May 26, 2011 / 4:29 PM / 9 years ago

DC move to tax out-of-state bonds may face rocky time

WASHINGTON (Reuters) - The Washington, D.C., City Council is creating a budget that would include taxing the interest paid on municipal bonds sold by other jurisdictions, but the idea could face a rocky time before the budget is finally passed in June.

“While eliminating the non-tax status is worth consideration, taxing retired seniors on fixed incomes who relied on the District is a big mistake. Hopefully, this will be revisited in two weeks on second reading,” Jack Evans, the council member charged with keeping an eye on finances, said in a statement.

The budget of the nation’s capital, a city without a state, must make it through two council votes before going to the U.S. Congress for approval.

During the first vote on the $10 billion spending plan on Wednesday, Council Chairman Kwame Brown suggested the District abandon the local tax exemptions it grants for interest paid on bonds sold elsewhere.

The council approved the idea, which is intended to raise $13 million and which Brown suggested as an alternative to a tax hike included in Mayor Vincent Gray’s budget.

Washington’s exemption is unusual in the $2.9 trillion municipal bond market. Most states tax interest on debt sold elsewhere.

In 2002, the District considered taxing municipal bonds from outside its borders, but residents’ opposition led the council to change its mind.

According to The Washington Post, the District exempts interest paid on out-of-state debt because it has low bond issuance. If it did not exempt outside bonds, then only a small proportion of investors would have a tax advantage.

The District must close a budget shortfall of $322 million before its fiscal year begins October 1.

A poll conducted by the DC Fiscal Policy Institute, an independent research group, earlier this month found residents strongly support increasing income taxes on individuals making more than $200,000 a year to fund education, human services and public safety.

Reporting by Lisa Lambert; Editing by Jan Paschal

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