District of Columbia budget legislation makes numerous tax changes

On July 26, 2024, Mayor Muriel Bowser returned the Fiscal Year 2025 Budget Support Act of 2024 unsigned to the city council, allowing the budget to proceed to congressional review. Earlier, the corresponding emergency legislation, immediately enacting the budget provisions, was returned on July 15, 2024, also unsigned. The emergency legislation is temporarily effective for 90 days, through Oct. 13, 2024, essentially enacting the fiscal year 2025 budget provisions. The budget makes a number of tax changes included adopting the Finnigan method of apportionment beginning in 2026, repealing the special capital gains tax on certain qualified high technology company investments and raising the general sales and use tax rate over two years to 7%, among others. 

Fiscal year 2025 tax changes

The budget as returned by the mayor makes a number of tax policy changes. A summary of the salient changes for most business taxpayers includes the following:

Corporate apportionment methodology: For tax years beginning after Dec. 31, 2025, the District will employ a Finnigan methodology to apportionment, meaning receipts sourced to the District from any member of the combined group are included in the sales factor numerator, regardless of whether the member generating the District receipts has nexus within the District.

Qualified High Technology Company (QHTC) tax repeal: Previous legislation suspended the reduced 3% tax rate on capital gains from the sale or exchange of an investment in a QHTC for tax years 2020 through 2024. The budget legislation eliminates the beneficial rate entirely, and capital gains from a QHTC investment will be taxed at the regular statutory franchise tax rate. The District offers companies in the technology business that meet the definition of a QHTC, such as businesses in internet-related services or information and communication technology, a number of tax benefits including wage credits, training credits and property tax benefits.

Sales and use tax increase: The budget increases the District’s general sales and use tax rate for tangible personal property and selected services to 6.5%, effective Oct. 1, 2025, and then to 7%, effective Oct. 1, 2026. The current rate of 6%, valid through Sept. 30, 2025, was effective in October of 2018. The specified sales tax rates on all other categories remain unchanged, such as the 10% rate on food and drink sold for immediate consumption.

Residential property tax increase: Residential property, including certain single-family homes and condominiums, are subject to an increased assessment rate of $1, from $0.85, of each $100 of taxable assessed value over $2.5 million, effective for tax year 2025. The assessment rate on assessed value under $2.5 million of residential property remains unchanged.

Other tax changes to note: Several other tax changes in the new fiscal year budget are worth noting, including the following:

• Increased rates for the motor vehicle excise tax on gas vehicles as well as a repeal of the exemption for electric vehicles
• A delay in the District earned income tax credit match to the federal credit to 2029
• The elimination of the out-of-state bonds interest exclusion when calculating gross income for personal income tax purposes

Takeaways

In her letter back to city council, the mayor noted her displeasure with the budget, but did not veto it, noting that the budget could result in additional tax hikes next year. Notably, the District will join New Jersey in recently adopting the Finnigan method of apportionment. The District also looks to become one of the few jurisdictions to increase sales tax rates in recent years as no state has increased its general sales tax rate in several years.

The Fiscal Year 2025 Budget Support Act was submitted to Congress for a 30-day review period. It is anticipated to become law by Dec. 7, 2024. The Emergency Act is effective for 90 days, or through Oct. 13, 2024, enacting the provisions of the Fiscal Year 2025 Budget Support Act while pending congressional review.