WASHINGTON -- The Council of the District of Columbia has adopted emergency legislation canceling a proposed tax on the interest residents earn from bonds of other municipalities.

The tax was scheduled to become effective Jan. 1, 1992, and generate about $2 million annually. The legislation to cancel the levy was approved Tuesday night.

If signed by Mayor Sharon Pratt Dixon, the legislation would be in effect for 90 days. In general, measures adopted by the council and signed by the mayor must then go to Capitol Hill, where lawmakers have an opportunity to review -- and possibly kill -- the proposed laws.

However, the council can pass emergency bills, which are effective only temporarily, that are not subject to congressional review.

Officials in Mayor Dixon's office could not be reached for comment, but the city's deputy mayor for finance, Ellen M. O'Connor, said, "We would have no objection to a delay in implementation." But she said no firm decisions have been made about whether to support a permanent cancellation of the levy.

The proposed tax was controversial from the start even though it would have brought the district in line with most other jurisdictions. Under the plan, residents purchasing district municipal bonds would pay no tax on their interest, but those purchasing bonds of other municipal governments would have been taxed on their interest income.

The problem, detractors said, was that the district does not have enough available debt to satisfy the needs of investors wishing to hold tax-exempt bonds.

An official in the council's legislative services office said the legislation had not yet been sent to Mayor Dixon, but may be forwarded to her today. The mayor has 10 calendar days upon receipt of legislation to sign it or veto it.

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