Elements of a $160 million-a-year tax-cut package passed by the D.C. Council last month may not take effect as planned after financial officials balked at the proposal, saying the revenue losses could throw the city’s long-term budget out of balance.
Council Chairman Phil Mendelson (D) said Tuesday that planned cuts in income taxes, business franchise taxes and estate taxes will be “triggered” to take effect only if city revenue rises above current projections, making them dependent on the District’s continued economic growth.
Mendelson acknowledged that the changes were made at the behest of Chief Financial Officer Jeffrey S. DeWitt and deputies, who have yet to certify that the budget deal passed May 28 is balanced and comports with city law.
But he characterized the changes as minor and said he was confident that future revenue growth would allow for the tax cuts to take effect: “They may happen earlier. They may happen later. But they will happen.”
While tax cuts set to take effect on Jan. 1 — including a lower-middle-income tax bracket and a higher standard deduction — are not threatened, deeper cuts scheduled for future years could be delayed.
The changes follow an initial budget vote that was taken less than a day after Mendelson made significant changes to the spending plan, incorporating tax cuts that had been proposed by a blue-ribbon commission but eschewed by Mayor Vincent C. Gray (D) in his budget proposal.
To pay for the tax cuts, Mendelson tapped spending on future capital projects, including hundreds of millions of dollars earmarked for a planned streetcar system. A total of $225 million in cuts is offset by about $67 million in new taxes — including a controversial expansion of the sales tax to cover health clubs, car washes and storage rentals.
“We do not rely on triggers or hopes of increasing future revenues for full implementation,” said a staff report circulated the night before the vote. “Instead, the Council reallocated existing resources to fully fund the plan. . . . [F]uture revenue growth will instead remain available to enhance District programs and services.”
But the plan was not fully vetted by DeWitt’s staff before passage. The main complication, according to city hall officials familiar with the issue, is the District government’s debt cap.
Under city law, the government is barred from spending more than 12 percent of its general-fund budget on debt servicing. The council’s tax cuts effectively lessened the amount of principal and interest the city can pay off in a given year. At the same time, the council passed a generous capital spending plan that could not be supported under the reduced levels of debt servicing. Capital spending is largely funded by debt.
Spending levels were set in one piece of legislation subject to a single vote that passed May 28, while taxing measures are contained in a separate bill still before the council. As a result, only the revenue side can be addressed at this point.
“Triggers” are not unprecedented for the D.C. Council; an even larger tax cut that was passed in 1999 was delayed three years later after economic conditions declined. While city financial officials have routinely upgraded revenue projections in recent years, such growth is not certain. DeWitt and his predecessor, Natwar M. Gandhi, have warned about ongoing risks to the city’s economic health, including an “unfolding era of federal austerity.”
The questions about the budget’s viability have contributed to an unusual delay in the revenue vote, which was initially set for June 11, then was postponed to Tuesday, then postponed again until June 24. The spending bill has not yet been sent to Gray for approval and transmission to President Obama, as required in the District’s unique form of governance.
A spokesman for Gray, Pedro Ribeiro, expressed “serious concerns that the council has passed an unbalanced budget” for the first time since a congressionally mandated financial control board was in place.
Mendelson brushed off the suggestion that the council had botched the budget, saying “there are some folks in the executive [branch] who really want to bash what the council did.” Gray and his aides have been deeply vexed by the council’s moves to cut back not only the streetcar commitment, but also funding for a new hospital in Southeast Washington.
“It’s really creating a counterproductive atmosphere,” he said.
Mendelson said financial officials were also uncomfortable with Gray’s decision to book roughly $180 million in as-yet unrealized and unproved savings in 2016 and beyond — contributing to the need for the tax-cut triggers.
DeWitt on Tuesday declined to address specifics of his negotiations with the council, but he said a solution was near. “We’re a few days away from getting everything worked out,” he said.
Correction: A previous version of this article misstated when a final vote will be taken on budget legislation. It is June 24, not Thursday. This version has been corrected.