D.C. City Council battle lines were drawn yesterday on rent control as John Ray (D-At Large), chairman of the committee that will hold hearings on the matter, proposed phasing out the program by lifting all rent limits on apartments as they become vacant.

The District's current rent law, which controls about 120,000 rental units and limits rent increases to a maximum of 10 percent annually, will expire on April 30.

Ray's proposal -- which also would set up a subsidy program for elderly and low-income tenants -- signals the beginning of what is expected to be a heated debate over whether the benefits of rent control to tenants outweigh its detrimental effects on landlords.

The only other rent control bill before the council, introduced by Council Chairman David A. Clarke last week, advocates extending the current provisions. Ray's Consumer and Regulatory Affairs Committee will hold hearings on both bills on March 1 and 2 and will make recommendations to the full council.

"I think Ray's bill has a good chance of passing," said council member John A. Wilson (D-Ward 2), a strong supporter of rent control. "It's going to have to go through major amendments, but the advocates who want to phase out rent control have more votes than the people who want to keep it."

Ray's proposal includes a combination of safeguards aimed at preventing tenants from being priced out of the housing market and offering financial incentives for property owners to stimulate housing construction and to renovate deteriorating buildings.

"Despite our years of rent control, we have seen the supply of rental units dwindle by the thousands," Ray said at a press conference. "Today, there are at least 5,000 wasted apartments in vacant and boarded-up buildings, and many more that are unsafe and unfit to live in."

Ray also argued that rent control has not helped the poor, as it was designed to do, but has artifically lowered rents for upper-income tenants.

Clarke, on the other hand, is opposed to phasing out rent control and contends that the law has helped low-income tenants and maintained a "racial, ethnic and economic diversity in neighborhoods."

Clarke noted that the existing law has a subsidy provision and pointed out that when the city tried to fund the program for fiscal 1981, Congress, which must approve the city's budget, rejected the proposal.

Under the Ray bill, landlords would use the 1983 base rent instead of the 1973 base rent, which is currently used, for calculating rent increases in continuously occupied apartments, but would maintain the present practice of basing annual rent increases on the area's Consumer Price Index for Urban Wage Earners. As in the existing law, increases would be limited to 10 percent even if the index exceeded that figure. However, landlords who are granted hardship status would be allowed to raise rents by 12 percent.

But under Ray's bill, all rent controls would be lifted from apartments as they became vacant except when incoming tenants are elderly.

Ray's bill also would:

* Create a tenant assistance program that would set aside $15 million a year to subsidize rents for low-income and elderly tenants whose rent exceeds 30 percent of their gross income. The program would be funded by a surcharge on landlords, expected to raise $5 million a year, and $10 million a year from the city's general revenues.

* Grant a one-time waiver of property taxes and water and sewer fees on rental buildings that qualify as distressed property.

* Reduce taxes -- by 80 percent the first year -- and water and sewer fees for new or substantially rehabilitated rental buildings. The full taxes and fees would be phased in over a six-year period.

* Outlaw discrimination against the elderly and families with children.

* Give tenants the right to leases of up to five years.