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Proposal to Create New $400,000 Tax Bracket NotBalanced:
DC Council Should Start Bracket at $200,000 to help sustain criticalpublic investments
Councilmember Mary Cheh plans to introduce an amendment to the FY 2012Budget Support Act that would propose creating an 8.9% tax rate for incomeabove $400,000 in order to reinstate a tax exemption for current out-of-statebondholders. The Council voted on May 26 to eliminate the tax exemption onout-of-state bonds-- which gave a tax break to residents who invest inmunicipal bonds outside their state borders-- and join every state in the wayit treats out-of-state bonds.Most DC residents that invest in these bonds arenot retired, and most have income above $100,000.While it is reasonable to consider creating new income tax brackets at higherincome levels — DC’s current top tax bracket starts at $40,000 — there aresome major concerns with the proposal. First, the new proposal does notraise enough revenue to balance DC’s budget in the four-year financial planand expires (sunsets) after four years, forcing millions of unspecified cuts toprograms and services in future years in order to maintain a tax exemptionthat no other state offers.Instead, the Council should consider starting the income tax bracket at$200,000 which would allow DC to maintain critical public investments, aproposal widely supported by DC voters.
Here’s why:The Cheh proposal does not raise enough revenue to balance thebudget over the required four-year period.
The proposal would raisethe income tax from 8.5 percent to 8.9 percent on residents earning morethan $400,000. Yet the revenue raised from the income tax increase is notenough to offset the cost of providing the tax exemption on out-of-statebonds from FY 2013-FY 2015 and would make DC’s budget unbalanced overthe four-year financial plan period. To address this, Councilmember Chehproposes unspecified cuts of $6.2 million, $5.4 million, and $4.3 millionduring each year of the financial plan to the Office of the Chief TechnologyOfficer (OCTO).1