Here's some good news for District taxpayers: The amount you pay for bad schools, high crime and an unresponsive bureaucracy is no higher than what Montgomery County residents pay for good schools, safe streets and officials who (generally) answer the phone.
It turns out, according to a new study, that the basic income and property tax burden borne by city residents is comparable to that of the Maryland suburbanites. In fact, the tax burden in Prince George's County for most homeowners and even some renters is clearly higher than for D.C. residents.
Many may find the study results surprising, given the District's reputation as a high-tax jurisdiction, said Ed Lazere of the liberal D.C. Fiscal Policy Institute. The key, he said, is the city's low tax rate on owner-occupied housing -- 96 cents per $100 of assessed valuation, plus a modest homestead exemption -- which for most middle-class homeowners offsets the high income tax rate, which reaches to 9.3 percent.
In Lazere's view, this undermines the argument the city should be lowering taxes because "that's the way to attract people."
"What we really need to do is make better use of the services," he said.
The study did, however, confirm the popular view that taxes are lower in Virginia.
Lazere did his calculations for what he figured would be typical renters and homeowners making $50,000 a year, and for homeowners with incomes of $100,000 and $150,000. And for homeowners, he assumed that they would itemize their deductions, thus allowing them to deduct their state and local taxes on their federal returns. Deducting those taxes is in effect a federal subsidy, reducing their real cost. The tax rates he used were for 2002.
Thus, a married couple with two children earning $100,000 and owning a $250,000 house and two cars would pay $6,094 in income tax and $2,112 in property tax, for a total of $8,206. Deducting that would reduce the couple's federal taxes by $2,216, for a net D.C. tax of $5,991, the study figured.
If the same couple lived in Montgomery County they would pay $5,869 in income tax and $2,763 in property taxes, for a total of $8,631. After the federal deduction, their net would be $6,301, the study said.
In Prince George's, the figures would be $5,961 for income and $3,425 for property, for a total of $9,386, or $6,852 after the federal deduction.
Prince George's has higher property and income tax rates. Maryland's top state income tax rate is 4.75 percent, but the state allows a local add-on, or "piggyback," tax, which is slightly higher in Prince George's but pushes the top rate over 7.5 percent in both jurisdictions. Montgomery's property tax rate is $1.105 per $100 in most areas of the county, vs. $1.37 in Prince George's, the report said, noting that some localities in both counties tack on more.
The lowest-tax jurisdiction in the survey turned out to be Arlington, where the couple would pay $4,360 in income tax at Virginia's top rate of 5.75 percent, and $2,483 in property taxes at Arlington's rate of 99.3 cents per $100. After the federal offset, the net is $5,210 -- $1,642 less than Prince George's, $1,091 less than Montgomery and $781 less than the District.
In Fairfax the couple would pay a bit more than in Arlington because Fairfax's property tax rate is higher at $1.21.
As income rises (at $150,000, a D.C. couple's income tax can jump by as much as $4,000; see the accompanying chart), the District moves closer to the top because its income tax bites harder and harder. And the study found that renters, who do not benefit from the low property tax rates, generally pay higher taxes in the District than they would in the suburbs.
The study didn't try to include sales taxes, because, Lazere said, it's very difficult to figure out what people actually pay. The District's general sales tax is the area's highest, but it doesn't apply to grocery food items. Also, it's fairly easy to avoid by driving to, say, Virginia, which has the lowest rate (though it does tax groceries).
The study did, however, include Virginia's infamous "car tax" (technically a personal property tax).
Lazere notes that the difference between taxes in the District and those in Arlington, the lowest-tax jurisdiction he studied, amount to a maximum of 1.5 percent of income for homeowners, 2 percent for renters.
But it's a leap to say this means the city doesn't need to cut taxes. Look at it this way: If you saw a Mercedes and a Yugo offered for sale at $50,000, the salesman could truthfully say that the Mercedes costs no more than the Yugo. But which is really more expensive?
It's fine to say that the District should keep its taxes high and improve its services, but so far there's little evidence that it can actually do the latter part. There are, of course, some unusual benefits to living here, such as the college tuition assistance program, but overall the economics of living here are pretty off-putting.
In fact, taxes are already going up -- even without the mayor's proposal to push the top rate to 9.9 percent. The federal alternative minimum tax, while it did not affect the examples in the study, is hitting more and more people. This tax, originally aimed at preventing the rich from using legal devices to wipe out their federal taxes, treats state and local tax deductions as a loophole. Thus, it goes after residents of high-tax jurisdictions and, unadjusted for inflation, it will erode the value of these folks' federal deduction, boosting their effective local tax burden.
The city is attracting some new residents, but they tend to be people who come because they like living here, not because they need services. And not all move their legal residences here. It's fairly easy, and legal, to spend part of the year here while remaining a legal resident of some other jurisdiction.
The District would do well to make itself more appealing to these folks. They are ideal taxpayers -- they pay full freight and don't cost much. Getting city taxes down might attract some more of them, creating in the long run a tax base that could help raise services above the Yugo level.
Having just paid your taxes, you may be looking around for a way to cut them next year. But if donating your old car or truck to charity strikes your fancy, there are some things you may want to know -- that is, if you care about the charity.
Recently, the General Accounting Office reported to the Senate Finance Committee that while the popularity of such donations is growing, the cost of the deductions greatly exceeds the benefit to the charities.
"It's a troubling picture," said Finance Chairman Charles E. Grassley (R-Iowa).
In 2000, about 733,000 taxpayers reported donating vehicles worth a total of $2.5 billion, cutting total tax liability of the donors by $654 million, according to the GAO, which noted that the figures are estimates.
The charities, though, realized only a fraction of that $2.5 billion. In practice, most charities sell the cars to dealers or for parts. Some that operate programs in-house get as much as 40 percent of the sales value of the car, but others, especially those that rely on fundraising organizations, see far less.
The GAO reported a 2001 case in which a man donated a 1983 pickup truck to an unnamed charity and claimed a deduction of $2,400. The charity's fundraiser sold the truck at auction for $375. After deducting fundraising and advertising expenses, the sale proceeds totaled $63, which the charity split 50-50 with the fundraiser. The charity's ultimate take: $31.50.
The report said most charities are not greatly concerned with the tiny percentage they receive, figuring that without the program they'd get nothing. So they allow the vehicles to be sold at auction for far less than an individual seller might realize in a private deal.
The GAO estimated that the average deduction for vehicles donated in 2000 was $3,370, and it found that in almost all cases the amount was within the blue book value for the vehicle. But the agency said that since it lacked information about the condition of the vehicles, it could not determine whether the write-offs represented fair market value, which is the allowable deduction.
The Internal Revenue Service's latest Statistics of Income Bulletin, released last week, took a preliminary look at the 130.5 million individual income tax returns filed for tax year 2001. It found that while the number of returns increased 0.9 percent over the previous year, taxable income declined 5.2 percent, to $4.3 trillion. Total income tax decreased 8.6 percent, to $892.3 billion, and the amount owed because of the alternative minimum tax fell 32.5 percent, to $6 billion.
The bulletin also estimates, based on 1998 estate tax returns, that more than 6.5 million individuals in the United States had gross assets of $625,000 or more. These individuals represented about 3.4 percent of the adult population, the bulletin said. As a group, top wealth holders owned more than $11.1 trillion in total assets, or 32.6 percent of all U.S. personal asset holdings. California remains the state with the largest number of millionaires, while Connecticut was the state with the greatest per capita concentration of them.