Earlier this year, the District of Columbia local government clashed with Congress over including federal tax changes from the One Big Beautiful Bill Act (OBBBA) into DC’s local income and business taxes. The DC Council voted to decouple from numerous OBBBA provisions, but that action was then blocked by Congress. In its recently passed budget, the DC Council now decouples from fewer OBBBA provisions, and fixes a retroactive tax increase on small business stock that would have been challenged in court by NTUF.
OBBBA became law in July 2025, and its provisions include a $750 increase to the standard deduction, an above-the-line deduction for charitable contributions, a new deduction for tips, a new deduction for overtime, a new deduction for car loan interest, an enhanced deduction for senior citizens, permanent business full expensing, and permanent research & experimentation expensing.
States soon faced the question of whether to conform to all, some, or none of the new federal tax provisions. Twenty-three states and DC automatically follow any federal tax changes, twenty-two other states follow but require action to update any changes, and just two states (Arkansas and Mississippi) decouple completely from the federal tax code. By the end of 2025, nine states (Colorado, Delaware, Illinois, Maine, Maryland, Michigan, Pennsylvania, Rhode Island, and Virginia) had decoupled from one or more OBBBA provisions, with Rhode Island and Virginia decoupling from wide swaths of the law. (In 2026, more states have conformed to or decoupled from OBBBA provisions, and Virginia has switched from automatic to fixed-date conformity.)
The DC Council voted in November 2025 and again in December 2025 to join these states by decoupling from nearly all the key OBBBA provisions. The provisions DC decoupled from included the $750 increase to the standard deduction; the deductions for tips, overtime, car loan interest, and seniors; business full expensing; and research & experimentation expensing. Congress disapproved the DC law in February 2026. Amid uncertainty over whether Congress’s action was proper, DC’s Chief Financial Officer refused to release the savings from decoupling for spending by the DC local government for 2026 and after.
As part of its budget passed this month, the DC Council has now passed a fresh—and narrower—decoupling from OBBBA. The budget still decouples from business provisions, such as full expensing, changes to interest expense, and research and experimentation expensing. It also decouples from the above-the-line charitable deduction for non-itemizing taxpayers created by OBBBA. But it allows taxpayers to take DC deductions for tips, overtime, car loan interest, and the enhanced senior deduction, all for tax years 2026, 2027, and 2028. (Under federal law, these provisions expire at the end of 2028.)
The DC decoupling also fixed what was likely a mistake with DC tax treatment of Qualified Small Business Stock (QSBS) that resulted in a retroactive tax increase on small business owners. QSBS, which dates to 1993, allows a one-time exclusion from capital gains tax for founders of small businesses who sell their stock as a way of incentivizing investment in growing small businesses. Prior to OBBBA, QSBS was limited to a $10 million exclusion on stock held for at least 5 years for a company worth no more than $50 million. OBBBA changed those amounts to a $15 million exclusion for a company worth no more than $75 million, and the 5-year hold requirement became a phase-in (50% exclusion for a 3-year hold, 75% for a 4-year hold, 100% for a 5-year hold).
The earlier DC bills probably intended to decouple only from OBBBA’s increased generosity, but instead decoupled entirely. Worse, the change was made retroactive to January 1, 2025. Small business owners who engaged in such sales throughout the year—before either the July federal bill or the November and December DC bills—now had the rug pulled out from under them and saw these one-time long-standing tax benefits vanish. DC officials projected little revenue gain from the change—less than $1 million—but the tax burden would be crushingly large for those small businesses who counted on it.
Accordingly, since March, NTUF and affected taxpayers have worked to alert policymakers to what happened, educate on the likely unintended consequences, and warn that litigation was likely unless it was fixed. NTUF’s Taxpayer Defense Center challenges retroactive tax increases as unfair violations of the Constitution’s Due Process Clause and undermining public respect for the law. We were assured that a fix would be included in a June bill, but it was not, so we made preparations for a lawsuit.
We were therefore pleased to see DC’s July Budget Support Act on page 380–381 contains language recoupling to the original QSBS as of January 1, 2026, and limiting the original decoupling only to transactions that “occurred on or after December 3, 2025.” This date, when the DC law was first passed, eliminates all retroactivity. The bill now awaits the Mayor’s action.
DC decoupling may continue to be a hot topic, especially since the DC Council plans a fall hearing on tax policy and revenue measures. Not adopting pro-growth policies like full expensing and R&D is a bad policy choice on tax timing—DC’s policy essentially means that business investment in DC faces heavy up-front tax burdens, such that many investments may not happen in the first place. The retroactive tax increase on small business stock was important and easy to fix, but should be just the first step in ensuring a competitive tax environment for the nation’s capital.