DC Councilmember Brianne Nadeau recently proposed what has been colloquially referred to as a “wealth tax.” This gives the impression that it targets the multi-millionaires and billionaires traditionally in the crosshairs of similar proposals, but that is far from the case.
Instead, the tax will hit far more taxpayers who are of more average means—hardly poor, but certainly not the ultra-rich traditionally envisioned by “wealth taxes.” Moreover, given the District’s status as a city that can be fled by simply moving a few miles away, it is likely to result in more substantial out-migration than councilmembers may assume.
The Proposal
The proposal is best described as a DC-level surcharge on the federal Net Investment Income Tax (NIIT). Like the federal-level NIIT, it applies to taxpayers with an adjusted gross income (AGI) of $200,000 (for single filers) or $250,000 (for married filing jointly). These thresholds are not adjusted for inflation.
Federal NIIT
At the federal level, taxpayers who exceed these thresholds must pay 3.8% of the smaller of either:
- Their modified AGI over the NIIT threshold (modified AGI for NIIT purposes includes AGI with the foreign income exclusion and other foreign investment exclusions added back to AGI) or
- Their net investment income.
Net investment income is defined as income received from any of the following sources:
- Net capital gains from the sale of stocks, bonds, or mutual funds
- Stock dividends
- Rental income
- Royalties
- Nonqualified annuity income (annuities purchased with taxable income)
- Income from businesses involved in trading commodities or investments
- Passive business income
Capital gains from the sale of a primary residence below the thresholds ($250,000 for a single filer/$500,000 for married couples filing jointly) are also excluded, as are other nontaxable retirement distributions, income from the sale of municipal bonds, and active business income.
Proposed DC NIIT Surcharge
Under Councilmember Nadeau’s proposal, DC residents would pay an additional 2% NIIT to DC. Additionally, income from incomplete gift non-grantor trusts and municipal bonds not issued by DC would be added back into net investment income for the purposes of the 2% DC surcharge.
Only Minnesota has a similar tax at the state level, though it only applies to taxpayers with $1 million in investment income and is assessed at a 1% rate. Virginia and Vermont considered proposals to adopt a similar tax this year, but thus far have not adopted them.
The Impacts
Proponents of the DC NIIT argue that it could raise $121 million and target the city’s wealthiest residents. However, neither is likely to be the case.
A Tax on Average DC Families
First and foremost, far more non-millionaire residents would end up paying the new NIIT surcharge than millionaire residents. In the latest IRS data from 2022, 90.5% of DC residents who paid the NIIT earned under $1 million that year, while 71.4% earned less than $500,000.
And while $250,000 sounds like a high bar to clear, it isn’t in the District. According to the latest Census data, the median married family income in DC is around $229,000, while the median married family with at least one child under 18 years old earns over the $250,000 threshold. In other words, this is a tax that would impact at least half of all married parents of young children in DC.
This tax will only affect more middle-class families in future years, as the thresholds are not indexed to inflation. The NIIT initially went into effect in January 2013, when the $250,000 threshold was equivalent to around $360,000 in 2026 dollars. Over time, more and more middle-class families will be pushed over the $250,000 threshold as inflation erodes the dollar’s buying power.
Additionally, the $250,000/$500,000 in capital gains on primary residences that is exempt from the proposed DC NIIT is less substantial than in many other locations across the United States. The median DC home sells for about $650,000, while the median detached home exceeds $1.3 million. The traditional attached DC townhouse or rowhouse sells for a median value of around $850,000 to $900,000.
Small townhouses in emerging neighborhoods like Petworth or Shaw have appreciated substantially since the early 2000s. A family earning $250,000 that has seen their home grow from a value of $150,000 to around $900,000 over the past two and a half decades—a fairly typical change for these neighborhoods—would face a $5,000 DC NIIT. That would hardly be an insignificant tax bill on the sale of a home that this hypothetical couple may have been counting on to fund a large portion of their retirement expenses.
DC Is Uniquely Vulnerable to Outmigration
DC is already not particularly competitive in tax policy compared to its neighbors. Thanks to a top income tax rate of 10.75% and one of the highest property tax burdens in the country, DC currently ranks 48th out of 51 on Tax Foundation’s State Tax Competitiveness Index. DC’s top income tax rate is nearly double that of Virginia (5.75%) and higher than every Maryland county, even after factoring in local income tax rates.
NTUF’s research consistently shows that tax rates play a major role in the residency decisions of taxpayers, and higher-income taxpayers in particular. Already, DC loses about 7 residents a day, on net, to other states. Even before this tax, NTUF estimates that DC will lose around $180 million in revenue to net outmigration in 2026.
DC is particularly vulnerable to outmigration given its small geographic size and income tax reciprocity agreements with all its neighbors. Anyone living and working in DC can reduce their state tax burden simply by moving no more than three miles across the DC border.
In other states, moving because of taxes usually entails either getting a new job or, at the very least, switching to remote work. But former DC residents can move to Arlington or Bethesda and still have access to the same community, public transit, and even a relatively short driving commute.
Put another way—we can observe higher-income taxpayers leaving coastal California and Washington state due to tax increases when doing so means moving a plane ride away. Leaving DC is significantly easier and involves far fewer trade-offs.
This means that a tax targeted at higher-income taxpayers, who are both more sensitive to tax increases and have more resources to pack up and leave, would likely bring in less than the $120 million its proponents optimistically project. Additionally, it would mean less revenue from other sources such as income and property taxes, further limiting the fiscal benefit to the city.
Will Taxpayers Really Move Because of a 2% Tax Increase?
Proponents may argue that a 2% tax increase is not enough to push higher-income taxpayers to leave. But this imagines that taxpayers react only to the impact of specific tax increases in isolation, rather than their total current tax burden and the likelihood of new tax increases in the future.
For instance, this proposed increase would bring DC-level taxes on short-term capital gains, non-qualified dividends, and rental income up to 12.75%, compared to 5.75% in Virginia. It is more than just a 2% increase; it is a 2% increase on top of a tax rate that already looks bloated compared to DC’s neighbors.
Additionally, higher-income taxpayers can tell which way the wind is blowing. Cities and states that are constantly looking for new sources of revenue always look first at their wealthiest residents, and will do the same the next time they face a budget shortfall. To these taxpayers, a 2% increase today means a 2% increase the next time DC needs more tax revenue, and so on.
Meanwhile, a 2% tax increase in DC means that any of the 13 other states that cut their top income tax rate this year start to look even more appealing by contrast.
When You Tax Something, You Get Less of It
While the impacts would be less directly observable on the District’s budget, it is worth noting that the policy of targeting investment for special tax increases will also have economic harms. While investment is what powers future growth, high-income DC residents would face an all-in tax rate of 36.55% for long-term capital gains, while short-term capital gains and non-qualified dividends would face a 53.55% tax rate.
This means that DC businesses could struggle to attract investment capital from locals, who would face higher tax rates on investment returns than residents of nearly anywhere else in the country. Once again, the tax itself is not the only issue—it would also represent a signal that investments and entrepreneurship are on the menu, making productive investments riskier in DC than in less tax-happy jurisdictions.
A DC-level NIIT is also likely to make housing more expensive, both for renters and for buyers. Smaller, private landlords would be subject to the NIIT surcharge, and would pass these increased costs on to renters in the form of higher rents. Adding anything close to a 2% increase on top of normal annual rent increases would be felt by the poorest DC residents.
Additionally, a NIIT could intensify the lock-in effect on housing. Individuals already have a strong incentive to hold onto housing that has benefited from years of appreciation in value, as it would be subject to a hefty capital gains tax at the time of sale. Should those individuals simply hold the property until death, it would benefit from the step-up in basis, allowing heirs to sell the property while avoiding capital gains.
A DC NIIT would add 2% to the tax rate that could be avoided by simply holding onto a property until death. This lock-in effect essentially takes homes off the market, reducing supply and artificially increasing housing costs.
Conclusion
While being sold by proponents as an easy, no-strings-attached way to raise revenue from the wealthiest DC residents, Councilmember Nadeau’s proposal would neither target the wealthy nor solve DC’s financial problems. Instead, it is likely to hit families considered middle-class in the context of the District’s exorbitant cost of living and drive the wealthy to greener pastures, shrinking DC’s tax base for the future.
DC’s budget problems can’t be solved by a single “wealth tax” silver bullet. If that bullet is fired, it is only going to hit average District residents right in the wallet.