The D.C. Council appears poised to raise taxes on the city’s wealthiest residents when it meets Tuesday, creating a new top bracket for wage earners with a taxable income of at least $350,000 annually.
Although there could be a last-minute attempt to derail the proposal, a majority of the council has apparently signed onto a plan for a new top bracket of 8.95 percent. If the proposal is approved, the council can revise a controversial new tax on out-of-state bonds as well as appease liberal activists, who have argued that the city needs a more progressive tax structure.
The vote, being pushed by the council’s liberal majority, comes amid a national debate about whether the rich should be asked to pay more to spread the burden of taxation.
All District residents who make $40,000 or more pay an 8.5 percent income tax rate. Under a proposal hammered out behind close doors at city hall Monday, the new 8.95 percent rate would go into effect immediately.
The new rate would guarantee that the District continues to have the highest top income rate of the three jurisdictions in the Washington region.
In exchange for the new bracket, the council would make the tax on out-of-state municipal bonds applicable only on bonds purchased after Dec. 31, 2011.
Without changes to the fiscal 2012 budget approved in June, revenue from those bonds was slated to be taxed starting this year, regardless of when the assets were bought. Some bond holders have complained that the tax is unfair because it will eat into retirement income.
Council member Phil Mendelson (D-At Large), who worked with council member Mary M. Cheh (D-Ward 3) to craft the tax-increase deal, said Monday that he has “six and three-fourths” of the seven votes needed for approval.
The council has to vote on the proposal Tuesday to guarantee it goes into effect by Oct. 1, the start of fiscal 2012.
“It’s unfair for us to impose what is effectively a retroactive tax on municipal bond holders,” Mendelson said. “Beyond that, this is good tax policy to have a progressive income tax. Someone who earns over $350,000 should pay a higher percentage of their income than someone who earns $40,000.”
This year, Mayor Vincent C. Gray (D) also endorsed a tax increase on the wealthy. In addition to Mendelson and Cheh, the bill is co-sponsored by council members Tommy Wells (D-Ward 6), Jim Graham (D-Ward 1), Michael A. Brown (I-At large), Harry Thomas Jr. (D-Ward 5) and Yvette M. Alexander (D-Ward 7).
If the majority remains intact, the vote could be another setback for Council Chairman Kwame R. Brown.
Brown (D) has consistently stated his opposition to higher taxes, except if the money were set aside for the maintenance of parks, libraries and recreational centers. Despite the powers he holds as chairman, Brown has struggled at times to keep members from overriding his wishes on budget and tax matters.
“People get elected to make decisions they think are appropriate,” Brown said. “Some people’s top priority is to raise taxes.”
Council member Jack Evans (D-Ward 2), a longtime opponent of higher taxes, said Monday that it was “a sorry day in city history” because Mendelson and Cheh appeared to have enough votes to approve their plan. “They just want to raise the rate. They don’t care if it would harm the city or not; they want to raise it,” he said.
According to an analysis by the Office of the Chief Financial Officer, about 6,000 D.C. residents have at least $350,000 in taxable income, Evans said.
Evans said he doubts that those residents will “get up and move,” but he worries that other wealthy residents who move into the area will choose to live in Virginia, which has a 5.75 percent top bracket.
“Now, we are a clear 3 percent above” Virginia, Evans said.
But Mendelson noted the proposed rate is still lower than the city’s previous 9.5 percent rate, which the council voted to roll back in 1999.