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Proposal to Create New $400,000 Tax Bracket Not Balanced:

DC Council Should Start Bracket at $200,000 to help sustain critical public investments Councilmember Mary Cheh plans to introduce an amendment to the FY 2012 Budget Support Act that would propose creating an 8.9% tax rate for income above $400,000 in order to reinstate a tax exemption for current out-of-state bondholders. The Council voted on May 26 to eliminate the tax exemption on out-of-state bonds-- which gave a tax break to residents who invest in municipal bonds outside their state borders-- and join every state in the way it treats out-of-state bonds. Most DC residents that invest in these bonds are not retired, and most have income above $100,000. While it is reasonable to consider creating new income tax brackets at higher income levels DCs current top tax bracket starts at $40,000 there are some major concerns with the proposal. First, the new proposal does not raise enough revenue to balance DCs budget in the four-year financial plan and expires (sunsets) after four years, forcing millions of unspecified cuts to programs and services in future years in order to maintain a tax exemption that 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, a proposal widely supported by DC voters. Heres why: The Cheh proposal does not raise enough revenue to balance the budget over the required four-year period. The proposal would raise the income tax from 8.5 percent to 8.9 percent on residents earning more than $400,000. Yet the revenue raised from the income tax increase is not enough to offset the cost of providing the tax exemption on out-of-state bonds from FY 2013-FY 2015 and would make DCs budget unbalanced over the four-year financial plan period. To address this, Councilmember Cheh proposes unspecified cuts of $6.2 million, $5.4 million, and $4.3 million during each year of the financial plan to the Office of the Chief Technology Officer (OCTO).

However, it is not clear where in OCTO these cuts would come from, or even if OCTO can sustain these cuts. This is a fiscally unsound approach that could force millions of dollars of cuts to be made in other parts of DCs budget to sustain a tax exemption that no other state offers. The proposal would create a future hole in DCs revenues. Another major concern with this proposal is that the tax rate would expire in four years. This would create a future hole in DCs finances and would violate the principle that in good times, ongoing programs should be funded with ongoing revenues. None of the tax provisions in Mayor Grays budget or in the first reading of the BSA had an expiration date. The Council should not vote to sunset new taxes ahead of the tax revision commission: The FY 2012 budget calls for creating a commission to study DC taxes over the next year and make recommendations. Calling for a tax bracket to expire would be making future decisions before considering recommendations of the tax commission. Instead, the Council can improve on Chehs proposal by starting the income tax rate increase at $200,000. This change would raise enough revenue to help sustain critical public investments without requiring unspecified cuts. Mayor Grays FY 2012 budget included a proposal to create a new income tax bracket of 8.9 percent for taxable income (income after deductions) above $200,000. This proposal would provide a steady stream of revenue to help meet the citys growing needs and has overwhelming support among DC voters, including those who would be impacted by the rate increase. DC voters overwhelmingly supported a new income tax bracket at 8.9 percent for incomes over $200,000. The Council can make a good move by supporting it as well.