The Washington, D.C., Council is moving forward with a tax increase on high earners, with a top rate of 10.75%. With the measure incorporated into the budget, proponents are preparing to declare victory. However, the real beneficiaries are Virginia and Maryland, which can expect to see an increase in new taxpayers fleeing Washington as the district returns to its old tax-and-spend ways — with a vengeance.
The proposal is a blast from the past, undoing the tax reform efforts of the better part of the past decade. It would impose a rate of 9.25% on those making more than $250,000, with progressive increases up to 10.75% for the highest earners, tying Washington with New Jersey for the nation’s fourth-highest top marginal rate.
The additional tax revenue would be earmarked to provide higher wages for childcare workers, additional housing vouchers, and monthly checks to low-income families (in addition to the existing earned income tax credit). Last year, a tax increase was proposed to fund violence interruption programs. Before that, a tax hike was proposed to fund additional childcare programs. The rationales change; the only thing the council seems sure of is a desire to raise taxes.
Due to a federally mandated reciprocity agreement with Virginia and Maryland, residents of the DMV pay income taxes where they live, not where their income is earned. Washington cannot opt out of this reality, and with a tax hike on the table for its highest earners, it is sending a signal to wealthy residents that they should buy homes in Arlington or Bethesda rather than Capitol Hill or Anacostia.
While someone earning over $250,000 certainly has means, that doesn’t mean taxes don’t affect their long-term decisions. For someone who is now fully remote, or even working at the office two or three days a week rather than all five, there’s less incentive than ever to remain in Washington and pay higher income taxes that could be avoided by moving a few miles down the road.
This tax hike will also affect small businesses. Ninety-two percent of all businesses that call the district home are “pass-through” businesses, meaning they pay individual income taxes, not corporate income taxes, and the vast majority of pass-through business income is reported by taxpayers above the threshold for these tax increases. These small businesses fuel some of Washington’s most cherished neighborhoods: gardening stores in DuPont Circle, fashion boutiques in Shaw, restaurants in Petworth.
They all faced unforeseen hardships during the pandemic and had to adjust operations. Now, just as things are returning to a semblance of normal, the council wants to raise their tax bills. The consequences? Less growth and opportunity, lower wages, or higher consumer costs. And when some taxpayers decide to leave town entirely with these new taxes in place, that shrinks small businesses’ customer base, leaving these businesses in an even tighter financial situation.
Mayor Muriel Bowser signaled opposition to last year’s tax hike proposal. This year, the case for a tax increase is even weaker. The district has about $2.5 billion in federal funding left over from the pandemic relief packages passed by Congress, and even without a tax increase, Washington is projected to raise an additional $1.4 billion a year in tax revenue by 2025. These numbers make the extra $175 million a year that the tax hike may raise seem like a drop in the bucket.
Instead of debating tax hikes that would do little to assist in Washington’s post-pandemic recovery, council members should be taking steps to address the new reality of many Washingtonians’ offices. Remote work is here to stay. With more mobile workers, tax competitiveness matters more than ever before. No matter how worthy the spending priorities, Washington residents won’t be better off if high earners increasingly decamp to Virginia and Maryland, reversing years of progress in revitalizing the district and coaxing workers back to the city.
Seven years ago, Washington assembled a broad coalition to make the tax code more competitive. A 10.75% top marginal rate would represent the final unraveling of that agreement just as workers begin preparing for a much more flexible post-pandemic “new normal.” Virginia and Maryland must be ecstatic.
Jared Walczak is vice president of state projects at the Tax Foundation, a nonprofit research organization in Washington, D.C.
