Like many U.S. cities, DC is facing a cash crunch. Revenues are roughly flat while costs of nearly everything are rising. Cities are running out of federal pandemic relief money, of which DC received more than $3 billion. Commercial property taxes have plummeted in tandem with property values and will likely get worse as buildings sit empty. District leaders are faced with hard choices in the 2025 budget to fill a $700 million hole. The top priorities are clear: public safety, downtown revitalization, and youth development. Mayor Muriel E. Bowser's proposed budget would spend just under $21 billion. The DC Council plan would spend about $41 million more than the mayor's plan. The big difference between the two is in the policy details, and that's key.
Taxes will go up, but the two chambers can't agree on which taxes to raise and how much. Councilman Bowser (D) would increase the paid family leave tax paid by businesses, add 80 cents per night to hotel room rates, and increase the sales tax (from the current 6% to 7% by fiscal year 2027), which would raise a total of $447 million in revenue next year under the mayor's proposal. The City Council would raise another $550 million in new revenue next year by raising the paid family leave tax and increasing property taxes on homes worth over $2.5 million. In fact, the City Council's budget would fill most of the budget shortfall with tax increases.
“That's not smart. Raising taxes this much instead of cutting spending sends a signal to businesses and residents that lawmakers can't focus on what really matters. It's also a warning that more taxes and fees will come if the budget hole continues. As business leaders consider whether to keep their operations in the city or relocate to Maryland or Virginia, they will be considering the city's public safety and finances.
The City Council backed down from the Mayor's proposed hotel fee, arguing it would make DC less competitive for conferences and events. Similar logic should apply to the City Council's proposed tripling of the family leave payroll tax from the current 0.26% to 0.75% of employee pay (Bowser has proposed 0.62%). The tax was meant to fund employees taking time off work to care for babies or sick family members, but will soon be used for city general expenses. In contrast, the City Council's property tax increase is relatively modest and would target the most expensive homes.
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On the spending front, we are pleased to see that the Mayor and City Council have agreed to increase funding for the police, repurpose unused offices, and strategically renovate public spaces and vacant storefronts. Education has also received a budget increase, but the Mayor and City Council continue to argue over how much of the budget should go to central offices and schools. In that case, the City Council is right to emphasize funding for teachers and classroom needs.
Another reality in the district is the huge inequality of income and wealth, especially between white and black households. Bowser proposed deep cuts to important programs for the disadvantaged, such as housing assistance for struggling families, the Access to Justice program, which provides civil legal assistance to low-income residents, and the Early Childhood Educator Pay Equality Fund, which subsidizes the salaries of childcare workers. The Legislature largely restored these, but went a step further, creating a new Child Tax Credit (CTC) of $420 per child, providing even more funding to low- and moderate-income families with children, and creating a baby bond program that would invest $1,000 per year for each low-income child. Baby bonds would be better funded through private foundations rather than public funds, and now is not the right time to implement the CTC for couples earning up to $240,000 a year.
CFO Glenn Lee has to sign anything the Mayor and Council adopt. If he doesn’t sign it, the residents and Council won’t be convinced. I’m glad the Mayor and Council are working closely with Lee as the June 12 budget vote approaches. The District needs to replenish its reserves, but not necessarily until 2025. There’s a sensible compromise in the works that would ensure the City has enough liquidity to pay all bills on time by allowing the CFO to temporarily put money into a separate trust fund if needed. This is a tactic often used in other state and local governments, and it works well as long as there are proper accounting and auditing systems in place.
As Congress makes final adjustments, it will have to face reality about taxes and spending — scaling back will be hard, but making the tough choices now is better than losing business to Virginia and Maryland.
