Tuesday, August 02, 2005

Article: Comparative Income Taxes in DC, MD, and VA

I’m in the process of moving from one part of the area to another, so I took the time to look up an article on how DC, MD, and VA compare in terms of their income taxes.

The short version is:

DC sucks. The District has the highest effective income tax rates in the country. For most people, it’s around 10%.

MD is moderate. The Old Line State has income tax rates from about 4.08% to 6.44%.

VA is good, but has a wide range. The Commonwealth has income tax rates from about 1.36% to 7.9%. It also (surprisingly) has the most progressive tax structure.

A careful student who reviews the MD tax rates will find that it tends to penalize singles (like me, sadly) and it is somewhat regressive, due to the marriage bonus for higher income couples, which I wrote about at length some time ago. The regressive tax structure is further aggravated by the ability of high income tax payers to shelter their income, mostly through mortgage payments and investments, though this happens pretty much everywhere.

If you’re interested, there’s a full article after some additional commentary in the full post…

From a tax perspective, if you are poor, it is best to live in VA. However, I know from personal experience that VA has comparatively stingy and hard to access social services. So if you’re poor and want Medicare, Food Stamps, TANF, etc., you’re screwed. But if you’re a member of the working poor that does not qualify (or chooses not to utilize) welfare, VA is the place to live. If you’re middle class, it’s a pretty great place. But if you’re rich, you might want to consider moving to the other side of the river.

MD has some of the best social services in the country. So even though the poor are taxed at comparatively higher rates compared to VA, they get more benefits in return. MD also has a much stronger transportation and affordable housing infrastructure. This can save you a lot more money then the $500 or so that you might recoup in taxes by living in VA. But if you drive to work and choose to live in a hot/expensive area (like the DC suburbs) then you should move to VA. But you might want to move back when your income is high enough to buy a house. MD’s top rates are lower then VA, and it has more affordable housing near to major hubs, especially in between Gaithersburg and Baltimore or DC and Baltimore (I just helped a friend move to Columbia – he’s the third friend I have this year to buy a place there.).

DC, though it has much higher taxes, also has one of the most corrupt and inefficient governments in the country, though they’ve made huge strides in the last five or so years. DC also suffers from far more concentrated poverty and crime, which makes social service delivery more difficult. As much as I love this city, there is simply no economic reason to live here. There are plenty of social reasons – connection to the neighborhoods, history, or family - proximity to art, culture, and restaurants - ability to live without a car and a shorter commute if you work in the city, and so on. But many of those things exist to in the inner suburbs, especially Alexandria, Arlington, Silver Spring, Bethesda, etc. Again, the District has come a long way in recent history, but it has a longer way to go.

Here’s a full article discussing comparative tax rates in the area, from the Washington Business Journal:

Personal Income Tax: How D.C., Virginia, Maryland Rate

John W. Zerillo & Aaron Perkins
August 4, 2003

An analysis of personal income tax structures in Maryland, Virginia and D.C. reveals significant philosophical differences in the way residents are taxed.

An objective way to compare personal income tax structures is by income group.

Information from a U.S. Census Bureau survey completed in March 2002 allows for the division of household incomes into five numerically equal categories. This facilitates a comparative analysis to determine state tax burdens by income category.

The results are surprising.

Maryland, for example, taxes its lower and lower middle income families more than Virginia.

Virginia, on the other hand, taxes its middle, upper middle and upper income families more than Maryland.

Meanwhile, the District taxes all residents in each of the five categories consistently higher than either Virginia or Maryland and substantially higher than national averages.

At the lower end of the scale

For a lower income family earning $20,000, D.C. leads the entire country with a tax burden of $896.

A Maryland family with a similar income will pay an average of $562, while in Virginia the average will be $410.

The national average is $283.

The trend seen with lower income families continues through the lower middle income category, defined as families earning between $25,000 and $45,000.

Again the District is No. 1, this time with an average tax of $2,078.

Maryland's average tax is $1,236. Virginia follows at $1,166.

The national average is $875.

In the middle of a philosophical debate

The trends seen in the first two income categories start disappearing when the middle income category is analyzed.

Families earning between $45,000 and $65,000 now begin paying more in Virginia than they do in Maryland.

In Virginia the average tax burden is $2,287, while in Maryland it is $2,194.

As expected, D.C. has the highest personal income tax burden in the country with an average tax of $3,886.

However, all three jurisdictions are above the national average of $1,771.

Virginia begins to surpass Maryland at this income level because these states have different tax philosophies.

Maryland's legislature has imposed a relatively flat, almost regressive, tax structure.

Virginia has set up a progressive tax structure for incomes from $0 to $100,000.

Progressive taxes have increasing rates as income goes up, while flat tax rates essentially stay the same as income increases. Regressive taxes have rates that actually go down as income increases.

Virginia has an effective rate that starts at 1.36 percent and grows to 7.9 percent at $100,000.

Maryland's effective rate begins at 6.44 percent and then fluctuates between 4.08 percent and 4.8 percent to $100,000.

D.C. starts at a very high effective rate of 10.42 percent and ends at $100,000 with a rate of 9.3 percent.

Virginia's higher rates begin to make more of a difference at upper middle income levels ($65,000 to $95,000).

Those residents of Virginia will pay an average of $3,704, while in Maryland the burden will be $3,394, a difference of $310. That compares to a difference of only $93 for middle income families.

Upper middle income families in D.C. will pay $6,211-- $2,507 more than in Virginia and $2,817 more than in Maryland.

At the upper reaches

D.C. has the highest personal income tax in the country for most families in the upper income levels (over $95,000).

A District family earning $100,000 will pay an average of $8,071 compared with the national average of $3,958, a significant difference of $4,113.

At the $100,000 level, which is at the lower end of the upper income quintile, D.C. has a tax rate of 9.3 percent, the fourth highest in the country.

These numbers support the thought that there is little tax relief for anyone in the upper income category living in D.C.

In the upper income category, Virginia and Maryland separate themselves from each other in two important ways.

First, Maryland's tax burden at $100,000 is $4,354 compared with Virginia's tax of $4,854, a difference of $500.

Secondly, and perhaps more important, is that Virginia's rate of 7.9 percent, the ninth highest in the nation at this income level, compares with a relatively small rate of 4.8 percent in Maryland.

As residents of Virginia climb up the income ladder, they will pay even greater differences than their income counterparts in Maryland.

The single life -- and taxes

Singles in lower and lower middle income categories pay more in Maryland than they do in Virginia and D.C.

Middle, upper middle and upper income singles, on the other hand, pay more in Virginia than in either Maryland or the District.

Beyond $70,000, the difference in tax burdens between Virginia and Maryland for upper income citizens again becomes greater because of Virginia's higher incremental tax rates.

There are advantages and disadvantages to each tax philosophy.

Maryland's tax structure will not increase revenues when the economy grows as quickly as Virginia's because of its lower rates.

Virginia, however, might lose capital or income because of those higher rates.

The District's high rates bring in a greater income stream, but the structure often fails to effectively attract new revenue sources.

As local economies move in and out of recession, politicians will need to be flexible enough to change tax structures to accommodate the changing revenue needs of their states.

John W. Zerillo is an assistant professor of business administration at St. Joseph's College in Standish, Maine, and chairman of the board of directors of Casco Federal Credit Union. Aaron Perkins is a certified public accountant who provides tax and accounting services with individuals and businesses through Milliken, Perkins and Co. in Windham, Maine.
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