The D.C. Tax Code Controversy

Today's post is not only going to be deep in the weeds, it is going to be buried in the soil beneath the weeds. Unless you are a fan of esoteric legal disputes, this topic will likely only be of interest to residents of the District of Columbia. I suspect even many who live in D.C. will be prone to skipping the post simply because it sounds boring. It is boring. But, this could have a major impact on your D.C. taxes and, potentially, even require you to refile your 2025 returns. The issue is a move by the D.C. Council in December to decouple the District's tax code from certain provisions of federal tax law.

First, what does it mean to "decouple?" "Decouple" may seem like a fancy word for divorce, and that is actually not too far off. Historically, the D.C. tax code, along with the tax codes of most states, was aligned — or coupled — to the U.S. tax code. As a result, if the federal government, for instance, decided to change the tax on widgets, the same modification would be reflected in D.C. taxes. The One Big Beautiful Bill Act, passed by Congress and signed into law by cult leader, convicted felon, and failed President Donald Trump last summer, contained a number of tax cuts, mostly benefitting businesses. Glen Lee, the District's Chief Financial Officer, estimated that if D.C. taxes were similarly modified, the D.C. government would lose more than $600 million over the next four years. In response, the D.C. Council approved two bills to decouple, or unlink, D.C. taxes from several provisions in the U.S. code, in effect preventing the federal tax changes from being passed on to the local tax code.

There were two bills due to the specifics of D.C. law. D.C. laws are subject to a Congressional review period during which Congress may act to overturn the law. This creates a practical problem in that nobody knows whether a new law is valid until the review period has passed without Congressional action. However, the Council may also pass "emergency" legislation which is not automatically subject to Congressional review, but is only valid for 90 days. In December, the Council passed both the Emergency Conformity Act, an emergency bill that was immediately effective and would be valid until March 3, 2026, and the Temporary Conformity Act, a regular bill that would be valid until September 25, 2026. Both bills were otherwise identical and both made the tax code changes retroactive to January 1, 2025.

As a result of this legislation, tax forms were prepared that reflected the Council's changes and D.C. taxpayers have been filing returns based on the decoupled tax code. For the record, D.C. is not alone in decoupling; three other states have also done so. If things had stopped here, this wouldn't really be much of a story. But, things didn't stop here.

As noted, D.C.'s laws are subject to a Congressional review period. For non-criminal code changes, this is a 30-day period "beginning on the day such act is transmitted by the Chairman to the Speaker of the House of Representatives and the President of the Senate". These are not strictly calendar days because there are lots of exceptions such as weekends and days that neither chamber is in session. In the case of the Temporary Conformity Act, it was sent to Congress on December 30, 2025, and, according to the D.C. Council, the review period ended on February 11, 2026. Therefore, the D.C. Council considered the Temporary Conformity Act to have become D.C. law.

However, there is a wrinkle. On February 4, 2026, the House of Representatives passed House Joint Resolution 142 "disapproving of" the Temporary Conformity Act. The Senate followed up by passing the same resolution on February 12, 2026. It was then transmitted to the president. If you have been paying close attention, you will have noticed that February 12 is after February 11, the day the review period expired. However, there is another wrinkle. Congressional officials have previously insisted that the review period does not begin until transmission of the legislation has been recorded in the Congressional Record. Under that interpretation, the Senate action would be within the review period. In the past, there has been a similar disagreement over the end date, and Congress's interpretation won out. If this were to be the case now, D.C.'s tax forms would need to be revised, and those who have filed taxes already would have to redo them.

According to Martin Austermuhle, writing for the 51st:

If Congress has its way, [DC CFO] Lee says tax-filing season would have to be delayed, and deadlines could extend into the late summer months and beyond. It could also cost D.C. $5-10 million to redo tax forms, systems, and guidance to preparers and lead to a possible cash flow shortage for the city.

Incidentally, Austermuhle has been on this issue all along. If you want to read coverage by a real reporter rather than just me, he has several articles on the topic.

The problem we have now is that the D.C. Council says that the Temporary Conformity Act is now law. Congress says it isn't. What is poor Glen Lee supposed to do? What he did do was to ask D.C. Attorney General Brian Schwalb for a legal opinion. Schwalb responded yesterday saying that the Council is correct.

Schwalb notes that both the Emergency Conformity Act and the Temporary Conformity Act made changes retroactive to the beginning of last year that created tax liabilities for D.C. taxpayers. He then cites 1 U.S.C. § 109 which he says states that the "repeal of a statute does not release or extinguish any liability incurred under that statute, unless the repealing statute expressly provides otherwise". Schwalb further writes that "HJ 142 did not retroactively alter the tax liability imposed" by the legislation. Therefore, the changes made by the two bills stand, regardless of the Congressional action. Schwalb additionally cites the general presumption against retroactivity and says that it "separately dictates that HJ 142 does not alter tax liability for calendar year 2025." For good measure, Schwalb also agrees with the Council's interpretation of the date the Congressional review period ended and says that the Senate acted a day late.

So where does that leave things? According to Austermuhle, the CFO's office is reviewing Schwalb's letter. In the meantime, tax season is proceeding under the legislation approved by the Council. The real question regards the response of Congress. Will Congress accept what is going on with D.C.'s taxes or try to assert its will? Congress could go to court and sue the District, or use legislative means to pressure the D.C. government. For instance, a rider that withholds funding or otherwise punishes the District unless the tax code is again aligned with federal laws could be attached to another bill. Congress has a myriad of ways to meddle in D.C. affairs. This is particularly true with Trump in the White House, given his propensity to get involved in running the District.