District of Columbia Creates New Tax Bracket for Earnings Over $350,000

September 21, 2011

On September 20th, the D. C. Council agreed to create a new tax bracket for individuals earning over $350,000. The new bracket would be taxed at a rate of 8.95 percent, up from the 8.5 percent currently collected from individuals making above $40,000 The new change, expected to be signed into law by the city mayor in the coming days, will expire in four years unless officials move to extend it. The creation of this new tax bracket and hike of the tax rate will affect 6000 residents and is expected to raise $106 million in additional revenue within the four-year-period.

Though the tax rate increase will only impact a small portion of the city’s population, the increase in the progressivity of the tax code in the District could have lasting effects on investment, job availability and migration. High-income taxpayers who plan to move to D. C. may choose to live in Maryland where they would be subject to 5.5 percent statutory income tax rate (plus local income taxes as high as 3.2 percent), or Virginia where they would be subject to 5.75 percent income tax rate. Interestingly, the timing of this decision puts DC at the center of the national debate on higher taxes for wealthy Americans.

Echoing president Obama’s speech on September 18th, D.C. Council member Phil Mendelson claimed, “people who earn $350,000, $400,000, $1 million, should not be paying the same rate as someone earning $40,000.”

However, many high income tax payers feel they have already contributed substantial tax dollars to the city in the form of property taxes, business taxes and a peculiar “luxury car tax,” which effects all cars in the city that have leather seats.

Since the early 2000s, D. C. residents who earn $40,000 or more have paid an 8.5 percent income tax rate. However, the new top rate is still lower than the 9.5 percent top rate that D. C. repealed in the early 2000s.

Though the new D.C tax changes are said to be a four-year temporary measure, many commentators believe the measure will likely last longer. Ward 2 Councilman Jack Evans said he thought it would be “naïve” to believe the tax increase will expire in four years. The city’s sales tax increase in 2009 was expected to expire on September 30, 2012, yet extensions and plans for expanding the sales tax to previously exempt items were proposed.

For a list of State Individual Income Tax Rates, click here.

For a recent report on local income taxes, click here.

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