Today the District’s Dime takes a final look at DCFPI’s three-part series about the issues surrounding the elimination of a tax break for income earned from non-DC municipal bonds.
A quick refresher: The DC Council voted to eliminate the tax break on out-of-state bonds to help close a $322 million budget shortfall for FY 2012. Yet this proposal was raised just days before the Council’s budget vote ‘ giving little time for its effects to be considered ‘ and it has generated a lot of controversy since it was passed. This has resulted in two proposals to restore the exemption in some way, shape, or form ‘ both of which have failed.
There is broad agreement among DC policymakers that the city should join every other jurisdiction* in the country and end the blanket tax break for investing in out-of-state bonds. But how that should happen is more complex. WHO should be impacted? WHEN it should happen? And HOW should the city address the revenue loss that would occur from restoring the tax exemption for some residents?
Previously we wrote about the WHO and the WHEN, and now we turn to the HOW. As discussed below, DCFPI thinks that the Council should largely keep in place its plans to eliminate this tax break. However, if policymakers wish to restore it substantially, they should offset the revenue loss with another revenue source, particularly an increase in income taxes on higher-income residents.
The DC Council has considered two significant changes to the way the city phases out the tax break for out-of-state bonds. This includes a grandfather clause for all current bondholders ‘ meaning current bondholders would be allowed to keep their tax exemption ‘ and delaying implementation of the tax change by one year.
However, any changes to the elimination would result in a considerable loss of revenue for the District, throwing the FY 2012 budget out of balance. Overall, this tax break costs DC upwards of $30 million each year at a time when funding for libraries, homeless services, and assistance for people with disabilities has been cut due to the Great Recession.
DCFPI suggests that the District move forward in eliminating the tax break on out-of-state bonds as adopted by the Council, with one modification. Low-income households and households that get a large share of their income from out-of-state bonds should be exempted from the changes, because they could be substantially impacted by the elimination of the exemption.
If policymakers wish to restore even more of the out-of-state tax break — such as maintaining the exemption for all current bondholders ‘ the District should replace the foregone revenue with revenue from another source. The alternative would be to dip into the District’s savings account or cut programs even further. Both of these approaches have been rejected this year.
The best revenue alternative would be a modest increase in the tax rate for higher-income residents, as has been proposed by Mayor Gray and by some DC Council members. This has broad public support and would help preserve important public services, another goal that is important to residents.
*Utah taxes out-of-state bonds, but provides an exception for Utah residents who invest in out-of-state bonds from states that do not levy an income tax and/or do not tax their residents on out-of-state bonds. This includes the District of Columbia. Once DC starts to tax interest on out-of-state bonds, Utah residents who invest in DC bonds will also have to pay tax to Utah.
