D.C. Budget Proposes Sales Tax Hike, Office Conversion Tax Break

District of Columbia Mayor Muriel Bowser unveiled a $21 billion budget plan Wednesday that would raise the city’s sales tax and institute other revenue-raising measures, including a delay in the planned increase in the earned income tax credit.

The fiscal 2025 plan avoids increases to property or income taxes even as the city braces for a slowdown in revenue and the end of federal pandemic relief funds, Bowser said.

The budget would also carry out plans for an office conversion tax credit as part of the mayor’s downtown revival program, which would reduce revenue by $13 million over four years.

While the city expects to see revenue growth from corporate franchise taxes, insurance premiums, and interest income, it’s bracing for a fall in sales tax revenue as consumer spending shifts from goods to services, according to the budget document. Sales tax revenue growth is expected to decrease from 12.9% in fiscal 2023 to 1.9% in fiscal 2024.

Bowser said the general sales tax hike, from 6% to 6.5% in fiscal 2026 and 7% in 2027, would help close looming budget gaps that have been estimated to range between $700 million and $1 billion. The measure would raise $338 million over four years. The mayor’s budget letter said the increase would “support increased Metro costs.”

The budget also would raise revenue by amending the combined reporting method for business entities, a change that the document says would generate $38.9 million over four years. The plan doesn’t specify the changes but said they would occur in tax year 2026.

The budget plan also factors in a $68.8 million increase in revenue over four years by freezing changes to the city’s earned income tax credit. Tax filers who qualify for the federal EITC would continue to get a 70% match of the federal credit amount on their District income taxes instead of seeing an increase to 100% in 2026 as currently planned.

Other proposed revenue-raisers include an increase in the excise tax for vehicles that perform at 40 miles per gallon or greater and a repeal of the excise tax exemption for electric vehicles, both of which are expected to produce $14.4 million over four years.