taxes

THE PROBLEM

The District’s tax system can push many working families into, or deeper into, poverty. In fact, a recent report from the Institute of Taxation and Economic Policy (ITEP) showed that those making just $20,000-$30,000 a year pay nearly 10 percent of their income in DC taxes, the second highest rate of any group of residents. DC families making $33,000-$57,000 a year pay the highest amount in taxes, nearly 11 percent of income. By contract, the top 1 percent of income earners in DC, with incomes of more than $1.5 million, has a combined DC tax liability of just 8 percent, according to the DCFPI report.

WHAT IS BEING DONE NOW

The District created a state-level Earned Income Tax Credit (EITC) in 2000. The EITC is a refundable tax credit provided to working individuals and families. Since 2000, DC’s EITC has been expanded and is now at 40 percent of the federal credit — the highest of any state in the nation. The relatively generous EITC is one of the reasons why DC’s lowest income population (those making less than $20,000), have the smallest overall DC tax liability — 6.2 percent.

DC has funded EITC outreach efforts in recent years, but that support was eliminated in 2010.

It is estimated that between 7,000 and 11,000 residents fail to claim the federal EITC, which they must do in order to claim DC’s EITC.⁷

The District has also raised the DC standard deduction and personal exemption over the past few years. The standard deduction and personal exemption help families reduce their overall tax liability and are most beneficial to low-income residents. However, as a result of budget shortfalls, the inflation adjustments for DC’s standard deduction and personal exemption were removed in FY 2010 and are not set to re-start until 2014. This weakens their ability to reduce taxes for DC’s low-income working families.

LEARN MORE

• Who Pays?: A Distributional Analysis of the Tax Systems in All 50 States, 3rd Edition, Institute on Taxation and Economic Policy, November 2009
• The Middle-Class Squeeze: DC’s Tax System Falls Most Heavily on Moderate-Income Families, DC Fiscal Policy Institute, 2009
• DC’s Earned Income Tax Credit Supports Working Families across the District, DC Fiscal Policy Institute, 2008
• Property Tax Relief for Low-Income Residents: Improvements Needed in DC’s “Schedule H” Credit, DC Fiscal Policy Institute, 2008

[7] Kerstetter, Katie, “Bridging the Gaps in DC: Strategies to Support Low-Income Working Families,” November 14, 2008, available at: http://dcfpi.org/?p=266