High-Income Residents: Are They the Driving Force Behind DC’s Premium Apartments?

In a recent post, we concluded that the premium apartment rental market is the more popular and ascendant segment of the city’s housing market in the context of the current trend in net population growth. To further elaborate on this topic, we profile the tenants in the city’s Class A and Class B apartment buildings built after 2000 based on income tax data characteristics. The full research paper can be found here.

Economic Profile of Tenants

Table 1 tells us that in 2015 half of the residents who were income tax filers in the 88 Class A and Class B large and mid-sized apartment buildings that were built after 2000 had annual reported income of less than $57,428 and were under the age of 31.5. And, the vast majority of these tenants were single tax filers (unmarried and no dependents) and were relatively new[1] to the city.

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[1] We classify a new resident as someone who existed in the city’s income tax data in either 2013, 2014, and/or 2015, but did not exist in 2012 or prior.

Who is more likely to live in new apartment units?

Our data shows that there was a tripling in the number of premium apartment units delivered in 2013 compared to 2012. To better evaluate the data, we divided the buildings into two groups. The first cohort is comprised of all 2015 tax filers found to be residents in multifamily buildings that delivered between January 2000 and December 2012 (relatively older premium multifamily buildings). The second cohort is comprised of all 2015 tax filers found to be residents in multifamily buildings that delivered between January 2013 and December 2015 (newer premium multifamily buildings).  We then fit a statistical model to the data to determine the characteristics of new buildings versus older buildings.

Using T-tests, we find that the newer buildings tended to have units that were an average of 88.3 square feet (10.5 percent) smaller and cost 17.5 percent more per square foot (Table 2). We also found that individual tenants in newer buildings tended to have income that was on average of $9,884 (12.3 percent) less and 1.3 years younger than renters in older buildings.

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Using a statistical model to differentiate the characteristics of tax filers living in a newer building in 2015 versus older buildings, we calculate the probability that certain factors affect the choice of residing in newer apartment buildings instead of older buildings.

While the tenants in new and older apartment buildings are generally very similar, we were able to again tease apart a few distinctions in the two populations as well as a few contributing factors for their housing choices.

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We find that income has almost no influence on whether a resident chooses to live in a newer or older apartment building (for every $100,000 increase in income, the probability to choose a newer building increases only about 4 percent). Age is also an important factor in determining how likely a resident will choose newer or older apartment units. Younger residents are more likely to reside in newer apartment buildings. For each additional year in age, existing residents are 0.8 percent less likely to reside in newer buildings, while this percentage is 0.2 percent for new residents. We also find that tenants commonly supplement their traditional wage/salary income with additional business income from entrepreneurial or other self-employment endeavors.[2]

Given that 83 percent of all tenants in these buildings are single filers (as shown in Table 1), we find that long time city residents who are head of household tax filers (unmarried income earning adults with dependent children) are 23 percent more likely to live in newer buildings compared to married residents. This is possibly due to the city’s affordable housing efforts to place low-income households in these new buildings via affordable housing programs.  And finally, single residents are more likely to reside in newer buildings compared to married filers, especially when they are relatively long-time residents.

[2] On government tax forms, adjusted gross income is comprised of wages and salaries, business income, investment gains or losses and other income.

Several Ways DC is Changing

In sum, we find the following results. First, 64 percent of the tenants in all the apartment buildings in this study tended to be new to the city. Second, the newest apartment units are smaller and more expensive, and their residents tended to be slightly younger and have less income than residents in the relatively older buildings. Third, residents in the newest units are more likely to have business income as part of their total reported income, which suggests there is an increased tendency for these residents to supplement their traditional wage and salary income with additional income from entrepreneurial or other self-employment endeavors. Lastly and surprisingly, the analysis shows a relatively strong increase in probability for residents in the newer buildings to be head of household filers. This is possibly due to the city’s affordable housing efforts to place low-income households in these new buildings via inclusionary zoning and various housing subsidy programs.

Conventional wisdom assumes that these newer buildings are attracting primarily high-income residents; however, we find that compared to older buildings, the city’s newest and pricier apartment buildings built during the recent residential construction surge (2013 and after) tend to attract a higher percentage of new residents to the city, and also attract a higher percentage of single, young residents with income below the city average. It appears that both the city’s demographics and apartment rental market are continuing to evolve and change in significant ways. And, it is very likely these changes will have considerable implications on the residential and economic patterns of the city in the years to come.

 

The Data

Using data from CoStar, we identified 88 Class A and Class B large and mid-sized apartment buildings (containing 21,203 total residential units) from across the city that were built after 2000. The list can be found here. This study also uses 2015 individual income tax data for all DC tax filers who listed their home address as being in one of the 88 apartment buildings mentioned above.

 

 

The Elephant in the Boom: Global, U.S., and District income inequality in an era of general economic expansion and globalization

The “Elephant Chart”

Across most developed countries, including the United States, income growth has stagnated for low and middle class workers over the last several decades. Real GDP per capita for the U.S. grew merely 36 percent cumulatively during the 20-year period from 1988 to 2008. This period also saw some of the greatest growth stories in world history for China and India, as Chinese and Indian real GDP per capita, as measured in constant international dollars, has increased by 560 percent and 230 percent, respectively, during the same 20-year period, according to data from World Bank.

The stark contrast in global income growth between developed and developing nations is captured succinctly by the graph known as the “Elephant Chart,” as shown in Figure 1. This much-discussed chart was produced by the former World Bank economist Branko Milanovic last summer. We borrowed the chart from Branko Milanovic’s blog.  The chart ranked the world’s households from the poorest 1% to the richest 1%. At each percentile, the chart shows the growth in income between 1988 and 2008, an era of increasing globalization.

The chart, nicknamed the “elephant chart” because of its peculiar shape, shows that in the last few decades the “global middle classes,” mostly from China and India (point A) and the world’s elite (point C) have gained income significantly in the era of globalization, while income for the middle classes in the richest countries (point B) have stagnated. According to Milanovic, from 1988 to 2008, relative income growth was 75 percent for the developing world middle classes and 65 percent for the global top one percent, but only 0-5 percent for the rich countries’ middle classes. Despite acknowledging that correlation is not equal to causation—many economists nevertheless point to the chart as proof that globalization allowed developing countries like China and India to grow at the cost of middle class workers in rich countries.

Figure 1: Change in Real Income Between 1988 and 2008 at Various Percentiles of Global Income Distribution (Calculated in 2005 International Dollars)image001

Source: Branko Milanovic’s blog

How does the U.S. compare?

The “elephant chart” is an interesting and remarkable chart. One may wonder how the contours of inequality for the U.S. and Washington DC look when compared to the “elephant chart.”  Using the Public Use Microdata Sample (PUMS) data from the Census Bureau, we have created our own “elephant charts” for the United States and for the District of Columbia between 2001 and 2015. We will also compare the DC chart based on Census data, with the chart based on personal income tax data collected by the District government. We chose Census data for this specific period mainly for comparison purposes because DC income tax data is available only for this period.

The pattern of inequality in the United States is much different from the world’s. Figure 2 illustrates something that is all too familiar: for the past 15 years, which includes a mild recession and a financial panic, the country’s middle class and the poor have seen their incomes fall. In fact, households in the bottom 75 percent of distribution have experienced income losses of 8 percent on average during the 15 years from 2001 to 2015. Households in the top 25 percent of distribution, on the other hand, have experienced real income gains averaging 5 percent. The upper-class households in the top 5 percent of the distribution have been doing particularly well, with income gains averaging about 14 percent during the same period. The pattern does remind us of the so called “Matthew Effects,” where the rich get richer and the poor get poorer.

Figure 2: Real Income Gains Between 2001 and 2015 for U.S. Households at Various Percentilesimage002

            Source: U.S. Census Bureau

How about the District?

In contrast to the income trend nationally, the majority of households in Washington DC saw their incomes rise, especially among middle-income percentiles. The DC contour, as shown in Figure 3, is “elephant-like:” Middle class households and top earners in the District have experienced the largest income growth.

Figure 3: Real Income Gains for DC Residents at Different Percentiles Between 2001 and 2015image004

            Source: U.S. Census Bureau

Since the Census data for DC is survey based on a sample size of only about 3,600 DC households, the sampling error is relatively large. On the other hand, the number of tax filers in DC averages about 360,000 per year.  The blue line in Figure 4 shows the distribution of before tax income growth for DC based on DC tax filer data. Consistent with the chart based on census data, most DC residents have experienced income gains even after taking inflation into consideration. This is a clear contrast with the national pattern. One notable feature of Figure 4 is that residents at around the 21st to 25th percentiles experienced stagnant income growth. Low income tax filers from the 5th to 20th percentiles fared better. We believe this may be attributable to DC minimum wage policy. Since 2001, the DC minimum wage has grown much faster than inflation. As shown in Figure 5, the DC minimum wage had increased by 71 percent while the cost of living had increased by 41 percent. Thus, residents who have benefitted from the rising minimum wage (those in the 5th to 20th percentiles) have seen their income growing faster than residents working at wage rates just above the minimum wage (those in the 21st to 25th percentiles).

Figure 4: Before and After Tax Real Income Gains for DC Residents at Different Percentiles Between 2001 and 2015 Based on Income Tax Dataimage006

            Source: Office of Tax and Revenue

Figure 5: DC Minimum Wage VS the Consumer Price Index (CPI)image008

            Source: U.S. Department of Labor

The red line in Figure 4 shows an income growth pattern after adjusting for the District government’s tax policies such as taxable deduction, exemption and refundable and nonrefundable tax credits. The area between the blue line and the red line represents increase in income growths that was due to tax policies. The poor apparently benefited significantly from this tax policy. The DC earned income tax credit (EITC) did most of the job in helping the low-income residents (at or below the 30th percentile), as the District’s EITC credit has increased from 25 percent of the federal credit amount in 2001 to 40 percent of the federal amount since 2009.  For reference, Table 1 shows how much income DC tax payers earned in 2015 at certain percentiles both before and after tax.

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Source: Office of Tax and Revenue

Table 2 takes another look at how taxpayers at different income percentiles fared from 2015. The share of total income for the bottom 30 percent is much lower despite their relative increase from 2001 to 2015. The bottom 30 percent taxpayers earned only 5 percent of total before-tax income in 2001, and this percentage dropped to 4 percent in 2015. The DC Income tax schedule did help the taxpayers in the bottom 30 percent by maintaining their after-tax income share at 5 percent from 2001 to 2015.

The middle class, typically defined as households with income between the bottom 30 percent and the top 20 percent, fared slightly worse, with the before-tax and after-tax income shares declining by one percent and two percent respectively between 2001 and 2015.

The top 20 percent upper class households fared much better than the middle class by gaining both before-tax and after-tax income shares. The top 1 percent received a lion’s share of 23 percent of total before-tax DC income in 2001, and this percentage increased to 24 percent in 2015. The top 1 percent actually benefited more from the DC tax policy as their share of total after tax income increased from 20 percent in 2001 to 23 percent in 2015.

Table 2. Income as a percentage of total taxable income for taxpayers at different percentiles of income distribution

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In conclusion, we have gained substantial knowledge about inequality in DC and in U.S. from reproducing the “elephant chart” for the period between 2001 and 2015. We found that households in Washington DC on average experienced faster income growth than their counterparts in the nation for this period. Although the top one percent earners in DC and in the U.S. have both done well, the middle class in DC actually experienced real income gains, while the middle class in the U.S. experienced real income losses. We also want to emphasize that DC’s minimum wage and tax policies have helped lower income DC residents gain income faster than their national peers.

What exactly is this data?

Our data on personal income tax is from Office of Tax and Revenue personal income tax returns for tax year 2001 to 2015. The minimum wage and inflation data is from the Bureau of Labor Statistics, U.S. Department of Labor. Public Use Microdata Sample data (PUMS) from the Census Bureau was also used to calculate the distribution of income growths for the U.S. and DC.

Fitzroy Lee, Stephen Swaim and Bob Zuraski contributed to this post.

Sources of income change by income levels, tax filing status, age and ward

The composition of income for DC taxpayers changes significantly as income, filing status, age and ward of residence changes.

Wages and salaries become a smaller part of total income as income increases.  In tax year 2011, salaries and wages made up about 80 percent of adjusted gross income (AGI) for DC taxpayers with annual reported income below $250,000. For those with AGI exceeding $500,000, wages and salaries made up less than 50 percent of their total income. Rental income averaged about 30 percent of total income for taxpayers making between $0.5 million – $5 million.  For taxpayers with AGI over $5 million, capital gains made up more than half of their total AGI, and non-wage and non-retirement income, including business income, rental income, capital gains, interest, and dividends — accounted for almost three quarters of AGI.

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Married couples and domestic partners are more likely to collect income from capital gains, business income and rents and royalties.  Wages and Salaries made more than 80 percent of AGI for single filers and 85 percent for tax filers who claimed head of household filing status.  As for married couples or domestic partners, wages and salaries accounted for only about 60 percent of reported income.

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As taxpayers grow older, wages and salaries account for less and less of their income. For taxpayers younger than 45 years old, the share of wages and salaries ranged between 81 percent and 92 percent of their 2011 total income. For taxpayers between 45 and 55 years old, wages and salaries were about 71 percent of their AGI. The percentage dropped to roughly 53 percent for taxpayers between 55 and 65, just before retirement age, and rental income, capital gains and retirement income each accounted for about 12 percent of their income. As taxpayers entered retirement, pensions, annuities, IRA distributions, and Social Security became the most important sources of income, making up about 49 percent of income for taxpayers over 75.

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Taxpayers in Wards 2 and 3, who are generally higher income earners, receive a significant amount of non-wage and non-retirement income. Taxpayers in Ward 3, for example, received 52 percent of their income from wages and salaries, while wages and salaries contributed more than 80 percent of total income for taxpayers living in Ward 1 and Wards 5 through 8. Taxpayers living east of Anacostia River, in Wards 7 and 8 had virtually no business, capital gains, interest and dividends or rental income, according to the 2011 tax returns.

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