Last year, I had the privilege of serving on the District of Columbia’s Tax Revision Commission, chaired by former mayor Tony Williams. On Monday, the Tax Policy Center will host a panel to discuss our broad-based effort to rework DC’s often unwieldy revenue system. To prepare, I looked more closely at how the personal income tax plan would affect different income, age, and family groups.
But first some thoughts about the overall package. Not surprisingly, the plan would create both winners and losers. But because it cuts overall revenues from personal and business taxes, most households and businesses would come out ahead.
While the DC economy is booming, the city faces some real revenue challenges. Thanks to the massive federal government presence, along with a large number of universities, hospitals, and other non-profits, much of the city’s potential tax base is off limits. Plus Congress has barred DC from imposing a commuter tax on the many high-income suburbanites who come into the city to work each day (and use city services). Finally, given federal budget constraints, federal spending in the district will probably diminish over time. Thus we introduced a service fee based on the number of employees, using information employers already report for existing unemployment insurance programs. The fee will increase costs for non-profits and some firms that don’t pay business franchise taxes, but recognizes that all workers and companies benefit from district services.
My fellow commissioners represented a wide range of backgrounds, from business executives to advocates for low-income families and even some academics. In the end, we unanimously agreed to a reform plan. And it did my public finance heart good to hear many of the commissioners repeat the tax economist mantra; “broaden the base and lower the rates.”
After seven years volunteering to prepare tax returns for low-income residents, I was most focused on the District’s individual income tax. The current system is very complex, in part because DC uses different filing statuses than the federal return. We simplified filing by conforming DC law more to the federal rules. For example, we matched federal filing statuses, personal exemption levels, and standard deductions and eliminated some deductions or credits that were used by few taxpayers or benefitted specific groups. Like the federal rules, our plan has different income brackets for different types of households. In general, our expansions to the personal exemption and standard deduction more than offset any tax increases these changes would cause.
We would also create a new middle income tax bracket (6.5% rate reduced from 8.5%) and expand the earned income tax credit (EITC) for childless workers, foreshadowing a major proposal in President Obama’s budget. This was done to make the system more progressive. The EITC has been effective in helping families with kids; it could also improve work incentives for households without children who are largely left out of the current credit.
Most filers will pay lower income taxes, benefitting from the higher deductions and exemptions and the new tax brackets. About 99% of filers with income under $100,000 and over 95% of all filers would pay less tax in 2015. Here is how it looks for various groups:
Single vs married taxpayers
Although we start the top two tax rates at lower income levels for singles and married couples filing separately than for joint filers and heads of household, the vast majority of individual filers would receive tax cuts under our plan. Even among singles with income over $350,000, over half would pay lower taxes than they do today.
In general, married couples would benefit from the new 6.5% bracket. But about half of couples with income over $200,000 would pay an average of about 3 percent more in taxes in 2015. One reason: We’d eliminate DC’s filing status of “married filing separately on the same return,” which allows couples to split income but often confuses taxpayers and ends up leading them to choose a filing status that is less than optimal.
Taxpayers over 50
Most older taxpayers would also benefit from the middle income tax bracket and the higher standard deduction and personal exemption. Many low-income people between the ages of 25 and 65 would also benefit from the expanded childless worker EITC. Similar to the current changes being considered in Maryland, our plan would also increase the estate tax exemption from $1 million to $5.25 million to match the federal threshold . This would benefit higher income households, or at least their estates.
We propose eliminating the long-term care insurance premium exclusion and the $3,000 exemption for District and federal pension payments. Both may increase taxes for some seniors, though the higher standard deduction and personal exemption will offset the impact for most.
It was a real treat for me to be involved with on-the-ground policymaking. To learn more, join us Monday.