Proposed tax cuts could constrain future D.C. mayor’s fiscal options

Finance officials critical of budget plan


D.C. Council members Muriel E. Bowser (D-Ward 4), left, and David A. Catania (I-At Large). (Melina Mara; Sarah L. Voisin/Post)

It was not a particularly controversial vote — perfunctory, even. But in voting for a city budget that includes wide-ranging tax cuts and slashes spending through at least 2018, the two leading candidates to become the District’s next mayor may have deeply complicated their potential administrations.

D.C. Council members Muriel E. Bowser (D-Ward 4) and David A. Catania (I-At Large) backed the spending plan orchestrated by Council Chairman Phil Mendelson (D-At Large) in a May 28 vote. Both say they continue to support the package of income, business and estate tax cuts it contains.

But financial officials have closely scrutinized the council’s plan in recent weeks, with the city’s chief financial officer saying it contains “several deficiencies” including violating the District’s legal cap on borrowing and taking away necessary budgetary flexibility. For the new budget to pass muster, Mendelson acknowledged lastthis week, fiscal “triggers” will have to be added.

That means the tax cuts will only be implemented once new revenue materializes to support them — as much as $160 million a year. The upshot is that future revenue increases above and beyond those already projected will be plowed into the tax cuts and will not be available for future programs and projects championed by the mayoral candidates.

“It drastically reduces all future discretionary spending options they have,” said a senior aide to outgoing Mayor Vincent C. Gray (D), who spoke on the condition of anonymity because the aide was not authorized to speak to the media. Gray has openly criticized the tax-cut plan, which Mendelson paid for by cutting deeply into planned funding for a 37-mile streetcar network.

Gray administration officials have since attacked the council’s budget moves, calling them unwise and potentially illegal. They saw vindication in a Wednesday letter from Chief Financial Officer Jeffrey S. DeWitt to the council confirming that its spending plan was out of balance.

“This is an uncertified budget,” Gray spokesman Pedro Ribeiro said. “Now they have to come up with a plan to produce a budget that is certified.”

Mendelson said this week that Gray and his deputies were “working themselves into a spiral of froth” because they are upset over the council’s dismissal of the lame-duck mayor’s priorities. He added he was “100 percent” confident the tax cuts will pass fiscal muster before a final vote scheduled for Tuesday.

Still, DeWitt said in his letter that “several modifications” will be necessary before he can sign off on the spending package, which not only sets the budget for the 2015 fiscal year, but also balances the city’s fiscal picture through 2018. Among the consequences, DeWitt said, is that he is postponing a planned round of borrowing until he is able to sign off on the budget.

”I cannot certify a budget that removes the necessary financial flexibility, violates the District’s debt cap, or is not structurally balanced due to long-term revenue reduction,” DeWitt wrote.

He criticizes the council’s choice to implement cuts to income, business and estate taxes recommended by the blue-ribbon D.C. Tax Revision Commission without also including the commission’s revenue-raising recommendations — such as a $100 yearly per-worker levy on city employers.

Mendelson and colleagues voted to make up for the lost revenue by cutting “pay as you go” capital funding, or “PAYGO” — non-borrowed funding for infrastructure and other major projects that can be easily redirected to operating needs should they arise.

“By spending PAYGO to support tax cuts, the Council has fully eliminated an extremely important tool used by state and local governments around the country to manage unanticipated events,” DeWitt wrote. “Council-approved tax relief renders these monies permanently unavailable in the event of a shortfall.”

Wall Street bond raters, he added, are likely to view the move as a “credit negative.”

DeWitt also confirms in the letter that the council’s budget violates the city’s debt cap, which limits debt-service costs to 12 percent of general-fund expenditures. By cutting PAYGO expenditures to fund the tax cuts, the council lessened its borrowing capacity over time, resulting in debt-cap violations by 2018.

The debt cap has constrained mayoral ambitions. A proposed $150 million investment in a pro soccer stadium, for instance, is being financed by a complex package of real estate swaps rather than the borrowing that financed Nationals Park.

The future revenue set to be swallowed by tax cuts could be more constraining. Catania, for instance, has championed a new college scholarship program, D.C. Promise, that could cost $20 million a year. The council voted to authorize the program, but Gray did not fund it in his 2015 budget and the council did not identify resources to implement it.

Another major fiscal pressure could be coming: A bid for the 2024 Olympics, now being led by private businesspeople, but which could require significant funding commitments in the coming years. Gray recently signed a letter with Virginia Gov. Terry McAuliffe (D) and Maryland Gov. Martin O’Malley (D) to the U.S. Olympic Committee pledging “whole-hearted support” for the bid.

Catania said Friday he was not concerned that the new budget would affect his ability to govern if elected mayor. He noted that he co-sponsored an even more ambitious tax-cut package in 1999, which was delayed after an economic slowdown in 2001 and 2002.

“This is not the apocalypse; this is the way budgets are constructed,” he said. “There is the flexibility to revisit. . . . I don’t want people to live under the assumption that what we do under this budget will set in stone what we do in the future.”

And while John A. Wilson Building observers saidthis last week that a future mayor may hesitate to delay or roll back the tax cuts, Catania said he would have no compunction about doing so. “I don’t see a groundswell of demand for these reductions. It’s not as though the Wilson Building has been packed to the gills with people asking for this,” he said.

Bowser, too, said she remains ”very comfortable” with Mendelson’s budget plan.

“My position is, our citizens need a tax break,” she said. “I’ve stated very clearly that we need to have middle-class tax cuts. It’s also important to invest in making our government more competitive with those in the region. In the long run, that’s going to create more revenue.”

But she added that DeWitt’s letter had given her pause: “You don’t want to give a benefit and find out three or four years later you can’t afford the benefit.”

In a radio interview Friday, another mayoral candidate, former D.C. Council member Carol Schwartz, said she would have voted for the Mendelson budget package were she still on the council. “I’m for tax cuts,” she said. “We’ll have to find a way to make them work.”

Mike DeBonis covers local politics and government for The Washington Post. He also writes a blog and a political analysis column that runs on Fridays.
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