Overview of D. C.’s Dedicated Taxes, FY 2010 – FY 2019

Like many other states and municipalities, the District sometimes earmarks or dedicates tax revenue for specific purposes rather than general budget purposes. One of the most common examples of a dedicated tax is the motor fuel tax used to fund roads and highways and it has become more popular as a way to raise tax revenue. On one hand, dedicating taxes guarantees funds are available for a particular purpose, such as making bond payments or matching federal grants.  On the other hand, dedicating taxes to specific purposes reduces general funds available to support the full range of programs and services provided by government.

All or part of a tax may be dedicated to a specific purpose. For example, the Housing Production Trust Fund, which receives 15 percent of the revenue generated by the District’s deed recordation and deed transfer taxes while the sales tax on parking is fully dedicated to fund the District’s annual commitment to the Washington Metropolitan Area Transit Authority (WMATA).

Dedicated taxes in the District were first reported in 1999. In that year, $51 million was dedicated to the Convention Center Fund from sales tax revenue associated with restaurant and hotel activity.  The amount dedicated was 1.5 % of total gross revenue. Since FY 1999, the number of dedications from taxes has increased significantly. In FY 2019, there were 22 dedicated taxes (chart 1).

Chart 1: Change in number of dedications 1999-2019

In addition to the increase in number of dedications, there has been substantial growth in the amount of tax revenue earmarked for dedications. During the period between FY 2010 and FY 2019, total dedicated taxes increased from $334 million in FY 2010, to $805 million in FY 2019, a 141 percent increase in the proportion of tax revenue set aside for specified purposes (Chart 2).  The percentage of dedicated taxes to total taxes also increased from 7 percent of total taxes to 9.8 percent during the same period.

Chart 2: Aggregated dedications FY 2000 – FY 2019

Sales and use tax provided much of the revenue earmarked for dedications in FY 2010 and FY 2019, whereas the percentage of motor fuel, gross receipts, and property tax revenue as a total of dedicated taxes was reduced in FY 2019, compared to FY 2010 (Chart 3). The percentage increase in the proportion of dedications from sales and use tax revenue is due to 1) the number of new dedications (for example, a new dedication of $178.5 million for WMATA capital improvement projects representing most of the increase in FY 2019), and 2) changes in rates for some taxable items listed in Tables 1 and 2.

Chart 3: Dedicated tax by tax type as a percentage of total dedicated taxes

Note: Other includes dedications from health-related taxes and the Baseball Project. 

Table 1: Changes in rates from sales and use tax, 2019 compared to 2010

Table 2: New tax dedications by tax type, 2019 compared to 2010

The District’s dedicated taxes are directed towards economic development, transportation, health, housing, and general services.  In FY 2019, economic development projects and transportation accounted for 75 percent of dedicated taxes, shown in Table 3.

Table 3: Dedicated tax use categories, FY 2019

A summary of dedicated taxes is reported in the Annual Comprehensive Financial Report (ACFR), as is information on the District’s debt.  In addition to the ACFR, the CFO’s Office of Revenue Analysis prepares a report on dedicated taxes every two years.  In addition, dedicated tax revenue is estimated as part of the official quarterly revenue estimate and details about fund balance, revenue, and use are included in the revenue chapter of the annual budget summary. However, these reports focus on reporting the data and do not evaluate the effectiveness or the continuing need for dedications.

Who Claims the DC Earned Income Tax Credit?

This blog expands on our review, here, of the DC Earned income tax credit (DC EITC) looking at the distribution of DC EITC recipients by income, qualifying children and childless workers, and the geographic location. The benefit is concentrated among working families with dependents earning between $10,000 to $25,000 between 2006 and 2017. Additionally, more than a third of DC EITC recipients live in Wards 7 and 8.

Distribution of Credits by Income

From 2006 to 2017, most (78 percent) DC EITC recipients reported a DC adjusted gross income (DC AGI) of less than $25,000. Recipients with incomes between $10,000 and $25,000 benefitted the most, receiving on average over $1,000 per year in refundable credits between 2006 and 2017. This corresponds to the phase-in range of the program and decreasing at higher income levels with the phase-out range of the program (shown in Chart 2 below using the 2018 DC EITC schedule).

Chart 1: Median EITC by DC AGI 2006-2017

Source: ORA

Chart 2: DC EITC Schedules, 2018

Distribution of Credits Between DC EITC Filers with Qualifying Children and Childless Workers

Of all recipients from 2007 to 2017, those with one or two qualifying children accounted for 76 percent of the credit amount claimed (Table 1). Almost 70,000 children per year lived in households that benefitted from the DC EITC and 52 percent of those children lived in poverty during the same period. Overall, ORA found that about eleven percent of the children of EITC claimants living in poverty were lifted out of poverty because of the local earned income tax credit in the same 11-year period (further analysis of DC EITC benefit and its impact on children can be found in the “Income Security Tax Expenditure Review” Review of Income Security and Social Policy Tax Expenditures 2021 | ora-cfo (dc.gov).

Table 1: Total EITC Filers and Credits Claimed, by Number of Qualifying Children from 2007-2017

Note: ORA analysis of individual income tax data by number of qualifying children from 2007-2017. The total amount of claims by qualifying children do not equal the total claims because it excludes DC EITC recipients with missing information.

Benefits for childless adults expanded in 2014

In 2014, the maximum benefit and income threshold for DC EITC childless workers was expanded, driving an increase in the number of childless workers that claimed the credit by about 33 percent—especially those with incomes between $14,850 (the federal income threshold for childless workers to claim the credit) and $24,254 (DC’s expanded income threshold), allowing childless workers with higher income who were not eligible for the federal credit to become eligible for the DC credit. The maximum benefit was also increased to 100% of federal rather than 40% for other filers with dependents.

Prior to the expansion of the credit, the share of childless workers on EITC averaged about 24 percent in 2013 and 2014, but they only received about 2.7 percent of the total distribution of the credit (Chart 3). As a result of the EITC expansion for childless workers, the share of childless workers as a portion of the total number of households on EITC increased to an average of 36 percent in 2015 and 2016. Additionally, the share of the credit amount received by childless workers significantly increased by over 400 percent to about 14 percent in 2015 and 2016 due to the increase in the share of federal credit from 40% to 100%.

Chart 3: Percent of Childless Population and Claim Distribution Before and After the Expansion (2013-2016)

Source: ORA

The expansion eliminated all tax liability for a higher percentage of EITC recipients without children shown by the upward bump in Chart 4 after the law became effective in 2015. Specifically, the law increased the number of childless workers whose tax liability would be completely removed by the credit by about an average of 3 percent while also decreasing the number of childess workers whose tax burden was partially eliminated by an average of 11 percent.

Chart 4: Percent of DC Tax Liability Covered by DC EITC Before and After the 2014 Expansion

Source: ORA

Distribution of Credits by Ward and Neighborhood

DC EITC recipients living in Wards 7 and 8 between 2001 and 2017 received the largest share of the credit—$278 million in credits or 45.3 percent of the total credit claimed over that period and accounted for the most claims processed. Among recipients in most wards, the most common filing status during the same time was ‘head of household’. In Wards 2, and 3, however, the most common recipient was a single filer (Chart 5 below).

Table 2: Total Number of EITC Households and Credits Claimed, by Ward from 2001- 2017

**Number of households does not equal total because it includes repeat claimants that moved to another Ward between 2001 and 2017. The claimant is therefore captured in both Wards at different time periods.

Note: ORA analysis of individual income tax data. The total credit claimed by Ward does not equal the total credit claimed by all DC EITC recipients because the addresses of some recipients were out of state, missing, or could not be geocoded. 

Chart 5: Percent of DC EITC Filers by Filing Status and Ward

Source: ORA. Note: Head of household filers are unmarried filers with dependents.

Most of DC EITC recipients lived in only 20 of DC’s 74 assessment neighborhoods and claimed 92 percent of the total credit in 2017, as shown in Table 3 below. Nine of the top 20 neighborhoods, all located in Wards 7 and 8, made up 43 percent of DC EITC recipients and accounted for an estimated $275.7 million in credits between 2001 and 2017, or about 45 percent of the total DC EITC during that time with an average claim of about $855 per household per year.

Map 1 below shows the density per square-mile of DC EITC recipients per 1,000 tax filers in 2017. We control for the number of tax filers by neighborhood because some neighborhoods have a higher (or lower) proportion of DC EITC recipients in relation to the total number of tax filers in the same neighborhood. For example, while the Columbia Heights neighborhood is ranked third among neighborhoods with the highest number of DC EITC recipients in 2017 (see Table 3 below), the neighborhood is 18th for recipients as a share of all tax filers. Proportionally, a tax filer in Barry Farms in Ward 8 was almost three times more likely to claim the EITC than a tax filer in the Columbia Heights neighborhood.

Map 1: Neighborhoods by Share of EITC Claimed, 2017

Source: ORA

Table 3: Total DC EITC Claimed by Top 20 Neighborhoods, 2017

Note: ORA analysis of individual income tax data, 2017. The total credit claimed by neighborhood does not equal the total credit claimed by all DC EITC recipients and DC EITC recipients by Ward because the addresses of some recipients were out of state, missing, or could not be geocoded. 

What is this data?

This study used DC individual income and federal individual income administrative tax data from 2001 to 2017. This data is geocoded and provides information on DC EITC claimants including amount claimed, and number of qualified dependents.

Pandemic led to DC population loss, but data suggests population rebound last summer

As has been reported, the U.S. Census Bureau estimated that the District (D.C.), after years of population increases, lost nearly 20,000 people between April 1, 2020, and July 1, 2021. This is not surprising since moves out of the city accelerated after April 2020, when COVID-19 arrived in D.C. Now, nearly two years into the pandemic, are we seeing people return to the city? The data suggests yes. Apartment vacancy data and change of address data from the U.S. Postal Service (USPS) point to the city’s population reaching a low in the winter of 2020/2021, and then recovering to a large extent by the late summer/fall of 2021.

Apartment vacancy data from Delta Associates, which excludes vacancies in newly built units, shows vacancies in the District peaking the last quarter (Oct-Dec) of 2020 and first quarter (Jan-Mar) of 2021, with the increase in vacancy rate most pronounced for newer apartments with amenities (Class A). The vacancy rate then began to drop in 2021 and was below the pre-pandemic rate in the third quarter (Jul-Sep) of 2021. This is a strong sign of population recovery. Vacancy rates in the suburbs remained relatively flat through the pandemic, which perhaps isn’t surprising since our own research and others’ show the pandemic benefited the suburbs in this way.

Data from the USPS, which provides the number of net moves out of the city, show a similar pattern of population loss then rebound. Net moves out peaked above their pre-pandemic levels in September 2020. They then declined but continued above pre-pandemic levels through early spring 2021. In July 2021, net moves out dropped below pre-pandemic levels for the first time, and remained below pre-pandemic levels through October 2021, signaling a gain in population. This likely gain was due to both more people entering the city and fewer people leaving than pre-pandemic. Unfortunately, it is difficult to get an exact count of population recovered using the USPS data because it almost certainly undercounts people returning.(1)

It is possible not all of this population recovery was captured in the latest Census estimate, since the estimate reflects the population on July 1, 2021, and our data indicates recovery was still happening then.

According to USPS data by zip code, the population rebound appears mostly to have been driven by the neighborhoods that lost the most people earlier in the pandemic: those in and near downtown. However, Navy Yard and south Capitol Hill (zip code 20003) had the strongest in-migration numbers in last summer and fall’s USPS data, despite showing middling population loss earlier in the pandemic. This could be due to the large number of new housing units there. Upper northwest (zip codes 20015 and 20012) also appears to have contributed to the rebound, which is somewhat surprising since it had nearly no pandemic population loss in 2020, according to our prior research.

On the flip side, USPS data shows neighborhoods on the eastern edge of the city still had higher out-migration than pre-pandemic when other neighborhoods were rebounding. East-of-the-river zip codes 20019 and 20020 had roughly the same elevated level of outmigration last summer and fall as earlier in the pandemic, though earlier in the pandemic they didn’t have the stark outpouring of people that we saw downtown.

(Note that zip codes 20007 (Georgetown) and 20017 (Brookland) could be showing higher out-migration due to the presence of universities, though we are not seeing similar patterns in other zip codes with universities.)

While the USPS data shows a somewhat uneven recovery among neighborhoods, apartment vacancy data shows vacancy rates very close to or below pre-pandemic levels among all neighborhoods for which we have data.(2) However, it would be possible for us to see pre-pandemic vacancy rates yet a lower population in some neighborhoods, or even city-wide, if household sizes shrunk due to some members of a household leaving and others staying (as may be the case with roommates or inter-generational households.)

There is also the question of whether those who left the city are similar to those who returned. A decline in school enrollment and evidence of moves to the exurbs could mean families were more represented among leavers than they were among returnees. This migration pattern could also lead to low apartment vacancy rates but a lower population than-pre-pandemic due to smaller household sizes.

There are signs the population recovery is slowing or ending, and even if D.C. has made it back to its pre-pandemic population, there is still the risk of low growth or population stagnation moving forward. In November 2021, USPS data showed outmigration returning to 2019 levels, when D.C. had close to zero total migration and negative domestic migration, according to Census, meaning significant population gains could have ended. Other cities faced the same plight pre-pandemic: Boston, New York City, and San Francisco all had negative domestic migration in 2019, but places like Austin, Raleigh, Denver, and the D.C. exurbs were attracting people and continue to do so. In fact, there were several reports noting that the pandemic increased moves to places already attracting people. Telework of course remains the big wild card; if it continues at substantial levels post-pandemic it could change not only the number of people who live in D.C. but the types of people who choose to live here.

End Notes

(1) The USPS data counts international moves out, but not in, which are typically a substantial portion of migration to D.C. The absence of international moves in will almost certainly lead to an undercount of people returning, even after normalizing the pandemic data by comparing it to pre-pandemic data.

(2) Delta Associates shows the following stabilized vacancy rates (rates that exclude new units) for D.C. neighborhoods:

*Note that while Cap Hill/Riverfront/SW shows slightly higher than pre-pandemic vacancies, this area had the highest apartment absorption city-wide in 2021, which is not reflected in the stabilized vacancy rate in the above table.

The Class A and B neighborhood data shown above from Delta Associates does not include data for neighborhoods east of the Anacostia River. However, CoStar data shows vacancy rates in “Anacostia Southeast” have dropped to pre-pandemic levels (from 7% in 2019 Q3 to 6% in 2021 Q3).

CoStar data also shows that Class C apartment vacancies city-wide dropped to pre-pandemic levels in 2021 Q2.

Brief Overview of DC EITC

The DC Earned Income Tax Credit (DC EITC) was created as an add-on to the federal earned income tax credit to encourage work, reduce poverty, and provide additional tax relief to low-income taxpayers, especially those with dependent children in the District. In TY 2017, 62,513 Washingtonians claimed about $57 million in earned income tax credits in addition to $122 million in federal EITC. ORA recently released a detailed analysis of the DC EITC in our “Review of Income Security and Social Policy Tax Expenditures” Review of Income Security and Social Policy Tax Expenditures 2021 | ora-cfo (dc.gov). The following is the first of a series of DC EITC blog posts that summarizes the descriptive analysis provided in that report.

Chart 1: Total Federal and DC EITC by Year with DC EITC Effective Amendment Dates

Source: ORA. Note: The data labels refer to the years the DC EITC changes became effective

To claim the EITC, tax filers must meet the eligibility requirements instituted by the federal government. The most recent 2020 federal eligibility requirements were as follows:

  • Investment income received must be $3,650 or less for the year, and a federal adjusted gross income of less than:
    • $15,820 ($21,710 married filing jointly) with zero qualifying children
    • $41,756 ($467,646 married filing jointly) with one qualifying child
    • $47,440 ($53,330 married filing jointly) with two qualifying children
    • $50,594 ($56,844 married filing jointly) with three or more qualifying children
  • Maximum federal credit amounts:
    • $538 with no qualifying children
    • $3,584 with one qualifying child
    • $5,920 with two qualifying children
    • $6,660 with three or more qualifying children

If qualified, the tax filer can claim 40 percent of the federal credit for families with qualifying children. In 2014, DC expanded the EITC childless workers to be at least 100 percent of the federal credit and a wider earned income range (chart 2). The expansion allows more tax filers to receive more of the credit. For example, in tax year 2020, the federal EITC began its phasing out for single childless workers with income at about $8,800 ($14,700 for married filing jointly) and ran out at income over $15,820 ($21,710 for married filing jointly). However, the DC EITC allows filers to claim  the full federal credit (not just 40%) and extends the income to get the maximum credit from $8,800 for single childless workers ($14,700 for married filing jointly) to $19,489 for both groups and phases out until it runs out when income reaches $25,833 for both married and unmarried tax filers (dashed line in chart 2).

Chart 2: DC EITC Schedule, 2020

Based on our review of administrative tax data, between 2010 and 2017, on average 60,141 filers claimed $952 in benefits each year, with the majority earning incomes between $10,000 to $25,000 per year, shown in Table 1. This illustrates the broad impact of the program despite strict eligibility limits that target low-income families.

Source: OCFO/OTR

By design, the DC EITC has helped reduce poverty in the District and in 2017 about 10 percent of households with children and an estimated 3.9 percent of childless workers claiming the credit were elevated out of poverty: 1,874 filers (with 3,386 children) and 489 childless adults. Our Review shows the DC EITC is meeting the goal set by the DC Council of reducing tax burdens for low-income workers when the legislation was enacted and has lowered the average tax and effective tax rates for its claimants compared to tax filers with the same income and reference income level not claiming the credit.

Our analysis also highlights some areas where the credit could be improved. To obtain better results and improve accountability, ORA finds that the DC EITC could be amended in a variety of ways including addressing the marriage penalty that exists for childless workers, going after tax preparers for fraudulent returns, providing more resources for outreach and supporting the Office of Tax and Revenue’s (OTR) efforts to reduce fraud. Please see our complete analysis for further detail.

What is this data?

This study used DC individual income and federal individual income administrative tax data from 2001 to 2017. This data is geocoded and provides information on DC EITC claimants including amount claimed, and number of qualified dependents.