Federal income taxes in the District of Columbia, Maryland and Virginia would increase more than the national average if a Treasury Department proposal to drop deductions for state and local taxes is enacted, according to a Congressional Research Service study.
The District would be hardest hit, as the study shows that only New York state would exceed the District in tax increases under the proposal.
"The District is one of the biggest losers because it's got relatively high income taxes and high sales taxes, which would cease to be deductible," said an aide to Sen. Daniel P. Moynihan (D-N.Y.), who is fighting to retain the deduction. "Even if the overall rate were reduced as a result, 16 states and the District would pay more in taxes."
The 44 percent of D.C. households that itemize taxes would pay $1,433 more in federal taxes, according to the study. A Maryland family that itemizes would pay $1,207 more if the deduction for state and local taxes were dropped. A Virginia household that itemizes would pay $958 more, compared with a national average of $927 if the longstanding deduction is eliminated.
Dropping the deduction may cause District officials to decide to raise the city's tax rate, according to City Council member John A. Wilson (D-Ward 2), chairman of the council's Finance and Revenue Committee. "We've always felt this idea would be a problem for us," he said. "We've had tax increases for the last seven years and . . . I was hoping we didn't have to do one this year."
Even though fewer than half of District households itemize taxes, "they're the ones who make the money in the District," Wilson said. "Income tax is our biggest moneymaker."
Education groups are lining up to keep the deduction, saying that its elimination will most directly affect local property taxes on which schools depend for support.
"Education is the last public service that voters have a say over because they can affect the property tax rate," said Greg Humphrey, legislative director of the American Federation of Teachers and spokesman for the Coalition to Defend Education's Tax Base, an organization of 15 national education groups.
"We've estimated that eliminating the deduction will cause a $16.5 billion price increase in education at the state and local level," Humphrey said. "This is the kind of price tag that states can't swallow."
Larry Hunter, research director of the Advisory Council on Intergovernmental Relations, an independent federal research office, said local officials are worried about ending the deduction because "they will have to be on the firing line for every tax dollar."
He added, "You're pulling away a federal subsidy of education."
Wilson said that "so far, all I'm getting are calls about business lunches and vacation homes. But when people realize that any sizable loss caused by this plan has to be made up with new taxes, my phone will be ringing off the hook."
The Joint Economic Committee has scheduled hearings today and tomorrow on the impact of eliminating the deduction.