Congressional Republicans, who last year barred the District of Columbia from spending $1 billion of its own revenue in its 2025 budget, are now moving to block another D.C. law. This action poses risks to D.C.’s public services and credit rating, and could create tax filing chaos for families and businesses just as tax season begins. Congress should respect D.C.’s decision-making and allow this law to stand, rejecting calls by some to override the judgement of D.C.’s elected officials.
In addition to extending many 2017 tax changes, H.R. 1’s new tax changes included significant new federal tax cuts, including for multinational corporations. Last November, the D.C. Council passed legislation to ensure that the federal tax cuts enacted in H.R. 1 didn’t unbalance D.C.’s budget.
Many state tax codes, and D.C.’s, are linked to the federal tax code in various ways. When the federal government enacts federal tax changes that could reduce state revenue in ways states hadn’t counted on, states often choose to change their tax code (known as “decoupling”). That’s just what D.C. did in this case. If it hadn’t, the District would have lost $658 million in revenues over the next five years.
D.C.’s legislation to decouple from these provisions of H.R. 1 won’t affect the federal tax changes themselves. The decision was fiscally sound. Federal layoffs contributing to slower revenue growth, high inflation, and new costs to D.C. in health care and food assistance enacted in H.R. 1 are all putting significant pressure on D.C.’s budget. By acting to prevent a revenue loss they didn’t vote for, the D.C. Council helped ensure that D.C. can meet its balanced budget requirement.
Next week, however, House Republican leadership is expected to advance legislation to the floor that disapproves D.C.’s legislation, which would effectively rescind it and leave D.C. with a sizable budget hole. The Senate Homeland Security and Governmental Affairs Committee is expected to consider an identical bill on Wednesday.
Losing more than half a billion dollars in revenue over the next five years would make addressing D.C.’s budget challenges far harder. Education, first responders, and human services make up more than half of D.C.’s local budget, and D.C. would likely be forced to make harmful cuts to these public services or raise taxes on others if it had to adopt all of the federal tax changes.
D.C.’s elected officials need to be able to manage its budget, including being able to spend its own revenues and ensure its tax code can support its budget.
That’s not all. Blocking the legislation would cause significant and ongoing harm, including:
- Putting D.C. at risk of another credit downgrade, which could lead to higher borrowing costs for the District. D.C. has demonstrated strong financial management through balanced budgets and 28 consecutive clean audits. But ratings agencies are already questioning D.C.’s ability to meet its financial obligations because of federal actions. Moody’s downgraded D.C. last year after Congress barred the District from spending $1 billion of its own revenue in its 2025 budget.Fitch cited that same congressional action in putting D.C. on its Rating Watch Negative list, noting that Congress had never before overturned a D.C.-enacted revenue-raising measure. Fitch pointed out that, “Until now, Congress had a lengthy record of specifically preserving the District’s spending authority at levels set forth in the budgets approved by the District’s council and mayor for each fiscal year.”
- Making D.C. less affordable for families trying to make ends meet by repealing D.C.’s new Child Tax Credit and expanded Earned Income Tax Credit (EITC). As part of the legislation, the D.C. Council raised its EITC to 100 percent of the federal credit and created a new Child Tax Credit worth $1,000 per child. These tax credits build on the success of both federal credits by putting more money directly in the pockets of families struggling to afford the basics, improving child well-being, and keeping dollars flowing through local economies.Together, the new and expanded credits are projected to reduce child poverty by 20 percent, with most of the gains going to households earning less than $61,000 annually. Repealing these crucial supports would be particularly harmful now with the D.C. economy “teetering toward recession,” due in part to the substantial layoffs of federal workers and the affordability challenges low- and moderate-income families in D.C. are facing. If Congress doesn’t allow D.C. to retain its current levels of taxation, low- and moderate-income families could lose out on the Child Tax Credit and EITC expansions. Meanwhile, the largest federal tax benefits from H.R. 1 are going to higher-income families.
- Creating chaos for D.C. families and businesses at the start of tax filing season. D.C. began accepting and processing tax returns on January 27, and families are already beginning to file their taxes and claim the newly expanded EITC. One reason the D.C. Council prioritized passing this bill in November was to finalize tax forms and prepare for the upcoming tax season. Changing D.C.’s tax code now would create additional hurdles and confusion for families and businesses, especially families expecting to receive a larger Earned Income Tax Credit.
Here’s some background. The D.C. government takes on most responsibilities states usually hold, such as administering Medicaid, funding schools and child care, and providing unemployment insurance and other public supports. Like a state, D.C. must balance its budget each year.
But unlike a state, D.C.’s laws are subject to congressional approval under the Home Rule Act of 1973. Congress has 30 days to review D.C. legislation for most types of laws. For decades, Congress has generally permitted D.C. laws related to the budget to stand. Striking down this legislation would represent an increased level of interference by Congress into D.C.’s ability to raise and spend its own revenue. And Congress would then have no responsibility to fill in the budget hole it had created.
D.C. isn’t alone in decoupling its tax code from some of the recent federal tax changes. Michigan and Pennsylvania have also decoupled from several business-related provisions in last year’s federal law, for example, and Alabama allows corporations to choose whether to deduct research and experimentation expenses immediately or over time. After major tax legislation enacted in 2001 and 2017, many states took legislative action to decouple elements of their tax code from the federal code.
D.C.’s legislation changed nothing about the federal tax cuts enacted last year — D.C.’s families and business will still receive them. For Congress to rescind the legislation would only deny D.C.’s ability to decide whether to add to those federal tax cuts with additional D.C. tax cuts, an issue correctly left to D.C.’s elected officials.
To meet its balanced budget requirement, safeguard its high credit rating, and meet its own residents’ needs, D.C.’s elected officials need to be able to manage its budget, including being able to spend its own revenues and ensure its tax code can support its budget. The choices the D.C. Council and mayor have made are reasonable and in line with the choices other states are making, balancing the maintenance of crucial public services with prudent fiscal management in a time of weak revenues and an uncertain economy.
