The D.C. Council on Wednesday gave its blessing to the first significant package of tax cuts in the District since 1999, providing relief to residents of a city whose coffers have swelled in recent years along with its cost of living.
The tax package, which will run the city $165 million annually, will be phased in over five years and includes 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.
“Very rich people were paying a lower effective rate on their income than middle-income people were, and that’s not right,” Mr. Mendelson said. “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.”
The plan passed over the strenuous objections of Mayor Vincent C. Gray, who complained that the plan to fund it required gutting the city’s developing streetcar program. Legislators will have to vote on the package a second time June 11.
“The mayor is deeply disappointed by the council’s action today, which kills the streetcar system,” Gray spokesman Pedro Ribeiro said. “We’re going to continue to try to educate the members about what they have done — and the public.”
The changes lower the tax rate for residents making less than $1 million. People 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 to creating a new income tax bracket, the plan also expands the single earned income tax credit and realigns standard deductions and personal exemptions to conform to federal levels.
To stimulate continued business growth, the plan also includes a reduction of the incorporated and unincorporated business franchise tax to 8.25 percent — the same rate as Maryland’s and closer to Virginia’s 6 percent rate.
Although only two council members raised objections during Wednesday’s hearing, others said they might seek further explanation of some initiatives — specifically a provision that broadens the sales tax base to include sectors such as gyms and health clubs.
“I’ve never supported a tax increase to health clubs. I want to see, and will ask, the chairman what could really be generated from that proposal and see if there is any other way to get that money,” said council member Muriel Bowser, Ward 4 Democrat and candidate for mayor.
Health clubs are among six types of businesses that would have sales taxes imposed on their services as a result of the package. Others include storage rental facilities, car washes and bowling alleys.
The components of the proposal came from the D.C. Tax Revision Commission, a panel led by former Mayor Anthony A. Williams, which was charged with assessing the fairness of the city’s tax structure while broadening its base and keeping it competitive with surrounding jurisdictions.
The commission also included recommendations for the city to recoup the tax cut losses, most notably by adopting a per-employee business tax, but neither the council nor the mayor embraced the idea.
Mr. Gray’s budget proposal held off on adopting the bulk of the committee’s recommendations, eschewing changes to the estate tax entirely and listing other cuts as items only to be funded if there was a budget surplus.
D.C. Council member Tommy Wells, Ward 6 Democrat and a longtime advocate of expanding public transportation options, like the mayor objected to the fact that the budget plan would strip the money for streetcars.
The council’s plan does not cut all funding for the program but rather reduces the dollar amount allotted to $45 million to $65 million a year and delays implementation of several planned routes.
“There was over $500 million in the budget for streetcars, and they have yet to be able to spend close to that,” Mr. Mendelson said.
The tax cuts were proposed after the District reported a $1.75 billion fund balance at the close of the last fiscal year, up from $705 million at the end of fiscal 2011.
The city, which has weathered a national economic downturn in large part because of the high-paying jobs associated with the federal government presence, ended its past fiscal year with a $321 million surplus because of higher-than-expected tax revenue and underspending by city agencies. Officials also reported surpluses in the three prior years.
The city’s population swelled from 553,523 in 2004 to 646,449 last year, and development has increased property values and rents, putting some longtime residents at risk of being unable to afford to live in the District.
“If we want to have more benefits for middle-class folks to keep more of their money so they can afford to stay in this city, there are going to be some trade-offs,” Ms. Bowser said.
David A. Catania, at-large independent who is also running for mayor, said he generally agrees with the provisions of the tax package and supports phasing them in.
“Implementing the tax reform commission’s recommendations over time is sensible,” he said. “By not doing them all at once, it gives us a chance to put the brakes on should we hit a recession and need to re-examine some of our choices.”
The last time the council adopted significant tax revisions, 15 years ago, the income tax cuts that were supposed to be phased in were suspended three years later when the city encountered spending pressures.