D.C. Council agrees to raise taxes on city’s wealthiest residents

The D.C. Council agreed Tuesday to raise taxes on the city’s wealthiest residents, capping a heated debate that exposed a deep philosophical divide among its members.

In the 7 to 6 vote, the council agreed to increase the income tax rate from 8.5 percent to 8.95 percent on about 6,000 District residents who earn more than $350,000 a year. The council also voted to sunset the increase in four years.

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 Name-calling and ethical allegations have marred the D.C. council’s return after a two-month recess, and many of its members have faced investigations.

But moments after the council’s action, District leaders were jolted by the news that Moody’s Investors Service issued a negative outlook on the city’s bond rating for the first time in a dozen years. The credit-rating agency specifically cited worries about the impact of federal spending cuts on the city, but the outlook revision became ammunition for those concerned about the District’s fiscal management.

“It’s not unexpected given the actions this council has taken,” said Council member Jack Evans (D-Ward 2), chairman of the Finance and Revenue Committee. “Way to go, guys.”

In a statement Tuesday afternoon, Council Chairman Kwame R. Brown (D) stressed that Moody’s decision should not be perceived as “weakness of the District’s fiscal management policies” because of the city’s “unique exposure” to the federal government.

The tax increase, which liberals have advocated for years, puts the District at the center of the national debate about whether the wealthy should share a greater tax burden.

Since the early 2000s, District residents who earn $40,000 or more have paid an 8.5 percent income tax rate.

“This is about good tax policy by creating a new top bracket,” said Council member Phil Mendelson (D-At large), a chief sponsor of the tax increase. “People who earn $350,000, $400,000, $1 million, should not be paying the same rate as someone earning $40,000.”

Mayor Vincent C. Gray (D) is expected to sign the tax increase into law, which enables the council to delay the implementation of the city’s controversial new tax on the proceeds of out-of-state bonds.

After it was approved in June, some bond holders complained they were being unfairly penalized with a retroactive tax.

“We are in this extremely difficult position of having to choose between two really, really bad alternatives,” said Council member Mary M. Cheh (D-Ward 3), a sponsor of the income tax increase.

But with the District recording an $89 million surplus in fiscal year 2011, a minority of pro-business council members put up a fight to derail the tax hike. During the three-hour debate, members traded insults on the dais as they tried to wrestle the last winning vote for their side of the argument.

Opponents, including Brown, noted the increase would raise $106 million over four years while city spending had already soared during the recession.

“This is lazy government, this is ideologically driven, this is agenda driven,” said Council member David A. Catania (I-At large), who referred to the tax increase as a “joke.”

But Jim Graham (D-Ward 1), a supporter of the increase, noted that the District has slashed millions from the human service and community programs this year.