D.C. residents will have to start paying a new tax starting Oct. 1 on out-of-state municipal bond income after Mayor Vincent Gray refused to sign a bill that would have pushed the tax back a year. Gray said Wednesday that he still hopes to stop the immediate implementation of the tax by offsetting the $13 million it would raise by raising the income tax rate for the wealthy.
In a letter sent to council Chairman Kwame Brown late Tuesday, Gray said he chose to use his pocket veto because he feared using cash once designated for the savings account could harm the city’s standing with bond rating agencies. The dollars in question represent .0013 percent of the city’s $10.6 billion annual budget. By using the pocket veto power, Gray has made it so the council cannot override his decision.
Last month, Ward 3 Councilwoman Mary Cheh pushed through the council the measure Gray vetoed. On Wednesday, Cheh said Gray’s justification was “nonsense.”
“When the mayor sent over his budget, he didn’t have any money designated for the reserve fund,” Cheh said.
The cash the council sent to the savings account was part of $77 million in additional revenue the chief financial officer predicted in June that the city would raise in the next fiscal year. When the council passed the budget weeks before the CFO’s prediction, it had already determined how it would spend extra cash, including sending a big chunk to the savings account. It was that money that Cheh’s bill would have used to start taxing the municipal bonds on Jan. 1, 2012, rather than Jan. 1, 2011.
Despite the veto, Gray said taxing municipal bonds starting this year is unfair.
“I continue to believe that increasing the top tax rate on higher income earners to 8.9 percent is a far more equitable tax policy,” Gray wrote in his letter to Brown. Gray said he supports a measure Cheh had planned to introduce to offset the bond tax that would have raised from 8.5 percent to 8.9 percent the tax on those who earn more than $350,000 annually. Cheh never introduced the tax-rate raising bill, saying she didn’t have the votes to get it passed.
The budget Gray introduced in April raised the income tax rate on those who earned more than $200,000 a year. But Brown took the rate increase out and replaced the dollars it raised with the municipal bonds tax.
“I strongly disagree with Mayor Gray’s assertion that this relatively minor council action would be a precipitating factor in a future bond downgrade,” Brown said Wednesday.
