Alexandria weighs tax increases as federal workers face economic squeeze
City confronts timing dilemma as budget pressures mount while key taxpayer base deals with layoffs, payment plan requests increase
Alexandria faces a difficult timing dilemma: The city needs more revenue just as a significant portion of its taxpayer base confronts job losses and economic uncertainty from federal workforce reductions.
City officials presented potential tax increase options during Saturday’s budget retreat, but emphasized the tension between fiscal needs and residents’ ability to pay, particularly federal employees and contractors who make up a substantial share of Alexandria’s population.
“I think as we are having these conversations, the other part of this conversation about engaging with our community is 3 to 4 cents is never easy for anybody in this community,” Mayor Alyia Gaskins said. “But in the context of everything we just heard and all of the situation that we are facing with federal workers in this community and others who are being hit in this economy in ways we’ve never seen before. Like, I think we have to be mindful about that.”
The city projects just $5.2 million in new revenue growth for fiscal year 2027, less than 1% over current levels, while facing cost pressures exceeding $25 million when accounting for school funding requests, capital improvements, and inflationary increases.
What tax increases would cost residents
Councilman John Chapman calculated that fully addressing the budget gap would require a real estate tax increase of 3 to 4 cents per $100 of assessed value, on top of the current rate of $1.135.
“I think we’re talking 3 to 4 cents on the tax rate if we’re just being honest about it,” Chapman said. “And I don’t. That’s tough for this community and tough to understand that that’s the beginning.”
Each penny increase in the real estate tax rate generates approximately $7 million annually, meaning a 3- to 4-cent increase would raise $21 million to $28 million. For a home assessed at $600,000, a 3-cent increase would mean an additional $180 in annual property taxes.
The economic strain on federal workers already shows in city data. Roughly 60 federal workers have applied for vehicle tax payment plans, and three have requested real estate tax payment arrangements, according to information presented at the retreat.
Consumer spending dropped more than 4% in recent months as federal employees and contractors face job uncertainty. A Northern Virginia Chamber of Commerce survey found 44% of business leaders believe the federal shutdown is causing declines in their companies, with half anticipating further deterioration over the next six months.
Morgan Routt, director of management and budget, said the city must balance competing pressures while acknowledging economic realities.
“We think about that’s $5 million in new money for next year’s budget, to compare to $25 million growth that we saw in this current year’s budget,” Routt said.
The city has directed departments to identify 1% savings in base services, totaling approximately $4.5 million in reductions. Partner agencies received guidance to limit growth to 1.5%, though Alexandria City Public Schools still faces a $15.1 million budget gap even with that increase.
Revenue options beyond property taxes
Laura Gates, deputy director of finance, outlined potential revenue options beyond property taxes. The meals tax currently stands at 5%, with each 1% increase projected to generate $6.5 million, though officials noted that the estimate may prove optimistic given declining restaurant spending.
“Real estate, these are essentially the tax rates that are not at the cap or not capped by state code, with one exception, our sales tax, which is at the maximum,” Gates said, explaining the city’s flexibility. “So real estate, vehicle personal property, business personal property, meals tax, transient occupancy. Those are all items that either have no cap or are not at the cap.”
Any tax rate changes require extensive procedural steps including public hearings, ordinance introduction and rate advertisement, necessitating early decisions if council chooses to pursue increases.
“We also have requirements that we have to advertise, introduce ordinances and advertise the rate,” Routt said. “If we were to consider any of these avenues, that’s the kind of thing that requires community engagement, that we need more time than just a late date.”
City Manager James Parajon emphasized the city has not made decisions about tax increases but must present all options to council.
“We’re very tight. We’re not in a negative situation, but what we have directed all of our staff and partner agencies is that we’re very tight,” Parajon said.
Gaskins raised concerns about the narrative around budget decisions, particularly avoiding the appearance of pitting city services against school funding.
Balancing needs and taxpayer capacity
“I think what I also see is the flip side, that if we can’t give the full investment, that somehow we weren’t investing in our children or we weren’t investing in our city,” Gaskins said. “And I feel like that then does set up the conversation that we’re trying to avoid of two bodies against each other.”
The mayor emphasized the need to consider both service needs and taxpayer capacity.
“So what is the way we create a different narrative or work together that it’s not we’re choosing because we can’t or it’s not because we don’t understand the needs that are there,” Gaskins said. “But we are also trying to make sure that those who are paying for it and those who are helping sustain our community are going to be able to stay here.”
Chapman noted the challenges extend beyond a single budget cycle, as real estate assessment growth continues slowing.
“As we talked about with the assessments, the assessment picture does not get better next year,” Chapman said. “This is not a one-year bump.”
The city projects residential real estate assessment growth of 2.7% for fiscal years 2026 and 2027, down from stronger growth in previous years. Commercial property values improved from a decline of 4% to less than 1% negative growth, but office vacancy rates climbed to 21.1% in the second quarter of 2025.
Councilman Abdel-Rahman Elnoubi urged focus on revenue protection and growth strategies rather than solely on expenditure reductions.
“I think as we approach this next budget, what we need to be thinking about more is how do we protect our current revenue streams, but what are strategies that we can think about that we can grow our revenue stream?” Elnoubi said. “I think thinking about what supports can we put in place to protect our small businesses and our local businesses?”
Elnoubi noted that business failures directly reduce city revenue, creating a compounding effect on budget challenges.
“Because it’s one thing if we scale back on services that we provide that don’t necessarily generate revenue,” Elnoubi said. “But when we’re looking at businesses going out of business, that is revenue we’re losing.”
Both city and school officials emphasized the need for increased state funding advocacy. Virginia provides only 20% of Alexandria City Public Schools' funding compared with a 55% state average, placing an extra burden on local taxpayers.
“They poked us in the eye last year when they said they have $4 billion left,” Chapman said, referring to Virginia’s state surplus. “We shouldn’t have to go up in local taxes because you just said you had a $4 billion surplus.”
The city plans to pursue grant opportunities and economic development initiatives to diversify revenue sources. Alexandria City Public Schools is evaluating local user fees, including a potential technology fee that could generate $500,000 to $1 million, according to Dominic Turner, school system chief financial officer.
Routt cautioned council members about expecting significant changes to the revenue forecast as more data becomes available.
“I can almost promise the number will be different from what it is now,” Routt said. “And if I had to guess, I would say it would probably go up, but it would not go up by much. So I wouldn’t expect us to see the 20 million, $25 million of revenue growth that we saw last year. It may go up by a little bit, but, you know, hundreds of thousands to maybe millions of dollars, but not significantly from where we are now.”
The city manager will present the proposed budget in late February, beginning a three-month public engagement process. Any tax rate considerations would require community forums and council work sessions before final decisions.
The budget process continues through spring 2026, with final adoption scheduled for May. The fiscal 2027 budget takes effect July 1, 2026.
City officials maintain Alexandria’s AAA bond rating remains intact despite budget pressures, and emphasized the focus on maintaining essential services while navigating economic uncertainty.