DC Should Be Judicious About Decoupling from the OBBBA

The Council of the District of Columbia is considering legislation to decouple its taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code from several revenue-reducing provisions in the recently enacted One Big Beautiful Bill Act (OBBBA). Signed into law on July 4, 2025, the OBBBA extends and expands elements of the 2017 Tax Cuts and Jobs Act (TCJA), including lower individual and corporate tax rates, enhanced deductions, expensing, and targeted exemptions. While states and the District of Columbia do not incorporate federal rate changes, for jurisdictions like DC that maintain rolling conformity with the federal tax code, many of these other changes flow through to the tax code automatically.

The Council seeks to temporarily suspend conformity with the following OBBBA elements, effective retroactively to January 1, 2025:

• Exemption for overtime pay
• Exemption for tips
• Increased standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. Taxpayers who take the standard deduction cannot also itemize their deductions; it serves as an alternative.
• Enhanced special depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and disco allowances.
• Immediate expensing of research and development costs

The proposed session targets provisions expected to reduce DC’s revenues by $95 million in fiscal year 2025, and by $567 million through fiscal year 2029. These provisions represent a subset of the OBBBA’s more than 84 tax changes, selected for their near-term revenue effects.

The District of Columbia is not alone in assessing the costs of OBBBA conformity, with lawmakers across the country evaluating the trade-offs associated with adopting or decoupling from key provisions of the reconciliation act.

While the Council is right to question some of the temporary revenue losses with no long-run trade-off against economic growth, it should be careful not to throw the baby out with the bathwater. In particular, DC should maintain conformity with the business expensing reforms that are strongly pro-growth, better align with sound tax principles, and primarily change the timing of revenues. Decoupling from these provisions introduces penalties against capital investment and research and development (R&D) expenditures.

The OBBBA restores and makes permanent full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. for machinery and equipment under Section 168(k), reverses Section 174 amortization for R&D expenditures, introduces Section 168(n) expensing for qualified production property, and raises the Section 179 expensing cap to $2.5 million. These provisions, which come closer to providing neutral cost recoveryCost recovery refers to how the tax system permits businesses to recover the cost of investments through depreciation or amortization. Depreciation and amortization deductions affect taxable income, effective tax rates, and investment decisions., reduce investment biases and boost economic output by accounting for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin and the time value of money. While the restoration of these provisions comes with frontloaded costs, the costs are dramatically lower in subsequent years. And the unplanned windfall DC has received in recent years resulting from the phasedown of Section 168(k) and the amortization of Section 174 would soften the blow further.

In particular, DC always conformed to first-year expensing for research and experimentation expenditures under Section 174, which has been part of the federal tax code since 1954. That policy shifted to five-year amortization in 2022 after a gimmicky federal pay-for (offsetting rate reductions not relevant to DC’s conformity) backfired. Lawmakers anticipated the longstanding treatment would be extended, but instead, the amortization went into effect before being reversed by the OBBBA. Continued conformity to Section 174 is simply a return to longstanding corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. policy, not a new cost from which DC should decouple.

On the other hand, provisions like exemptions for qualified tips and overtime pay (through 2028), a deduction for up to $10,000 in auto loan interest, and an enhanced senior standard deduction are temporary and targeted, but they could erode revenues without meaningfully driving growth. Very few states are in line to conform to these provisions, given the way their conformity statutes are already drawn. The Council is indeed justified in decoupling from these to preserve revenue stability. Maintaining the expensing provisions, which are pro-growth and better align the corporate income tax with profits, while decoupling from the new temporary provisions, is not only prudent but also consistent with what most states are in line to do.

Given broader revenue uncertainty in DC, it’s understandable that the Council wants to act quickly. However, by being more judicious with its emergency legislation, the Council can ensure that its tax code does not discriminate against investment and undercut the long-term growth DC needs.

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