D.C.'s Paid Family Leave cuts take the 'trust' out of 'trust fund'

When the Council of the District of Columbia finalized its version of the municipal FY2027 budget, it set the city on a path toward a troubling milestone: As of October 1, D.C. will become the first jurisdiction in the country to implement cuts to paid family and medical leave (PFML). A majority of the program’s dedicated payroll tax revenue, amounting to hundreds of millions of dollars, will be diverted to unrelated expenditures. Meanwhile, the maximum weekly benefit will be decreased for all PFML categories, the maximum leave duration will be reduced for some, and D.C. will continue collecting the program’s dedicated payroll tax at a rate of 0.75 percent.

D.C. had been an early adopter of contributory PFML, enacting its program in 2017 when just five states had done the same. The number of these social insurance programs has grown throughout the past decade, and as of 2026, there are 14 other statewide programs across the country. In the national capital region, Maryland and Virginia both recently enacted programs that will take effect in coming years. 

In the 15 jurisdictions with these programs, the state collects funds for PFML benefits through a payroll tax on employees, employers or a split between the two. The state holds the money in a pooled paid leave fund, and pays the benefits out to workers when they need time away from work to bond with a newborn, recovering from a serious medical condition, or care for an ill family member. Each state determines program characteristics such as the wage replacement rate, maximum weekly benefit, and the duration of leave allowed.

Initially, D.C.’s program functioned as intended. However, in recent years D.C. has siphoned off a portion of the dedicated funds for general spending, redirecting more than $300 million annually. With the cuts set to take place, while the payroll tax rate stays the same, even more of the money will be diverted, and workers will lose some of the flexibility they currently have available. This mechanism allows D.C. to fill gaps in its budget at the expense of workers and their families. D.C. should reserve these dedicated funds for the PFML program and pursue other revenue streams for unrelated activities. 

D.C. is reducing social insurance benefits …

The Council’s version of the budget makes several cuts to the program (see Table 1). They include a lower cap on maximum weekly benefits, while otherwise leaving the current wage replacement rate in place. The legislation will reduce the amount of leave available for workers taking time away for their own medical issues unrelated to pregnancy, or who take time away from work to care for a family member. It does not alter the maximum leave duration for new parents, both for the two weeks of prenatal leave available to expectant mothers and the 12 weeks of bonding leave available to all new parents. The budget became law after the mayor sent it back to the Council unsigned in protest over fiscal issues such as the use of one-year funding for multi-year programs.

Table 1: Changes to D.C.’s program in the FY2027 budget legislation

Before the Council adopted the FY2027 budget legislation, no other contributory PFML program in the country had cut existing benefits. As in D.C., states with contributory programs finance PFML benefits using revenue from payroll taxes. Annual adjustments to contribution rates and maximum benefits enable these programs to remain fiscally sustainable, as D.C.’s program has been since its establishment. Policymakers have not provided much reasoning for their decision to enact cuts to a solvent program, and explanations that the upcoming cuts are necessary to rightsize the program don’t line up with facts presented in materials that the D.C. government published which show the program is currently solvent. 

…without reducing the social insurance tax

Despite the program being highly solvent even before the benefit cuts take effect, the budget does not provide employers with a corresponding reduction in the payroll assessment. Each year, D.C.’s chief financial officer is required to certify the payroll tax rate needed to sustain the Universal Paid Leave Fund at the level required to pay out anticipated PFML claims. Earlier this year, the CFO certified that benefits could have been maintained at the current level without the cuts for the next year with a payroll tax rate of 0.25 percent. This tracks with previous trends; last year, the CFO certified that benefits for FY2026 could be maintained with a PFL fax rate of 0.23 percent. Instead, while benefits are reduced, employers will pay 0.75 percent, or three times the rate that the CFO indicated was necessary to sustain the program.

District employers already faced a different payroll tax landscape than their counterparts in the 14 states which have enacted social insurance PFML programs. While the 0.75 percent payroll tax rate is not itself an outlier, other characteristics of the payroll tax distinguish D.C.’s Paid Family Leave (PFL) Tax from corresponding taxes in the other states. Most state PFML programs split the tax incidence between employer and employee, while D.C. stands alone in solely assigning the payroll tax incidence to employers.

Nor does D.C. cap the taxable wage base for its PFL tax; among the 14 states with contributory PFML, only California forgoes a cap on wages subject to the payroll tax. Many of the other states use the Social Security annual income cap as the ceiling for their PFML taxable wage base. 

Rather than using the excess funds to build up the program’s reserves, the D.C. budget will divert the residual savings to D.C.’s general fund. 

Diverting a dedicated revenue stream 

Decoupling the tax revenue from the benefits it was intended to sustain breaks the implicit agreement between government and individuals that underlies social insurance programs such as contributory PFML. These new benefit cuts are part of a worrying trend in which D.C. policymakers are raiding the paid leave fund to finance unrelated spending.

The Fiscal Year 2024 Revised Local Budget Emergency Act of 2024 nearly tripled the payroll tax rate, bringing it to the current level of 0.75 percent, and directed that any revenue in excess of the amount needed to maintain program solvency must be deposited into D.C.’s General Fund. Estimates from D.C.’s CFO forecasted this would lead to diversion of $322 million in FY2025, which was expected to increase to $355 million by FY2028, for a total of $1.36 billion across four years. 

For the two fiscal years since the amendment was enacted, the CFO has certified that the fund would be solvent with an employer payroll contribution rate of no more than 0.25 percent, while the rate has remained at 0.75 percent. This means that since this policy change took effect, about twice as much payroll tax revenue would be diverted to the General Fund as would be paid to PFML recipients. This was expected to continue, and analysis by the D.C. Fiscal Policy Institute indicated that under current law about $345 million, or 67 percent of the PFL tax, would have been transferred from the Paid Leave Fund to the General Fund in FY2027. 

Furthermore, according to the Fiscal Impact Statement the CFO prepared analyzing the first iteration of the FY2027 budget legislation, cuts to the maximum weekly benefits and maximum weeks available for leave would result in an additional $41 million in PFL Tax revenue being diverted to the General Fund next year. Because the version the Council passed included less severe cuts than proposed in an earlier iteration of the FY2027 budget, it’s likely that the PFL Tax surplus will not quite reach that estimate, but could still yield additional revenue.

In any case, D.C. will collect several hundred million dollars of revenue from employers that was meant to fund a specific benefit for workers and their families, and the law requires that the majority of these funds will be spent on unrelated programs. 

D.C. policymakers can reconsider

The budget legislation recently headed to Congress, and will become law if federal lawmakers do not exercise their authority to amend or veto it within 30 legislative days of their August 20 receipt of the bill. The budget will go into effect at the start of FY2027 for the remainder of the Congressional review window on an emergency basis.

The incoming mayor and Council should honor the city’s promise to families and restore benefits to the current level. Furthermore, lawmakers should revisit the provision requiring that surplus from the Universal Paid Leave Fund be diverted to D.C.’s General Fund and ensure those funds are used for their intended purpose: to support workers and their families. 

If tax increases are needed to fund other essential services, the Council should use other revenue streams rather than raiding what is meant to be a dedicated, program-specific funding source. When the program was established, there was a process in place if the PFL Tax was yielding a surplus. Each year, the CFO assessed the state of the fund and, if there was a surplus, could recommend a lower payroll tax rate or for benefits to be expanded. D.C. could reverse the change from the 2024 legislation and return to the original policy, which would ensure the funds collected for the program are solely used for their intended purpose.