FOR IMMEDIATE RELEASE

WASHINGTON, D.C. — District households making over $500,000 per year would have to pay a small surtax on passive income—capital gains and other investments that require no labor on their part—under legislation submitted Wednesday by Councilmember Brianne K. Nadeau, D-Ward 1.

The introduction of the legislation, the Wealth Proceeds Tax Amendment Act of 2026 has been expected since Nadeau initially laid out her proposal in June, when she intended to propose it as part of the District’s FY27 budget.

“The bottom line is that we’re facing a fiscal cliff. It took a lot of one-time funds to fix this year’s budget and we won’t have that option next year,” Nadeau said. “We cannot keep asking the people who need the most to give the most, while asking those who have the most to give nothing more.”

The Wealth Proceeds Tax proposal comes amid several other tax and revenue considerations, including: a feasibility study on a business activity tax, approved by the Council this week as part of the budget; a planned fall roundtable to review taxes and revenue, promised by Council Chairman Phil Mendelson; and Nadeau’s separate legislation to create a permanent Tax and Revenue Commission.

The Wealth Proceeds Tax would amend the District’s tax code. It would create a 3 percent surcharge on passive income—such as capital gains, dividends, interest, annuities, and other investments that require no labor—on the wealthiest residents. The change would apply to individuals making over $400,000, and married couples making over $500,000, and only apply to the amount of passive income over those thresholds. For example, a household with $480,000 in earned income and $40,000 of passive income, would pay the 3% surtax only on the $20,000 above the threshold, or $600.

The surcharge is a local version of the federal Net Investment Income Tax—straightforward and easy to administer (and enacted by other states). The D.C. surtax would be lower than the federal tax and has a threshold twice as high as the federal tax.

Nadeau’s proposed tax would increase the city’s General Fund by $200 million in the first year and over $100 million in subsequent years, according to preliminary estimates.

Nadeau also praised the Council’s action earlier this week on a business activity tax feasibility study: “There are many companies operating in D.C. that are effectively getting a free ride, while locally-owned businesses—large and small—are paying their fair share, and then some, to compensate for the businesses that aren’t paying at all.”

She added, “I appreciate all of the pieces currently in play that together can establish a fairer and more resilient tax code.”

Nadeau anticipates the legislation will be included in Mendelson’s tax and revenue hearings this fall, along with the permanent Tax and Revenue Commission bill, after the Council returns from recess in mid-September.

Download the bill and introduction statement

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Wealth Proceeds Tax Explainer

SUMMARY

• Councilmember Nadeau proposes a Wealth Proceeds Tax (WPT), a local surtax that is closely tied to an existing federal tax structure, with additional exemptions for D.C. residents.
• The Federal Net Investment Income Tax (NIIT) is a 3.8% tax on the net investment income of individuals, estates, and certain types of trusts. The income subject to the WPT would be nearly identical to the relevant federal definitions, with some minor exceptions such as excluding certain federal bonds that states and DC are not permitted to tax.
• The proposed D.C. WPT would be 3% on certain types of passive income beyond a high annual threshold and apply to modified adjusted gross income over $400,000 for individuals and $500,000 for those married and filing jointly. This is significantly higher than the NIIT threshold.
• It would yield substantial new annual revenue to benefit more District residents without undermining the District government’s fiscal health.[1]

DETAILS

• Anticipated Revenue Impact
  With a 3% tax rate on the highest earners of passive income, the Institute on Taxation and Economic Policy (ITEP) anticipates revenue of over $150 million per year. Another preliminary analysis estimates nearly $200 million in the first year and more than $115 million each subsequent year.  Ninety-six percent of the revenue would come from households with incomes of $1 million or more, with the remainder coming from couples making over $500,000 and individuals making over $400,000 (though fiscal experts note that married couples make up the bulk of this bracket). Roughly 8 percent of D.C. taxpayers would pay the WPT.[2]
  
  
• Transactions Currently Subject to Comparable Federal Tax[3]
  Wealth Proceeds Taxes would be tied to the federal definition of passive incomes subject to the federal NIIT. The federal tax code defines five major components of wealth proceeds subject to the NIIT: capital gains (approx. 60% of NIIT revenue), dividends (22%), interest (8%), annuities (0.3%), and certain kinds of rents, royalties, and business income (10%).
  • Capital Gains – profits generated from the increase in value of assets such as stocks, bonds, real estate, and other property which are generally taxed only when the asset is sold.
  • Dividends – business profits distributed to shareholders, the vast majority of which are “qualified dividends” held for a specific period and taxed at preferential rates.
  • Rental income from passive real estate investments – earning generated from leasing real estate properties where the owner does not materially participate in managing the business, including, e.g. Real Estate Investment Trusts. Most rental income is not subject to the federal NIIT, and the same would be true of a D.C. equivalent; most owners of rental income are involved in its management or their incomes fall below the threshold.
  • Royalty income – payments received for the authorized use of property such as copyrights, patents, or material rights.
  • Passive income from partnerships, S-Corporations, some types of trusts – business proceeds and distributions flowing to an owner or beneficiary who does not actively work or materially participate in the entity.
  • Interest income from investments and savings – ordinary income generated from standard bank accounts as well as savings accounts like Certificates of Deposit (CDs), corporate bonds, and taxable bonds.
  • Income from non-qualified annuities – the portion of an after-tax investment payout that exceeds the owner’s initial contribution once the annuity begins to pay out.

• Many Transactions Generally Exempt
  Councilmember Nadeau’s WPT proposal would exempt nearly all the same categories as the federal NIIT:
  • Active Business Income – income derived from a business where the owner “materially participates” (depends on hours worked in the tax year)
  • Primary Home Sales (subject to thresholds) – profits from selling a primary residence up to $250K for single filers and $500K for joint filers
  • Tax-Preferred Retirement Accounts – capital gains and investment growth generated within standard retirement accounts like 401K and IRAs.
  • Qualified Annuity Income – payouts from retirement annuities funded with pre-tax dollars, which are already subject to ordinary income tax upon distribution.
  • Initial Principal Withdrawals from Non-Qualified Annuities – portion of a non-qualified annuity payout that represents a return of the owner’s original after-tax investment.

D.C. and states are also prohibited from taxing federal bond interest income; the proposed text reflects this.

• Minimal Impact on D.C. Real Estate Market and Owners of Rental Homes
  Short version: the surtax would have no discernible impact on the real estate market and would impact only the wealthiest owners of real estate.
  • The vast majority of rental property owners are not subject to the proposed surcharge.
    • DCFPI estimates that 79% of all DC taxpayers with rental and royalty income are below $500k in total income – in other words, they would not be subject to the surtax at all.
    • Relatedly, DCFPI estimates that 96% of the resulting income would come from people earning more than $1 million annual.
    • Many rental property owners are also actively involved in management (a “real estate professional,” as defined by IRS and “materially participat[ing]” in the management). Their income here is reported as active business income and not subject to the surtax. In general, anyone who spends about 10 hours a week, sometimes less, managing rental properties is excluded from the tax.
  • Rents would not be affected. ITEP notes:
    • Market rents are set at the regional level and D.C. landlords already charge tenants a premium. There’s no reason to believe the market could bear an increase.
    • Many landlords of D.C. properties live outside D.C. and would not be subject to D.C.’s surtax and therefore it would not impact rents.
    • Even if landlords passed the full price on to tenants, it would amount to a few pennies per month.
  • Quick example of how little the proposed surtax adds: a married couple with $470,000 adjusted gross cash income also earns $50,000 per year in passive real estate income, for a total income of $520,000. They now must pay 3% on the $20,000 of passive income over the $500,000 threshold. They’ll pay a $600 surtax.
  • SUMMING UP: The vast majority of rental income recipients are not subject to the federal NIIT, and the same would be true of a D.C. equivalent; most owners of rental income are involved in its management and/or their incomes fall below the threshold.

• Some Jurisdictions with WPTs or Similar Taxes
  • Minnesota – the first state to enact a law piggybacking on the federal NIIT in 2023. Minnesota’s levy assesses a 1 percent tax and applies only to the portion of wealth proceeds that exceed $1 million. We expect this tax to raise more than $60 million next year.
  • Maryland – In 2025, Maryland enacted a 2 percent surcharge on both long-term and short-term capital gains for households with income over $350,000.
  • Massachusetts – filers pay a tax rate on short-term capital gains that is 3.5 percentage points higher than the ordinary income tax rate.

[1] https://dcfpi.org/wp-content/uploads/Wealth-Proceeds-Final.pdf

[2] See https://dcfpi.org/all/dc-can-raise-121-million-or-more-with-a-simple-tax-on-proceeds-from-wealth/

[3] Sarah Austin and Carl Davis, October 30, 2025, “The Wealth Proceeds Tax: A Simple Way for States to Tax the Wealthy,” Institute on Taxation and Economic Policy.