The D.C. Council on Wednesday delivered a blow to Mayor Vincent C. Gray's vision of a thriving tech sector in the District, hours after he strenuously defended investor-friendly tax cuts as a compelling way to diversify the District's economy in the face of potentially steep federal spending cuts.
City lawmakers took on the Technology Sector Enhancement Act of 2012 — which provides a five-year exemption on franchise taxes for tech companies that set up shop in the District and, more controversially, reduces to 3 percent the capital-gains tax on "angel investors" who fund these companies.
It was part of a legislative session that reignited the council's post-summer labors with topics that ranged from jail visitation to the body's own ability to review large contracts sent down by the mayor's office.
Although Mr. Gray's tech-sector bill passed on its first reading, council member Jack Evans, Ward 2 Democrat and chairman of the Committee on Finance and Revenue, used an amendment to successfully carve out the investor portion of the bill. He said it would make more sense to ask the newly established D.C. Tax Revision Commission to consider whether it is prudent to reduce the investor tax, especially since some city lawmakers think other parts of the District's populace, such as seniors, should be first in line for tax relief.
"I think it's completely appropriate that we ask the tax revision commission to take a look at this," said council Chairman Phil Mendelson, at-large Democrat.
But council member David A. Catania, at-large independent, spoke forcefully against watering down the mayor's bill. In his remarks, he echoed Mr. Gray's argument that investors will move across the Potomac to Virginia, where they pay no capital-gains tax on such investments.
"We're going to get 8.5 percent of nothing, rather than 3 [percent] or 4 percent of something," he said.
Mr. Catania served as an unlikely political ally to Mr. Gray on the issue. Over the summer, he was the first of three lawmakers to call on the mayor to resign in light of courtroom revelations that straw donations and undocumented funds filtered through the 2010 Gray campaign.
Mr. Gray has been battered by questions about what he knew about the furtive payments during the campaign, but has attempted to carry out his agenda on job creation and economic development. He visited a tech-company incubator on Monday to tout the tech-sector bill as a key part of that agenda and to correct "misinformation" about it.
Mr. Gray doubled down on his position at his biweekly press briefing on Wednesday, shortly before the "12 other people," as he referred to council members at the John A. Wilson Building, took up the bill. He said many of them were missing the point of the legislation's tax incentives, which he defended as a "catalytic opportunity to bring more tech firms to the city and to keep them here."
He also dismissed any notion it could set an unwieldy precedent for other industries that seek tax breaks down the road.
"To me, each proposal has to stand on its own," Mr. Gray said.
Mr. Gray said a broad-based economy is necessary to defend against the austere effects of federal spending cuts, known as "sequestration," that are set to take effect in 2013. His budget director, Eric Goulet, said sequestration would most likely affect federal grants to the D.C. Public Schools and charter schools that are filtered through the Office of the State Superintendent of Education, as well as funding to the D.C. Homeland Security and Emergency Management Agency and programs at the D.C. Department of Health.
After the meeting, Mr. Catania said it was clear Mr. Gray has lost some of his allies on the council and been "weakened" during the past year, but for him the tech bill centered on a more objective question — "Is an entrepreneurial investor class something we want to compete for?"
He said tax incentives for investors could give tech startups the "breathing room" to set up their businesses, even if many factors draw business to one jurisdiction over another. He also objected to his colleagues' position that some tax breaks should be played against others.
"We've lost any ability to be objective and rational," he said.
In other business, Mr. Evans introduced legislation that would eliminate the council's review of city contracts worth more than $1 million. He said the proposal would keep the contracts insulated from legislative meddling, a key point of contention among reformers who want to end pay-to-play politics in the city, and lawmakers could still request copies of the contract and hold public hearings on them.
"We should go right to the source of the problem," Mr. Evans said. "And the council's contract review is, in my view, in many ways the source of the problem."
Council member Marion Barry, Ward 8 Democrat, introduced legislation that would study all forms of gambling for potential legalization in the District in response to efforts in surrounding jurisdictions — namely, casinos in Maryland. He said revenue from potential gambling should be dedicated to educational programs in the city.
Mr. Evans co-introduced the measure, but warned it does not establish any kind of gambling.
Mr. Barry also introduced a bill that would restore in-person visitation rights to family and friends of inmates at the city jail, after officials recently switched over to a video-only system that critics say diminishes the quality of contact between incarcerated persons and those on the outside.
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