid only 0.2% less of their income in taxes than residents with incomes of $1.54 million or more.
- Those with incomes between $20,000 and $33,000 paid 3.3% more.
- And those with incomes between $33,000 and $57,000 paid 4.1% more.
This is a system we should cut critical services to preserve?