Last Friday, the D.C. Council held a nine-hour hearing on the exact thing most taxpayers never want to hear about: possible tax increases.
The discussion came amid challenging economic times in the city, and ahead of a significant political change in D.C. that will see a new mayor take office in January. A range of experts and advocates made their pitch to the council, some urging lawmakers to make the wealthy pay a bigger share and others countering that now is the time to limit existing spending.
We wouldn’t expect you to sit through the entire hearing yourself, so here are our main takeaways.
There’s no silver bullet — at least not a quick one.
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This much was undisputed leading into and during Friday’s hearing: D.C. is facing a deficit next year of anywhere between $600 and $800 million in a roughly $11 billion local budget.
While some lawmakers argued that existing spending needed to be scrutinized, the hearing itself was an indication that a number of council members believe that some types of taxes may have to be raised next year.
But even advocates of the idea likely came away from the hearing understanding that there aren’t many workable options that could quickly raise revenue — and the ones that exist would only pull in enough extra cash to fill the expected hole, not fund much else beyond it.
“A word of caution: The reality is the financial proposals on the table … are unlikely to support massive new spending programs,” said Ward 5 Council member Zachary Parker. “We need to continue to do the hard work of improving our procurement systems to deliver better results and cut bloated spending in the budget.”
Of the tax-hike ideas that could bring in substantially more money, aides to D.C. CFO Glen Lee made clear that implementing those wouldn’t happen overnight — in fact, they warned, it could take between 12 and 24 months.
None of this is to say that taxes would be increased next year. On Monday, Chair Phil Mendelson noted that the budget for the current fiscal year was $1 billion leaner than the year prior. “We were able to move forward without a major tax increase,” he said.
Whether to raise taxes next year, he added, will be a political choice, not an undeniable necessity. But with anywhere from two to four new lawmakers joining the council between January and early summer, Mendelson may well find himself in the minority.
There was a lot of talk about taxing law firms and lobbyists — but it’s complicated.
There’s not a ton of political sympathy out there for lawyers or lobbyists, so it’s easy to understand how a tax proposal targeting them would seem like an easy sell. The reality, of course, is much more complicated.
For years, some advocates in D.C. have called on the city to impose what’s known as a Business Activity Tax, or a new levy that would hit law firms, lobbying shops and consultancies owned by nonresidents who can claim all the profit as personal income, thus allowing them to avoid paying the city’s usual business taxes. Proponents say it’s a matter of simple fairness: If a normal business operating in D.C. has to pay business taxes, why should a law firm owned by someone who lives in Maryland get to skip out? (Layered on top of this is another unfair reality, they add: Congress has prohibited D.C. from taxing the income of nonresidents.)
“This moment isn’t about maintaining the status quo or kicking the can down the road. It means taking a hard look at who contributes to [government] services and who our tax code lets off the hook,” said Ward 4 Council member Janeese Lewis George, who is expected to be D.C.’s next mayor and during her campaign endorsed imposing a Business Activity Tax in order to fund her plan to bring down the cost of child care.
Advocates say a 2% BAT could bring in $500 million a year and broaden the city’s tax base, making it more resistant to periodic economic ups and downs. They also say it’s not an outlandish proposal: New Hampshire has had one for years without apparent negative impacts to the state’s business climate.
Critics, though, warned that any tax that targets lawyers is likely to end up in court, potentially delaying the revenue it promises to bring in. Additionally, past efforts to impose a BAT envisioned it as part of a broader revenue-neutral package, where the new tax could be largely offset by decreases in other business taxes.
Finally, former Mayor Anthony Williams cautioned that in a moment where D.C.’s commercial property values continue falling, taking aim at lawyers and lobbyists who may still have offices in downtown D.C. isn’t a particularly wise move. “I think we’re just making it harder for some firms that are a key component of the office economy to stay in D.C.,” he said. “That’s not a risk worth taking.”
Eat the rich — or not?
While the council could consider any type of tax increase, it’s been clear that the goal is to target D.C.’s wealthiest households.
Ward 1 Council member Brianne Nadeau wants to impose a 3% surcharge on capital gains, piggybacking on an existing federal tax. The tax would target individuals making more than $400,000 a year, or couples pulling in north of $500,000. The total take: an estimated $200 million a year in new revenue. And Ward 3 Council member Matt Frumin has proposed a pied-à-terre tax, essentially a higher property tax rate on homes worth more than $2.5 million that aren’t occupied by their owner year-round.
“The goal is simple: Protect ordinary wages and ensure that those who receive substantial returns from accumulated wealth contribute fairly to the city we all depend on,” said Nadeau.
Lee, the city’s CFO, cautioned that D.C.’s wealthiest residents already shoulder a significant share of the city’s tax burden. Just over 12,000 people — 3.5% of all taxpayers — contributed more than $1.4 billion to the city’s tax coffers in 2024, or 42% of the city’s total take that year. Additionally, they’re also positioned to find clever ways to avoid higher taxes if any new ones are imposed.
Opinions were split on whether higher taxes would push wealthy residents to leave D.C., especially since lower-tax Virginia is just over the Potomac River. Some experts said research points to some tax flight happening, while others said it would be minimal or nonexistent.
But Williams said that by increasing taxes, whether on wealthy individuals or some businesses, lawmakers would be sending the wrong signal to people it should be looking to keep, as well as people it could be looking to attract. Instead, he said, the council and new mayor should develop some type of “grand compromise” that focuses on a combination of spending cuts, some tax breaks for businesses and incremental tax increases that are broadly applied.
“Everyone is coming to the table and giving up something for the greater good,” he said. “The council can send a powerful signal that will trigger economic growth.”
Raising the sales tax or property taxes will be a tougher sell.
While taxing law firms and wealthy homeowners got the most attention, lawmakers have also been considering broader tax hikes, including by raising the city’s existing sales tax by a percentage point or imposing an across-the-board increase on property taxes.
“We are going to have to do something courageous in the next budget,” said Elissa Silverman, an at-Large council member.
Many of her colleagues said they’d want to avoid across-the-board tax increases, largely because they could disproportionately impact lower-income residents. That’s especially the case with the D.C. sales tax, which Mayor Muriel Bowser has pushed to increase to 7% from the current 6%.
Still, Mendelson said on Monday that the council should think about tax hikes that hit everyone, not just the wealthy. And that could start with increasing the city’s sales tax, since the underlying rationale would be to create a more reliable funding stream for the Metro. “I do think that some of the negatives have been overstated,” he said of a sales tax increase.
There was one point of agreement: D.C. needs a better way.
While lawmakers and others who spoke at the hearing differed on the particulars of various tax hikes — and whether tax increases were even necessary — there was something of a consensus that D.C.’s current process for digging into spending and raising revenue isn’t working.
Consider: Friday’s hearing was the council’s first dedicated deep dive into tax policy in as long as anyone could remember, and every time lawmakers have increased taxes in recent years, it’s happened at the last-minute during the budget process, with little chance for residents to explore benefits and drawbacks.
“There’s a better way to do this,” said Nadeau.
Some lawmakers are pushing for the council to create a new commission that would be empowered to dig into city spending and tax proposals; others simply want Mendelson to revive the council’s finance and revenue committee, which he disbanded six years ago.
“It may be worth us looking at a neutral body that can look at government spending and produce recommendations,” said Parker.
D.C. did have the Tax Revision Commission, which was supposed to meet once a decade and produce recommendations for making the city’s tax code more equitable and competitive, but it imploded in 2024 over disagreements about implementing a Business Activity Tax.
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