D.C. Council Chairman Kwame Brown will present a budget to his peers that will include a limitation on income tax deductions, which would have the city’s top earners paying more. Other council members who support the mayor’s other tax proposal, a rate increase on those who make $200,000 or more annually, say they will fight to get it back in the city’s 2012 budget. The income tax increase proposed by Mayor Vincent Gray would raise about $35 million. But it divides into two parts: an increase in the rate for incomes of $200,000 or more, and a reduction in the itemized deductions those same earners can claim. Brown says he will nix the rate increase and keep the deduction limit in the $5.5 billion operating budget he will put before the council on May 25. The mayor proposes the budget and the chairman sculpts the version the council will vote on.
“The issue is the tax-rate hike and its affect on small businesses,” Brown told The Washington Examiner on Monday. “There are a number of tax increases in the budget. We can’t get rid of every tax increase and every cut that’s in the budget,” he said, referring to his decision to stick with the limit on deductions.
| An example |
| How the limitation on deductions would be based on income level: |
| Adjusted gross income: $300,000 |
| D.C. itemized reductions: $50,000 |
| Subtract $200,000 (the threshold) from AGI = $100,000 |
| Multiply amount above threshold by 5 percent ($100,000 x .05) to get reduction in itemized deduction = $5,000 |
| Final itemized deduction = $45,000 |
The change in deductions would raise about $16.7 million, the mayor’s budget office estimates. The proposal reimposes on D.C. taxpayers a limit on deductions that varies depending on how much the taxpayer earns above $200,000 per year. It was made part of the federal and city tax structure in 2000, but ended with the tax cuts pushed through Congress by President George W. Bush.
If Brown follows through, he’ll have to find the $18.2 million the tax rate increase would have raised. He also said Monday that he wants to preserve $4 million for homeless services that Gray proposed to cut.
Council members who want to keep the rate increase in the budget will now have to find seven votes to revive it, and they’re getting ready for the fight.
“We will try to put it back in,” Ward 1 Councilman Jim Graham told The Examiner. “We have to come up with tens of millions of dollars to preserve key services already.”
Graham said the structure of the tax rate increase could change from the mayor’s proposal.
“The rate and thresholds we impose will be determined by the process as we try to assemble the votes to pass it,” he said.
