June 8, 2024

Dear neighbor,

Following the Council’s first vote on the Fiscal Year 2025 budget, a number of people reached out to my office with questions about proposed tax and fee increases in the budget. Before the second vote next week, I wanted to share some more details on the revenue raisers currently in the budget. 

Every five years the District convenes a Tax Revision Commission (TRC) to review and make recommendations on the city’s tax policy. In early January, the TRC, which is currently chaired by former mayor Anthony Williams, released a draft Chairman’s Mark with a full menu of recommendations. The expectation was that the TRC would finalize those recommendations by early February, and they could subsequently inform the mayor and Council’s FY25 budget and financial planning. The TRC, however, could not reach sufficient consensus and has not issued final recommendations. The TRC will likely reconvene and finalize recommendations this fall, which can then inform work on the FY26 budget and financial plan.

In the interim, given both critical expenditure needs and slower growth, it became clear that increased taxes and fees were necessary for the FY25 budget and financial plan. Both the mayor’s proposed budget and the Council’s subsequent budget included revenue raisers, in many cases based on analysis and preliminary recommendations from the TRC. 

No one wants their taxes to go up, and increasing revenue should not be considered lightly. I do not support tax increases simply for the sake of tax increases. In looking at our tax landscape, one resource I have looked to is data from the Institute for Taxation and Economic Policy (ITEP), which measures tax burdens by income brackets at the state level. The District has the most progressive distribution of any state. However, the highest tax burden in the District, 12.4%, falls on families earning between $107,500 and $148,000. In comparison, families earning between $399,400 and $1,039,100 pay 10.9% of their household income and those earning more than $1,039,100 pay 11.4% of their income in aggregate local taxes.

I strongly support tax progressivity at the national level, where the comparison for residents is between living in the United States or in another country. At the local level, residents have much greater mobility in their choice of places to live, including nearby jurisdictions. There are limits on how much a city can increase taxes without losing residents.

Throughout the budget process, my compass point has been that if local taxes were to change, the intent should be to reduce the tax burden for those who pay the highest percentage of their overall income – those earning between $100,000 and $400,000 – and to bring overall taxes for households earning more than $400,000 closer to the share paid by middle-income households consistent with a spirit of shared sacrifice.

In total, the mayor’s budget proposal raised roughly $328 million in FY25 and $1.5 billion over the four-year financial plan through additional taxes and fees. The Council budget raised an additional $124.2 million in FY25 and $435.1 million across the financial plan. The Committee of the Whole’s report on the FY25 Local Budget Act (B25-785) provides a detailed description of the taxes and fees included in the Council budget, starting on page 13. Below I outline a few key measures and my position on them.

• The mayor proposed increasing the Universal Paid Leave Fund payroll tax paid by employers from 0.26% to 0.62%, restoring the tax to the rate initially set in 2019. The mayor’s proposal generated $246.1 million in FY25 and more than $1 billion over the four-year financial plan. In the budget the Council voted on last week, the chairman increased the UPLF tax further, bringing the rate to 0.75% and raising roughly an additional $76 million for FY 25 and $321.6 million over the four-year plan. While I heard little criticism of the initial increase to 0.62%, the subsequent increase to 0.75% has raised significant concern particularly from universities and hospitals, which are some of our largest employers. In an ideal world this increase would be more modest, but the lower revenue would need to be replaced by an alternative. While I see little prospect for change in this tax at the Council’s second vote, it will be important for the TRC to come back with a comprehensive proposal on how to address business taxes for consideration in the budget next year.  

• The mayor’s budget increased sales tax from the current 6% to 6.5% in FY26 and 7% in FY27, with the increase linked to the need to fully fund WMATA. The Council budget retained this proposal. Sales taxes are inherently regressive. The increase, however, does not take effect until FY26 and can be reconsidered next year. Meanwhile, I expect the sales tax will be debated in the coming year as part of the discussion on long-term, sustainable funding for WMATA.

• Chairman Mendelson included a new marginal property tax that would impact homes with assessed values greater than $2.5 million. Homes assessed below that value would not see any change in their taxes. Homes with an assessed value greater than $2.5 million would only experience an increase on the portion of the value above $2.5 million, with the tax increasing by 15 cents per $100 of value. As an example, a home with an assessed value of $3 million would see an increase of $750 a year in property taxes. (To calculate the increase for your home, take the amount of the assessed value greater than $2.5 million and multiply by 0.0015.) The chairman’s proposal is similar to recommendations the TRC made. While not a precise tool, the tax increase will largely be borne by the highest income earners. I have spoken with some senior citizens who own homes where the value has increased under them and now live on a fixed income, who have expressed concern that any marginal increase in property taxes would be burdensome. Those concerns were loudest when there was talk of setting the threshold at $1.5 million in assessed value. If the tax had kicked in at that level, I would have coupled it with increased protections for seniors. At the $2.5 million threshold, which will be indexed to inflation, and with existing property tax credits and tools for senior citizens, I am reassured that seniors living on fixed incomes will be protected. If this proves not to be the case, I will work to address any issues in the FY26 budget.

• The Committee on Transportation and the Environment raised fees on electric and natural gas service, increasing average monthly household costs by $0.80 (electric) and $1.80 (gas), to restore funding for critical climate and environmental programs. The Council budget retained those increases. While as a city we want to encourage transitions to renewable energy sources, these fees can also be regressive. My reservations about the fee increases were not significant enough to oppose them, but we need to tread carefully in this area.

• The Committee on Business and Economic Development proposed eliminating the tax exemption on interest earned from out-of-state municipal bonds, which the TRC previously recommended and included in its Chairman’s Mark. The current Council budget postpones elimination of the exemption until calendar year 2025 and broadens the category of District affiliated bonds that would be exempt. I am on record opposing lifting tax exemptions for interest on out-of-state bonds. This change will disproportionately impact seniors, including people who have methodically planned for their retirements. Even with the proposed expansion of qualified exempt bonds, there are not enough such bonds to meet demand in the District, and if residents could only rely on District bonds, they would not be able to enjoy the kind of portfolio diversification residents in other states enjoy. I continue to work with colleagues to find a path to reverse or postpone the elimination of the interest exemption. 

While much of the conversation has been around tax and fee increases, the Council also took steps to ease the tax burden on families and small businesses, including:

• restoring the Earned Income Tax Credit (EITC) to an 85% match of the federal EITC, providing critical relief for lower-income families and workers;
• creating a new Child Tax Credit that provides a refundable tax credit to low- and middle-income families; and
• increasing the Small Retailer Property Tax Credit to support small, local businesses faced with rapidly increasing rent and real estate costs.

I fully support these tax reductions, which advance the goals of expanding opportunity and supporting economic growth that benefits all residents.

Next Wednesday, June 12, the Council will take the second and final vote on the FY25 Local Budget Act. A final vote on the FY25 Budget Support Act will come later in the month. The District, by law, must pass a balanced budget, and there is limited latitude to make changes between the first and second votes as any decreases in taxes or fees must be paired with either reductions in expenditures or alternative revenue measures. Similarly, increased spending for one program must be offset by making cuts to other programs or by increasing revenue. In either case, the chairman would need to include them in the amended Local Budget Act and/or a majority of the Council would need to embrace the tradeoffs.

I have been pleased with what we have achieved thus far through the budget to support residents across the city and in Ward 3. My efforts in advance of the second vote necessarily must be targeted, and my highest priorities are preserving and strengthening early childhood educational opportunities and supporting our seniors.

My focus on the city’s revenue and expenditures will not end with the final budget vote. Indeed, the city’s larger tax policy is arguably best addressed outside the budget process, which is why we have the Tax Revision Commission. I will be urging the TRC to resume its work and present a comprehensive package of recommendations this fall. 

My next newsletter comes out on Thursday, June 13. Look for more information then on the FY25 budget and all the work I'm doing on behalf of Ward 3.

Best,

Matt Frumin

Ward 3 Councilmember

Councilmember Matt Frumin

1350 Pennsylvania Avenue NW

Suite 408

202-724-8062