- Proposal overview: Councilmember Zachary Parker plans to introduce a tiered surcharge on realized capital gains of $350,000 or more, raising the effective top rate to 13.75 percent for some taxpayers.
- Potential taxpayer response: Capital gains are timing- and location-sensitive; high-income filers can defer realization or recognize gains in lower-tax states, shrinking the taxable base.
- Behavioral elasticities: Empirical studies suggest a 1 percent increase in capital gains tax can result in anywhere between a 0.5 percent increase to a 0.5 percent decrease in capital gains realizations, with “when” responses (deferral) explaining approximately 55 percent of the effect and “where” (migration) a smaller but non-trivial share.
- Projected yield: The OCFO’s preliminary estimate, which incorporates this behavioral response, is $6.7 million in the first year of full implementation (FY 2027).
- D.C. exposure: Only about 1,600 filers with incomes above $1 million reported gains in 2022; their small number and lumpy income make collections exceptionally sensitive to behavioral shifts and market cycles.
- Design unknowns: No bill text yet—indexing thresholds, sourcing rules, and whether surcharges apply per transaction or per taxpayer will all affect compliance burden and stability.
- Fiscal risk: Capital gains tax revenue is pro-cyclical and unreliable; relying on it for ongoing spending could widen budget gaps during downturns.
- Fundamentals vs. rates: Office of Revenue Analysis research shows D.C.’s long-run expenditure growth has been driven by fundamentals—jobs, households, and housing units—not higher tax rates.
- Policy implications: For stable, scalable revenue, D.C. should prioritize growth-oriented reforms that spur employment, attract residents, and increase housing supply—especially as resident employment falls, and housing permits remain historically low.
During the second reading on the District’s Fiscal Year 2026 budget proposal on July 28, the D.C. Council might consider a proposal to increase taxes on realized capital gains. Currently, capital gains are taxed as ordinary income, subject to the District’s standard income tax rates. Councilmember Zachary Parker has announced his intention to introduce a budget amendment that would add a surcharge on high-value realized capital gains. Based on his public letter, the proposal would apply incremental surcharges as follows:
- 1 percentage point on gains over $350,000 (effective top rate: 11.75%)
- 2 percentage points on gains over $500,000 (effective top rate 12.75%)
- 3 percentage points on gains over $1 million (effective top rate: 13.75%)
The Office of the Chief Financial Officer (OCFO) has not yet released a formal fiscal impact statement, but Councilmember Parker has shared that the first full-year revenue is estimated at $6.7 million (FY 2027).
Capital gains taxes create a strong behavioral response.
Realized capital gains are fundamentally different from wage and salary income. Taxpayers have considerable control over both the timing (“when”) and the location (“where”) of their gains, resulting in much less revenue than what static scoring would predict. Numerous studies have been conducted on how taxpayers respond to increases in the state-level capital gains tax and the estimates suggest that a 1 percentage point increase in capital gains tax never yields a 1 percent increase in tax revenue.[1] Rather, the response could be anywhere between a 0.5 percent increase to a 0.5 percent decrease, with short-term effects more likely to be in the negative territory than long-term effects.[2]
Timing (“when”): Taxpayers may defer realizing gains—opting to hold appreciated assets or borrow against them rather than sell—especially in response to higher taxes. Studies suggest that this “when” effect is stronger than the “where” effect (see next point), explaining 55 percent of the total behavioral response.[3] And it is stronger when one excludes the taxpayers who move in response to a capital gains tax increase,[4] suggesting that high-worth individuals have considerable flexibility over if and when they realize capital gains.
Location (“where”): For those who cannot defer, such as entrepreneurs exiting a business, the key variable becomes jurisdiction. These taxpayers can choose where to recognize their gains. In such cases, tax policy can influence domicile decisions, especially for high-net-worth individuals with mobility. Studies find that the “where” response prior to the pandemic was relatively small, with a 1 percent increase in the capital gains tax resulting in a 2 percent decline in the number of filers with $1 million or more in income over the next ten years. [5] While the decline seems small,[6] it matters when the pool of these payers is itself also small, and their contribution to the individual income tax revenue is large and variable.[7]
The revenue risk from these responses is arguably higher in D.C. According to the 2022 Statistics of Income data, only 15 percent of filers reported any capital gains, and only 1,636 of filers out of 361,757 (0.45 percent) accounted for 59 percent of the reported capital gains. Anticipated behavioral responses to the proposed increase appear to be reflected in the OCFO’s modeling. Their preliminary estimate is just $6.7 million—suggesting a significant adjustment for taxpayer behavior, timing shifts, and mobility.[8]
Policy risk
There is also no detailed bill text yet making it difficult to evaluate design choices such as how thresholds are defined or indexed, how gains are sourced, and whether the surcharges apply per transaction, per year, or per taxpayer. Each choice will affect both revenue stability and administrative burden.
Importantly, shifting more of the tax revenue to such a volatile, narrow, and pro-cyclical base carries significant revenue risk, complicating multi-year financial planning, especially if the revenue is used to pay for recurring expenditures. Without exception, revenue departments in in every state that taxes capital gains describe capital gains tax revenue as unreliable and unstable. With greater reliance on capital gains, base erosion from market cycles becomes a bigger risk.
Reliable revenue is driven by base growth.
Higher capital-gains surcharges might seem like an easy way to collect more from top earners, but the payoff is inherently risky. Affluent taxpayers can defer realizing gains or recognize them in lower-tax states, turning the revenue stream into a volatile and unpredictable source. After behavioral adjustments, the net yield is modest while the threat to D.C.’s tax base—already under pressure from resident out-migration, diminished investor interest, declining resident employment, and tepid revenue growth—remains significant.
A study by the Office of Revenue Analysis shows that D.C.’s fiscal capacity has historically grown with the size of its tax base—jobs, households, and housing units—not with higher tax rates.[9] That is, the causal relationship between expenditures and revenue has historically been one-directional and driven by growth in economic fundamentals, not tax rates or expenditure needs. To build stable, reliable revenue, the District should prioritize growth-oriented policies that boost resident employment, attract and retain households, and accelerate housing production. With resident employment sliding and housing permits at historic lows,[10] growth-oriented reforms are far more likely than a capital-gains surcharge to strengthen long-term fiscal stability, economic competitiveness and expenditure capacity.
[1] See for example, Congressional Research Service (2019) Capital Gains Tax Options: Behavioral Responses and Revenues, available at https://www.congress.gov/crs_external_products/R/PDF/R41364/R41364.6.pdf or Tim Dowd and Robert McCleland (2024), The Sensitivity of The Tax Elasticity of Capital Gains to Lagged Tax Rates and Migration. Tax Policy Center. Available at https://taxpolicycenter.org/sites/default/files/publication/165863/the_sensitivity_of_the_tax_elasticity_of_capital_gains_to_lagged_tax_rates_and_migration.pdf
[2] The elasticity of capital gains to the tax rate is the percentage change in realizations divided by the percentage change in the tax rate. This number is always negative, so researchers typically report the absolute value. Per the Congressional Research Service, any elasticity under 1 is a disproportional gain in realizations, and any number above one is a loss.
[3] Ole Agersnap and Owen Zidar (2020) The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates, AER: Insights 2021, 3(4): 399–416 https://doi.org/10.1257/aeri.20200535.
[4] Dowd and McCleland (2024).
[5] Estimate from Agersnap & Zidar (2020). Other studies that focus on overall income tax changes—and not just capital gains tax—find more modest responses. For example, Young, Varner, Lurie & Prisinzano (2016) use IRS census of all U.S. million-dollar filers, 1999-2011find that a 1 percentage point gap in top tax rates raises net millionaire outflows by 0.07 percent each year, most of whom relocate in Florida. Varner & Young (2021) use California Franchise Tax Board microdata for 2011-2014 to show that Prop 30, which raised income taxes by 2.5 to 3 percentage points for high earners, resulted a loss of 0.1 percent of millionaire filers per year.
[6] In 2022, there were 3,026 tax filers with incomes above $1 million.
[7] Arguably, the District’s proximity to a lower tax destination (Northern Virginia) creates a stronger inducement to tax sensitive high earners. Virginia’s top tax rate on income (including capital gains) is 5.75 percent, and while DC exempts only $4.9 million in estate taxes compared to $13.99 million at the federal level (and $27.98 million for couples), Virginia has no estate taxes. Further, last year the District adopted a mansion tax for properties valued at $2.5 million or more, eroding the DC advantage in residential property taxes compared to nearby Northern Virginia jurisdictions.
[8] A very imperfect static scoring that uses average reported capital gains tax for filers with incomes $1 million or more yields $26 million in revenue.
[9] Siami-Namini, Sima; Muhammad, Daniel; Fahimullah, Fahad (2018). The Short and Long Run Effects of Selected Variables on Tax Revenue – A Case Study. Applied Economics and Finance v. 5, n. 5, p. 23-32. doi:http://dx.doi.org/10.11114/aef.v5i5.3507.
[10] Office of Revenue Analysis, District of Columbia Economic and Revenue Trends, June 2025. Available at https://ora-cfo.dc.gov/sites/default/files/dc/sites/ora-cfo/publication/attachments/Trend%20Report%20June%202025.pdf.