The DC Council voted on Tuesday to temporarily increase the marginal income tax rate on those making over $350 thousand a year from 8.5% to 8.95%, in a move that will raise an estimated $106 million in revenue over the next 4 years (when the measure will sunset).
Due to harsh economic times, the DC Council has faced a difficult task in balancing the District’s budget, causing it to make $108 million in cuts to critical human services support and other low income programs in the fiscal 2012 budget.
A modest tax increase on high income taxpayers may seem like a relatively straightforward step for the Council to take in a time of such austerity, yet the vote was highly contentious, with the measure just barely passed, seven to six
As part of the deal, supporters of raising taxes on high income earners agreed to undo a recently added tax code provision that progressive tax advocates liked. Just this summer, the Council voted to start taxing the interest that individuals earn on non-DC municipal bonds they own, no matter how long ago the bond was purchased. The deal eliminates the retroactivity and means that only out of state bonds purchased after this year will no longer prove their District owners a tax break. Although it also means a decrease in the amount of revenue generated, the elimination of the tax exemption on bond interest going forward will enhance the progressivity of DC’s tax system (just like it has for every other state).
DC’s tax increase on high income taxpayers is still only a small step toward making DC’s upside down tax system fairer. According the Institute on Taxation and Economic Policy’s Who Pays report, the middle 20% of taxpayers (those making between $33 and $57 thousand) pay on average 10.5% of their income in District income and other taxes, while the top 1% of taxpayers (those making over $1.5 million) pay an average of only 6.4%.
This small but positive step toward more progressive taxation builds on other smart revenue increases enacted by the DC Council in June, such as the implementation of combined reporting for businesses and setting budget limits on the value of itemized deductions.