Baxter, 27, who played with the Charlotte Bobcats last season, was taken into custody around 2:30 a.m. after a person on the street flagged down a Secret Service officer and reported shots were being fired from a white sport utility vehicle, said Secret Service spokesman Eric Zahren.
Officers stopped the vehicle, which Baxter was driving, near the intersection of 17th and I streets in Northwest Washington, he said.
"There were spent shell casings in plain view inside the vehicle," Zahren said. Officers searching the vehicle also recovered a handgun, he said.
The Secret Service charged Baxter and his passenger Irvin Martin, 35, with carrying a handgun without a license and other firearms charges. It wasn't immediately clear why they were allegedly firing the gun.
"We're not sure at this point," Zahren said. "There may be some subsequent charges if we discover some additional information."
The two suspects were being held by District of Columbia police.
Baxter signed a one-year deal earlier this month with Italian team Montepaschi Siena.
Baxter is a former University of Maryland star who was chosen rafted by the Chicago Bulls in the second round of the 2002 NBA Draft. He is a native of Silver Spring, Md., just outside of Washington, and played for Maryland from 1998 to 2002. He also played briefly with the Washington Wizards.
Bobcats spokesman Scott Leightman said Baxter is no longer with the team. "His contract ran out, and we opted not to resign him," Leightman said.
Baxter joined the Bobcats in the middle of last season in a trade with Houston.