Phillip Mann is one of those really smart tax guys. You know the kind of lawyer I’m talking about. He has served as the tax legislative counsel for the Department of the Treasury. His practice includes policy work with the Internal Revenue Service and the Treasury Department. So why would he knowingly pay more per year in income taxes to live in Maryland rather than Virginia?
Then there’s Robert Baldassari. As a principal with the McLean accounting firm Matthews, Carter and Boyce, he works on some of the most complicated tax issues in the Washington area. He quotes tax statutes with the same ease that many quote sports statistics (and finds it just as interesting). So why would he do something as inane as pay Virginia a personal property tax of more than 4 percent each year for his car while Mann drives free of this tax?

Finally, as past chairman of the American Bar Association’s Section on Taxation, Stef Tucker also knows his taxes. So much so that when he’s not practicing law as a partner with Venable, Baetjer and Howard, he’s teaching tax issues at Georgetown School of Law. So why would he willingly pay a higher real estate tax just to live in the District while Baldassari and Mann pay less for more land in the surrounding suburbs?
If there were one right answer to the query “We’re moving to the area. Where should we live?” one would expect these tax gurus to reach the same conclusion. Truth be told, the variables involved in choosing a home are numerous, and most have little to do with the investment or tax aspects.

Real estate agents bank on the fact that people will buy based on their emotions. And with the disparity in costs and taxes between Washington, Virginia, and Maryland, it seems that local governments are also counting on these emotional decisions to lure new residents.
In comparing the tax advantages and disadvantages of each part of the D.C. metro area, I’ll focus on 1999 as a base. But follow ongoing local tax proposals closely, as these pieces of legislation are mostly designed to lower future tax bills.

THE BREAKDOWN
The most expensive taxes that we pay are income taxes. Here, each jurisdiction has a sliding scale that taxes the first dollars you make less heavily than the last dollars.
In Washington, Stef Tucker will find his first $10,000 earned taxed at 6 percent, the next $10,000 at 8 percent, and anything greater than $20,000 taxed at 9.5 percent.
Just a jump over the border in Maryland, Phillip Mann pays a county tax in addition to state taxes. The state tax will cost 3 percent for the first $3,000 of income and 4.85 percent on the remainder. Montgomery and Prince Georges counties levy an additional 3.01 percent.

In Virginia, Bob Baldassari has it even better: 2 percent for the first $3,000, 3 percent for the next $2,000, 5 percent for the next $12,000, and 5.75 percent for everything over $17,000.
Let’s examine the taxes and costs for a sample family of four with an annual income of $250,000. Assuming they own a $600,000 home with a mortgage of $450,000 at 8 percent, it would cost about $18,300 in income tax to live in the District, $15,660 to live in Maryland, and roughly $11,300 to live in Virginia.
If you’ve ever shopped for a house in the Washington metropolitan area, then you know that $600,000 can buy you a house on several acres in Germantown, Md.; a four-bedroom home on half an acre in McLean, Va.; or 2,500 square feet of livable space in Georgetown. For the purpose of this discussion, however, let’s disregard the value of the house-buying dollar and the potential growth of the investment on the different properties, and focus solely on the immediate taxes that the homeowners will incur.

In general, Washington charges residents the most for their annual real estate taxes, approximately 1.35 percent of the property’s value. Maryland uses a confusing formula by setting tax rates on the assessed value, which they place at 40 percent of the current market value. (I told you it was confusing.) On average, you’ll pay 1.25 percent of your home’s market value each year.
Takoma Park is the highest, at 1.42 percent, Silver Spring the lowest, at 1.01 percent. In Prince George’s County, you will pay 1.19 percent in Bowie and 1.37 percent almost everywhere else. In Arlington, residents pay 1 percent, while their neighbors in Fairfax pay 1.23 percent, and those in Alexandria pay 1.11 percent. Keep in mind that there are often additional assessments depending on the amenities offered in your neighborhood.

In all cases, the tax depends on the assessed value of the property. This value is determined not by you or your neighbors, but by county-run formulas on your land and comparable home values. With real estate prices rising dramatically in the area, assessed values are escalating as well. However, according to attorney Joy Siegel, President of Settlement Pros in Bethesda, Md., you do not have to blindly accept these figures. If you think your assessed value is too high, “appeal immediately,” she claims. “Most people accept their tax bill when it should be lower.”
She has had a remarkable success rate arguing in front of county assessors to lower these values, and claims that most homeowners can do it on their own.
For parents with kids, Maryland is the place to be. The state has great parks, and it ponies up a $1,850 exemption per dependent. Washington offers $1,370 for each dependent, and Virginia checks in at only $800. The tax savings are approximately $145 in Maryland, $130 in Washington, and $46 in Virginia.
Local sales taxes can also make a significant difference in the cost of your goods. In the Distsrict, the general sales tax is 5.75 percent on most items, 6 percent on cars, and 10 percent on restaurant food and liquor. Maryland has a 5 percent sales tax, but lifts the tax for groceries. Virginia charges a mere 4.5 percent on almost everything. One exception to the Virginia rule is automobiles: The tax on car sales is 3 percent.

THE CAR CATCH
Cars are a Catch-22 in Virginia. While buying one is cheaper, owning one is much more expensive. An annual personal property tax applies to any vehicle registered in the commonwealth. Again, these rates vary depending on the county, Arlington being the cheapest at 4.04 percent and Alexandria the most expensive at 4.75 percent. Anticipate spending $1,200 to $1,400 a year to drive a new $30,000 car in Virginia.
Many outsiders think that the car tax compensates for the low real estate tax that Virginians pay. This reasoning can be correct if you are a homeowner. To live in the same $600,000 house and drive the same $30,000 car, residents would pay $8,040 in real estate taxes to live in the District, while living in Alexandria would cost $8,085 in real estate and property tax. So the difference appears to be a wash.
But soon the advantage will be to the Virginians, because this tax has been a heated battle in political campaigns and is in the process of being phased out.
Car insurance is another expense with which you must contend. Insurance rates will vary based on your age, the length of your commute, your marital status, and even your Zip code.

Assuming standard coverage on a new $30,000 Volvo for a couple with no tickets or accidents in the past three years, insurance would cost about $1,400 per year in Washington. In the suburbs, insurance will range from $1,200 to well above $2,000 in Maryland, but only about $1,000 in most Northern Virginia counties. These figures were quoted by the local State Farm Insurance offices, with standard coverage and no discounts.

AND THE WINNER IS . . .
In general, it is cheaper to live in Virginia than Maryland or the District. But the costs will change based on your own profile. If you rent your apartment and drive a Porsche, for example, you will pay an exorbitant car tax in Virginia, so you may want to live in Washington or Maryland. If you own a beat-up car but are in the market for a mansion, then perhaps you should live in Virginia. Because each situation is unique, please consult your individual tax and financial advisers.
What I cannot quantify are the values, ambience, and practical factors that lure us to certain areas. Stef Tucker would rather deal with higher real estate taxes to live in the District so he can enjoy its social and cultural events. He adds, “There is no place in the country that offers more per cost-dollar than D.C. You just have to take advantage of it.”

Phillip Mann loves his commute just over the border in Maryland. He moved his family into their dream home in 1975 and never left. Bob Baldassari lives in Fairfax County for his children, who enjoy the renowned school system. And maybe, just maybe, he stays there because he pays less in taxes.
Our three tax experts have chosen different paths. After juggling the myriad factors involved in deciding where to live, each has found a solution that isn’t too taxing.

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