Taxes Cut, Not Saved
Assessments, Gas, Lost Profits Leave Some Gasping
By Jonathan Weisman and Neil Irwin
Jerry Bailey is precisely the kind of taxpayer President Bush had hoped
to bestow his tax cuts on: an entrepreneur brew-pub owner, a job
provider, not overly rich by Washington area standards but well off
enough to pay a hefty sum to the federal government each year.
But after three tax cuts in three years, the part-owner of Loudoun
County's Old Dominion Brewing Co. is not exactly celebrating his gains.
Sure, his federal tax bill was trimmed, by a healthy $5,600, according
to a rough calculation by Clint Stretch, director of tax policy at the
accounting firm Deloitte & Touche LLP.
But other factors having nothing to do with federal taxes have clouded
Bailey's situation. This year, the property tax bill on his Bethesda
home will reach $6,725, a $950 increase over his payment four years ago.
The annual cost of his 56-mile-a-day commute has jumped more than $300
since 2001, and the long, slow decline of business profits these past
four years has left Bailey far behind, no matter what his federal tax
payment may be.
"I'm not paying any taxes at all because we're not making any money,"
Bailey said with a sigh. "I loved paying taxes. It meant we were doing
As the Democrats converge on Boston this week to nominate their
presidential candidate, the rhetoric around the economic policies of the
past 42 months will doubtless be shrill. At first blush, the Democrats'
case may seem like a hard sell. Economic growth has returned. Job
growth, while slow, has perked up over the past 12 months. Most of all,
Republicans may expect some gratitude for cutting taxes by more than
$1.7 trillion over the next 10 years.
####But many Americans feel they have lost ground since 2001, and a
solid 71 percent are convinced they have received no tax cuts at all. A
poll by CBS News and the New York Times in March found that only 22
percent believe the policies of the Bush administration made their taxes
go down; 25 percent said their taxes actually went up.####
Taxpayers in the Washington area at the highest income levels appear to
have profited handsomely from the tax cut, as one Cleveland Park
businessman's tax returns show. Further down the income scale, some
people barely broke even, as Alverta Munlin and Donald Belton can
attest, after local taxes and rising costs of living were factored in.
And some struggling middle-income families, such as that of Serkalem
Nessibu, lost their entire tax cut to things like the rise in their
property tax because of the increased value of their home. Presumably,
the numbers would have been worse for many people had they not had their
federal taxes cut; but these other demands on their money help explain
why some taxpayers may dismiss the tax cut and instead focus on their
reduced bottom line.
True, rising property and sales taxes at the local level have clawed
back as much as 27 percent of the federal income tax cuts, said Mark
Zandi, chief economist at the research firm Economy.com. Nonetheless, he
said, personal income tax payments have fallen about $200 billion since
Bush took office.
"I don't think there is any doubt that [the tax burden] has dropped,"
said Greg Jenner, acting assistant Treasury secretary for tax policy.
"The statistics are irrefutable, and it's absolutely clear that the
American people are better off because of the tax cuts that the
Since early 2001, state and local taxes have actually fallen as a share
of personal income, said Mark Warshawsky, assistant Treasury secretary
for economic policy, from 6.3 percent of income to 6.1 percent. Factor
in federal taxes and the total tax burden has plunged from 18.3 percent
of personal income to 13.9 percent.
"Tax cuts on the federal level have greatly outweighed those state and
local [tax] increases," agreed Dean Maki, an economist at J.P. Morgan
Chase, who has studied the impact of tax law on personal incomes and
But Maki had a caveat that could well apply to the Washington area, one
that can easily make people feel as though their annual outlays have
grown, no matter what: Housing prices in the Northeast and California
have risen considerably faster than the national average. Deloitte &
Touche's Property Tax Services Group in Chicago found that single-family
home values nationally have jumped 24.2 percent since 2001, from a
median $147,800 to $174,600. But in the Northeast, median home values
shot from $146,500 in 2001 to $212,280 in May, a 45.5 percent leap.
That, in turn, has driven up property taxes and cut into individual
gains from the federal tax cuts. Nationally, property taxes rose an
average of more than 10 percent, DeLoitte researchers say. In
Alexandria, they rose 53 percent.
As the economy slowed in 2001 and federal funds for states tightened,
local jurisdictions had to find myriad ways to raise revenue that have
pinched local consumers' pocketbooks. In 2001, the District of Columbia
repealed a law that would have lowered the top marginal rate on income
earned in the city to 8.5 percent from 9.5 percent. In the past three
years, the District has raised taxes on cigarettes, ***ic beverages
and phone services.
Maryland has raised a number of fees, such as raising the price to
register a typical car to $128, from $81. And ***ia this year passed
a wide-ranging tax package that will increase the sales tax rate by a
penny per dollar starting next month, and eliminate a $12,000 state
income tax deduction for wealthy seniors.
"I have no doubt I've gone backwards," said Al Aitken, an American
Airlines copilot who is trying to organize a property tax revolt through
his VOTORS, or ***ians Over-Taxed On Residences. "I favor President
Bush's tax cut, but my increase in property taxes more than ate it up."
Aitken has the records to prove his point. In 1997, he fled his five
acres outside of Manassas when his property tax payment reached $4,000,
then settled on 10 acres in Culpeper County, where his tax payment
dropped to $1,700. But Washington sprawl and soaring real estate prices
quickly caught up to him. By 2002, his tax obligation was back up to
$4,000. It has now reached $6,000.
With an income of $128,132, including a Marine Corps pension, Aitken did
profit from the president's tax cuts, saving roughly $3,150 last year,
by Stretch's calculations. But $2,000 of that was snatched away by
Culpeper County. About $270 was consumed by rising gasoline prices,
inflating the cost of his 100-mile commute to Dulles International
Airport. His net gain? $880.
It's something, of course, but there are other factors. The collapse of
the airline industry in the wake of the Sept. 11, 2001, attacks took a
toll on Aitken personally. This year, American Airlines pilots swallowed
a 23 percent salary cut to keep the planes flying. With wages last year
totaling $92,236, Aitken effectively gave back more than $21,000. His
net gain vanished into a substantial loss.
Bush administration economists say such anecdotes do not paint an
accurate picture of the national experience. Property taxes have risen,
but measured against personal wealth, the increase has been slight, from
1.24 percent of personal incomes in 2001 to 1.35 percent now. Overall,
they stressed, after-tax incomes have risen 11 percent since the
president took office.
"People are always nervous about changes in tax law, and they're
skeptical about the benefits," Jenner said. "But overall, wages have
gone up, and after-tax income has gone up significantly," Warshawsky added.
Of course, many Washingtonians have come out ahead -- way ahead. Last
year, with his firm revving back up, a Cleveland Park businessman who
discussed his finances only on condition of anonymity pulled down more
than $1,035,000 in salary and bonuses. His wife, a federal employee,
chipped in $45,000, giving the family of four a sizable income that
enjoyed tax rate cuts in every income bracket, including the top, which
was lowered from 39.6 percent to 35 percent.
The couple also received $33,512 in taxable dividends last year. Before
Bush took office, those would have been taxed at the ordinary income
rate of 39.6 percent. But last year, Congress slashed the dividend rate
to 15 percent. All told, the businessman's taxes fell $44,500 from where
they would have been under the Clinton-era tax code, according to
Deloitte & Touche. With the assessment of his house more than doubling
since 2001, his property taxes have risen by $4,320. But rising gas
prices had negligible impact on a commute of just four miles. The
household's net gain? About $40,000 a year.
Down the income scale, the picture looks considerably different.
Serkalem Nessibu, an Ethiopian immigrant in her forties, moved to the
United States in 1979 and since then has achieved a middle-class
existence. She and her husband have a three-bedroom house in Accokeek,
in Prince George's County, and two children, one of them on the way to
college this year.
To help support it all, Nessibu works one full-time job answering the
phone at a downtown Washington hotel. After her shift ends, she
typically packs up and goes to a second job, working until recently as a
supervisor at a diner. Altogether, she works 70 to 75 hours a week, and
brought home $38,000 last year for her efforts. Her husband was laid off
from his job with an electric utility when there was a merger two years
ago, and he now works part time driving a bus while looking for
Altogether, Nessibu's family made about $50,000 last year, and she paid
about $1,100 less on her federal taxes than she would have had the Bush
tax cuts not been enacted. But the family took home about $60,000 back
in 2000, when the economy was booming, Nessibu received ample overtime
at the hotel and her husband worked full time. They bought a house in
2000, and the property tax has ...
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