Greater Greater Washington

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Should DC dump the sales tax?

DC should consider getting rid of the bottom tier of the sales tax and replacing it with a higher income tax. This could stimulate business, help the working poor by removing a regressive tax, and retain more money within the District by taking advantage of federal deduction rules.


Photo by Tennessee Wanderer on Flickr.

Replacing this part of the sales tax with an income tax on higher earners would transform the bottom tier portion of the $973 million dollars DC residents currently pay in general sales tax, into a tax that is deductible from federal income tax.

This would return as much as $341 million dollars to the District's residents, serve as a tax break on the lower and middle class, and give DC businesses a competitive advantage over Maryland and Virginia, all while saving the District money.

There are five tiers to the DC sales tax. The 5.75% tier charged on tangible personal property is the bottom one. The others, on liquor, restaurant meals, parking, hotels, rental vehicles and sports tickets, represent luxury items or taxes on visitors and would not have the same effect if removed. When I talk about removing the sales tax, I'm talking about this bottom tier.

In 2009, the District raised $724,552,000 from its general sales tax, part of which came from the bottom tier. It is only tax-deductible from federal income tax by those who itemize, and only if they choose not to deduct their DC income tax. The sales tax deduction, which hasn't yet been extended this year, was designed for states without an income tax, primarily Texas, and is used rarely by DC residents, if at all. Thus, that entire sum of money is eligible for taxation by the federal government.

It is in the best interest of DC taxpayers as a whole to remove non-deductible taxes and replace them with deductible ones. By eliminated the sales tax and replacing it with a deductible tax, District residents could reduce their combined federal tax burden by up to 35%.

Those millions of dollars would stay in the hands of DC residents, much of which would be spent here, instead of going to the federal government. This would give a boost to local businesses.

Removing the sales tax would be good for local businesses in other ways as well. The District is surrounded by shoppers who would love to take advantage of sales-tax free spending, as would the 15 million annual visitors to the District. District tourist literature could promote DC as a place to see the sights "and shop tax-free."

Oregon has no sales tax and stores along the state line with Washington and California see a lot of business from out-of-state residents seeking a bargain. Unlike Oregon, DC's entire economy is a "border economy" so the impact would be even larger here. In addition, businesses would no longer need to collect, transfer and report sales tax, which would reduce overhead. Similarly, DC would no longer need the infrastructure to track, collect, audit and enforce sales taxes, thus allowing them to reduce costs.

DC would see other benefits too. While it would lose some sales tax that it currently earns from out-of-state shoppers, it would gain revenue from increased sales and the taxes, such as property and income, associated with profitable businesses. Stronger DC businesses would likely result in more jobs and so the District would also benefit from the taxes associated with workers, and reduced costs associated with lower unemployment.

As a further benefit, this would reduce taxes on those most in need of tax relief and make the system more fair. Sales taxes are paid by people across the economic spectrum, including those who can least afford to pay it. The top 1% of DC earners pay 5.8% 6.4% of their income in DC taxes. The bottom 20% pay 8.4%. The second and third 20% pay 11.0% and 10.8% respectively. So replacing the sales tax with a tax on high earners would make the tax system less regressive.

Cutting the sales tax will cut taxes for everyone. DC could then increase the income tax on those making more than $34,000 in taxable income (the start of the 25% bracket). Those making below $34,000 would pay no sales tax and would see no increase in income tax, which would represent about a 6.8% tax cut for them.

This tax cut would not be costly. In order to replace the revenue of the sales tax collected from the bottom 20%, the District would only need to increase the tax on the top 1% by 0.6%.

But that isn't necessary. By staggering the DC brackets to match the federal brackets, and tweaking the current rates, it could be arranged so that everyone pays less total tax, but the District gets the same amount of revenue, depending on the amount of state general sales tax that is paid by those out-of-state. This is done by taking money away from the federal government in the form of tax deductions. Those paying above $34,000 would pay an increased state income tax that could be more than offset by elimination of the state sales tax and a reduction of federal income tax.

Any fear that wealthy residents would choose to live just across the state line to take advantage of the reduced sales tax would be tempered by the fact that taxes in Maryland and Virginia are already higher than in DC. Maryland state income tax is 9.45% for those making more than $1 million, compared to 8.5% in DC, for example.

There are some possible drawbacks. A higher income does create a greater incentive to cheat, but with collection savings from removing the sales tax, DC could add enforcement staff for the income tax. Business gains for DC could spell loses for those just across the District line in MD or VA, but that is hardly DC's concern.

And by gaming the system to avoid federal taxes, DC runs the risk of Congressional intervention. But Congress created the system (without DC's input) and can hardly blame a state for gaming it. Further, the fear of Congressional intervention should not be a reason to avoid decisions that are best for DC residents.

A final drawback is that income tax revenues tend to be less stable, rising higher during good years and dropping farther during lean times. To make it work, DC needs to be more disciplined, setting aside more money in the rainy day fund during booms, so that it's available during busts.

None of these problems are so severe as to make this unmanageable. Five states, including nearby Delaware, have no sales tax, proving that whatever drawbacks there are, they are not insurmountable. For a jurisdiction with a strong border economy, numerous tourists, and an unbalanced tax rate among classes, getting rid of the sales tax is worth a look.

David Cranor is an operations engineer. A former Peace Corps Volunteer and former Texan (where he wrote for the Daily Texan), he's lived in the DC area since 1997. David is a cycling advocate who serves on the Bicycle Advisory Committee for DC.  

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This is an interesting idea, though, I'd like to see the counter-argument.

by Eric on Nov 29, 2010 3:31 pm • linkreport

I like this idea, if for no other reason I prefer progressive taxes over regressive ones.

You say that by eliminating the sales tax DC "would gain revenue from increased sales." How so? If DC makes 0% on sales, what does it matter if sales are increased?

by Steven Yates on Nov 29, 2010 3:33 pm • linkreport

@David C. This is a terrific idea! The only thing better would be for us to get exempted from federal income taxes like other non-states such as Puerto Rico.

by Lance on Nov 29, 2010 3:35 pm • linkreport

@Steven, David is only proposing doing away with the sales tax on your regular dry goods ... (in the same way that we don't pay sales tax on grocery food sales in the District.) There would still be hotel sales taxes and restaurant sales taxes (11% ... I once had a friend from Bethesda say that meant she refused to pay for parking in DC since she was already paying more for a restaurant sales tax than she would at home in MD) and all other kinds of sales taxes. People coming in from other jurisdictions would probably stop to grab a bite to eat while coming here to shop for the 'tax free bargains' ...

by Lance on Nov 29, 2010 3:39 pm • linkreport

This is an interesting argument, but there is a real lack of numbers here. Lower the sales tax, increase the income tax and let the feds balance it out sounds great -- but I'm not sure how the numbers actually balance out.

And a minor point: taxes on meals is not a "luxury" tax. If anything we should be cutting those as well. Plus, the employment benefits of more restaurant spending are easy to see.

by charlie on Nov 29, 2010 3:39 pm • linkreport

Somehow I doubt that Congressman would be bothered by not having to pay sales tax. And it helps eliminate the internet retail subsidy.

But unless I am missing something, you didn't report how much money this tax that you propose to repeal is actually collecting. You just keep saying that it is an unspecified fraction of $974 or $724 million. Unclear why that would save $341 million, unless the fraction is close to 100%. Is it? Why go to press without that key number?

by Jim Titus on Nov 29, 2010 3:42 pm • linkreport

As someone from Delaware I endorse the idea of tax free shopping.

by Ted on Nov 29, 2010 3:48 pm • linkreport

@Eric

Not really sure if this is a counter-argument, but studies by the OECD as well as (shameless personal plug) my master's thesis found that income and sales tax are the most harmful to GDP growth when compared to other forms of taxation. Substituting one for the other, as David C. suggests might result in the positive benefits he outlines but the research that I looked at and that I did found that, while maintaining a constant tax revenue, shifting the tax burden from sales and income taxes to property taxes and other similar "fixed" taxes would actually help boost GDP. While the OECD and I both looked at nations for our analysis, I would assume that the same would hold true for states and cities.

On a personal note, my choice to live in Arlington over DC was almost entirely driven by the income tax difference, with DC having a higher income tax than Virginia for my tax bracket. I'm not sure increasing the income tax would lead to a mass exodus from DC but assuming I'm not the only one who made the decision to live in VA over DC because of the income tax, it might have unforeseen negative consequences.

by Teyo on Nov 29, 2010 3:49 pm • linkreport

This doesn't seem like a good idea to me. In taxation, you always want to broaden the base and lower the rate to minimize deadweight loss. This is especially true with multi-jurisdiction sales taxes. There are close substitutes nearby, so high sales taxes have behavior-shifting effects governments want to avoid. And taxing income is also a bad idea because it's really taxing work (and savings, when you think about it).

This proposal is basically the opposite of a VAT. Instead, we should lower the sales tax, but apply it on all goods (food, medicine included). We could then lower the income tax rate so the proposal is revenue-neutral. And if you're worried about progressive-regressive issues, you could create a credit for lower-income residents. Make it refundable, if you want.

But whatever we do, the principle should be low rate of tax on large base. Not the other way around.

by WRD on Nov 29, 2010 3:57 pm • linkreport

I like this proposal a lot. My primary concern is that itemized deductions only make sense if you can exceed the standard deduction of $5,700 for individuals ($11,400 for couples). To really take advantage of the local income tax deduction, your annual income would have to approach the six-figure mark for individuals.

In addition, one of the more plausible proposals to come out of the president's deficit commission was the end of itemized deductions. That would certainly put a prime benefit of this strategy into doubt, but I guess we'll cross that bridge if/when we get to it.

by Adam L on Nov 29, 2010 3:58 pm • linkreport

Bad idea for too many reasons. Also: not gonna happen.

by Jasper on Nov 29, 2010 4:00 pm • linkreport

Basically, what we should do is cut a tax below our competing jurisdictions that they themselves cannot cut to compete with us. DC does this with property taxes-- Montgomery and Arlington Counties can't but their property taxes and still keep their books balanced. Certainly I think there's a strong possibility we could cut sales taxes to encourage consumers who might otherwise shop in Bethesda or Arlington to come to DC.

by JustMe on Nov 29, 2010 4:04 pm • linkreport

Nobody shops in DC anyway, ever since the bag tax.

by JJJJJ on Nov 29, 2010 4:11 pm • linkreport

Oh, and my other concern is that I believe the additional sales tax charged at restaurants, hotels, etc. is part of dedicated tax revenue that primarily goes to service bonds for used to finance various public projects, and doesn't directly enter the general fund. We'd have to see how those sales taxes that remain would be allocated.

@Teyo

In regards to taxes, Virginia certainly has lower income taxes than D.C., but it also has higher property taxes than the District. Likewise, Virginia businesses have a low corporate tax but then pay higher property and corporate asset taxes. As it is, Maryland has the individual highest tax burden overall (their income and property taxes are both higher than DC and Virginia). However, there are trade-offs for everything and I certainly wouldn't base my decision on where to live solely on taxes.

by Adam L on Nov 29, 2010 4:13 pm • linkreport

Taxes certainly affect decisions. Although when it comes to residence, I think it helps considerably to separate the population in to those with and without children.

If we're talking about people without children, roughly speaking, I'd guess that income taxes would swamp property taxes for impact.

If we're talking about those with children, then you want to include something about public school quality. Roughly, a lot of parents believe that the preponderance of property taxes heads towards local services dominated by schools. If moving to NOVA means lower income and higher property taxes but a better distribution of public schools, such that private school are largely unnecessary, then I suspect that the income tax will, on the margin, push more families to NOVA.

by Geof Gee on Nov 29, 2010 4:48 pm • linkreport

The only reason DC has a tax problem is because there's a plurality of people in this city who can find no other way to keep themselves alive than city tax revenue. If folks spent half the time reading and educating themselves at one of our fine libraries that they do comparing themselves to and complaining about other people, we wouldn't need to scrounge to find new ways to tax people.

Instead, because we're DC, we turn to the ballot box hoping that some marginally educated moron with a nice smile and a reassuring look will somehow figure out how to siphon money out of an economy without breaking it. Mews flash, there isn't a way to 'stimulate' people out of poverty.

Put the money back into schools with proven track records of success and teach people how to feed themselves.

by Jimbo on Nov 29, 2010 5:16 pm • linkreport

I think this has got to be one of the most absurd things I've ever seen suggested on this blog, inside or outside of the comments. For the record, as a contributor, I tend to agree with much of what's said here. But not this at all.

It's possible this might be a debatable suggestion in Nowhereville, USA.

But Washington, D.C., is one of the most tourist-visited places in the world!

Does the obvious even need to be said? People don't come to DC to shop tax-free. They come to see the White House, the Capitol, the Smithsonian, and the memorials. These tourists will come no matter WHAT the sales tax rate is. In fact, I'd argue the sales tax is damn near inelastic in a city like Washington.

Moreover, over half the employees in Washington during the day come from other jurisdictions in the area, and none of these people would pay income tax to DC. Yet they pay for shoe-shines, magazines, and suits at Filene's Basement on their lunch hours.

You're advocating taking essentially free out-of-zone money away from the District in exchange for, what, some arguably more progressive income tax system and the hope that people looking for the occasional cheap shopping would choose the District over outlets in Woodbridge or Leesburg?

by Joey on Nov 29, 2010 5:31 pm • linkreport

Brilliant. I'd like to see the DC government crunch some budget numbers first, but if they come up roughly the way that this article suggests, it's a solid plan. I say that even though someone like me, who is pretty miserly about spending, might lose out in the short run.

by tom veil on Nov 29, 2010 5:33 pm • linkreport

"This is done by taking money away from the federal government in the form of tax deductions"

And therein, is why this idea won't ever see the light of day...

by Meigs on Nov 29, 2010 5:35 pm • linkreport

These tax-free schemes are a wash. Marylanders do not drive to Delaware for its great shopping. In fact the majority of retailers in the greater Salisbury area are located on the Maryland side. Delaware is not an economically competitive state despite its tax schemes. Same with Texas, no income tab but the nation's worst public schools and high welfare rates. DC does not have enough big box or luxury retailers to make any use with a sales tax scheme.

by Cyrus on Nov 29, 2010 5:50 pm • linkreport

#1 Problem: Currently the DC sales tax is paid by DC residents *and* non-residents. If you replace it with an income tax on DC residents only (per Congress) then it means that you are collecting more taxes from DC residents than before, and it's only revenue neutral.

Also, when you say raise taxes "0.6%" I think you mean "0.6 percentage points" which from your figures I think is a 10% tax increase, or if based on current DC tax rates about a 6% increase.

by ah on Nov 29, 2010 6:20 pm • linkreport

@Cyrus

Speak for yourself. We drove to the outlets in Delaware all the time. Tour buses along I-95 also pull off in Delaware as a tourist shopping destination. That sure is a draw for the state.

As for big box and luxury retailers, they're coming. In fact, I wouldn't be surprised if Walmart located their stores exactly in their proposed locations for exactly that purpose. The proposed location at Capitol Heights near Southern Avenue is barely located inside D.C. border, and the NJ Avenue location is convenient to Virginians on 395. Walmart might be the biggest advocate for this D.C. tax-free scheme and I wouldn't doubt that they're already positioning themselves to take advantage of it.

by Adam L on Nov 29, 2010 6:28 pm • linkreport

@Joey "Does the obvious even need to be said? People don't come to DC to shop tax-free. They come to see the White House, the Capitol, the Smithsonian, and the memorials."

None of those things brings in tax revenue for the District. Regardless of the tax rate, hotels and restaurants are always going to be cheaper in Virginia and Maryland where the vast majority of visitors to D.C. stay and eat.

by Adam L on Nov 29, 2010 6:30 pm • linkreport

Actually, a correction to the above. Prepared foods, restaurants, and hotels would still be taxed. Those are the biggest expenditures by tourists in DC, so that revenue would remain intact. The only thing we would be losing out on are things like clothing sales. However, all those stands that sell FBI t shirts don't charge sales tax anyway.

by Adam L on Nov 29, 2010 6:42 pm • linkreport

The best way is to simply undercut Maryland and Virginia tax rates since DC is in a better financial position. Its basic competition.

by Sivad on Nov 29, 2010 7:44 pm • linkreport

Why not:
*Increase the lodging tax: demand from annoying tourists is practically inelastic.
*Cut general sales taxes: it does hit the poor harder.
*Implement comprehensive commuter tax: the bridge & tunnel crowd should pay more for coming to the District.
*Cut income taxes: 8.5%? Outrageous.
*Increase vice taxes.
*Adopt a fast food tax.
*Adopt a soda tax.

by E H on Nov 29, 2010 8:45 pm • linkreport

If I pay an extra $5,000 in DC state income taxes, does the deductibility mean that I pay $5,000 less in federal income taxes making me come out even?

Or does it mean that deduct $5,000 from my federal income, which means I save something like 32% of that, or $1,600, which puts me $3,400 in the hole? That sure doesn't sound attractive.

by Ward 1 Guy on Nov 29, 2010 9:19 pm • linkreport

Delaware can afford to be without a sales tax, because its Division of Corporations draws in about 22% of the state's income. Note that this is distinct from corporate income taxes. DC has no such advantage.

by Craig on Nov 29, 2010 9:21 pm • linkreport

@E H

1. Lodging tax is already at 14.5% Tourists in D.C. can't afford hotels in the city as it is, and most stay in Maryland or Virginia. Further increases in hotel taxes would mostly only affect corporate customers who may decline the additional travel expenses or move conferences outside the District.

2. Congress bars the District from charging commuter taxes, including tolls. In addition, even if it were possible, how would you toll commuters from Maryland who travel by neither bridges nor tunnels?

3. Income taxes are high, but not as high as neighboring Maryland. And as mentioned before, D.C. has lower property taxes than both Maryland and Virginia.

4. Vice/fast food/soda tax increase: the city lost revenue on the latest cigarette tax hike as more smokers purchased bulk cartons in Virginia. Taxes on other vices could be increased but they would be problematic for the same reason you cited that general sales taxes are problematic: they are regressive and generally affect the poor.

by Adam L on Nov 29, 2010 9:24 pm • linkreport

A good tax system should aim to charge users of its services. A lot of money spent in DC comes from tourists and commuters, who get the benefits of the city without paying income taxes. How would you tax this segment of users of city services?

by SJE on Nov 29, 2010 9:27 pm • linkreport

@Ward 1 Guy

1. You wouldn't be paying sales tax on most items you purchase.

2. If the relatively small increase in the income tax rate caused you to owe an additional $5,000 in D.C. taxes, that would mean you're making close to eight figures and I can't really feel sorry for you. ;-) But to answer your question, current tax law allows for a deduction of your local income tax only; it is not a tax credit.

by Adam L on Nov 29, 2010 9:34 pm • linkreport

An increased tax burden may induce a lot of high-income earners to bail from DC. If that happens, and, yes, it is certainly possible, the District's revenue take will suffer a double hit -- that of decreased income taxes as well as a softening in property tax revenue, as the demand for upper-level housing may weaken.

Any policy that serves to push high-income earners to move elsewhere is nothing less than stupid.

by Anon on Nov 29, 2010 10:06 pm • linkreport

@Adam L. (respectfully)

Re #1: do tourists really compare lodging tax rates in determining where they stay in the DC metro area?

Re #2: I think a commuter tax eventually is doable. If London with all of its competing political and economic interests can do it, I think the District could find a way. I take your point about MD commuters though. Perhaps setting up tolls on the main entrances to the District from MD, such as NY and GA avenues, would be a start.

Re #3: DC's income tax rate is 8.5%, while MD's is 4.75% for the same bracket. DC's property tax is only 0.85% though, while property taxes in MD & VA are much higher. Conclusion: it sucks to be a DC renter?

Re #4: DC smokers in mass schlep all the way to VA to buy tobacco products in bulk, while incurring the weekly or monthly transport costs?

Regarding soda/fast food taxes, I think they could be implemented, along with a robust public outreach campaign from the DC Department of Health about the health hazards of fast food and sugary soft drinks. Ostensibly low-income households can still make rational decisions, provided the District supplies all the facts.

by E H on Nov 29, 2010 10:26 pm • linkreport

@E H

Re #1: They don't compare the tax rates, they compare the room rates. If a hotel pays higher taxes, it will charge more so that it can make a profit. Higher taxes = higher rates = tourists staying in VA and MD

Re #2: Tolls are not allowed by Congress. That won't change.

Re #3: It DOES suck to be a renter in DC. Hence why I chose to rent in Arlington instead of DC.

Re #4: It doesn't cost very much to take the Metro to the Costco at Pentagon City. Or you could just buy them illegally from the shady dude I see standing around near the Chinatown stop selling them out of his backpack. I'm sure he's not the only "entrepreneur" in town.

by Teyo on Nov 29, 2010 10:31 pm • linkreport

@Teyo

Re #1: many hotels do not include taxes with the room rates, so unwitting tourists get duped.

Re #2: you're right: too many dbag representatives/senators from the VA & MD 'burbs would thwart any DC efforts to implement a commuter tax.

Re #3: buy a place in the District: you'll come out thousands of dollars ahead per year.

Re #4: DC residents really go to VA--duffle bag in hand--via Metro to stock up on smokes in bulk? I suspect smokers are too lazy.

by E H on Nov 29, 2010 10:44 pm • linkreport

@Eric, I tried to cover all of the counter-arguments I could come up with.

@Steven Yates, You say that by eliminating the sales tax DC "would gain revenue from increased sales." How so? If DC makes 0% on sales, what does it matter if sales are increased? That may have not been clear. The money comes from the second part of the sentence "and the taxes, such as property and income, associated with profitable businesses." So the point is that if a business sells more, it will make more money and pay more in property and income taxes as a result.

@Lance, Puerto Ricans who work for the federal government pay federal income taxes, so that wouldn't help many DC residents

@Charlie and Jim, I wish had more data. I wish I knew the breakdown of sales tax by tier, but could not find it. I wish there were an analysis of how much of each tier comes from in-state or out-of-state. My opinion would change if a lot of it came from out-of-state. But I could not find that. If someone does, I'd be glad to crunch the numbers. Some of the numbers don't really matter (like how much money could be saved, as long as it is a net positive). And charlie, the luxury element is on eating in restaurants which I would say is a luxury. Jim, The $341 million is 35% (top federal tax bracket) of $973 million. Now that I look at it again, that should be 35% of $725 million or $254 million. Good catch.

@Tepo, it works if you shift sales tax to property tax too. But I thought that might focus it on too few people. Again, I'd love to have all the data needed to crunch the numbers.

@WRD, I don't think deadweight loss is much of an issue on high earners. That would mean they decided to work less because, at $75 an hour, it just isn't worth it to them anymore. Not sure that is the case.

@Adam L, you're right about the income you need, but one could also have a mortgage. Ideally, the increased income tax would only recapture the sales tax in the $34,000-$100,000 range and then pick up for the federal tax savings above that.

@Jasper, Thanks for your eloquent insight

@Joey, People don't come to DC to shop tax-free. That's because they can't. But they might if they could. They come to see the White House, the Capitol, the Smithsonian, and the memorials. There are more visitors to DC then just tourists, and many tourists never visit the memorials. I often have friends visit who don't want to see those things. They saw them in high school. As I said, I don't know the breakdown of in-state vs. out-of-state tier I taxing. If you are right that out-of-state dominates, then I'd change my opinion. But if you're wrong, then this idea is not absurd, it's mathematically pretty sound. (see below)

@ah, it means that you are collecting more taxes from DC residents than before, and it's only revenue neutral. That depends on what percentage of tier I sales tax comes from out of state. Imagine that DC citizens pay all of the sales tax which we'll say is $100. And then it changes all of that to deductable income tax at the highest tax rate. They would save $35. If DC citizens paid none of the sales tax, they'd lose $65. If they paid $65 of it, they'd break even. So what we know is that if people from out of state pay less than X amount of the sales tax, where X is equal to the average federal income tax rate of the new DC income taxes, then this is a money maker.

@Ward 1 guy. The idea is that you'd pay $5000 more in state income tax, but $3500 less in state sales tax and $1600 less in federal income tax for a net gain of $100 for you and $1500 for DC. Or something similar.

by David C on Nov 29, 2010 10:54 pm • linkreport

@Anon, Any policy that serves to push high-income earners to move elsewhere is nothing less than stupid. As Meg Tilly said in Body Snatchers "Where you gonna go, where you gonna run, where you gonna hide? Nowhere."

by David C on Nov 29, 2010 10:57 pm • linkreport

@E H

1. Yes. They do. Nearly all D.C. travel guides suggest that tourists stay in Maryland or Virginia and take Metro in.

2. Not doable as long as Congress exists.

3. You're failing to include local (i.e. county) income taxes of 3.2% to your Maryland figures. That would mean that Maryland's middle-income tax bracket effectively becomes 8% (combined state and local), and the state's highest income bracket rises to 9.5%. In addition, with the homestead deduction of $67,500, D.C.'s property tax rate can be as low as .65% on a $300,000 home. And while renters do not pay property tax, the property owners do. If the owner pays more in tax, then rent will also likely go up.

4. "All the way to Virginia" is a 15-minute ride. And to save $2.20 per pack ($22.00 per carton), the ride across the Potomac is worth it to many.

5. Really don't have a problem with higher vice taxes, but don't think for a second that "education" alone will solve America's obesity epidemic.

by Adam L on Nov 29, 2010 10:58 pm • linkreport

@DavidC; well, since I am not going to look up the numbers either no foul. But you're wrong about restaurant meals being "luxury". $10 for tacos, or prepared foods that count as restaurant meals hurt. An easy exemption would be say anything less than $20 is tax free, although bill splitting would mess would that.

And while it MAY be revenue neutral -- and we don't know -- I think the more interesting question is what distorting effects a sales tax free District would create. For one, not sure it would help employment. It would make some retail real estate more expensive. Also make online shopping better in the future when that exemption is repealed.

by charlie on Nov 29, 2010 11:19 pm • linkreport

@Adam L.
1. That's really crappy advice: on par with telling someone visiting NYC to stay in Newark or White Plains.
2. Yeah, you're probably right.
3. Agreed, MD property owners get screwed.
4. Agreed, smokers are fiends, they probably make the trek.
5. Never mentioned anything about education solving the obesity epidemic--only saying that if lower cost food and beverage alternatives are available to low-income households, then there's no excuse for buying fast food and soda that are levied with high taxes. DC residents who impose more health costs on the District as a result of eating poorly should at least pay higher taxes on the crap food and beverages they consume.

by E H on Nov 29, 2010 11:21 pm • linkreport

@ E H

With # 2 you will end up taxing DC residents also.

People who live/work/visit the top northern corner of DC east of Rock Creek the only streets out of there are East Beach Drive & Eastern Ave which leads to Georgia Ave.

People who reside in eastern part of DC on the east side of the Anacostia who travel west of the river. NY Ave/50 in Maryland also is a way of for DC residents east of the Anacostia to get to the west side since there are a lack of bridges. I know many people who live in Deanwood and surrounding areas who take 295 to MD then 50/New York Ave into DC to go areas just across the river or to other sections of NE & to NW. The only other option is to drive to Benning Road then travel to Blandensburg Road since DC never built a bridge for Eastern Ave crossing the river and which could probably never be done because of Keniworth Aquatic Gardens & the Arboretum

by kk on Nov 30, 2010 1:13 am • linkreport

For 1996 the taxes seemed to be about $125 million for restaurants, $74 million for hotel, and $20 million for parking. But some of that is earmarked and probably deducted. Still, as a starting point you could assume that this figure increased by the same fraction as other sales taxes.

Regarding the portion of state and local income tax that is actually deductible, you can probably get that figure nationwide. Probably need to also find out what portion of property taxes are deductible--that figure may be higher given commercial and rental properties.

Overall, a reasonable first guess is that about 2/3 of the revenue is from general sales tax and that 2/3 of DC income tax is deductible. I'd use the 28% rate for calculating revenue savings. The upper 2% are not buying proportionately more items subject to the DC sales tax with all that extra money, so the class-neutral reduction in the rate would probably tilt to the middle/upper middle.

As others point out, a broader tax base does discourage cheating. I suspect that tax evasion by internet purchasers is greater than tax evasion by waiters, cabbies, and construction workers in DC.

by Jim Titus on Nov 30, 2010 7:39 am • linkreport

While an interesting idea - I think the first thing we ought to push for, especially now that we have a Republican Congress is H.R. 1014 (introduced by Rep. Gohmert (R), 1st District, Texas)

For those not familiar, it's the Taxation without Representation Act and basically it would tell the IRS to treat DC as if it was a territory (they way it should already be treated) and tax it as though it was Guam, PR, etc.

You want to give DC a tax edge over MD and VA? Imagine how well we'd be doing if we alleviated our citizens of the entire Federal Income Tax. DC could then adopt your sales-tax plan with ease and still make its ends meet.

by Andrew in DC on Nov 30, 2010 10:04 am • linkreport

Few high-income people are legal DC residents anyway. Many keep residency at summer houses in Rehobeth or other no-income-tax states.

In the past most retail for metro DC was in DC, but there's very little now. If a lower retail tax would lure shoppers from Ward 9 to DC Wal-Marts, it's only fair since we educate a number of their kids.

by Tom Coumaris on Nov 30, 2010 11:04 pm • linkreport

This statement is demonstrably not accurate, as can be seen in the sources you cite:

"Any fear that wealthy residents would choose to live just across the state line to take advantage of the reduced sales tax would be tempered by the fact that taxes in Maryland and Virginia are already higher than in DC."

Virginia's income tax is dramatically lower than D.C. Your next sentence looks at Maryland's income tax, but you never then looked at Virginia's income tax. The VA income tax is why many high-earners who work in D.C. live just over the border in VA. Although some may note that property taxes are a bit higher in, say, Arlington, $1000/year extra in property taxes is negligible compared to the income tax savings for those making $250k-plus.

You also state: "[t]he top 1% of DC earners pay 5.8% of their income in DC taxes" and link to an analysis piece to support that proposition. I'm not sure that the analysis piece was by a disinterested group, as there are quite a few editorial statements in the piece. But with D.C.'s top income tax bracket being way above 5.8 percent (around 8.5 percent?), and with that bracket beginning at a relatively modest $40k (I believe), it is hard to see how you got to 5.8 percent, even including the federal deduction, given all of the other taxes.

Indeed, the report you cite lists the total D.C. taxes for the top 1 percent at 8.0 percent. (It then argues that this is effectively 6.4 percent given the federal deduction, although that calculation would have to be checked.) According to the same document, Virginia comes in at 6.3 percent and 5.2 percent after the deduction, for the same figures. You might want to correct your blog post.

Your proposal would be terrible for the residents of D.C., by providing yet another incentive for high-earners to live outside of the city. On the other hand, for high-earners who live in VA, your proposal could be quite positive, as they could then shop in the District and live in VA.

D.C. already has one of the highest income taxes in the nation. The solution to every problem is not to continually raise taxes for one group. Taking the long view, we should be encouraging high-income residents to live within the bounds of the city, so that they can contribute to the tax base. "Us or them" won't work over the long term.

by Orange Line on Dec 5, 2010 9:18 am • linkreport

Orange Line, he solution to every problem is not to continually raise taxes for one group. This is not a soak the rich policy. State income tax would go up, but sales tax and federal income tax would go down. Ideally taxes for everyone would either remain the same or go down. The only losers here would be the federal government, Maryland and Virginia.

I never claimed that Virginia's income tax was lower than DC's. I said taxes are higher. For many people, total taxes in Virginia would be higher - when property taxes, including car taxes, are added in - than in DC. An October 2006
study by the DC Fiscal Policy Institute found that when both income and property taxes are added up, DC residents at many income levels pay the lowest overall taxes in the region.

it is hard to see how you got to 5.8 percent I didn't. They did. They explain their methodology on page 121.

Your proposal would be terrible for the residents of D.C., by providing yet another incentive for high-earners to live outside of the city. It would be possible that high earners would choose to live outside the city and then drive into the city to shop, but IMO, unlikely. There is a cost in time for such an idea, and for the wealthy, time is more valuable. A lawyer making $500/hr does not want to spend 2 hours a day driving to and from work. In addition, as I stated above, the total tax would either remain the same or drop. So in order to game the system, they'd have to move to Virginia and then do all their shopping in DC. I just can't see the wealthy deciding that their time is worth so little. But I'd be interested in a study that included that as a consideration.

On the other hand, for high-earners who live in VA, your proposal could be quite positive, as they could then shop in the District and live in VA. Fantastic. That means that DC businesses make more income and pay more income tax. That means more employment for DC citizens, which translates into more personal income taxes and fewer unemployment payments. That means that DC property becomes more valuable, which translates into more property taxes. It means more parking which translates into more parking taxes.

So we have two sides of the same argument here. You're saying that wealthy people will move out of the District and then invest a lot of time into coming back to do their shopping, thereby hurting DC's tax rolls. I'm arguing the opposite. That the wealthy value their time too highly to do that. So they stay in the District. But those in the bottom quartiles who live in MD and VA will travel into the District to shop because they have more time than money. I think mine proposition is more reasonable. But as I said, I'd love to see a professional analysis.

According to the same document, Virginia comes in at 6.3 percent and 5.2 percent after the deduction, for the same figures. Two problems with trying to compare the DC section of this report with the VA section. One: the top 1% are totally different groups. In DC the average income of that group was $2.7M. In VA it was $1.5M. Two: The VA analysis was of the state as a whole. Taxes vary from jurisdiction to jurisdiction so you'd need an analysis of Arlington, Alexandria and Fairfax. You're comparing apples to PCs here.

by David C on Dec 5, 2010 9:55 pm • linkreport

Your blog post says: "The top 1% of DC earners pay 5.8% of their income in DC taxes." The report you cite for this says the figure is actually 8.0% (or 6.4% if you include the federal deduction, but that number starts comparing apples to oranges and will confuse most people). See pg. 32. Both of those figures are higher than the 5.8% you cite. Shouldn't you correct the post?

You then say: "Any fear that wealthy residents would choose to live just across the state line to take advantage of the reduced sales tax would be tempered by the fact that taxes in Maryland and Virginia are already higher than in DC."

The report you cite shows that taxes for the top 1% of earners in VA are lower than in D.C. See pg. 108. Shouldn't you correct the post?

High income earners know that the Virginia tax burden is significantly lower than D.C. It doesn't advance the debate to proceed under the incorrect assumption that D.C. has lower taxes. D.C.'s current choice not to compete with Virginia is a significant roadblock to attracting high-earners as residents. Your proposal will make the problem worse.

by Orange Line on Dec 6, 2010 6:35 pm • linkreport

Both of those figures are higher than the 5.8% you cite. Shouldn't you correct the post? The mistake I made here was using the numbers from the 2nd edition of "Who Pays" while citing the 3rd. I will ask the editor to update this.

The report you cite shows that taxes for the top 1% of earners in VA are lower than in D.C. See pg. 108. Shouldn't you correct the post? To quote myself "two problems with trying to compare the DC section of this report with the VA section. One: the top 1% are totally different groups. In DC the average income of that group was $2.7M. In VA it was $1.5M. Two: The VA analysis was of the state as a whole. Taxes vary from jurisdiction to jurisdiction so you'd need an analysis of Arlington, Alexandria and Fairfax. You're comparing apples to PCs here."

It doesn't advance the debate to proceed under the incorrect assumption that D.C. has lower taxes. To quote myself again "An October 2006 study by the DC Fiscal Policy Institute found that when both income and property taxes are added up, DC residents at many income levels pay the lowest overall taxes in the region."

High income earners know that the Virginia tax burden is significantly lower than D.C. Which even if true would be rather irrelevant. Since (1) The idea is not to raise taxes, but rather to raise some and lower others so that no one's total tax goes up and some people's go down. (2) There is not a lot of evidence that people move to avoid high income taxes. From the NYT "Though tracking the movement of wealthy taxpayers from state to state is difficult, experts on public finance and migration say they have yet to document a substantial “rich drain” in states that have raised income taxes in recent years....But even experts who oppose such taxes on other grounds — out of fear that they will retard economic growth and innovation, or encourage lawmakers to indulge in bouts of new spending — concede that there is not much evidence that raising taxes on the wealthy would drive out a significant number."

So whatever, taxes are lower in Virginia or they aren't. Either way it doesn't matter.

by David C on Dec 6, 2010 10:33 pm • linkreport

More money to spend on lottery tickets.

by FJ on Feb 11, 2011 12:05 pm • linkreport

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