This week the notoriously dysfunctional and economically illiterate Washington, D.C. City Council rammed through an upper-income tax increase on District residents and small businesses. The measure, which passed by a 7-6 vote, raises the tax rate on incomes in excess of $350,000 by 5 percent, taking the rate from 8.5 to 8.95 percent, and leaving D.C. with the dubious distinction of having one of the highest marginal rates in the country.
Foregoing normal legislative protocol, the proposal, which was hastily concocted behind closed doors, bypassed the tax and revenue committee and was approved without public input. Even the Washington Post editorial board referred to it as “D.C.’s irresponsible tax hike.” To borrow a tongue and cheek phrase from the Wall Street Journal’s erudite James Taranto, when you’ve lost the Washington Post editorial board, you’ve lost middle America.
Councilman Phil Mendelson and Mary Cheh, the tax hike’s chief proponents, utilized the same class warfare and soak-the-rich rhetoric that the White House has perfected in recent weeks. Yet, as with President Obama, Mendelson and Cheh fail to realize the consequences of their actions. The fact is their tax increase on “the rich” takes its toll on small businesses, since the individual income tax system is the one under which they file. In fact, according to IRS data, over 52,000 small businesses in the District of Columbia pay D.C.’s income tax, which was already onerous and uncompetitive prior to this week’s events. Nearly 5,000 D.C. small businesses pay taxes on annual income in excess of $200,000, and a large portion of these employers will see a reduction in their job-creating capacity thanks to the misguided and opaque actions of D.C.’s corrupt City Council. In this gloomy and uncertain economy, it is unconscionable that lawmakers would do anything that would make employers less likely to hire, yet that’s precisely what Mendelson, Cheh and company did this week.
Such an economically-damaging tax increase would be bad enough by itself, but the fact is that it is also completely unnecessary. The District is currently sitting on an $89 million surplus, and that’s even after ramping up spending by 8 percent in just the past year. The tax increase is projected to yield a little over $100 million over the next four years. However, given the DC Council’s poor revenue projection record, don’t be surprised if this latest tax increase misses the mark when businesses and high earners, who are the most mobile, adjust their behavior or simply relocate. D.C.’s neighbors to the north have already shown what happens when lawmakers sack the rich. In 2008 Maryland Gov. Martin O’Malley signed into law a new tax bracket on millionaires, only to see the number of millionaires filing taxes in Maryland drop by a third the following year.
D.C. residents and those thinking of moving to the District don’t have to go far to avoid the higher rates found in the nation’s capital. As the Tax Foundation noted yesterday, “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.”
The saying goes that taxpayers vote with their feet, leaving high tax locales for more friendly tax climates. Don’t be surprised to see Washington families and employers vote with their metro cards as a result of the D.C. Council’s actions this week.