Today, District Dime readers, we take up Part II of the DC Fiscal Policy Institute’s three-part series that aims to bring clarity to the issues surrounding DC’s tax break for out-of-state bonds.
Mayor Gray and a majority of the Council agree that the city should stop offering a blanket incentive for residents to invest in bonds from other jurisdictions, as we have noted. What is up for debate, however, is how the tax change should occur: WHO should be impacted, WHEN it should happen, and HOW the city should pay for it.
Today, we will examine “when” the elimination of the tax break should go into effect. (Last week, we addressed the issue of “who” should be impacted.)
The budget adopted by the DC Council ended the out-of-state bond tax exemption as of January 2011. That means that anyone who earns interest in 2011 from non-DC municipal bonds will pay income tax on it when they file an income tax return for 2011.
Because the tax applies to income earned throughout 2011 but was not passed until mid-2011, some argue that this tax change is unfair, that it is wrong to change tax treatment of income already earned. Mary Cheh proposed moving the date for ending the tax break to January 2012 in response to this concern, but it was vetoed by Mayor Gray because the proposal would have dipped into savings that the Council had committed to set aside.
While there is some legitimacy to this claim ‘ in general, it is better for any change in law to go into effect after the law is passed ‘ it is worth considering that changes to the tax treatment of income are often passed during the year in which they will take effect.
For example, New York and Wisconsin adopted “combined reporting,” a corporate tax reform in the middle of the year, but it went into effect for the whole year. This spring, Connecticut increased income tax rates and had them go into effect for the entire year. Vermont, Kentucky, Kansas, and Idaho also have passed taxes in recent years in this manner.
Often times, this happens because state budgets are passed in the middle of the year, while the income tax operates on a calendar year basis, starting in January. As tax collections tanked from the recession, many states have had to implement tax changes sooner than they might have otherwise, in order to avoid massive cuts to programs and services. That is the case in DC as well.
One of the bigger factors contributing to the current concerns over this tax change is the lack of public discussion before it was adopted. The change to the out-of-state- bonds tax break was announced just days before the Council voted on it, leaving little time for policymakers to understand its full implications and little time for stakeholders to weigh in on its implementation.
And because the DC Council eliminated of the tax break for out-of-state bonds, including an effective date of January 2011, to replace the Mayor’s proposal to create a new income tax bracket, any change to the “who” or “when” aspects of the out-of-state bonds tax break will cause the District a significant loss of revenue.
Stay tuned later this week for Part III of this series which will address how the District could find revenues needed to alter the “who” or “when” of eliminating the tax break on out of state bonds.
