D.C. Council Chairman Phil Mendelson says he will attempt to do Wednesday what Mayor Vincent C. Gray failed to do in this year’s budget: ask the council to implement the largest package of tax cuts for District residents in 15 years.
The cuts would be phased in over five years, first softening the tax burden for low- and middle-income residents in January. Over ensuing years, tax cuts would expand to benefit every city resident earning up to $1 million annually and even those who inherit multimillion-dollar estates.
Mendelson’s plan amounts to an eleventh-hour attempt to implement an overhaul of District tax policy that was recommended by a commission led by former mayor Anthony A. Williams to increase competitiveness and make the city’s tax code more progressive.
But how Mendelson plans to fund the tax package drew immediate criticism from Gray, who chose to adopt only a fraction of the panel’s proposals, saying most would cost the city too much in revenue.
Under Mendelson’s plan, the District would significantly curtail funding for a promised citywide network of streetcars, including delaying until late in the term of the next mayor a plan to pay for an increasing share of the multibillion-dollar project with cash.
Mendelson released a budget plan late Tuesday showing that he would continue to fund streetcars at a rate of $400 million over six years and said he is not trying to kill the streetcar network. Rather, he cast the package of tax cuts as a fair way to return the District’s increasing wealth back to residents, as well as to spur further investment.
Mendelson also said he was reluctant to throw an ever-greater share of city money toward a streetcar project that so far has repeatedly failed to live up to expectations. “There’s no way that a streetcar to Takoma is going to be built in the next three years, and they ought to spend their time and attention completing H Street,” Mendelson said of the administration’s delays in opening the first leg of the light-rail line.
Gray spokesman Pedro Ribeiro blasted the chairman’s plan, saying that it would take money from a project designed to reduce traffic and increase the quality of life citywide.
“Highly ill-advised doesn’t go far enough,” Ribeiro said. “The chairman is talking about cutting taxes for the wealthiest individuals and funding it by cutting infrastructure that would benefit residents all across the District. . . . Clearly the city doesn’t need . . . tax cuts for millionaires.”
The two council members running for mayor, Democratic nominee Muriel Bowser (Ward 4) and independent David A. Catania (At Large), said they didn’t have enough information Tuesday night to comment.
The last-minute cut to streetcar funding echoed a 2010 plan by Gray when he was council chairman that drew intense criticism. But Mendelson’s proposal was well-received Tuesday by advocates for the city’s poor and the chairwoman of the council’s transportation committee, which has oversight of the streetcar project.
“I spoke to the chairman about it, and I said, ‘Tell me what this does substantively going forward — I don’t want anything to happen to the plan,’ ” said council member Mary M. Cheh (D-Ward 3).
The D.C. Fiscal Policy Institute, which analyzes the effects of city policy on poor and low-income residents, said the plan would correct a “troubling imbalance” in the District’s tax code. Because the code is based on four broad income brackets, it can sometimes leave middle-income residents paying a larger share of their income than the city’s wealthiest residents.
Late Tuesday, council budget officials circulated an analysis of Mendelson’s plan that would call for adding two new income-tax brackets. One would lower taxes almost 24 percent — to 6.5 percent — for those earning $40,000 to $60,000 a year.
In addition, Mendelson’s plan would embrace the D.C. Tax Revision Commission’s recommendations to expand the single earned income tax credit and increase the standard deduction to $5,200 for singles and $8,350 for married residents, the same as federal levels. Combined, those moves would be expected to lower taxes for working-class families by $1,000 or more and for middle-income families by hundreds of dollars.
At the top end of the income scale, a current rate of 8.95 percent, which now kicks in at annual income above $350,000, would apply to only those earning $1 million or more.
A new, lower bracket of 8.75 percent would be created for those earning between $350,000 and $1 million.
Between 2015 and 2019, Mendelson’s plan would also reduce the city’s business franchise tax to 8.25 percent, the same rate as Maryland’s and closer to Virginia’s rate of 6 percent.
Under the plan, the District would raise its current $1 million threshold at which higher estate taxes apply to $5.25 million, conforming with the federal level.
The District would also try to become more attractive to investment bankers and others in the financial sector by exempting passive investment vehicles from its unincorporated business franchise tax.
In all, council budget officials estimated the package would reduce the effective tax rate for all District resident taxpayers from 4.9 percent to 4.5 percent.
What Mendelson’s plan would not do is implement many of the revenue increases that Williams’s commission recommended to offset the tax cuts. It proposed a general, quarter-cent sales-tax increase to 6 percent. It also proposed a $100-per-employee fee on each company, thereby capturing some tax revenue by companies with workers in the District who live elsewhere.
In a statement Tuesday, Williams praised Mendelson’s plan, saying that “the D.C. Council’s recommendations maintain the balanced approach endorsed by the Commission of enhancing the fairness of the D.C. tax system — particularly for those in the middle class — and enhancing the competitiveness of the District of Columbia as a place to live and locate a business.”
The last time the city embraced a major set of tax cuts, in 1999, the cuts had to be put on hold two years later because of an economic downturn.