D.C. Council Approves Largest Tax Cut in 15 Years

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By: Victoria Jones

The D.C. Council approved the city’s largest income tax cut in 15 years on May 28th. The tax cut reflects a growing urgency among lawmakers to provide relief and lessen the burden of low- and middle-class residents since the District’s recent rise in its cost of living.

The tax package, which will go into effect in January 2015, will run the city $165 million annually over the following four years. It will also include the creation of a 6.5 percent tax rate for middle-income residents who make between $40,000 and $60,000 annually and an increase of the threshold for the city’s estate tax from $1 million to $5.25 million. The tax relief will benefit businesses, residents earning up to $1 million dollars annually, and even those who inherit multimillion-dollar estates.

The Council has proposed slowing down spending on a citywide streetcar service, which was a top priority for Mayor Vincent C. Gray. The council’s surprise decision was a hard hit to the lame-duck mayor (Gray lost in the April 1st Democratic Primary) as the council has already cut funding for his proposed new hospital to replace the only existing hospital east of the Anacostia River, United Medical Center. The new tax plan now threatens to undo Gray’s streetcar proposal.

“The mayor is deeply disappointed by the council’s action today, which kills the streetcar system,” Gray spokesman Pedro Ribeiro said to the Washington Times. “We’re going to continue to try to educate the members about what they have done — and the public.”

Council Chairman Phil Mendelson believes that the tax relief is a more pressing issue in the city than the creation of the streetcar system. “There is an affordability issue in this city. Our ability to adjust and reduce the burden, which we reduce on virtually every taxpayer in this budget, is important, said Mendelson in the Washington Times.
The chairman orchestrated the tax-cut plan by making private phone calls and visits with council members over the Memorial Day weekend. The plan was then approved in an 11-2 vote in favor with the city’s overall $10.7 billion 2015 fiscal budget that will begin in October.

The tax cut plan first emerged from a commission led by former mayor Anthony A. Williams, who has worked on the plan for about 18 months. The goal of the commission was to make a tax code in D.C. in order to make it more progressive and competitive with neighboring states Maryland and Virginia.

In order to make the city’s tax code more progressive, the council’s plan covers about $67 million of the almost $225 million in cuts with new revenue that is mostly from sales taxes on services. The 5.75 percent sales tax will apply to health-club memberships, bottled water delivery, carpet cleaning, car washes, billiards, bowling and storage locker rentals for the first time. The commission also included recommendations that will help the city to recoup tax cut losses, but neither the council nor the mayor embraced that idea.

After its December release, Mayor Gray stalled the plan by rejecting the tax cuts and holding off on adopting the bulk of the committee’s recommendations, saying the loss of money would hinder the city from closing its widening economic disparity. The mayor also avoided all changes to the estate tax and listed other cuts as items only to be funded if there was a budget surplus.
The council’s plan would add two new income-tax brackets. One lowers taxes for people earning $40,000 to $60,000 a year to 6.5 percent. Another one will be created to lower taxes for those earning between $350,000 and $1 million to 8.75 percent.

The changes will ultimately lower the tax rate for residents making less than $1 million. People who are earning $25,000 to $50,000 would save an average of $352 on their tax bills, those making $50,000 to $75,000 would save an average of $436, and those who earn $75,000 to $100,000 would save an average of $602.
In addition, nearly everyone between the two new tax brackets would benefit from an increase in the standard deduction to $5,200 for singles and $8,350 for married residents, which is the same as federal levels. Low-income residents will also see an expansion of the earned income tax credit.

Mendelson’s plan would also reduce the city’s business franchise tax to 8.25 percent, the same rate as Maryland’s and closer to Virginia’s 6 percent, in order to stimulate continued business growth.

The package would reduce the effective tax rate for D.C. resident taxpayers from 4.9 percent to 4.5 percent as estimated by council budget officials.

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