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As usual, "best practice" means "the practice your team is willing to do." Personally I prefer to do city as Washington, state as DC for standardization purposes (since, as you mention, there are always records that do otherwise, such as leaving a state blank, but that messes with any geosegmentation you may want to do for the United States.) I'd honestly just pick a standard that works for you and your team and set up some maintenance campaigns to ensure any incoming records meet that format.
We do what both you and Courtney had mentioned.
In your example City = Washington and State = DC
I wouldn't be leaving the State blank though.
DC=State and City=Washington is the post office approved method.
You can do whatever you want of course.
We do the same. For State, we spell out "District of Columbia"