Greater Greater Washington

Kwame Brown pushing tax cuts over his prior promises

When passing DC's FY 2012 budget, DC Council Chairman Kwame Brown and many other members patted themselves on the back for staving off some of the worst cuts to important services. But avoiding many of the cuts depended on extra revenue, and ultimately got bumped for other priorities.


Photo by dbking on Flickr.

Now, Freeman Klopott reports that Brown is trying to find more money in the budget. But instead of funding these priorities which got left behind, Brown is pushing instead to repeal a tax increase that hits mainly wealthy residents, saying that has been his top priority all along.

That's news, since when Brown released his version of budget in June, he had 4 items ahead of that in his own priority list, and only 2 have been funded so far. Instead of restoring the bond tax exemption, he should pay for Housing First, the Housing Production Trust Fund, and the other foregone priorities.

Mayor Gray's original budget proposal included a hike of 0.4% on income over $200,000, which Brown focused much of his effort on eliminating. He ultimately hit on the idea of replacing it with a measure ending the tax exemption on out of state municipal bonds, an exemption that has been eliminated in all other states which had one.

While his rhetoric argued this was fairer, it was clear he really wanted to reverse the change when DC's revenue estimates turned rosier, as was expected.

Brown addressed the future "unanticipated revenues" through a list of conditional budget items, which would get funded in priority order depending on how much extra money comes in. $21.567 million also goes to the capital budget and 50% of the remainder goes to the reserve fund, so the rightmost column shows how much "unanticipated revenue" there would need to be to get up to that specific item.

ItemCostTotal 2012
UR needed
1. Hiring more police$10.8$43.2
2. Housing First (homeless housing)$1.6$46.4
3. Housing Production Trust Fund (affordable housing)$12.0$70.4
4. Mental illness services (housing and children's services)$5.5$81.4
5. Restoring bond exemption for pre-10/1/2011 bonds$13.4$108.2
6. Keeping MLK Library open on Sundays$0.3$108.8
7. Main Streets green teams$1.8$112.4
8. Parking rates lowered to $1/hr in busiest areas$3.0$118.4
9. Buying books for libraries$1.4$121.3
10. Early childhood education$2.0$125.3
All figures in millions.

But the Council had a few other ideas. Tommy Wells successfully passed an amendment to replace restoring the bond exemption with a set of other items: interim disability, affordable housing, children's mental health, and homeless services. He had to give Vincent Orange $500,000 to throw a party at the Lincoln Theater, where Orange serves on the board, to get enough votes.

Between first and second reading, the Gray administration disclosed a large spending pressure for FY 2012 involving healthcare providers for DC's Medicaid and DC Alliance programs that went onto the top of the list. The Council then moved the Green Teams to the top.

Meanwhile, there was also some "unanticipated revenue" in FY2011, the current budget year. The mayor proposes to use that to fund the Medicaid costs, school nurses, police, and mental health services, all of which would then come off the list for how to spend FY2012 money.

Finally, the FY2012 "unanticipated revenue" estimate is $77 million at the moment, enough to just fund the green teams and the rest of the Medicaid costs. That could increase or decrease in the future.

This list summarizes all the items and how they will be funded with 2011 or 2012 money under the current estimates. Items in green are currently slated to get funded, while red items are not. As above, the rightmost column shows the total amount of "unanticipated revenue" needed for that item and all above it to get funded.

ItemCost2011Total 2012
UR needed
1. Main Streets green teams$1.8$25.2
2. Payments to Medicaid managed care companies$32.0$6.0$77.2
3. School nurses$12.5$12.5
4. Hiring more police$10.8$10.8
5. Housing First (homeless housing)$1.6$80.4
6. Housing Production Trust Fund (affordable housing)$12.0$104.4
7. Mental illness services (housing and children's services)$3.5$3.51
8. Interim disability, affordable housing, children's mental health, homeless services, and Vincent Orange's party$13.4$131.2
9. Keeping MLK Library open on Sundays$0.3$131.8
10. Parking rates lowered to $1/hr in busiest areas$3.02$137.8
11. Buying books for libraries$1.4$140.6
12. Early childhood education$2.0$144.6
All figures in millions.
1 The original item listed $5.5 million, but the administration now thinks they can cover the remainder through savings in the existing mental health budget.
2 Due to an error by the budget office, $3 million isn't enough to revert all $2/hour meters to $1/hour.

This is the Council's priority list. If more money comes available, whether found elsewhere in the budget or through increases in "unanticipated revenue," it should go to these priorities.

What it shouldn't go toward is reverting the bond tax exemption. Brown himself declared a list of priorities that put Housing First and affordable housing, well, firstor at least ahead of reversing the bond tax.

It's disappointing that now he wants to go after that again, even though higher priorities on his own list are still not funded, and the Council made clear that it wants to restore cuts to services instead with extra money. Brown should follow the Council's wishes, rather than putting first his own priorities which aren't even shared by most DC residents.

David Alpert is the Founder and Editor-in-Chief of Greater Greater Washington and Greater Greater Education. He worked as a Product Manager for Google for six years and has lived in the Boston, San Francisco, and New York metro areas in addition to Washington, DC. He loves the area which is, in many ways, greater than those others, and wants to see it become even greater. 

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According to his office, he was just blessed by the Dalai Lama... so he's got that going for him.

by @SamuelMoore on Jul 6, 2011 4:01 pm • linkreport

Isn't one of the biggest issues with the bond exemptions is that it was a back dated i.e. instead of most taxes becoming effective on the enactment date the bond exemption was backdated to the beginning of the year instead of enactment date. Thus, people that bought the bonds had with a certain expectation of value for those bonds.

And, I hate to break it to you but it is mostly elderly people that buy bonds whether weathly or not because of its general assurances of consistent return. Given the low interest rate environment and deduction of that return can have serious effect on a person's retirement.

by Burger on Jul 6, 2011 4:02 pm • linkreport

If I remember correctly, both Kwame Brown and Mary Cheh voted FOR the bond tax hike with the plan to then vote AGAINST it by repealing it when new, additional revenues came out.

It was only Tommy Wells' on-the-dais purchase of Vincent Orange's vote via the $1M transfer to two Orange pet causes (the Lincoln Theater, on whose board he sits, and the Emancipation Day commemoration) that Wells was able to muster enough votes to kill the second half of Kwame and Cheh's plan.

(Some people call that Wells "giving" Orange money; others call it a blatant example of live-on-TV corruption endemic to this Council and this administration.)

If anything, Kwame is being consistent with his original logic of voting for something before voting against it (reminiscent of John F. Kerry's explanation of one of his Senate flip-flops during the 2004 election).

And no doubt Cheh has been hearing from her constituents who would be affected by the RETROACTIVE tax hike on their bond holdings (can't wait to see who files the first federal lawsuit on that minor aspect).

At the very least, any bond tax hike should be prospective as of a date certain (e.g., January 1, 2012) so that those impacted by the hike would have time to review their bond holdings and prepare accordingly.

Of course, the folks at the Fiscal Policy Institute (using the wonderfully supportive poll they paid for) will fight this tooth and nail claiming any reduction or changes to a RETROACTIVE tax hike will kill the homeless, the children, the poor, the elderly, etc.

And then people scratch their heads wondering why DC has such a pitiful reputation for its business friendliness.

by Fritz on Jul 6, 2011 4:04 pm • linkreport

Everyone is raising a number of good issues about the bond tax.

First of all, the income tax was a lot fairer than the bond tax. This does hit more seniors than the income tax did.

Fritz is right (is that a first?) that it's sort of crazy Brown, Cheh, and Evans voted to replace the income tax with the bond tax and are now complaining about the bond tax because they always thought they'd get rid of the bond tax.

But about the bond tax, I don't buy that you have to promise people the amount of revenue they expected when they bought the bond. Do we say we can't raise income taxes because people expected a certain amount of take home pay when they got a job, and now it's less?

by David Alpert on Jul 6, 2011 4:15 pm • linkreport

Let's say you make $240,000 a year. This 0.4% surtax is a matter of $160 a year for you. That could buy you a couple nice dinners. Or, you could fully fund the DC mental health and homeless services. Now, I don't know about the rest of you, but I'm disturbed by all the people I see on my walk from the Metro station who are clearly not just a little addled, but a danger to themselves and others. It's a very concrete, urgent problem, and I'd gladly spend that kind of money to fix it.

by tom veil on Jul 6, 2011 4:19 pm • linkreport

@David Alpert: What other examples are there of a retroactive tax hike which gives the public absolutely no advance notice and no means of mitigating the tax hike? As far as I can remember in previous Fenty budgets, the various, much-disliked fee increases were all prospective in nature.

I'd compare it to a bank jacking up the monthly mortgage payment (or landlord jacking up the monthly rent) midway through the terms of the contract and making it retroactive to the first of the current year.

It's astoundingly unfair (I seem to recall another thread where Congress is urged to do something "because it's the right thing to do") and I imagine someone will make the case that's it's illegal because of no due process to bondholders (paging the Institute for Justice....).

by Fritz on Jul 6, 2011 4:33 pm • linkreport

Fritz: I definitely agree that swapping it without notice and without hearings was a terrible move.

by David Alpert on Jul 6, 2011 4:35 pm • linkreport

@tom veil It's a very concrete, urgent problem, and I'd gladly spend that kind of money to fix it.

I suspect part of the problem is that people don't have that much confidence that it will fix it. We're talking about DC ... a jurisdiction which spends a whopping 2/3rds of its revenues on education and other social programs and has one of the worst education systems and one of the worst poverty problems in the nation. I don't see anyone being opposed to giving that small amount you reference if people really believed it would make a difference. The problem is, I don't think we do. And stealing from Peter to pay Paul makes the whole thing even more onerous. What we really need to see is a cutting of waste and an increase in efficiency so that real results occur. And that doesn't necessarily need more money. It just needs more capable management at City Hall.

by Lance on Jul 6, 2011 4:36 pm • linkreport

David,

If you haven't been paying attention, labor income is always treated as secondary to capital income. It's a mantra now. You have to tax capital gains lower than labor income dontchaknow? You can write off cash and equity donations on your taxes...but do 10 hrs of charity volunteer work and no average hourly write off for you! And of course, debt instrument holders of any stripe should of course have exactly the same tax for the duration of their holding, but your labor income of course is subject to change whenever.

Get with the program!

by John on Jul 6, 2011 4:40 pm • linkreport

It wasn't just a terrible move. It shows that the Council, at times, seems unable to understand or deliberate on some basic issues facing the city.

by Andrew on Jul 6, 2011 4:40 pm • linkreport

@John, The retroactive change in tax status would be analogous to an employee being told they're making $50,000 a year, and then in July being told that the salary figure's been changed to $30,000 and that the extra $10,000 they've already received (i.e., 6 months of income = $25,000 old - $15,000 new = $10,000 difference) has to be returned.

As Fritz mentioned, not only is it ethically wrong ... but probably illegal.

by Lance on Jul 6, 2011 4:43 pm • linkreport

@ David Alpert: Two postings in which you agree with me?!

Where's the real David Alpert and what have you done with him!

by Fritz on Jul 6, 2011 4:48 pm • linkreport

@Andrew It wasn't just a terrible move. It shows that the Council, at times, seems unable to understand or deliberate on some basic issues facing the city.

which is a double-whammy for us because it's not going to help make the case that we could handle budget autonomy. (And before someone rolls out the old 'does IL need to show they can handle their budget?' I'll remind everyone that IL isn't a federal enclave with the federal responsibilities that directly led to the very creation of the District. We have to live by a higher standard if we're to convince those with responsibility for the District and its federal functions that we too can handle those federal functions. And poorly thought out actions such as retroactively changing a tax rate doesn't quite cut it.)

by Lance on Jul 6, 2011 4:49 pm • linkreport

No Lance, it isn't. It would be like Congress passing a change in the tax code that started in the fist of the year. Which has happened in the past.

I do love how everyone conflates a tax change to a change in what is being taxed.

by John on Jul 6, 2011 4:54 pm • linkreport

All of that being said, I wouldn't have a problem with Kwame and gang modifying the change to apply starting 1/1/2012.

by John on Jul 6, 2011 4:58 pm • linkreport

@ John +1

by Lance on Jul 6, 2011 5:16 pm • linkreport

@John, while I agree with you, this presents two problems. First, eliminating the tax is supposed to yield about $14M in revenue for the city. This would mean that there would be no impact for the current budget, and thus, the Council would have to find this money somewhere else.

Second, many of the bonds these residents own run 3, 5 15 years into the future. This means that if these residents want to avoid taxation, they would have to sell their current holding and then hope they could find DC bonds on the open market that fit their investment goals. By my recollection, there have been very few DC bonds available on the open market in the past couple of months, much less with any diversification of risk or yield. Councilmember Evans noted on the Dias that DC has seven bonds and Rhode Island, the next smallest jurisdiction, has over 400.

This is simply a function of the size and nature of the District and is the reason why this exemption has been in place. It is akin to the DC Tuition Assistance Program that subsidizes tuition for DC residents to state universities nationwide.

by Andrew on Jul 6, 2011 7:40 pm • linkreport

@Andrew, These types of bonds really exist solely to allow local governments to borrow at below market rates. The retirees can easily substitute higher rate taxable bonds whose net will be the same. There's no justifiable reason for DC to be exempting other jurisdictions bonds. The issue here as I see it is simply that you don't change the rules after the fact.

by Lance on Jul 6, 2011 8:42 pm • linkreport

Many people (myself included) invest in a municipal bond mutual fund that holds many different state’s bonds. These bond funds have a lower return than a taxable bond fund. I for one would sell all my shares if DC was to set a date after which these would be taxable and purchase shares in a taxable fund that would provide a better return. A retroactive tax increase is no fairer than say a retroactive cut to food stamps or welfare payments.

by Bruce on Jul 7, 2011 8:09 am • linkreport

David, great post! And completely agreed that we must fight this absurd bond tax buy back.

Factual question: could you explain how you compute the rightmost column? E.g. in row 5, you have $1.6M in homeless housing requiring $80.4M. As I understand it, $22M will be set aside for the shift from operating budget to capital budget. So I could understand your adding $22M and $1.6. I also know 50% must be set aside for the cash reserves, so I can understand if you double the cost of each line item. But I can't make sense of your numbers.

by Kesh Ladduwahetty on Jul 7, 2011 10:41 am • linkreport

Kesh: The formula is that it takes the $21.567 million set aside for the capital shift, and then doubles each item, and shows the cumulative total. So line 1 is 21.567 + (2 x 1.8). Then line 2 is the number in line 1 plus double the amount (in this case, 26, which is 32 minus the 6 in 2011).

So the number in line 5 is the number above it (77.2) plus twice the cost of this item (1.6 x 2 = 3.2).

In other words, if you have 77.2 million in unanticipated revenue, you can fund the Medicaid payments. If the UR goes up to 80.4, then under the formula, Housing First gets funded, because half the extra goes to the rainy day fund and then you have enough left over to fund HF.

by David Alpert on Jul 7, 2011 10:46 am • linkreport

Thanks, David, that explains it. But my understanding is that the full $32M in Alliance spending is paid for with FY11 revenue (see Mayor's Suppl Plan: http://www.keepandshare.com/doc/2943878/fy11-supplemental-budget-plan-as-of-070511-doc-july-5-2011-7-18-pm-108k?da=y). So I don't see a need for FY12 money to pay for any of this. Am I wrong?

by Kesh Ladduwahetty on Jul 7, 2011 11:42 am • linkreport

I vote for the tax increase because it looks good to the lower income earners. I vote against it to ensure the higher income earners that they are all that matters.

Yeah USA.

by greent on Jul 7, 2011 12:11 pm • linkreport

The retroactive tax on municipal bonds is grossly unfair. I only bought these bonds because DC gave me an incentive to do so. Now the very same entity is going to change the deal retroactively in a manner that will cost me thousands. If this happened in the private sector it would be a fraud. Now a small subset of DC will pay a high price solely by virtue of investment decisions encouraged by the very same DC government that now seeks to penalize them.

by Steve on Jul 7, 2011 1:53 pm • linkreport

Okay folks, this is the first and likely last time you will ever see me write the following words.

I'm in full agreement with Lance, here.

Muni bonds are written solely for the purpose of funding those items which cannot be funded by immediate taxation or other resources. They are not written to provide investors with a diversified portfolio of risk and yield. Nor are the laws written to provide investors with such. That is a reversal of the policy order...just because the existence of muni bonds has resulted in an investment market does not mean it must perpetuated to the investment market.

In other words, while the retroactive issue may have validity, the rest is...who gives a f*ck?! People will just have to adjust their investments.

by John on Jul 7, 2011 2:26 pm • linkreport

The ONLY problem I have with the tax on munis is the retroactivity -- I have no problem with a prospective tax on munis -- I have already adjusted. Are you so naive you don't see that the only reason the Council made it retroactive was to trap citizens in a predatory gotcha scheme -- otherwise we silly bondholders would all "adjust" so that our tax liability would be minimal. No, its the third world, banana republic retroactive treatment that will chill investment in DC in the future. Why don't we just pick citizens at random in a lottery and confiscate their houses and all their possessions? What if the Council voted to retroactively add an 8.5% sales tax on everything you purchased since January 2011?

by Steve on Jul 7, 2011 4:02 pm • linkreport

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