Mayor Is Told of $96 Million Budget Gap

Finance Chief Cites U.S. Slowdown, Recent Cut in D.C. Commercial Tax Rate

The D.C. government is facing a projected budget gap of $96 million next year, the city's chief financial officer said yesterday, the first sign that the economic slowdown being felt in other jurisdictions is finally catching up with the District.

The revenue downturn left aides to Mayor Adrian M. Fenty (D) scrambling to cut spending weeks before they are due to deliver their fiscal 2009 budget request of roughly $5.5 billion in local dollars to the D.C. Council. The crunch could affect spending for key Fenty administration initiatives, including schools and public housing, some council members said.

In a letter to the mayor and council, Chief Financial Officer Natwar M. Gandhi painted a grim picture for 2009, lowering projected revenue from sales, deed and income taxes compared with the estimates he had made in December. The city's dilemma was exacerbated by the council's decision last month to cut the commercial property tax rate, Gandhi said.

He warned that more bad news could be on the way as the national economy continues to struggle.

There is "evidence that a slowing national economy is beginning to be reflected in D.C. tax collections," Gandhi wrote in the letter. "Collections for both general sales and withholding for the individual income tax weakened in the 3-month period ending in January."

Fenty would not be specific when asked how the new revenue projections would affect his budget request. In a statement, he said the budget "will be balanced and take into account Dr. Gandhi's new revenue estimates while continuing to improve services to District residents without creating new taxes."

Even as Gandhi noted a slowdown in sales, deed and income taxes yesterday, he reiterated that the real property market remains strong, contrary to the national trend. However, the potential for property taxes to offset the declines in sales and income taxes was partially mitigated by the controversial legislation the council approved last month that slashed the commercial property tax rate.

Trying to provide tax relief to small businesses, the council cut the tax rate on all commercial properties from $1.85 per $100 of assessed value to 91 cents per $100. (This new rate affects only the first $3 million of each property's value, above which the $1.85 rate kicks in.)

The new rates mean that about $95.7 million in commercial property taxes that normally would have been collected will not be, Gandhi wrote, an amount that would have covered the budget gap.

Council member Jack Evans (D-Ward 2), chairman of the Committee on Finance and Revenue, said that council members did not expect the legislation to result in so much uncollected revenue in a single year. Evans said he would consider revising the legislation to phase in the rate cuts more slowly, but only if his colleagues were willing to curb spending.

The news of a budget shortfall reignited debate over the tax cut.

Barbara Lang, president of the D.C. Chamber of Commerce, said businesses, which have been hit hard by rising property tax bills, would strongly oppose any change to the new rate system.