In 2005, former D.C. Mayor Marion Barry (D) pleaded guilty to two misdemeanor tax charges and admitted he had failed to pay most of his income taxes for five years.
Four years later, he owed the federal government $277,000, and had failed to make required payments to the District. This past March, IRS officials filed a lien against the Ward 8 councilmember to collect remaining cash.
So Barry isn't known for his expertise on tax issues. But last Wednesday, Barry dispensed a little tax advice on TBD's NewsTalk with Bruce DePuyt.
"Everybody knows that if you pay more state taxes, it's deducted from your federal taxes," Barry said. "Everybody knows that. ... Really, it's almost a one-to-one situation."
Barry is pushing for the District to close its budget gap using tax increases rather than service cuts, and he was making that case that tax increases wouldn't hurt high-income earners all that much. Is he accurate?
"That's what accountants tell me," Barry said, when asked to clarify his comments.
When we asked the IRS about Barry's comments, they referred to us to this document, which outlines the different types of taxes that can be deducted. State and local income and property taxes both make this list.
The key word here is deduct. There are tax credits and tax deductions. Deductions are subtracted from the income you report to the IRS. So if you make $40,000 and you paid $2,000 in state income taxes, the IRS would tax $38,000. Credits are subtracted from what you owe the IRS. If you originally owe $40,000 to the feds, and then get a $3,000 credit, you end up paying $37,000.
Barry is right that you can get relief from the feds if a state tax rate goes up, but he said it was "almost a one-to-one situation." That's a bit trickier, and will require us to go into a hypothetical realm.
Let's say Joe D.C. Resident earns $100,000 a year. He pays 35 percent federal income tax, and 10 percent D.C. income tax. With the state income tax deduction, he pays 35 percent of $90,000 to the U.S. Treasury, which is $33,250. And he already paid $10,000 to the District. That's $43,250 total.
If this was the one-to-one switch Barry claims, Joe D.C. Resident would end up paying $35,000 total — $25,000 to the IRS, and $10,000 to the District.
Barry might be not earn his CPA anytime soon, but he makes a good point about how much tax increases might harm D.C. residents. What he said is Only Kind of True.