Here at DCFPI we’ve started to nickname the Fiscal Year 2012 budget “Freddy Krueger,” because just like the infamous horror movie character it keeps coming back to life.
The next iteration may come as early as Tuesday, when the DC Council considers changes to the FY 2012 Budget Support Act. Though much of it is technical in nature, one possible addition may be more than procedural: Some council members want to reverse previous votes to tax income from out — of-state municipal bonds. That’s not a small matter, and it deserves serious consideration. If a majority of the Council wants to “grandfather” the tax exemption for current bondholders, that will cost $13 million in reduced revenue for FY 2012 and more in later years.
The budget must balance, so the removal of the bond tax must be replaced with another revenue source. As of today, no proposals have been circulated. One possibility for restoring this tax break for current bondholders would be to offset the revenue loss by creating a new income tax bracket for individuals with incomes above $350,000. This idea was floated in July but not voted upon. Another possible proposal would be to pay for the tax break with unanticipated revenues that may be announced by Chief Financial Officer Natwar Gandhi in his September revenue forecast.
DCFPI has supported eliminating the bond tax break as a progressive way to raise revenue. That said, we agree that the bond tax did not get a full public vetting, and we understand concerns of bondholders in this regard. Therefore, we believe it is reasonable to grandfather current bondholders as long as the revenue loss is replaced with another progressive form of revenue, such the high income earners tax. DCFPI would oppose a proposal to tap into projected revenue growth to restore the bond tax break, since that would make it harder to restore a number of services that were cut in the FY 2012 budget, including child care, disability assistance and housing.
A brief recap of how we got to this point: In its initial May budget vote, Chairman Kwame Brown replaced Mayor Gray’s proposed income tax with elimination of the bond tax. DCFPI supported eliminating the tax exemption for non-DC bonds, as DC is the only jurisdiction now to give such a blanket tax break for investing in infrastructure outside its borders. The Council considered several proposals that would partially restore the tax break in one way or another, but they were either defeated by the Council or vetoed by the Mayor.
Given this, it is possible a proposal to raise DC’s top income tax rate from 8.5% to 8.9% on income above $350,000 may surface again. The additional revenues would be used to bring back the bond tax break for current bondholders. Council member Mary Cheh (D-Ward 3) considered such an amendment in July, but opted not to introduce it at that time. This will bring in less revenue than the Mayor’s initial proposal that DCFPI supported, which would have raised the income tax rate to 8.9% for income above $200,000. We were also supportive of eliminating the bond tax break, but we were concerned that this would impact some lower-income residents who may rely on this income source. Our preferred solution would be to preserve the out of state bond tax exemption for lower-income residents, but we will support the replacement of one progressive source of revenue for another.
This is consistent with results of a DCFPI poll this spring which found that DC voters think it is very important to protect education, social service, and public safety programs, and nearly all support moderate increases in taxes to help preserve services.
For that reason, DCFPI does not support restoring the bond tax with growth in revenues. We do not know if there will be additional revenue until Dr. Gandhi’s announcement, but if there are funds the Council has already decided how to allocate those resources. According to the FY 2012 Budget Support Act, affordable housing programs are next on the list to benefit from this revenue.
In summary: Do not put grandfathering bondholders at the top of the contingent revenue list or reorder the list. Replace progressive revenue with progressive revenue. And stay tuned to the District Dime Monday on this important issue!
