WASHINGTON (AP) — After nearly three hours of angry debate, the D.C. Council voted Tuesday to raise income taxes for the district’s wealthiest residents, a last-minute move intended to soften the blow of a previously approved new tax on municipal bonds.
The Council voted 7-6 to hike the tax rate for residents making $350,000 or more to 8.95 percent, one of the highest in the country.
Presently, all district residents making $40,000 or more are taxed at an 8.5 percent rate.
Proponents said the increase makes the district’s tax rate more progressive, but opponents called it unnecessary and fiscally irresponsible. Only five states — Hawaii, California, Iowa, New Jersey and New York — have higher income tax rates for top earners.
“This Council is out of control. You can’t run a government like this,” said Councilmember Jack Evans, D-Ward 2.
The local tax debate comes in the wake of President Barack Obama’s proposal to raise taxes on the wealthy. But the district, which has had balanced budgets since the late 1990s and benefits from a booming commercial real estate market, is in far better fiscal shape than the federal government.
The tax hike takes effect Oct. 1 and is expected to reap $106 million over four years, after which it will expire. It will take
the place of a retroactive tax on interest from out-of-district municipal bonds. The bond tax will now take effect in January.
Councilmembers said about 6,000 residents — 1 percent of the district’s population — would fall into the new tax bracket.
Councilmember Phil Mendelson, D-At Large, who introduced the tax increase, called it sound fiscal policy.
“People who earn $350,000, $450,000, a million, should not be paying the same rate as somebody who’s earning $40,000,” Mendelson said. He added that people count on tax-exempt bonds as part of their long-term financial plans and that taxing them retroactively “is particularly unfair and onerous on those individuals.”
But several council members said there were other ways to avoid the retroactive bond tax and that neither the Council nor Mayor Vincent Gray has made a good-faith effort to curb government waste.
Councilmember David Catania, I-At Large, noted that the district will bring in $900 million more tax revenue in fiscal 2012 than it did in fiscal 2008, before the Great Recession. Most states, he said, have yet to eclipse their 2008 revenues.
“This is a joke, and this is simply the government not wanting to make decisions about how to live within its means,” Catania said. “This government wants to pretend like there is a crisis.”
The mayor is expected to sign the bill. During the Council’s summer recess, Gray issued a pocket veto of an earlier budget bill that would have taken money from the district’s reserve fund to delay implementation of the bond tax. In his veto letter, he noted that he strongly preferred an income tax increase for the wealthy.
Since that veto, the district has brought in $89 million in additional revenue, most of which is expected to go toward
replenishing the reserve fund.
The 13-member Council includes 11 Democrats and two independents, yet there are often strong disagreements over fiscal policy. Councilmember Marion Barry, D-Ward 8, took a rare stand with the council’s fiscal hawks in voting against the bill.
The former four-term mayor said he typically favors tax increases “for worthy projects” but said the council was wrong to hike taxes without a hearing to give taxpayers their say. Bob Kabel, chairman of the D.C. Republican Committee, also condemned the tax increase.
“If Mr. Mendelson wants to fix any injustices with our tax code, he should just lower the income tax rate on middle-class
families,” Kabel said in a statement.
But Councilmember Jim Graham, D-Ward 1, said that when the district needed to cut spending this year, Gray proposed cuts to programs for the homeless and welfare recipients. He said it was fair to ask the wealthy to pay a bit more.
Councilmember Mary Cheh, a Democrat representing the wealthy Ward 3, said she reluctantly supported the tax hike because it was a better option than the retroactive bond tax.
“We should never have come to this point,” Cheh said. “Neither of these choices are good. Both are bad, and one is worse
than the other.”
(Copyright 2011 by The Associated Press. All Rights Reserved.)