DC passes budget, axes muni tax exemption

The D.C. City Council tentatively passed a budget on Wednesday that includes eliminating the tax exemption on interest from out-of-state bonds. 

The D.C. Office of the Chief Financial Officer believes eliminating the exemption will save $7.7 million in fiscal year 2025 and about $16 million annually thereafter. 

The OCFO has still not given the final sign off to certify the budget. Per their statement, “We will make that determination once we have an opportunity to review the final budget. The second vote on the BSA will take place next week.”  

D.C. Mayor Muriel Bowser is not completely happy with the council’s version. In a letter to City Council before the vote she warned that even though the budget is approved the fiscal shortfall is not completely solved. 

Per her letter, “Revenues are growing at 2% per year while the costs of doing the basics are growing even faster. Indeed, the Chief Financial Officer’s revenue estimates project slow growth this year and throughout the four-year financial plan.” 

D.C. works on a four-year budget cycle and must submit balanced ledger sheets or risk a congressional takeover.

The $21 billion budget includes about 600 additional housing vouchers, funds to design a new city jail and build a youth sports complex on the site of RFK stadium.  

To pay for everything the budget increases taxes paid by businesses to support the Paid Family Leave program, along with increases on property taxes on homes worth more than $2.5 million which doesn’t sit well with the mayor’s office.  

Per the mayor’s letter, “Let’s be clear: by opening the door to increasing some property taxes this year, the Council has set the stage for more property tax hikes for our residents and businesses next year.” 

In April Bowser presented her first crack at the budget that revealed a $4 billion deficit measured through fiscal 2029 which included a $700 million shortage for this year. 

The deficit was blamed on dwindling pandemic relief funds and falling tax revenues from downtown businesses. 

The shortage kicked off a three-way tug of war with the mayor attempting to cut popular social welfare programs, a City Council hoping to expand services and the Chief Financial Officer warning about dwindling reserves. 

Muni watchers are expressing alarm about the constant assault on tax exemption as lawmakers continue to search for ways to shore up budget shortages.

“By eliminating the tax exemption on out-of-state municipal bonds, D.C. is setting a precedent that could have far-reaching consequences for public financing across the nation, potentially increasing costs, hindering infrastructure development, and disrupting a well-established and effective financing mechanism,” said Jessica Giroux, general counsel & head of fixed income policy, American Securities Association. 

The budget also rolls in $515 million worth of bond-financed improvements to the Capital One Arena in downtown DC. The site is home of two of the city’s major league sports franchises, the NBA’s Washington Wizards and the Washington Capitals of the National Hockey League.   

Eliminating the tax exemption on out of state bonds in D.C. has been a political football since 2011 when the City Council passed a similar resolution eliminating the tax break.

In 2013, then Mayor Vincent Gray signed legislation repealing the law. In 2014, Gray lost his reelection to Bowser.

Bowser remains adamant about achieving financial stability via spending cuts. Per her letter, “Although there’s been some rhetoric on the need to be more fiscally responsible and reduce spending, this Council has chosen to take a pass on making any hard decisions.”