Tax Policy Changes Aimed at �Middle-Income Households

DC Tax Revision Commission

July 2023

Richard C. Auxier

Overview of presentation

• Discussion of tax changes that could benefit middle-income households in the District
• What is “middle income” in the District of Columbia?
• Median income: $97,000
• Median income in Ward 3: $134,000
• Median income in Ward 8: $39,000
• Presentation goal: Gain a better understanding of how different tax changes could benefit different types of households—as well as the costs of these tax changes
• Many ways to help different groups through tax policy, but DC has limited fiscal resources
• What groups does the DC Tax Revision Commission want to prioritize? Why? How?

�Note: This is a tax cut focused presentation, but tax cuts are not always the best way to achieve goals related to supporting middle-income households. Alternatively, goals could require spending tax revenue.

​

WWW.TAXPOLICYCENTER.ORG

2

Tax policy options discussed

Individual income tax

1. Lower income tax rates
2. Enact a child tax credit (CTC)

​

Property tax

1. Alter property tax rates for residential property
2. Lower the special deed tax rate for first-time homebuyers

​

*Note: This is not a comprehensive list and we left off relevant policy options discussed at previous meetings (e.g., property tax circuit breaker). The goal is illuminating the effect of different tax changes.

​

​

WWW.TAXPOLICYCENTER.ORG

3

Individual income tax changes

WWW.TAXPOLICYCENTER.ORG

4

DC individual income tax rates and brackets

WWW.TAXPOLICYCENTER.ORG

5

• Taxable income is calculated after exemptions and deductions—that is, a married couple with $70,000 in taxable income probably earned closer to $90,000 in actual income
• All DC tax filers use the same brackets. However, DC allows married couples to file as married filing separately on the same return, which prevents a “marriage penalty” by separating (instead of combining) each person’s income

Lower individual income tax rate/create new bracket

WWW.TAXPOLICYCENTER.ORG

6

Option 1: Lower 6% tax rate to 5%

Option 2: New 7.5% rate and bracket

Note: Both examples were created solely to illustrate different policy options.

Income tax rate cut pros and cons

Pro

• Simple, understandable form of tax relief
• 2013 DC Tax Revision Commission recommended the 6.5% bracket

​

Con

• Any new or lower tax rate would have a large revenue cost
• Not well targeted because high income households get as much as or more benefit. �For example, the new 7.5% rate would provide:
• A household with $70,000 in taxable income a $100 tax cut because only $10,000 is in the new bracket
• A household with $100,000 or more in taxable income a $400 tax cut because all $40,000 is in the new bracket
• Racial equity note: High-income households are disproportionally white

​

WWW.TAXPOLICYCENTER.ORG

7

Enact a child tax credit (CTC)

8

• A state CTC, like the federal CTC, is a tax credit for households with eligible children
• 14 states currently offer a state CTC; 10 enacted/expanded since 2021 (ARP expanded federal CTC)
• Policymakers must make choices for CTC design, including (see state examples below):
• Amount of credit
• Refundable or nonrefundable credit
• What age children are eligible
• Income restrictions

New child tax credit pros and cons

Pros

• Income limits allow policymakers to restrict benefit to low- and middle-income families
• Allows policymakers to target limited resources at households with children
• Can further target benefit with age restrictions—i.e., if only families with young children get the CTC, DC could provide a larger credits to fewer families (e.g., Vermont)
• Racial equity note: Black and Latino households are more likely than white households to earn income eligible for a typical state CTC and to have multiple eligible children

Cons

• Does not benefit filers without children—including people who have children but do not claim those children on their tax return (i.e., child claimed by another parent or relative)
• Revenue cost (but that could be mitigated with income phase-outs and age restrictions)

​

WWW.TAXPOLICYCENTER.ORG

9

Property tax

WWW.TAXPOLICYCENTER.ORG

10

Change tax rates on residential property

• Residential property in DC is taxed at $0.85 per $100 of assessed taxable value
• Tax applied after the $78,700 homestead deduction that lowers the property’s taxable value
• Proposal: DC could levy multiple, marginal tax rates on residential property
• $0.80 per $100 for first $200,000 of value
• $0.85 per $100 for value between $200,001 and $1 million of value
• $0.90 per $100 for value greater than $1 million

​

Note: This example is solely for illustrative purposes. Research would need to be done on the revenue costs and distributional effects for any specific tax rate changes.

​

​

WWW.TAXPOLICYCENTER.ORG

11

Residential tax rate change pros and cons

Pros

• Broad and simple tax cut for many homeowners

Cons

• Possible large revenue costs
• Depending on the specific new tax rates …
• Some high-income homeowners could benefit as much as or more than many middle-income homeowners or …
• Some middle-income homeowners could see a tax increases
• Related, it could be challenging to “thread the needle” given revenue constraints
• Any racial equity impact analysis would depend on the new rates, but white households are more likely to own residential property (and more valuable property)

WWW.TAXPOLICYCENTER.ORG

12

Expand special deed tax rate for first-time homebuyers

• Deed transfer/recordation taxes levied when taxable properties are sold or transferred
• Tax rate is 1.1% for transfers less than $400,000 and 1.45% for those greater
• Taxes apply to both recording and transfer, so rates are doubled/combined (e.g., 2.9% on homes valued at more than $400,000) for sales
• 2.5% for all mixed-use and commercial real estate transfers greater than $2 million
• Special 0.725% recordation rate (transfer tax unaffected) first-time DC homebuyers
• Home value cannot exceed $684,500
• Household income cannot exceed $179,460 to $338,220 (depending on persons in household)
• Proposal(s): Lower the special tax rate (or create 0% rate); increase the eligible home value threshold; increase eligible household income thresholds

WWW.TAXPOLICYCENTER.ORG

13

Special deed tax rate pros and cons

Pros

• Possibly incentivize current residents to purchase homes in the District and nonresidents to move into the District
• DC homeowners (claiming homestead deduction) pay income and other District taxes

Cons

• Revenue cost
• While an income eligibility limit and home value limit can concentrate the benefits among non-wealthy homeowners, the largest benefits of the rate reduction still go to owners of the highest value eligible homes

​

​

WWW.TAXPOLICYCENTER.ORG

14

Other possibilities and future conversations

• Create new exemptions and/or credits for some types of retirement income
• Expand tax credit for child care expenses
• Expand the earned income tax credit for “childless” filers
• Better target tax incentives for savings and investments (e.g., 529 plans)
• Expand DC’s property tax circuit breaker (Schedule H)
• Increase the homestead deduction

​

• DCTRC staff are preparing memos on numerous tax policy options for consideration in the fall deliberations
• If there are policies missing from our conversation or, more broadly, points of emphasis you’d like to see in those conversations, please tell the staff

​

​

​

​

WWW.TAXPOLICYCENTER.ORG

15