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.
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.
“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.
“How many children don’t have shoes? How many don’t have an evening meal?” Graham asked. “Lets say to the wealthiest, give us a hand.”
The debate reflects the philosophical tension within the body as members return from a two-month summer recess.
Along with Evans, Catania and Brown, Council members Vincent B. Orange (D-At Large) and Muriel Bowser (D-Ward 4) voted against the tax increase. Those five are expected to form the body’s moderate center against what is now a solidly liberal majority.
Yet, with emotions running high amid growing frustrations about the council’s direction, coalitions can be fleeting.
In a rare alliance that underscores the unusual dynamics, Council member Marion Barry (D-Ward 8) spoke out against the tax increase, partly as a favor for Brown.
Barry, who admitted he’s rarely met a tax increase that he didn’t support, accused Cheh of trying to sneak a tax increase past her wealthy constituents in Upper Northwest.
“She wants to tax those people in her own Ward 3,” said Barry, expressing concern that the bill was being voted on without more input from the public and the money wasn’t being directed toward programs for the poor.
But Catania accused the council of “hypocrisy” and said it had lost its “moral authority to lead” because Barry and Council member Michael A. Brown (I-At large) have had trouble paying their taxes on time.
Still, the outcome of the vote was a major victory for liberals who have been pushing for a more progressive tax structure.
According to analysis by the liberal Fiscal Policy Institute, the increase would add $675 to the yearly income tax bill of someone who earns $500,000. Activists also note the new top rate is still lower than the 9.5 percent top rate that the District repealed in the early 2000s.
“Even our president has said there needs to be some different levels for different folks who can pay more,” said Council member Harry Thomas Jr. (D-Ward 5).
Evans, however, predicted that the new rate would drive businesses and some wealthy residents out of the city.
“This council is out of control,” Evans said. “You can’t run a government like this.”