Va. vs. Md. vs. D.C.
Studies Show Virginia's Tax Bite Is Smallest in Region
By Peter Behr
Friends, neighborhoods, home values and commuting all figure in the decision about whether to cross the state line.
And then there are the taxes.
Figuring out where to go in the region to get the best tax deal is a true headache because the tax setups in the District and the suburbs are so wildly different. Virginia has a car tax, unlike Maryland and the District. But Maryland's counties have a personal income tax that piggybacks on top of the state tax. And the District has an array of local and federal tax breaks for homeowners.
Yet overall, a tax comparison clearly favors Virginia.
A family of four with $50,000 in combined income in 1996 would have owed $2,695 in state and local personal income taxes if they lived in the District, compared with $2,890 if home was Montgomery or Prince George's county; $1,808 in Arlington and $1,792 in Fairfax County, according to a D.C. Office of Tax and Revenue study. (To make its calculation, the D.C. analysts made up a family of four with $50,000 in income, living in a $125,000 house and driving a three-year-old sedan with a trade-in value of $12,650.)
In other words, the District's tax bill was 50 percent higher than in the Virginia suburbs and 6 percent lower than in Maryland.
Maryland's two suburban counties are lower than the District when family income rises above $75,000.
In all three jurisdictions, property taxes have been rising faster than income taxes over the past 15 years. Property taxes amounted to 4.7 percent of District residents' personal income, compared with 3 percent of Maryland residents' income and 3.1 percent in Virginia.
But total property taxes rose by 41 percent in Maryland between 1989 and 1994, faster than in either Virginia (33 percent) or the District (14 percent), where an exodus of families and businesses in the 1990s cut deeply into the city's property tax base.
While the property tax burden rises in the suburbs, other taxes have been headed the other way.
A huge windfall in state tax collections, flowing from the region's strong economy and investors' casino-like winnings in the stock market, has paved the way for tax cuts in Virginia and Maryland.
In 1997, Maryland Gov. Parris N. Glendening (D) won approval of a five-year, 10 percent reduction in the state's personal income tax. When the state's budget surplus kept growing last year, Maryland lawmakers voted to speed up the tax cut.
As they prepare their tax returns for 1998, Marylanders can crank in a higher personal exemption and a lower tax rate on state taxes, equal to about a 5 percent reduction in personal taxes, Maryland officials estimate.
When the Maryland cut is fully phased in over several more years, the top tax rate will have dropped from 5 percent to 4.75 percent, and the exemption will have jumped from $1,200 in 1997 to $2,400. (But Maryland taxpayers will have to make a separate calculation of their piggyback tax obligation to their home county, because the cuts affect only state taxes.)
In comparison with Maryland's frequent tweaking of its tax laws, the only major change in Virginia's tax scheme in years is the car-tax cut championed by Gov. James S. Gilmore III (R) as the cornerstone of his 1997 election victory.
The car-tax cut lowers owners' 1998 tax bill on their vehicles by 12.5 percent. The cut goes to 27.5 percent next year and 47.5 percent the year after. When fully in place, it will return $1 billion a year to Virginia motorists (and leave a hole of the same size in the state's tax accounts).
Virginians' enthusiasm for the car-tax cut in the 1997 election suggests that they feel overtaxed, but in fact, they aren't, argues University of Virginia economist John L. Knapp--at least not compared with the rest of Americans. And neither are Maryland taxpayers, he adds.
Knapp adds up all personal and business taxes collected by state and local governments in each of the 50 states and the District. Then he compares that with the total personal income in those jurisdictions. (He includes business taxes because that helps even out differences in tax policies among the states, and because businesses pass on their tax costs to consumers whenever they can.)
When those numbers are crunched, Virginia winds up collecting $101.40 in total state and local taxes for every $1,000 of its residents' personal income, well below the U.S. average of $115.06, putting it 48th from the top among the 50 states and the District. Maryland, which collects $110.12 per $1,000 of personal income, ranks 34th from the top. The District, however, is third, with $138.07 in tax collections.
"By any measure, Virginia is not a high-tax state," Knapp concludes.
But that's not why Keough moved his company. Nor, he says, is it why he expects he'll move, too, backing up economic-development experts who argue that taxes aren't a big reason for relocations.
Keough's company, Zona Financiera Inc., provides research and financial information to Latin American markets over the Internet. It has been running in the basement of his parent's Potomac home, next to the pool table. Once he decided to move the company to a real office in Virginia, to be near other Internet companies and their financial backers, he knew he would follow it.
Hitting Us Where We Live
Here are how state and local personal income taxes compare, at four income levels, in the District and neighboring jurisdictions:
$25,000 $50,000 $75,000 $100,000
D.C. $1,096 $2,695 $4,723 $6,842
Montgomery County 870 2,890 4,674 6,470
Prince George's County 870 2,870 4,642 6,434
Alexandria 570 1,796 2,997 4,269
Arlington County 580 1,808 3,014 4,292
Fairfax County 580 1,792 2,990 4,460
Here are state and local property taxation rates (as a percentage of personal income) in the District, Maryland and Virginia, along with the change over five years:
Tax rate, 1994 Percent change, 1989-94
D.C. 4.7% 14.1%
Maryland 3.05% 41.1%
Virginia 3.14% 33.0%
SOURCES: D.C. Office of Tax and Revenue, U.S. Census Bureau
© Copyright 1999 The Washington Post Company