WASHINGTON — The District of Columbia Council voted 11 to 2 to approve a proposed $10.8 billion budget for fiscal 2012 that would impose a local tax on non-district municipal bonds beginning on Jan. 1, 2011.
Councilman Jack Evans voted against the proposal, in part because of the council’s decision to tax the interest earnings from non-district bonds retroactively to the beginning of 2011, rather than grandfathering outstanding bonds and just applying the provision to new bond purchases. Councilman Phil Mendelson also voted against the budget, but for other reasons.
The final vote came after councilwoman Mary Cheh, supported by Evans, offered an amendment that would have repealed the bond tax provision. But the council voted 6 to 7 against it.
The proposed budget is intended to close a $322 million shortfall without making huge cuts to social services.
District Mayor Vincent Gray and Congress must still approve it.
Chris Mier, a strategist and managing director Loop Capital Markets LLC said he doubts the new tax will have much impact on the city’s municipal bonds.
“I’m sympathetic with the idea that state and local governments want to leave no stone unturned with regard to every possible revenue-raising item,” he said. “And from an equity standpoint you’d assume the district ought to do the same thing” as other states.
Virtually all other states tax out-of-state bonds.
“But it’s not likely to impact how D.C. bonds trade, the pricing structure,” Mier added.
While the new tax could encourage investors that live in the city to sell their non-district bonds and buy district bonds, he said, the city does not have a large enough population or large numbers of wealthy residents to make a big difference in that regard.
