In preparation for the next fiscal year, D.C. leaders are anticipating a challenging budget and the possibility of a tax increase. The city continues to grapple with the lingering effects of the pandemic, such as office vacancies and decreased tax revenue. D.C. Council Chairman Phil Mendelson estimates a deficit of $600 million to $800 million for the fiscal 2025 budget.

Mayor Muriel E. Bowser has urged lawmakers to prioritize core services and exercise caution with new spending. Chief Financial Officer Glen Lee has released modest revenue growth projections for the city, highlighting long-term economic risks associated with the commercial real estate market's struggles.

Mendelson has suggested that the mayor may propose a tax increase to balance the budget, citing several financial pressures on the city. These include the expiration of federal pandemic aid, the commitment to increase Metro funding by up to $200 million, the need to replenish reserves with $300 million, and the mayor's request to raise per-pupil funding for D.C. Public Schools by 12.4 percent.

While Bowser has not ruled out a potential tax increase, she emphasized that no decisions have been made. She acknowledged the possibility of seeking additional funds from voters to support affordable housing, job creation, increased tax revenue, and a stronger D.C. She referenced a similar situation in 2018 when she proposed tax increases to fund improvements to the Metro system.

Bowser is set to present the fiscal 2025 budget package to the council on March 20, with a vote expected later this spring. Although she has not disclosed specific cuts, she has emphasized the need to focus on core city services and public safety while carefully considering new spending.

Last year's budget formulation saw debates over cuts to social services programs due to declining tax revenue from commercial properties. Recent revenue projections indicate a slight increase, thanks to higher corporate revenue and nontax revenue streams. However, the city's commercial property tax revenue continues to decline, influenced by downtown's high office vacancies, threatening economic recovery.

Lee cautioned the council and the mayor that the likelihood of surpluses occurring, as experienced in the 2010s, is now near zero. The city's economy, particularly affected by the weakened commercial real estate market, has consistently underperformed the regional and national economy.

Efforts to reactivate downtown public space and spur investment were unveiled last month in the Bowser administration's 5-year, $400 million Downtown Action Plan. This plan could be another significant investment considered during the budget deliberations.

As the city works toward a more elastic economy, it is dealing with challenges such as a decline in federal employment and a slowdown in job growth. Despite this, D.C. experienced net population growth in recent years and saw a strong rebound in the leisure and hospitality industry.

Lawmakers will also need to allocate funds to replenish the city's reserves, as falling short by $322 million last year prevented full replenishment. The reserves, totaling $1.5 billion, cover 51 days of operating expenses but fall short of the city's 60-day goal.

Due to the delayed completion of the Tax Revision Commission's recommendations, lawmakers will not have the finalized set of proposals for tax system reform during the budget process. The commission expects to deliver its final report in the fall, suggesting changes to make the tax code more equitable while broadening the tax base.

The forthcoming budget challenges and the need to rank priorities pose difficult choices for the mayor and the council. Experts and stakeholders recognize the unprecedented nature of the situation, understanding the vast growth the city planned for from 2007 to 2019.

As the budget formulation continues, D.C. leaders face the task of making tough decisions to uphold core services, manage the deficit, and navigate the economic hurdles posed by the pandemic.