Tax Cuts Weighed To Retain Residents

Report Says the Rich Would Benefit Most From D.C. Proposals

The D.C. Council is considering substantial breaks on inheritance and real estate taxes, and the plans could cost the city almost $100 million in revenue over the next four years, officials said yesterday.

Some council members said the proposed cuts are a way to encourage homeowners to stay in the District. But a report scheduled for release today by a think tank concludes that the legislation would most benefit the city's wealthiest residents and do little for people who don't own their homes.

"This is a city that is divided by income already," said Ed Lazere, who wrote the report. Lazere is executive director of the D.C. Fiscal Policy Institute, which analyzes District tax and budget issues.

Under one of two bills, which will be debated tomorrow by the council's finance and revenue committee, the council would limit real estate tax increases on owner-occupied housing to 5 percent a year starting in fiscal 2008. Currently, the city has a 10 percent cap.

The second measure would extend an estate inheritance tax exemption from $1 million to $3.5 million in 2009. That change is similar to exemptions established by states and the federal government.

Carol Schwartz (R-At Large) is sponsoring the estate tax legislation, with Kwame R. Brown (D-At Large) and David A. Catania (I-At Large) as co-sponsors. Jack Evans (D-Ward 2), chairman of the finance and revenue committee, is the sole sponsor of the cap legislation.

It is not clear whether a majority of the council members will support the bills, but members have reduced the cap twice since fiscal 2004. Members who support the legislation said it is necessary to prevent residents from moving out.

"I actually know people who have established their residency at their second homes in Florida or Delaware to avoid that estate tax," Schwartz said. "We're losing out on income and other taxes when they move. . . . Sometimes, it's a penny-wise and pound-foolish policy."

Natwar M. Gandhi, the city's chief financial officer, found that the estate tax legislation would cost the city $38.5 million in revenue from fiscal 2008 through fiscal 2011. And the city would lose $58.9 million from fiscal 2007 to fiscal 2010 with the change in the tax cap, Gandhi said.

The 10 percent cap reduces property tax revenue by $165 million annually, Gandhi said.

Schwartz said she thinks the property tax relief offered by the proposed 5 percent cap is fair. "Those who pay more get more back. Those who pay less get less back, but everybody benefits," she said.

However, she added that she wants more information about how the loss in revenue would affect city services. She described the impact of the estate tax change as minimal.

Lazere disagreed, saying both bills are tax breaks for the wealthy.

Homeowners in wards 2 and 3, well-to-do areas in Northwest, would receive 52 percent of the tax relief, according to the report. About 6 percent would benefit homeowners in wards 7 and 8, east of the Anacostia River, Lazere's report says.

The tax reductions would not help the city's neediest residents, many of whom rent their homes and are strapped by high income taxes, Lazere said.

"A family of four with income of $30,000, for example, pays more in income tax in D.C. than in all but eight states," the report says.

Evans defended the tax proposals, saying the District has strong rent-control laws that provide relief for lower-income residents.

Rising property tax assessments appear to be the larger problem, he said. "I'd like to do more, but the voices we're hearing the loudest are those people who own homes," Evans said.

Although the 10 percent cap is far lower than the 25 percent cap on tax increases in place five years ago, residents say they cannot keep up with their assessments, Evans said. "Just because you live in wards 2 and 3 doesn't mean you are rich," he said. "We have a lot of people who are middle-class."