FY 2025 Budget Must Address Hardship with Equitably Raised Revenue

Note: DCFPI updated these priorities on May 6, 2024, to reflect the mayor’s proposed budget.

The District made progress towards tackling poverty in 2022 thanks to federal and local public investments in residents, underscoring that deeper, intentional investments can disrupt longstanding racial and economic inequity created over time through discriminatory policy and practice.^[1] Over 2021 and much of 2022, DC boosted cash assistance, increased pay for early childhood educators, and boosted supports like emergency rental assistance and housing vouchers that help people stay stably housed and, in turn, more stably employed.

DC leaders can’t pull back on those investments now. Although poverty in DC declined, more than 1 in 5 Black residents continue to experience poverty, and the Black poverty rate is eight percentage points higher than the rate overall. And despite our solid national recovery overall, polling shows a majority of Black voters (51 percent) experienced difficulty affording groceries in the past year, compared to 13 percent of white voters.^[2]

The same poll also shows near unanimous support from DC voters for investments in programs and services that support residents experiencing economic hardship. Voters overwhelmingly support increasing food security (93 percent), expanding access to affordable child care (91 percent), and creating a local child tax credit (79 percent), among other proposals. Yet the District cannot fund vital government services and programs without needed tax revenue.

In the face of big budget pressures—including the WMATA budget shortfall, expiring federal relief funds for schools, union contracts that must be renegotiated, and declining commercial property tax collections—DC lawmakers need to meet the moment by finding equitable funding sources to meet residents’ urgent needs and address extreme inequality. This will mean prioritizing budget savings and shifts for meeting residents’ basic needs and strengthening the District’s ability to tax its outsized concentration of wealth.^[3]

As the Council develops its fiscal year (FY) 2024 supplemental budget and the FY 2025 budget, the DC Fiscal Policy Institute (DCFPI) urges consideration and prioritization of the following recommendations:

Early Education

• Restore $10 million for the child care subsidy program. The mayor’s budget proposal included a $10 million cut to child care subsidy, which would hinder the Office of State Superintendent of Education’s (OSSE) ability to improve access to the program and could stall the planned expansion of child care subsidy to moderate-income families. OSSE should closely monitor participation in the program to ensure that families with the lowest incomes and those living in Wards 7 and 8, where utilization rates have been low, face low barriers to accessing affordable child care.
• Restore all funding in the Early Childhood Educator Pay Equity Fund (PEF) to ensure that OSSE can implement a well-designed and adequate compensation program for early educators. The mayor’s proposed budget eliminated the PEF. Council should ensure restored funding is adequate to address a flaw in the funding formula to fully pay child development facilities what they need to meet the minimum salary requirements. Redesigning the funding formula could lead to higher program expenses.
• Ensure adequate funding for rising costs in the PEF due to anticipated higher minimum salaries (as a result of public school salary increases) and growing credential attainment among early educators. DCFPI estimates the additional cost will be almost $13 million to cover salary increases and a likely growing number of teachers complying with DC credentialing requirements.^[4]

PreK-12 Education

• Invest in DC’s public education system by providing additional funds for schools, especially the 30 schools in Wards 5,7, and 8, that are facing staffing cuts under the mayor’s proposed budget.
• Collect data from school communities to understand which Elementary and Secondary School Emergency Relief (ESSER)-funded programs and positions were most effective. DC currently has $174.9 million left in ESSER III funding.^[5] DCPS should share their plan on how they will spend the remaining ESSER funds to meet the ongoing needs of students, families, and educators.
• Explore the design of a small school weight in the Uniform Per Student Funding Formula (UPSFF) to bolster the ability of small, by-right neighborhood schools—some of which experience enrollment fluctuations or declines that destabilize their budgets—to afford valuable positions that larger schools offer, such as librarians and after school programs.
• Sign and fund a Washington Teacher’s Union contract for DC Public Schools teachers that accounts for inflation. The contract should be retroactive to the 2023-2024 school year. Lawmakers should budget for how an increased salary scale for public school teachers will also increase the salary floor in the PEF.

Tax and Revenue

• Restore planned increases to the DC Earned Income Tax Credit (EITC) for families. Under current law, DC will match 100 percent the federal credit by 2026, up from the current 70 percent match. The mayor’s proposed budget would freeze DC’s EITC at 70 percent, leading to a profound decrease in income (over $70 million across the financial plan) for 39,000 eligible workers compared to what’s been promised.
• Ensure that the budget doesn’t raise taxes on residents already struggling to get by. The mayor’s proposed budget raises over $1 billion in revenue, including by increasing the sales tax, which disproportionately harms residents with low incomes. Combined with the EITC backtrack, these proposals would, on net, raise the effective tax rate on DC’s residents with the lowest incomes.
• Amend the DC EITC to allow taxpayers to opt into monthly payments, rather than it being automatic. Unlike lump sum payments, monthly EITC payments put some taxpayers’ Supplemental Nutrition Assistance Program benefits at risk because federal law mandates that the District must include recurring income when determining eligibility and benefit levels. Beginning in tax year 2024, DC should allow taxpayers to choose whether monthly payments or a lump sum payment works best for their household.
• Adopt a local Child Tax Credit (CTC) that takes aim at child poverty and builds on strategies to boost income and wealth like guaranteed income pilots, “baby bonds,” and DC’s EITC. A DC CTC for all children ages 17 and younger should be set at $500 per child, at a minimum. But the District should consider a larger CTC of $1,500 per child that would cut child poverty in DC by 18 percent while also helping families with low- and middle-incomes better manage the cost of raising children. The credit should include families filing taxes with an Individual Taxpayer Identification Number and be targeted first to the families most in need. A local CTC would cost between $38 million to $115 million, depending on size of the credit and eligibility parameters.^[6]
• Introduce progressivity into residential property tax structure by adopting a higher marginal property tax rate for single family homes valued over $1.5 million. Doing so will not only create a more equitable distribution of tax responsibility, but it could also raise up to $57 million in annual revenue for the District.^[7]
• Expand the Schedule H deduction for homeowners and renters with low and moderate incomes. Raise income eligibility to at least $78,000 and expand or eliminate the cap on the total benefit to allow for a larger credit.^[8]
• Tax all (realized) capital gains at a higher rate and create an exemption or credit to offset any tax increase for families in the bottom 80 percent of incomes. This highly targeted proposal would increase taxes on passive income sources like selling stocks, art, or other assets. Depending on the design, this could raise up to $163 million annually and only affect taxpayers in the top 20 percent of incomes, with 77 percent of the tax increase paid by those with incomes above $428,000 (the top 5 percent) and about 57 percent coming from those with incomes above $1.2 million (the top 1 percent).^[9]
• Eliminate the stepped-up basis for capital gains bequeathed at death. If an investor leaves an appreciated asset to an heir upon death, neither they nor the heir will ever owe capital gains tax on the growth in value up to that point. This loophole costs $33 million a year. DC can either tax realized gains at the time of transfer to an heir or implement a carryover basis tax.
• Permanently suspend the capital gains tax break for the sale or exchange of a qualified high technology company investment. Lawmakers suspended this tax break due to evidence that these incentives were costly and ineffective. Rather than allowing the tax break to resume in 2025, DC should eliminate it.
• Reject revenue policies that fail to advance racial justice and are poorly designed. Avoid poorly targeted tax breaks—temporary or permanent—including ineffective economic development tax incentives. The DC Council should reject the mayor’s proposed downtown property tax break for developers converting downtown offices to other uses, such as hotels and restaurants, costing $7 million a year by FY 2028 and $20 million a year by FY 2030. Council should also repeal the Housing in Downtown expansion in FY 2028, which increases this tailor-made tax break for developers from nearly $7.1 million in FY 2027 to $41 million in FY 2028 and continue to increase its cost by 4 percent each year after. Lawmakers should provide proof that this program is meeting its intended goals before quintupling its size.

Inclusive Economy

• Provide timely record relief for individuals with prior cannabis-related offenses. Fully fund the Second Chance Amendment Act of 2022 and allow waiting periods to begin from the date of conviction rather than after sentence completion.
• Restore the Medical Cannabis Social Equity Fund (SEF). The mayor’s budget proposal eliminates the SEF, which would provide grants, equity, and loans to support the entry of legacy cannabis entrepreneurs in the medical cannabis market. The mayor’s proposal will result in a reduction of $6.5 million towards the fund over the financial plan.
• Improve public transparency of DC revenues collected from fines and fees. Invest in the capacity of the Office of Chief Financial Officer (OCFO)—and other public agencies that assess and collect fines and fees—to analyze, publish, and share fines and fees data by race, gender, and ward. Require the OCFO to bi-annually publish non-tax and special purpose revenue reports.
• Remove financial barriers to obtain occupational and business licenses for those with unpaid fines and fees. Pass and fully fund the Clean Hands Certification Economic Expansion and Revitalization Amendment Act of 2023 to allow DC residents with more than $100 in unpaid debts to renew District occupational and business licenses.
• Reject the mayor’s proposed eligibility and benefit changes to the “baby bonds” program, restore baby bonds funding across the financial plan, and begin to implement the law. The mayor’s proposal narrows baby bonds eligibility, substantially reduces the District’s contributions to future beneficiaries’ baby bonds accounts, and scales back funding for the program by three-quarters by FY 2028. The Council should reject the mayor’s cuts and fully restore program funding at $66.5 million across the financial plan (this would be on top of the $17.6 million currently in the Child Wealth Fund). Additionally, the OCFO should speed up implementation, including by quickly enrolling eligible children, publicizing an implementation timeline, and releasing updated regulations.
• Maintain $1 million in funding for the Strong Families, Strong Futures guaranteed income pilot. Maintain the mayor’s proposed $1 million in funding for the Strong Families, Strong Futures pilot, which provides direct cash assistance to mothers with low incomes in wards 5, 7, and 8.
• Fund and implement a rigorous evaluation of the Marion Barry Summer Youth Employment Program (MBSYEP). This evaluation should assess the efficacy of the MBSYEP program relative to existing Workforce Innovation and Opportunity Act youth performance measures as well as other measures related to employment, training, education, and well-being that public officials should determine in partnership with young workers, advocates, employers, and other stakeholders.^[10]

Affordable Housing

• Add an additional $41 million to the Housing Production Trust Fund (HPTF). After ten years of allocating at least $100 million to the HPTF, the mayor’s proposed budget includes just $59 million. The DC Council should restore the budget to at least $100 million to ensure DC does not fall further behind in tackling the affordable housing crisis. Restoring this funding will also help DC clear its backlogged pipeline, ensuring desperately needed projects in the works can come online.
• Commit to and fund affordable housing preservation. Ensure that the Affordable Housing Preservation Fund has at least $5 million in flexible capital to cover carrying costs and sustain current preservation projects as they await a path to permanent financing. To ensure that preservation projects have a path to becoming safe, affordable, high-quality housing, the District should set aside at least a quarter of HPTF allocations specifically for preservation.
• Improve transparency and follow reporting requirements for the HPTF. And ensure adequate Project- and Sponsor-based Local Rent Supplement vouchers to support the production of deeply affordable housing, as required by law.
• Invest $30 million to enable tenants to purchase their building through the Tenant Opportunity to Purchase Act (TOPA). Reopen, expand, and fund the First Right to Purchase Program, which provides affordable financing to tenants who seek to purchase their building through the TOPA process. This investment would help create stable homeownership opportunities for tenants and build Black and brown wealth.

Ending Homelessness

Move More Residents Who Are Unhoused into Housing

• Allocate $36.6 million for 1,260 Permanent Supportive Housing (PSH) vouchers for individuals experiencing chronic homelessness, add $8 million for 580 PSH vouchers for families, and invest in Targeted Affordable Housing (TAH) for families. Homeward DC 2.0, the District’s strategic plan to end homelessness, anticipates that 1,260 PSH vouchers are needed in FY 2025. While there have been delays in the implementation of vouchers from recent fiscal years, DC is on track to match all FY 2022-2024 vouchers by September 2024. Without additional funding, there will be no vouchers for residents who become homeless in FY 2025, meaning residents will have to wait for a year to receive housing. Additionally, 2,000 families will be terminated from Rapid ReHousing (RRH) by the end of FY 2024. Approximately 20 percent of these families will need the intensive services that PSH provides, and others will need long term affordable housing through TAH.

Fund Homelessness Prevention and Robust Services

• Ensure prevention programs are adequately funded. Allocate an additional $80 million to the Emergency Rental Assistance Program (ERAP) to reach a total budget of $100 million so all in need can be served. ERAP prevents evictions by helping residents pay overdue rent and legal costs. Allocate an additional $550,000 to Project Reconnect, the prevention program for singles, to ensure service to all who qualify can find alternatives to shelter such as reuniting with friends and family.
• Add $2.9 million to fully fund the Coordinated Street Outreach Network. As of the January 2023 Point-in-Time count, unsheltered homelessness has increased 19 percent over the year prior and hit its highest point since 2017. Full funding maintains the current baseline budget for homeless street outreach and makes up for loss of outreach staff as the CARE pilot, a time-limited initiative focused on encampments, sunsets.
• Restore $5 million cut to RRH for individuals and add $2.5 million to create an additional 100 slots so that all individuals who are eligible and interested can enter the program immediately. RRH for individuals is a voluntary program that provides housing search assistance, supportive services, and short-term rental assistance, generally up to 12 months. The proposed FY 2025 budget includes a $5 million cut to the program, cutting the program in half, which currently has a waitlist. The Council should restore this funding and add $2.5 million so that all on the waitlist can be served.
• Restore funding for DC Flex for individuals. DC Flex is a five-year shallow subsidy program that provides a fixed amount of cash assistance annually to working households who are struggling to afford rent. When the District launched DC Flex, the program was limited to families with children. The District had planned to expand the program to serve 100 individuals, but due to proposed FY 2025 budget cuts, but will only serve 25 individuals without additional funding. The Council should restore funding so that 100 individuals can be served.
• Ensure there are at least 150 medical respite beds for individuals. Meet the need for medical respite beds, which offer a safe place for the unhoused to recover from surgery and illness or to learn to manage a chronic condition.
• Create a flexible funding program at the Department of Human Services to cover one-time move-in expenses for residents receiving a voucher or RRH and provide storage space for unhoused individuals so that unhoused residents can keep their belongings in a safe place until they find housing.
• Increase the number of psychiatric beds. There are not enough psychiatric beds for unhoused residents experiencing psychiatric problems who need intensive services, which often results in release before patients are ready. Adding beds can help clients stabilize while they wait to move into housing.
• Increase Personal Needs Allowance (PNA). DC’s first assisted living facility for chronically unhoused people is undersubscribed in part because Medicaid recipients may keep only $130 per month of any income they earn as a PNA. While this reflects a much needed $30 increase made in FY 2024, the PNA still falls short of what residents need to cover essentials like hygiene products and clothing. The District should increase the PNA for assisted living recipients based on their actual needs.
• Add $407,000 to the FY 2025 budget to continue the public restroom pilot. Without this funding, the pilot will end in the middle of FY 2025. The District recently secured a contractor for the pilot but has not yet installed the restrooms. Without additional funding, these restrooms will close during FY 2025.