DC lawmakers need to address inadequate revenue growth, a trend that is unlikely to change given structural changes to DC’s economy. DC faces lower revenue projections and a fiscal cliff in fiscal year (FY) 2028, after lawmakers patched the current-year budget together with hundreds of millions of dollars in one-time funds. If DC Council fails to raise revenue now, thousands of residents will lose access to critical services and programs, exacerbating child poverty and racial disparities in the District.
DC’s Economy Has Taken a Big Hit and Revenue Growth is Unlikely to Recover without Intervention
DC’s inadequate revenue growth is due to major changes to the economy, including significant strain from federal policies. In 2025, the Trump administration slashed the federal workforce and terminated federal contracts and grants to private organizations, leading to further layoffs. Last year, the Office of the Chief Financial Officer (OCFO) estimated that the loss of 24,000 jobs held by federal workers would cost DC more than $600 million in revenue by FY 2029. The federal workforce and affiliated industries have been the backbone of DC’s economy: federal jobs made up 13 percent of total resident employment, compared to 1.9 percent of all jobs nationally. The administration’s layoffs caused a man-made recession for the District and federal employment may not recover for years regardless of the state of the national economy.
Furthermore, the One Big Beautiful Bill Act (OBBBA) created massive tax cuts for the wealthy and profitable corporations, which would have been automatically replicated in the DC tax code if Councilmembers hadn’t voted to temporarily reject the most costly provisions. Lawmakers, however, did not make those changes permanent, passing a budget that only partially and temporarily decouples from OBBBA tax cuts. This will cost DC hundreds of millions in revenue across the financial plan. And the OCFO reported in its most recent revenue estimates that corporate tax revenue is down despite strong corporate profit growth as tech firms take advantage of expensing and depreciation deductions, a matter that will get worse in future years as DC reverts back to more fully replicating unnecessary federal tax breaks locally.
Other factors are also at play in depressing revenue growth. The COVID-19 pandemic resulted in a persistent shift to remote work that drove a steep decline in commercial property values and tax collections—one that has meant $260 million less in revenue since FY 2022 (Table 1). DC is unlikely to see this revenue source rebound to pre-pandemic levels in future years, even with growth in the economy, because the nature of work seems to have been permanently altered.
Table 1.
Because DC’s projected shortfall is due to so many structural factors, the problem is unlikely to remedy itself even if the economic picture improves, which it is not projected to do next year. The DC Fiscal Policy Institute’s analysis highlights that while Local Fund revenue held steady for the past 25 years as a share of the economy, the outlook shows decline. Looking ahead, the Local Fund revenue as a share of income is projected to shrink far below the historic trend of 15 percent, on average, down to nearly 12.7 percent by FY 2030 and down from 13.3 percent in FY 2026.
Residents Will Pay the Price if Lawmakers Fail to Raise Revenue
Lessons learned from past recessions underscore that DC lawmakers need a balanced approach to the current downturn that includes raising revenue to minimize budget cuts at a time when need is growing. More public investment in residents’ wellbeing during an economic downturn can speed up recovery, by partially replacing lost income for unemployed residents, for example.
The last three non-pandemic recessions were marked by lengthy “jobless recoveries,” meaning employment didn’t start to recover alongside a growing economy when those recessions ended. This resulted in longer lasting high levels of unemployment for people of color and young workers. Black workers always bear the economic brunt of recessions due to centuries of historic and systemic racism. Currently, Black DC residents have the second highest unemployment rate in the nation and three out of five Black residents can’t afford to live in DC. Unemployment makes it more difficult for people to afford essentials like food, housing, and healthcare, brings harm to businesses as people spend less, and can have long-lasting negative effects on workers’ employment and earnings prospects.
The pandemic-induced recession in 2020, to the contrary, was initially much deeper, but followed by an extremely quick jobs recovery due to more robust federal relief measures than what followed the Great Recession. At the local level, DC also responded to the pandemic with a key revenue raiser that allowed the District to increase early educator pay, invest in housing vouchers, and vastly expand the DC Earned Income Tax Credit, getting local economic support to people and families with low and moderate incomes. Lawmakers combined these additional resources with significant federal aid to support residents’ economic security and the District’s recovery.
Raising revenue to reduce budget cuts, especially to basic needs programs, is even more urgent and pragmatic this time around because DC will not have federal aid to stem the effects of the downturn. While the District will not be able to make up for lost federal funding or raise enough revenue to emulate a federal aid package, every dollar raised is a dollar that doesn’t have to be cut. Minimizing cuts will lessen the harm to DC residents and, even if minimally, help reduce the time it takes for the District’s economy to recover.
DC Lawmakers Have Options for Equitably Raising Revenue and Should Use Them Quickly
DC Council can raise revenue needed for a balanced approach to the local recession and recapture some of the windfall tax cuts under OBBBA for DC by taxing more of the gains, or proceeds, generated by wealth—such as capital gains, dividends, and other forms of passive income. Piggybacking on the federal Net Investment Income Tax by applying a local percentage on proceeds generated from wealth is a simple way for DC to raise hundreds of millions of dollars to help struggling residents withstand the local recession. DC Council can move quickly to adopt the Wealth Proceeds Tax (WPT) legislation already introduced and under consideration. A WPT would fall almost entirely on the very wealthiest—those with household incomes over $1 million—at a time when wealth from capital gains is growing.
They also can move quickly in the new year to improve the tax system’s adequacy and resilience with a Business Activity Tax (BAT), using the feasibility analysis that the OCFO is required to provide in January to perfect its design. Federal restrictions on DC exempt certain businesses whose owners live outside of DC, including major law, lobbying, and consulting firms, from paying DC’s primary forms of business tax. A BAT would correct this loophole, broadening the base of business taxation without increasing taxes on businesses that already meaningfully contribute to DC’s collective resources.
