The D.C. Council narrowly passed a bill Tuesday that will keep the city from imposing a tax on residents who hold out-of-state bonds retroactively and without fair warning.
The tax, instituted during fiscal 2012 budget talks, is the first of its kind in the District, affecting residents who buy bonds issued by other states and localities that sell them to fund infrastructure improvements.
But council members worried about the fundamental unfairness of taxing bondholders from Jan. 1 of this year, which predates the proposal.
The bill proposed by council member Mary M. Cheh, Ward 3 Democrat, on Tuesday uses about $13 million from the city’s general fund to cover the amount of revenue that would have been raised by taxing bondholders retroactively from the beginning of this year. Instead, it delays implementation of the bonds tax until Jan. 1, 2012.
The 7-6 council vote followed a debate that split along familiar lines in budget talks.
Some council members were consistently wary of the tax proposal — put forth last month by council Chairman Kwame R. Brown in lieu of a proposal by Mayor Vincent C. Gray to raise the income-tax increase on the city’s highest earners. They argued retirees on fixed incomes tend to hold the bonds, and public opposition had killed similar measure in the past.
Ms. Cheh and other council members said the lack of notice to current bondholders is “especially unfair” and should be rectified.
“It’s the worst form of retroactive taxation,” Ms. Cheh said.
She also considered an income tax on those making more than $350,000 as a replacement for the bonds tax, but realized she did not have enough votes to support it.
The plan she put forth faced strong objections from council members who had fought to make the bonds tax permanent to fund social services and other priorities.
Council member Phil Mendelson, at-large Democrat, said he would have supported the income-tax bill.
He also questioned whether it was prudent, or even legal, to spend money from the general fund. The council set 50 percent of all additional revenue aside in the general fund as a show of good faith to bond raters on Wall Street.
“We can’t spend that, and this would spend that,” he said of the bill, noting the council could have easily opened up the general fund to pay for police officers and other priorities.
Council member Jack Evans, Ward 2 Democrat, had railed against the bonds tax from the outset. He praised Ms. Cheh’s bill, noting the District raised 12 different taxes — such as those on alcohol and parking garages — in its budget for the coming fiscal year.