The D.C. Council on Wednesday unanimously approved a $10.8 billion budget plan, rejecting Mayor Vincent C. Gray's proposal to raise income taxes on the wealthy but reviving a once-unpopular proposal to tax out-of-state bonds.
Council Chairman Kwame R. Brown's spending plan restores funding to services for the homeless and other programs, even as it attempts to plug a $322 million budget gap. It also should satisfy bond raters on Wall Street by devoting 50 percent of additional revenue to the District's general fund balance.
"I am confident that history will record this budget as a defining moment in this city," Mr. Brown said.
The chairman's budget does not include a sales tax on live theater tickets, yet it does raise the alcohol tax from 9 percent to 10 percent and the parking garage tax from 12 percent to 18 percent.
Mayor Vincent C. Gray said he was disappointed that his proposal to raise the income tax on households making more than $200,000 was removed, but he said he would sign the spending plan when it reaches his desk.
In a letter to the chairman, the mayor said the income-tax increase "has received a full public vetting during this budget cycle, while a tax on bonds has not."
Some council members tried, but failed, to restore the income tax proposal during discussions.
Mr. Brown fulfilled a long-standing promise by avoiding an income tax increase. Instead, he inserted a provision that would raise about $13 million by taxing the income D.C. residents earn from interest on out-of-state bonds.
The tax break in the past has protected D.C. residents who buy bonds issued by other states and localities selling them to fund infrastructure improvements.
Local governments typically don't tax in-state municipal bonds as an incentive for residents to buy them. The District is the only jurisdiction in the United States that does not tax out-of-state bonds, largely because the bonds have not been available in the city in the past.
Increasing the income tax on wealthier households from 8.5 percent to 8.9 percent would have created the highest bracket in the region.
"To me, the choice is simple," Mr. Brown said.
But Jim Graham, Ward 1 Democrat, preached caution on the out-of-state-bonds tax, even though he supported the measure. He said he has co-authored similar initiatives only to have majority support among the council "evaporate" amid complaints from city residents.
The council in 2002 adopted a similar tax but quickly repealed it amid objections.
A contingent of lawmakers was able to insert an amendment that could affect negotiations ahead of the council's final vote on the budget, scheduled for June 14.
The group, spearheaded by council member Tommy Wells, Ward 6 Democrat, asked to make the tax on out-of-state bonds permanent instead of "buying it back" if additional revenues come into the District's coffers.
Phil Mendelson, at-large Democrat, noted the out-of-state bonds issue was pretty far down the list of priorities covered by additional revenues anyway and would likely stick around.
Other council members, including Mary M. Cheh, Ward 3 Democrat, voiced stern objections to their maneuver, calling it a carnival-like change of course after they realized an income tax was not possible.
"The same people, like 30 minutes ago, said how unfair it was for us to take this money in the first place, but now you want to take it permanently," Mrs. Cheh said of the council members who opposed the bond tax because they favored the income tax. "It's palatable to at least go back and say to folks we will make this prospective."
Yet Vincent B. Orange, at-large Democrat, became the crucial vote in getting the amendment passed after supporters sided with his effort to secure $500,000 for the Lincoln Theater and $508,000 for the Emancipation Day parade, giving the amendment enough votes to clear the council by a 7-6 vote.
"They're kind of in a bind, because they don't want to raise taxes," Mr. Orange said after the hearing, referring to those who opposed making the out-of-state bonds tax permanent.
Jack Evans, Ward 2 Democrat, voted against Mr. Wells' amendment and expressed his wariness about the bonds tax, noting that many retirees depend on income from bonds.
"While eliminating the non-tax status is worth consideration, taxing retired seniors on fixed incomes who relied on the District is a big mistake," Mr. Evans said after the debate.
Mr. Wells also introduced an amendment that would allocate one-third of additional revenues to the District's fund balance, reducing the chairman's pledge to put 50 percent in the fund.
Council member David A. Catania, at-large independent, opposed the measure, saying it is "time to inject a little reality" into budget talks. The District is in an enviable position because it saved its money in prior years. Had it not, he said, "we would have had an apocalypse in this city in 2009 when our revenue plummeted."
Mr. Wells' amendment failed on a 7-6 vote.
Mr. Wells and Marion Barry, Ward 8 Democrat, did not vote for the income tax increase, but they did join a council bloc consisting of Mr. Graham, Mr. Mendelson, Michael A. Brown, at-large independent, and Harry Thomas Jr., Ward 5 Democrat, in voting to reduce the contribution to the fund balance and to make the bonds tax permanent.
Despite some last-minute deal-making, the chairman said he was confident about the council's progress as it heads into final negotiations.
"We'll continue to work on it," he said in the halls of the John A. Wilson Building.
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