A legal dispute over Washington, D.C.’s attempt to opt out of federal tax cuts has left the city’s chief financial officer excluding $180 million in expected revenue from budget forecasts, setting up a clash between the mayor, city council, and Congress over local tax authority.
The District’s attorney general ruled last week that a Congressional attempt to block the city’s tax law failed on procedural grounds, but Chief Financial Officer Glen Lee has declined to include the disputed revenue in his February estimates. The disagreement centers on whether D.C. can collect an additional $180 million this fiscal year and $700 million over multiple years by maintaining higher local tax rates than the federal government.
What the Law Does
Last November, the D.C. Council passed temporary legislation to decouple from 13 of 84 tax provisions in the federal One Big Beautiful Bill Act. The local law means D.C. residents and businesses would continue paying city taxes on income the federal government now exempts, including tips and overtime pay.
The city operates under rolling conformity, automatically mirroring federal tax changes unless it actively passes legislation to break away. The temporary measure aimed to preserve local revenue while the federal government cut taxes, a move city officials say protects funding for local services.
The temporary law applies only through September 25, 2026, meaning it affects tax year 2025 filings due this spring but expires before next year’s tax season unless the council extends it.
Congressional Intervention and Timing Dispute
Congress moved to block the D.C. law through House Joint Resolution 142 under the 1973 Home Rule Act, which gives federal lawmakers 30 days to disapprove local legislation. The House passed the resolution on time, but the Senate voted one day late.
D.C. Attorney General Brian Schwalb concluded the late Senate vote invalidated the disapproval. “HJ 142 operates as an expression of Congress’s unfavorable opinion… not a repeal because it was not enacted within the 30-day period,” according to the legal opinion. The resolution also lacked retroactive language that would have applied it to past dates.
This marks a rare test of the Home Rule Act’s strict timelines. Congress has blocked D.C. laws before on issues like gun regulations, but procedural timing has seldom been the deciding factor in whether federal disapproval stands.
Revenue Estimate Standoff
Despite the attorney general’s opinion, Lee’s office excluded the $180 million from revenue projections “due to the uncertainty of the associated revenue as a result of Joint Resolution 142.” The chief financial officer noted his office is reviewing the legal analysis while tax season continues.
Mayor Muriel Bowser sent Lee a letter Friday requesting clarification on how he will apply the law to tax collection. “The February revenue estimate is either incomplete because you have not yet determined your legal position on DC Law 26-89 – in which case the estimate should be clearly qualified until that determination is made – or it is inaccurate because revenues the District will lawfully be collecting are not included in it,” she wrote. Lee had not publicly responded as of Monday evening.
Council Chairman Phil Mendelson said the decoupling represents roughly $700 million over the city’s multiyear financial plan through 2030 and must appear in forecasts. “They can reflect it with an asterisk, but you can’t just pretend it doesn’t exist at all,” he told reporters Monday.
The chairman added he has not heard pushback from federal officials since the attorney general’s opinion was issued, suggesting Congress may not pursue further action to block the law.
Budget Planning Complications
The revenue uncertainty complicates D.C.’s budget process as officials prepare spending plans for the coming fiscal year. If the chief financial officer continues excluding the disputed $180 million, the city faces either cutting planned expenditures or finding alternative revenue sources.
Lee noted in his letter that the temporary legislation does not affect estimated revenues for fiscal years 2027 to 2030 because it expires in September 2026. This means the $700 million multiyear impact Mendelson cited depends on the council passing permanent decoupling legislation or extending the temporary measure beyond its current expiration date.
The September deadline gives city officials time to resolve the legal dispute and decide whether to make the tax policy permanent. Without council action before that date, D.C. would automatically conform to federal tax law starting with the 2026 tax year.
What It Means for Taxpayers
D.C. residents and businesses filing 2025 tax returns this spring should expect to owe city taxes on income the federal government now exempts. This includes tips, overtime pay, and other categories covered by the 13 provisions the city decoupled from.
The attorney general’s opinion suggests the law stands for current tax filings, but the chief financial officer’s hesitation creates uncertainty about how aggressively the city will pursue collection. Taxpayers may want to consult tax professionals familiar with D.C. law given the ongoing dispute between city officials.
Nationally, early 2026 filers are seeing larger refunds compared to 2025, according to IRS weekly statistics, though those figures don’t break down state-by-state or include local tax impacts. D.C.’s decoupling adds a local layer that could reduce overall refunds for city residents despite federal changes.
The dispute also highlights the limited autonomy D.C. possesses compared to states. While states routinely decouple from federal tax provisions without Congressional review, the District’s status as a federal territory subjects its laws to potential veto even when procedural requirements aren’t met on time.
Source
DC Council Chairman talks taxes, budget, bodycams, federal surge | WJLA (7News)