Money Woes Stir Debate Over Area's Tax Burdens
D.C. Fears Fee Hikes Could Reinforce Image

By Tim Craig
Washington Post Staff Writer
Wednesday, July 29, 2009

The D.C. Council is struggling to determine whether it can close a $666 million revenue shortfall without raising taxes and fees, reopening a debate about whether District residents have a higher tax burden than their neighbors in Virginia and Maryland.

Despite the District's reputation for high taxes, some council members and social activists say the stigma is undeserved, especially when it comes to the region's wealthiest households.

"It's an old rap that's not true," said council member Jim Graham (D-Ward 1), who is proposing to raise the income tax from 8.5 to 8.9 percent on households with annual incomes of more than $500,000.

But other council members are adamant that the District, struggling to build a business-friendly image, cannot afford to raise taxes in a recession without damaging what they consider its fragile image among suburbanites.

"I will not support a budget that raises sales, property or income taxes," said council member Jack Evans (D-Ward 2), chairman of the Finance and Revenue Committee. "It's taken us too long to get even in the ballpark with surrounding jurisdictions."

The tax debate comes as council members continue a weeklong series of private meetings to try to agree on a new budget. A final vote is scheduled for Friday.

The extent of the challenges facing the council was evident Tuesday when Council Chairman Vincent C. Gray (D) outlined a proposal to cut $45 million from public schools. The proposal is a direct challenge to Mayor Adrian M. Fenty (D), who is trying to shelter the school system from the cuts he has imposed on other city agencies.

The council appears likely to approve millions of dollars in budget cuts to most agencies. It is also exploring eliminating earmarks to arts and nonprofit groups, slashing the Summer Jobs Program, scaling back road resurfacing projects, reducing library hours and limiting the hiring of police officers.

"There are choices that have to be made," said council member Phil Mendelson (D-At Large).

The council was reviewing a menu of 32 possible tax increases Tuesday night. The list included raising the sales tax on parking from 12 to 15 percent, imposing a 5.75 percent tax on theater tickets and higher taxes on alcohol and cigarettes.

Council members also heard a presentation about how increasing the sales tax from 5.75 to 6 percent would raise about $21 million annually.

In trying to agree what revenue should be raised, council members are comparing the District with Maryland and Virginia.

Maryland, for example, has a gas tax of 23 cents a gallon. If the District matched that rate, the city could raise $4 million in revenue.

Supporters of Graham's so-called millionaires tax, which would raise about $16 million annually, also draw comparisons between Maryland and the District.

Virginia's top tax rate is 5.75 percent, but Maryland has a top income tax rate of 6.25 percent on people with annual income of $1 million. Residents of Montgomery and Prince George's counties also pay a local income tax of 3.2 percent. Virginia has no local income tax.

District homeowners pay lower property taxes than their suburban neighbors on both sides of the Potomac River, according to an analysis by the D.C. Fiscal Policy Institute, a progressive think tank.

According to a 2007 analysis by the Office of the Chief Financial Officer, District homeowners with annual salaries of $100,000 had the lowest overall tax burden compared with those in Montgomery, Prince George's, Fairfax and Arlington counties and Alexandria.

The income, sales, automobile and real estate tax burden in the District that year was $9,072, compared with $9,091 in Fairfax, which had the second-lowest rate.

Ed Lazere, executive director of the policy institute, said "old myths die hard" when it comes to the District's reputation for excessive taxes.

"If you are thinking about how you balance the budget while sparing the local economy, there is a pretty good consensus among economists that raising taxes among high-income folks is probably the best way to go, because it does not tend to affect their consumption," Lazere said.

But Evans said statistics can be misleading. He said that D.C. residents are also socked with secondary taxes and fees, including levies on utilities.

"If you want to compare us to both state and county taxes" in Maryland, then you have "also got to throw in all the other taxes we pay," Evans said.

Instead of looking to taxes, Evans has teamed with Gray to look for cuts in more areas, including the school system.

One idea under consideration is a 2 percent cut, from $8,945 to $8,770, in the basic per-pupil allocation that public schools and public charter schools receive to fund school operations. That would save about $5.3 million. A possible 50 percent cut in the number of summer school slots for next year, from 8,700 to 4,300, would result in a $7 million savings.

Elimination of the ombudsman's office, which has come under heavy criticism by council members and community leaders for ineffectiveness, would take about $360,000 off the books.

The biggest single hit under consideration would be a $17 million reduction in maintenance funds that are included in annual per-pupil allocations. Council members said they want the money to go to the Office of Public Education Facilities Management, which also receives funds for maintenance.

Under the proposal, the council would cut the office's maintenance money and replace it with the $17 million from the schools.

Staff writer Bill Turque contributed to this report.

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