Below is the letter our office sent to the Mayor and DC Council, outlining our February 2025 revenue estimate. Read the full letter with data appendices here. Read the PowerPoint overview here.
This letter certifies the revenue estimate for the FY 2025 – FY 2029 Budget and Financial Plan of the District of Columbia. The FY 2025 local source revenue forecast has been revised downward by $21.6 million as year-to-date collections show lower-than-expected receipts for the sales and non-tax revenue sources. The revenue forecast for the rest of the financial plan period has also been revised downward by an average of $342.1 million annually, largely due to forecasted sharp declines in employment levels as the Federal government proceeds with reducing its workforce significantly. The resulting decline in income and consumption means lower revenue from the District’s individual income and sales taxes. Real property tax revenue in this estimate has also been lowered based on lower assessed values across almost all classes of properties. This reflects ongoing weakness in commercial property values due to expanded remote work since the pandemic and a recent decline in residential home prices.
Year-to-date tax receipts through January grew 5 percent, but do not reflect major tax payments for the District’s primary revenue sources, such as property taxes (first half payments are due in March) and final income tax payments (due in April). Changes in the economic landscape as the new administration proceeds with reductions to the federal workforce will shape revenue trends for the remainder of FY 2025.
Due to ongoing and planned federal workforce reductions, the District's economic outlook has deteriorated significantly from the December forecast. Nationally, over 75,000 federal employees have accepted buyouts, many probationary federal employees have been fired, and the administration has instituted a hiring freeze, allowing only one replacement employee for every four that leave. Federal employment in the District is projected to decline by approximately 40,000, or 21 percent, by the end of the financial plan period. With fewer federal employees in the region, spending on restaurants, retail, transportation, and other taxable goods and services is expected to decline, particularly for businesses that rely on federal workers. Job losses are also anticipated for federal contracting, hospitality, and transportation sectors, as reduced federal employment leads to lower demand in these sectors. There is a high degree of uncertainty around the forecast as some of the new administration's executive actions have or likely will be challenged in the courts, as new ones emerge, making meaningful economic impact analysis extremely difficult.
A variety of sources provide the basis for this estimate, including cash collection reports; federal data on District population, employment, and income; private data sources on housing, commercial real estate, and hotels; forecasts of the U.S. economy prepared by the Congressional Budget Office, and private-sector economists, including the Blue Chip consensus forecast of 50 private sector economists and two private-sector firms (S&P Global and Moody’s Analytics) that also prepare forecasts of the District’s economy. In addition, comments were received from recent meetings of three advisory groups of external subject-matter experts. These discussions focused on general business and economic conditions and real estate market developments in the District and the neighboring jurisdictions.
Revenue Highlights
Real Property Tax
Real property tax revenue for FY 2025 is unchanged from the December forecast. For FY 2026, the revenue forecast has been revised downward by $113 million due to a 2.2 percent decline in the total taxable real property assessments compared to FY 2025. These assessments reflect a significant adjustment that includes the most recent market valuations. With the reductions in assessments, real property tax revenue for FY 2026 is expected to decline by 3.2 percent.
While the revenue forecast for FY 2027 and FY 2028 has been revised downward from previous estimates, the projected growth rates have been adjusted upward from the December forecast for two key reasons. First, CoStar’s latest projections indicate that office market values will rise in 2026, driven by improving vacancy rates, higher rents per square foot, and favorable market capitalization rates. Second, the substantial downward adjustment to FY 2026 property assessments means the forecasted improvements in market valuations start from a lower base. As a result, real property tax revenue is expected to grow by an average of 2.6 percent annually during the period FY 2027 through FY 2029.
Sales Tax
The February forecast for general sales tax revenue has been lowered significantly across the forecast period due to anticipated sharp reductions in federal employment and their ripple effect on the District’s economy and tax base. Downward revisions begin with a relatively modest $15 million in FY 2025, escalating to nearly $80 million by FY 2028. The smaller impact in FY 2025 is based on substantial collections for the first quarter, amounting to nearly 4 percent growth year-to-date. However, as District employment deteriorates, consumers are expected to spend less, reducing sales tax receipts.
The average annual growth rate of 2.9 percent for sales tax over the financial plan period is primarily driven by incremental sales tax rate increases enacted under the FY 2025 Budget Support Act (BSA); from 6 percent in FY 2025 to 6.5 percent in FY 2026 and 7 percent in FY 2027 and onwards. Without these rate increases, underlying sales tax revenue growth would be notably weaker due to employment reductions.
Income Taxes
Individual Income Taxes
Year-to-date individual income tax receipts have grown 6.9 percent, driven entirely by an 8.2 percent increase in withholding tax collections compared to last year. However, withholding tax revenue growth is expected to slow as the federal workforce reductions decrease the wages and salaries of District residents. For FY 2025, the economic outlook for resident wages has been revised only slightly, meaning the strong year-to-date collections will help offset any immediate impact. The withholding tax revenue forecast for FY 2026 through FY 2029 has been revised downward to reflect the full impact of the federal job cuts; by $94.7 million in FY 2026 and an average reduction of $139.7 million per year for the rest of the financial plan period.
Non-withholding income taxes are down 3.4 percent year-to-date compared to last year, primarily due to higher refunds. However, January estimated payments, a key indicator of the upcoming April tax filings, rose 3.8 percent. This is a notable improvement from the double-digit declines seen in FY 2023 and FY 2024. As a result, the FY 2025 non-withholding tax revenue forecast was revised upward and is now projected to increase by 9.5 percent to reflect the improved estimated payments performance in January. Beyond FY 2025, the forecast for non-withholding taxes has been revised downward, reflecting expectations of weaker S&P 500 earnings as the market adjusts to align with its long-term average after the increases over the last two years.
Overall individual income tax is projected to increase by 4.5 percent in FY 2025 and decline by 0.7 percent in FY 2026. Growth is expected to average 3.2 percent for the remainder of the financial plan period.
Corporate Franchise Tax
Year-to-date corporation franchise tax receipts have risen 13.9 percent compared to the same period last year, driven by higher estimated and final tax payments. As a result, the FY 2025 corporate franchise tax revenue forecast has been revised upward by $13.4 million.
The forecast for the out years is slightly reduced, reflecting the lower earnings forecasts for large public companies in defense and other government support service sectors. As a result, corporate franchise taxes are expected to decline by 1.4 percent in FY 2026 and revert to an average growth of 1.3 percent through the remainder of the financial plan period.
Unincorporated Business Franchise Tax
Year-to-date unincorporated business tax receipts have surged by 18.2 percent, a sharp reversal from the 10.4 percent decline projected in the December forecast. This growth is largely driven by higher January estimated tax payments, which historically served as a key indicator for the April tax filing season. As a result, the FY 2025 unincorporated business tax revenue forecast has been revised upward by $15.8 million, reflecting both the strong year-to-date gains and adjustments for the estimated impact of previously enacted tax credits. While the previously forecasted decline in unincorporated business tax revenue for FY 2025 has been revised to 2.2 percent (an improvement from the earlier 10.4 percent decline), the growth rate for the remainder of the financial plan period is expected to remain negative, amidst continued challenges for the real estate sector, from which most District unincorporated businesses derive their earnings.
Gross Receipts Tax Revenues
Year-to-date gross receipts tax collections have increased 15.2 percent in FY 2025, driven primarily by higher sports wagering and public utility tax payments compared to FY 2024. The extreme cold weather has likely contributed to increased public utility consumption, prompting an upward revision to the previous forecast. Additionally, insurance premium tax receipts, another key component of gross receipts, have shown strong year-to-date gains, benefiting from the impact of higher inflation on insurance premium collections. As a result, the gross receipts tax revenue forecast has been revised upward by $18.1 million for FY 2025, and by an average of $31.8 million annually from FY 2026 to FY 2028.
Deed Tax Revenues
Year-to-date deed tax collections—including deed recordation, deed transfer, and economic interest taxes—have increased 20 percent compared to FY 2024, driven by a higher volume and value of commercial, single-family, and vacant property sales. This growth aligns with the December forecast, and as a result, the deed taxes revenue forecast remains largely unchanged.
Non-Tax Revenue
The non-tax revenue forecast for the financial plan period has been significantly reduced, primarily due to downward revisions in fines and miscellaneous revenue. Recent data on the expanded automated traffic enforcement units implemented last year indicate lower-than-expected ticket issuance rates, leading to a downward revision in fines and forfeitures revenue by an average of $23.1 million annually throughout the forecast period. Additionally, lower than expected investment income from reserves—driven by a combination of reduced investible reserves and lower interest rates compared to the previous year—has led to a significant reduction in the miscellaneous revenue component of local fund revenue.
National and Regional Economies
National Economy
U.S. GDP grew at an annual rate of 2.3 percent in the fourth quarter, according to the Bureau of Economic Analysis’ (BEA) advance estimate. Final sales to private domestic purchasers, a key measure of underlying demand, rose 3.2 percent, reflecting strong momentum. For the full year of 2024, the economy expanded by a solid 2.8 percent, exceeding economists' expectations. The primary driver of GDP growth was consumer spending, which accounted for 1.9 percent of the annual growth rate. Consumer spending has remained the cornerstone of economic growth in the post-pandemic years, supporting robust expansion despite the Federal Reserve’s efforts to slow the economy in its fight against inflation.
Inflation continued to ease in 2024, but progress toward the Federal Reserve’s 2 percent target has slowed. For the year, the Personal Consumption Expenditures (PCE) price index rose by only 2.5 percent, a significant decline from 3.8 percent in 2023. Excluding food and energy, the core PCE price index increased by 2.8 percent, down from 4.1 percent the previous year. However, inflationary pressures picked up toward the end of the year, with the core CPI inflation rate rising from 2.4 percent in Q3 to 3.6 percent in Q4.
The labor market rebounded after a slowdown in the third quarter of 2024, demonstrating renewed momentum. The January 2025 employment report showed a strong increase in payrolls, significant upward revisions to job growth for November and December 2024, and a drop in the unemployment rate to 4 percent.
Employment growth in the Washington metropolitan area continued to lag the national average in 2024, with regional employment increasing 0.8 percent for the year compared to 1.3 percent nationally. Slowing job growth is likely to remain a drag on the region’s economy.
There is significant uncertainty in three key federal policy areas: tariffs, fiscal policy, and efforts to reshape the federal government. Many analysts predict that implementing substantial import tariffs temporarily increases inflation in 2025, while workforce reductions may slow national employment growth. However, since federal employees (excluding the U.S. Postal Service) account for just over 1.4 percent of the civilian workforce, overall employment is still expected to expand in the coming months.
The Federal Reserve held the federal funds rate steady at its January 2025 meeting, maintaining a total of 100 basis points in rate cuts since the Federal Open Market Committee (FOMC) began adjusting the target range in September 2024. While moderating inflation has given the Federal Reserve room to ease monetary policy, strong job growth and a recent increase in core CPI inflation have reduced the urgency for further cuts. Lower rates will be welcomed by prospective homebuyers, many of whom were priced out of the housing market due to previously high borrowing costs. Additionally, rate cuts should relieve pressure on other interest-sensitive sectors, providing a boost to the broader economy, and greater stability in the job market. The Federal Reserve is expected to pause additional rate reductions in the first half of 2025 to assess the economic impact of federal policy changes.
Based on insights from sources such as S&P Global and Moody's, we expect the recent strength in economic growth to be carried over to the first half of calendar 2025. However, growth is expected to moderate in the second half of 2025 and in 2026 due to policy uncertainties and high interest rates. The GDP projections, along with forecasts for other economic activities in the nation and the District of Columbia, depend on a combination of factors, including key economic indicators, global market trends, geopolitical events, and changes in monetary and fiscal policy. The inherent uncertainties and complexities influencing current economic dynamics make it crucial to monitor these factors closely to gain a comprehensive understanding of the evolving economic landscape.
District Economy
While the District’s economy continues to recover from the pandemic-induced recession of 2020, it has consistently underperformed the national economy across most indicators. The District remains below pre-pandemic employment levels, with approximately 26,600 fewer jobs recorded in the fourth quarter of 2024 compared to early 2020 (Q1 2020). Among major industries, only the Professional and Management sector and the District of Columbia government had surpassed their early 2020 employment levels by the fourth quarter of 2024.
Employment growth in the District has accelerated this year. From the fourth quarter of 2023 to the fourth quarter of 2024, total employment in the District increased by 11,200 jobs (1.4 percent year-over-year), surpassing both the District’s historical average and the national growth rate of 1.2 percent.
The professional and management sector led job gains, adding 5,261 positions over the year. The Leisure and Hospitality sector, which suffered severe job losses during the pandemic—shedding 60 percent of its workforce in the second quarter of 2020—has rebounded to 97 percent of prepandemic levels. Additionally, the Other Services sector, which includes nonprofit organizations, recorded a strong gain of 3,433 jobs.
Other sectors, including trade, transportation and utilities, education and health, and the District government experienced modest job growth. In contrast, employment in the federal government, information and financial services, and business services sectors, along with other private industries, saw slight declines.
The District's unemployment rate averaged 5.6 percent in the fourth quarter of 2024. Although still near historically low levels, it increased from 4.9 percent in the same quarter of the previous year, and has been rising for the past two years. This trend suggests that the District's labor market is struggling to absorb the new residents it continues to attract.
In the third quarter of 2024, the District’s real gross state product (GSP) reached $149.5 billion, growing 2 percent from the second quarter. The economy is driven primarily by five key sectors— Government (including Federal and D.C.) at 30 percent, Professional, Management and Business Services at 22 percent, Finance and Real Estate Services at 13 percent, Information Services at 9 percent, and Other Services at 6 percent—which together account for 80 percent of the District’s GSP. Growth in the third quarter was largely concentrated in just two sectors: professional, management and business services and information services, which accounted for 80 percent of the expansion.
Personal income in the District grew by 5.1 percent in the third quarter of 2024, slightly trailing the national increase of 5.2 percent during the same period. Per capita personal income in the District has consistently exceeded that of all 50 states. In 2023, it reached $106,816, compared to the national average of $69,810, according to the U.S. Bureau of Economic Analysis. The District serves as a hub for high-paying jobs, driven largely by the substantial presence of the federal government, which offers salaries well above the national average. In the third quarter of 2024, the federal government accounted for 27.6 percent of all wages in the District. Additionally, proximity to federal agencies attracts private contractors that provide competitive wages to skilled professionals. Despite its high-income sectors, the District also has a significant lower-income population, with 14 percent of residents living below the poverty line in 2023.
By the third quarter of 2024, total income in the District had risen by 31.2 percent since the first quarter of 2020, while prices increased by 20.7 percent over the same period, resulting in real income growth of 10.5 percent for District residents. Although personal income growth in the District lagged the national average during the pandemic years, it experienced a strong rebound in 2022–2023. As a result, by the third quarter of 2024, the District's personal income had nearly returned to pace with the national trend.
Tourism is a vital component of the District’s economy, employing approximately 10 percent of the city’s workforce. According to Destination DC, the city welcomed nearly 26 million visitors in the past year, including 24 million domestic and 1.95 million international travelers. Strong demand from both consumers and businesses has driven a surge in activity at the region’s major airports—Ronald Reagan Washington National, Washington Dulles International, and Baltimore/Washington International—with airport traffic increasing by 7 percent in the 12 months ending September 2024 compared to the previous year. The hospitality sector has also seen gains, with 3.2 percent more hotel-room-days sold in the fourth quarter of 2024 than a year ago, while the average room rate rose by 4.6 percent. Additionally, weekend rail ridership on WMATA in 2024 surpassed pre-pandemic levels, marking an 11 percent increase from 2023.
Higher mortgage interest rates have slowed existing home sales both nationally and regionally from their post-pandemic highs. In the District, the number of active housing units for sale remains exceptionally low, with closed sales of existing homes in 2024 totaling approximately 6,900 units, the lowest level in over a decade. Housing starts have also declined sharply, falling to an annual rate of 1,426 units in the fourth quarter. Although this represents a slight rebound from the decadelow of 972 units in the third quarter, it is still below the 2,131 units recorded in the same period of 2023. This slowdown has had a broad economic impact, reducing revenue in real estate and construction-related sectors, and likely contributing to the region’s tight labor market, further limiting economic expansion.
Highlighting a positive trend, the District’s civilian labor force and resident employment surpassed their pre-pandemic peak in the first quarter of 2024. After experiencing a significant population decline in 2020, the District has recorded three consecutive years of population growth, reversing the losses seen during the COVID-19 pandemic. In December 2024, the U.S. Census Bureau released updated estimates showing that the District’s population grew from 687,324 to 702,250 between July 2023 and July 2024, a net increase of 14,926 residents. The majority of this growth (12,502 individuals) was driven by international migration.
Looking ahead, the District’s economy faces considerable uncertainty. The District has the most government-centered economy in the United States, a characteristic that offers both stability and challenges. Historically, the substantial presence of federal agencies helps buffer against economic fluctuations that may disrupt private-sector industries. During the early months of the pandemic, federal employment in the District expanded as the government increased its role in crisis response, hiring more staff for agencies focused on health, safety, and economic recovery.
The efforts to reduce the federal workforce are expected to have a disproportionate impact on the District’s economy. While federal jobs (excluding the U.S. Postal Service) make up just 1.4 percent of the U.S. civilian workforce, they account for close to 25 percent of total civilian employment in the District. Additionally, a significant portion of the Professional and Management Services sector depends on federal funding and contracts. As a result, widespread federal layoffs could have major ripple effects throughout the District’s economy.
We have updated our February forecast to reflect the impact of ongoing and planned federal workforce reductions on the District’s economy. Federal employment in the District is expected to drop to 150k by the end of our forecasting period, a reduction of 40,000, or 21%, compared to the previous forecast. Real GDP is now projected to grow by 0.9 percent in FY 2025, trailing the national growth rate of 2.4 percent. The District’s economy is expected to enter a mild recession in FY 2026, with GDP contracting by 1.9 percent, before beginning a gradual recovery in FY 2027 and returning to trend growth by FY 2028 and FY 2029. Employment in the District is expected to remain flat in FY 2025, decline by 2.6 percent in FY 2026, and decrease by 0.4 percent in FY 2027. Other key economic indicators have also been adjusted to reflect these latest trends.
Risks to the Forecast
The current forecast carries several notable risks. As a government-driven economy, the District relies heavily on federal jobs and related economic activity, making the new administration’s policies a key factor in shaping the city's economic outlook. The uncertainty surrounding federal policies adds complexity to forecasting. While some of the administration’s proposed budget and personnel cuts may be curtailed by legal challenges, the economic impact on the District will be more severe if more job cuts than assumed in the forecast are implemented.
The office real estate market poses a significant risk to the forecast, with the growing volume of vacant office space a major concern. The average vacancy rate for office buildings in the central business district reached 18.1% in the fourth quarter of 2024. A recent study by the D.C. Office of Revenue Analysis revealed that between 2020 and 2023, vacant office space increased by 8.4 million square feet, a 46.2% rise, primarily driven by the shift toward remote work. This trend is expected to persist for at least the next few years, even with the recent return-to-office order for federal employees. The assessed values of hundreds of office buildings are projected to remain depressed through 2029. A sharper-than-anticipated decline in property values could pose a risk to commercial property and deed tax revenues.
Additionally, potential WMATA service reductions to address its budget shortfall represent another risk to the forecast. Other risks include a surge in oil prices due to the escalation of regional conflicts and the prospect of a prolonged government shutdown, which could place significant strain on the economy. Previous government shutdowns disrupted the District’s economy and had a range of impacts on revenue.
The prevailing risks and high degree of uncertainty make for a challenging forecasting environment. As such, we will continue to monitor international, national, and local economic activity for any developments that would impair the forecast.