Taxation provides the resources DC needs to fund quality schools, housing, transportation, and other essential services that allow residents to thrive. DC’s current tax code also reinforces the concentration of wealth among disproportionately white households. With the District facing a persistent revenue shortfall, lawmakers are considering new ways to raise the dollars needed to maintain current commitments and invest in DC’s future. These choices will do more than close a budget gap; they will also shape how opportunity and wealth are distributed. Lawmakers can use this moment to advance a more progressive and racially-just tax system by evaluating tax proposals across five dimensions: equity, adequacy and stability, simplicity, neutrality, and accountability.[1]
Equity
An equitable, or progressive, tax system asks households to contribute based on their ability to pay. That means higher-income households devote a larger share of their income to taxes than lower-income households because they have greater financial capacity and more disposable income. By contrast, a regressive tax system places greater tax responsibility on households with lower incomes, who are disproportionately Black and brown in DC. Inequitable tax policy compounds racial disparities in income and wealth that are already deeply entrenched.
When evaluating tax fairness, lawmakers should look beyond individual proposals and consider how taxes interact overall. For example, while the District has a progressive, graduated-rate income tax, it also relies on regressive sales, excise, and property taxes that make the overall tax system less equitable. To offset the impact of these regressive taxes, DC targets tax credits and deductions to residents with the greatest needs, such as through the Earned Income Tax Credit and the Schedule H property tax credit. When taking into account all local taxes, DC has the least regressive tax code in the nation, as measured by the share of income in taxes paid by the bottom 20 percent of taxpayers compared to the top 20 percent of taxpayers. However, middle-income taxpayers still pay a greater share than that of the top 20 percent, top 5 percent, and top 1 percent (Figure 1).
Beyond progressivity, an equitable tax system also treats people in similar financial circumstances equally. That is, two households with the same income and family structure, holding all else equal, pay the same amount in taxes. Otherwise, the tax code can give some people advantages over others even when they have the same ability to pay, as seen in the One Big Beautiful Bill Act’s (OBBBA) “No Tax on Tips” provision. Under OBBBA, a cashier and tipped service worker in DC could earn the same amount, yet the latter could pay less in income taxes simply because of how their income is earned. Privileging some types of income over others offers numerous opportunities for tax avoidance and evasion and is unfair, wasteful, and adds unnecessary complexity.
Figure 1.
Lastly, an equitable tax system should help reduce, rather than reinforce, racial disparities in income and wealth. While tax policies may appear race-neutral because they do not explicitly determine tax liability based on race, systemic racism and discrimination shape the factors that do influence how much people pay, like income, savings, and consumption. For example, the mortgage interest deduction disproportionately benefits white households because structural racism in housing and lending has contributed to persistent racial gaps in homeownership, leaving Black households less likely to own a home and claim the deduction.
Adequacy and Stability
A pro-growth tax code raises enough revenue to meet current needs and sustain essential services and infrastructure that households and businesses need and are foundational to a strong economy. Balancing a four-year financial plan year after year requires adequacy over the short- and medium-term, but true fiscal stability depends on adequacy over the long-term. It requires the ability to maintain services, meet financial obligations such as debt service, and respond to emerging needs or changes in the economy. When taxation is inadequate, revenue does not keep pace with natural growth in the cost of maintaining services (i.e., growth that occurs even with no policy changes), meeting financial obligations becomes more difficult, and fewer options exist for adapting to economic shifts or shocks (like the persistence of remote work that stemmed from a world-wide pandemic).
DC’s ongoing revenue challenges highlight the importance of adequacy. In response to slowing revenue growth and increasing costs in recent years, DC lawmakers passed significant budget cuts and recurring and non-recurring revenue solutions. And, in order to balance the four-year financial plan, lawmakers have shifted to funding several ongoing programs on a one-year basis, rather than across the financial plan. As a result, lawmakers must revisit funding for the same priorities year after year to determine whether they can continue them. This leaves critical public investments, such as childcare and cash assistance, and the communities they support vulnerable to changing fiscal conditions. A truly adequate tax system would raise enough revenue to fulfill the District’s commitments on a recurring basis, across the financial plan and beyond.
Today, DC faces, at a minimum, a recurring $660 million spending gap beginning in fiscal year (FY) 2028, before accounting for any revenue changes that may materialize in the September 2026 revenue forecast, according to Chairman Mendelson. This estimate does not account for organic growth in the cost of providing public services.
When evaluating which tax proposals can meet short- to long-term needs, lawmakers should consider how revenue will perform as economic conditions change and what mix of taxes are needed to sustain budget growth over time. A strong, adequate tax system needs a mix of taxes that together provide a broad base, stable growth over time, and complementarity. For example, the property tax has a broad base and is less at risk in economic downturns. The sales tax is also broad-based, but more or less resilient depending on whether it is designed to keep up with changes in consumption patterns. Income taxes on wage earnings fluctuate with economic shocks but are sustainable over the long-term and tend to grow faster over time. Income taxes on passive income, such as capital gains, can be volatile but also at times counter-cyclical—meaning sometimes the stock market does quite well in a recession—so capturing that growth can help offset slower growth in other taxes.
Simplicity
Simple tax rules make it easier for residents to understand what they owe and access the benefits they qualify for. A complex tax system, by contrast, is one with numerous loopholes and exceptions that make forms longer and more difficult to complete and the system harder for governments to administer and enforce. Complexity also gives an advantage to taxpayers who can afford to hire accounting professionals and makes it easier for lawmakers to conceal tax breaks without clear public scrutiny.
When considering tax proposals, lawmakers should avoid adding unnecessary tax breaks that make the tax code harder to navigate and administer. New exemptions, deductions, and other tax preferences should be scrutinized to ensure they serve a clear public purpose and justify the additional complexity and administrative burden they create.
Neutrality
A neutral tax system generally avoids influencing people’s economic decisions. People and businesses should choose what to buy, where to invest, and what to produce based on what makes the most sense for them, not because the tax code gives one option a financial advantage over another. When tax breaks favor certain businesses, industries, or types of income, they can steer investment toward those activities even when other uses could generate greater economic value. Special tax breaks for sports stadiums, for example, squeeze out other, better possible investments and thus can result in less economic growth than otherwise could have been achieved. In addition, such tax breaks can be ineffective if they confer financial benefits to businesses to do activities that they would have done anyway, regardless of the tax break (as DC saw with DC’s Qualified High Technology Company incentive). Thus, when weighing tax proposals, lawmakers should be cautious about creating special tax breaks that give one sector of the economy an advantage over others.
Accountability
An accountable tax system requires both fair enforcement and transparency. All taxpayers should be expected to pay what they owe, while tax administrators should enforce the rules fairly and consistently. Lawmakers should also provide the public with information needed to evaluate whether tax policies are effective and fair, including who benefits from tax cuts and how much revenue they cost. For example, the Office of Chief Financial Officer produces two key reports—one on tax responsibility levels by income groups and across the DMV region, and one that documents the cost of tax breaks and who receives them.
Accountability also requires giving lawmakers the authority to shape tax policy around the needs of their constituents. Although Congress retains significant authority over the District’s tax policies, DC lawmakers should consider decoupling from the federal tax code when federal provisions conflict with the District’s priorities.
