Public Hearing on Bill 26-324: Pass-Through Entities Tax Workaround - March 19, 2026
Committee of the Whole Public Hearing on Bill 26-324 (Pass-Through Entities Income Tax and Tax Credit Act) - March 19, 2026
On Thursday, March 19, 2026, at 2:29 PM in Room 500 of the Council Chambers, Chairman Phil Mendelson convened a public hearing of the Committee of the Whole of the Council of the District of Columbia. The subject was Bill 26-324, which aims to allow certain pass-through entities (S corporations and partnerships) to elect entity-level taxation, providing a workaround to the federal cap on state and local tax (SALT) deductions. Similar legislation exists in 36 states, including Maryland and Virginia. The record remains open until 5:00 PM on April 2, 2026.
Public Comments & Testimony
- Salvador Zambri (Trial Lawyers Association of Metropolitan Washington, D.C.): Expressed strong support for the bill, urging emergency passage. He addressed nine concerns raised by the Office of Tax and Revenue (OTR), arguing they are drafting issues rather than policy problems. He suggested simple language to avoid double taxation, clarify non-resident credits, and allow an annual, irrevocable election.
- Chiny Hubbard (President & CEO, D.C. Chamber of Commerce): Voiced strong support, emphasizing competitive disadvantage with Maryland and Virginia. She noted the policy is revenue-neutral for D.C. and urged swift passage. She highlighted the need to conform with D.C.'s existing Unincorporated Business Tax (UBT) and to codify OTR guidance on credits for other states' PTE taxes.
- Nicholas Johnson (Senior Fellow, Institute on Taxation and Economic Policy): Supported the intent but criticized the current bill as too complex and possibly losing revenue. He advocated using the existing UBT structure as a starting point, while fixing its built-in inequity (flat 8.25% rate for UB owners regardless of income). He proposed replacing the personal income tax exemption for UB income with a dollar-for-dollar credit to maintain progressivity, which could raise about $14 million annually.
- Michael Hilkin (Partner, McDermott Will & Emery): Supported establishing a PTE tax and presented model draft legislation prepared by the late Diane Smith that builds on the existing UBT to simplify implementation and avoid creating a new separate tax. He noted this approach would address issues raised by OTR.
- Joe Bishop Henchman (Executive Vice President, National Taxpayers Union Foundation): Endorsed the bill, noting that 36 states and NYC have adopted such workarounds and the IRS has blessed them. He echoed support for leveraging the UBT structure and praised Diane Smith's draft, while also suggesting D.C. consider doubling personal income tax brackets to address a common taxpayer overpayment issue.
- Diana Mubarak (Small business owner, board member of Adams Morgan Partnership BID): Testified in strong support as a small business owner harmed by the lack of a PTE election. She urged emergency passage to allow benefits for the current tax year.
- John Michael Olson (Assistant General Counsel, Office of Tax and Revenue): Provided government testimony acknowledging the bill's goal but raising administrative challenges. He noted D.C. already has entity-level taxes (UBT and CFT) that provide a similar SALT workaround, so the new tax must be conformed to avoid double taxation. He attached a list of technical issues and recommended a three-year implementation delay (until tax year 2028) citing the need for new forms, system programming, and staff training, as well as concerns about a surge in manual refund reviews based on experiences in Maryland and Virginia.
Discussion Items
- Chairman Mendelson questioned witnesses about the best approach: modifying the existing UBT versus creating a standalone PTE tax. Most witnesses favored leveraging the UBT for simplicity, though Mr. Zambri offered alternative drafting language.
- The Chairman challenged OTR's request for a three-year delay, noting that if the bill passed soon, OTR would have nine months to prepare forms before the proposed 2028 effective date, and that other tax changes (like decoupling from federal law) have been implemented more quickly. He expressed dissatisfaction with the timeline and urged faster implementation.
- Chairman also asked about retroactivity to tax year 2024 and potential fiscal impacts; OTR had not yet analyzed the fiscal impact but did not identify specific policy objections to retroactivity beyond implementation challenges.
Key Outcomes
- No votes were taken. Chairman Mendelson indicated the committee will work with OTR to refine the bill, likely moving away from the Maryland model toward a simpler UBT-based approach.
- The record will close on April 2, 2026, and the Chairman noted the upcoming budget process may affect the markup timeline but expressed intent to move forward quickly.
Meeting Transcript
I'm calling to order this hearing. This is a public hearing of the Committee of the Whole of the Council of the District of Columbia. I'm Phil Mendelssohn. I'm Chair of the Council and Chair of the Committee of the Whole. Today is Thursday, March 19th, 2026. The time is 2.29 in the afternoon. We are in room 500 of the Council Chambers of the Johnny Wilson Building. This hearing is being recorded and will be available on the Council's website, which is WW.dccouncil.gov. The subject of this hearing is Bill 26-324 entitled Pass Through Entities Income Tax and Tax Credit on Certain S Corporations and Partnerships Amendment Act of 2025. The stated purpose of Bill 26-324 is to amend Chapter 18 of Title 47 of the District of Columbia Official Code to allow a pass-through entity to elect to be taxed at the entity level for income taxes on certain S corporations and partnerships and to provide a tax credit for pass-through entities. Similar legislation has been adopted in 36 states, including Maryland and Virginia. To say a little bit more about this, I'm reading from a background paper by the D.C. Tax Revision Commission. State and local taxes sometimes referred to as SALT for individuals at $10,000 per year, that has been revised last year by HR1 to be $40,000 per year. But the SALT is not capped for firms because state and local taxes count as a deductible business expense. The IRS is allowing states to introduce pass-to-entity taxes, otherwise known as PTE taxes, pass-through entity taxes, whereby partnerships and other businesses who aren't required to pay taxes directly at the entity level can do so voluntarily, with the state then reducing owners' individual tax liability by an equivalent amount. The DC business tax system already requires some pass-through entities, such as many S-Corps and sole proprietorships, to pay entity level taxes through the business franchise tax, which makes this kind of workaround unfeasible or unnecessary. But many other entities, such as law and accounting partnerships, are exempt, and there is currently no provision for them to pay such taxes, even if they wanted to. So their owners cannot take advantage of the IRS allowance. So in short, this legislation, which is in its intent consistent with that of three dozen states, is a workaround from the limitation on state and local tax deductions for federal tax returns, and the intent of this legislation would have no fiscal impact on the districts, district government's revenues. The record in this matter will be open for two weeks. That is, it will close at 5 p.m. on Thursday, April 2nd, 2026. Why do I say that? Because we're required to file a record and we have a cutoff for when a cutoff for documents to be submitted for the record. That doesn't mean something that comes in after that wouldn't be considered. Not clear to me when the committee will mark this legislation up, but it is my intent that we will make some modifications to this legislation to reflect testimony and then mark it up. With that, I have six witnesses who've testified before we get to the uh government, the government being a representative from the Office of Tax and Revenue. I think what I'm going to do is call the four individuals who are here in person, and then the um I'll go to the two virtual witnesses. But we'll let the two virtuals in. So Salvador Zambri, who is a member of the Trial Lawyers Association of Metropolitan Washington, D.C., uh Shinery Hubbard, who is President CEO of the D.C. Chamber of Commerce. Uh participating virtually will be Diana Mubarak. Also participating virtually will be Joe Bishop Henchman, who is Executive Vice President, National Taxpayers Union Foundation. Nicholas Johnson, who is Senior Fellow at the Institute on Taxation and Economic Policy, and Michael Hilkin, who is a partner at McDermott Will and Schulte. The um hearing notice had uh four minutes, but given that we don't have a lot of witnesses here, I'm not going to hold you strictly to that. But if it's we will have a clock, and if it starts to be a lot of time, I will ask you to wrap up. Uh let's begin with Mr. Zambry, and good afternoon. Good afternoon. I need to hit this button. Hit the button. I think is that working? Good afternoon, Chairman Mendelssohn. I appreciate you allowing me to speak today. Uh on behalf of the Trial Lawyers Association of Metropolitan Washington, D.C., we are very much in favor of this legislation. As you pointed out, there are at least three dozen states that have gone ahead and implemented legislation like this. DC has been disadvantaged. The business owners here who would qualify have been disadvantaged by not having this kind of law in effect. So we applaud you and the council for considering this.
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