D.C. Council Explores New Taxes to Close Budget Gap

Lawmakers are evaluating a range of tax proposals to address a projected budget deficit of up to $800 million.

Updated on Oct. 20, 2026 in Remote Work

D.C. Council Explores New Taxes to Close Budget Gap

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Should your local government address budget deficits by raising taxes rather than cutting spending?

The D.C. Council recently held a nine-hour public hearing to discuss potential tax increases as the city faces a budget deficit between $600 million and $800 million. Lawmakers are considering various levies to stabilize the approximately $11 billion municipal budget.

Why it matters

The hearing serves as a critical step in addressing a municipal financial shortfall that follows a $1 billion reduction in the current fiscal year budget. Council members remain divided over whether to expand revenue through new taxes or pursue further spending cuts.

Proposed measures include a 2% Business Activity Tax expected to generate $500 million annually and a 3% capital gains surcharge on individual earners over $400,000 to raise $200 million. Implementing any new tax structure is projected to take 12 to 24 months.

The players

Phil Mendelson

He serves as the Chairman of the Council of the District of Columbia and provides leadership on municipal budgetary matters.

D.C. Council

This is the legislative branch of the District of Columbia government responsible for enacting laws and setting the local budget.

The details

Proposals under discussion include new levies on law firms and lobbyists, a pied-à-terre tax, and potential increases to property or sales taxes. Officials noted that the top 3.5% of taxpayers currently provide 42% of the city’s total tax revenue.

The D.C. Council held a nine-hour tax hearing last Friday.
Chair Phil Mendelson commented on the budget last Monday.
The city's Tax Revision Commission dissolved in 2024.
A new mayor takes office in January.
The city faces a significant budget deficit next year.

Market Landscape

The current debate over tax structure follows the 2024 dissolution of the Tax Revision Commission, leaving the council to navigate fiscal policy without that specific advisory body. These proposals position Washington against neighboring jurisdictions like Maryland and Virginia as policymakers weigh the risk of capital flight.

Residents and business owners may face increased costs if the proposed sales tax, capital gains, or property tax hikes are enacted. These changes could impact the local cost of living and the operational expenses for firms based in the District.

The takeaway

Taxpayers should prepare for a lengthy legislative process, as implementing any of these major tax changes is expected to take between 12 and 24 months. Monitoring council sessions over the coming months will provide the clearest signal on how the city intends to close its budget gap.