DC Council Holds Hearing on Revenue Proposals

The hearing featured testimony from the District’s Chief Financial Officer (CFO) and more than 20 invite-only public witnesses. This alert provides a summary and analysis of the hearing in six key areas: an overview of the hearing, the CFO’s testimony, the proposed business activity tax, the wealth proceeds tax, the land value tax, and other revenue raising proposals. 

Overview

Recently, the Council had to draw on roughly $650 million in non-recurring funds to restore spending cuts Mayor Bowser proposed in the fiscal year 2027 budget. The District is projected to face a budget shortfall of roughly $700 million in the coming year. Chairman Phil Mendelson noted that the revenue proposals are being considered for the fiscal year 2028 budget, which the Mayor and Council will take up next year, and he stressed that new revenue is needed to close this shortfall. Councilmembers’ statements and questions centered on tax fairness, regional competitiveness with Maryland and Virginia, and ensuring that District programs deliver results to enhance affordability before taxes are raised. 

“”““The District faces an uncertain and challenging financial future. The Council is smart to begin its exploration of potential revenue raisers now, even before a new Mayor and Councilmembers are sworn in next year. The new Mayor and Council will face difficult decisions as they seek to balance the needs of vulnerable members of our community with feasible tax policies for residents and businesses.” 

– David P. Grosso, former DC councilmember and ArentFox Schiff partner 

Testimony of the CFO

CFO Glen Lee cautioned that any new tax proposals should be limited by what his office can estimate with certainty and implement quickly. He noted that revenue estimates are complicated by limited data, the mobility of taxpayers, the federal ban on a “commuter tax,” and the District’s reliance on a small number of taxpayers for most of its revenue. He warned that taxes targeting high earners are especially volatile because those taxpayers are most capable to shift the timing of their income, recharacterize income, or relocate to another jurisdiction. 

On implementation, the CFO testified that new tax initiatives could take 12 to 24 months to fully implement, and longer if multiple taxes are adopted at once. He indicated that the wealth proceeds tax, which builds on the existing tax system, could potentially be implemented by FY 2028, but that applying it retroactively to FY 2027 would not be feasible. He also noted that his office’s feasibility study of the business activity tax is expected by the end of January, and that a land value tax would require an entirely new assessment methodology for the Office of Tax and Revenue which could take more time. 

Business Activity Tax

The proposed business activity tax (BAT) received the most attention at the hearing. As proposed, the BAT would impose a 1.4% tax that reaches pass-through businesses, such as professional services firms, that fall outside the District’s existing corporate and unincorporated business franchise taxes. Estimates suggest the BAT could generate about $500 million in revenue. Councilmember Nadeau sponsored the measure, and Councilmember Lewis George is a leading supporter who views it as closing a gap in the current tax code. 

Supporters, including the DC Fiscal Policy Institute, the Institute on Taxation and Economic Policy, the Fair Budget Coalition, and Bread for the City testified that the BAT would improve fairness, stabilize the tax base, and capture revenue from businesses owned by non-residents. They also raised New Hampshire’s experience with a similar value-added tax. Many supporters recommended exempting small businesses and nonprofits.  

Opponents, including former Mayor Anthony Williams, the DC Policy Center, the Tax Foundation, the National Taxpayers Union Foundation, and the DC Chamber of Commerce warned that the tax would discourage hiring and harm the downtown economy. Several opponents raised concerns that the BAT could face legal challenges. The CFO likewise noted that taxing partnerships may capture non-resident labor income, which could lead to litigation that delays collection. 

Wealth Proceeds Tax

The Council is also weighing a wealth proceeds tax, which would apply an additional 3% rate to the investment income of high-earning individuals and households, with thresholds of $400,000 for individuals and $500,000 for households. It is estimated to bring in roughly $100 million each year. Supporters argued that the tax would fall only on top earners and that there is little evidence of tax flight among wealthy individuals, citing Minnesota’s experience with a similar wealth tax. Opponents countered that the tax would push the District’s rate on investment income above 13%, the highest in the country, and that residents could avoid paying the wealth tax by moving to a nearby jurisdiction. The CFO cautioned that revenue from the tax would be volatile and dependent on stock market performance. 

Land Value Tax

Witnesses also addressed legislation that would allow the District to explore assessing land separately from the structures built on it, a step toward a split-rate land value tax. Supporters, including Greater Greater Washington and several academic experts, argued that a land value tax would encourage development and promote equity, citing Detroit’s experience with a similar system. Skeptics, including the CFO, a real estate appraiser, and the National Taxpayers Union Foundation, questioned whether accurate land assessments are achievable in the District, noting that the change would require a radical overhaul of the Office of Tax and Revenue’s assessment system and could significantly increase assessment appeals. 

Other Revenue Proposals

Several additional measures are also being considered, including a pied-à-terre tax on second homes valued at $2.6 million or more (at a rate of $0.85 per $100 of assessed value), higher income tax rates for individuals with income above $250,000, broader property tax increases, and a move to quarterly property tax payments. Councilmember Frumin, the sponsor of the pied-à-terre proposal, indicated that the Council will weigh whether any of these options could be used instead of the sales tax increase (from 6% to 7%) currently scheduled for 2028. Many public witnesses urged the Council not to pursue the sales tax increase, which they described as regressive, and the DC Association of REALTORS opposed both property tax increases and the pied-à-terre tax. 

The hearing record will remain open until 5:00 PM on October 30 for written comments. Any proposals described in this alert are subject to further deliberation by the Council and would be considered as part of the Fiscal Year 2028 budget process. 

The Government Relations group at ArentFox Schiff will continue to monitor the Council’s consideration of these revenue proposals and publish follow-up legal alerts as developments warrant. If you would like to engage in a more detailed conversation about any of the proposals discussed above, please contact your ArentFox Schiff attorney or any of the authors of this alert.