Posted May 10 2018, 3:30 PM PDT by Matthew Gardner, Chief Economist, Windermere Real Estate

Why the Seattle Head Tax is not Progressive; it is Regressive & Bad Policy

Posted in Market News by Matthew Gardner, Chief Economist, Windermere Real Estate

 

The major topic of conversation at many Seattle businesses – both large and small – is the Seattle City Council’s proposal for a head tax on large companies. The city proposal is to raise $75 million annually for homeless and housing services through taxing businesses whose revenues exceed $20 million annually.

 

As a company that champions home ownership, we spend considerable time and resources thinking about housing affordability and homelessness. In Seattle alone, Windermere donated more than $465,000 last year towards these efforts. We have ideas as to how the region can address them; however, a head tax is not one of them.

 

In my opinion, and that of the rest of Windermere’s executive leadership team, this is clearly a regressive tax – and bad policy – and it should not be passed by the City Council. However, if it is passed, Mayor Durkan should immediately veto it if she has the option to do so.

 

Here is our rationale for taking this position:

  1. Has the Seattle City Council really considered the potential consequence of a head tax? We do not believe that the real effects on taxing Seattle’s largest employers have been adequately considered. While the Seattle City Council has convened a “Progressive Revenue Taskforce” to deliberate on the proposed head tax, it has failed to commission any sort of formal study that fully explores the potential consequences. In fact, statements in the media suggest that some council members’ rationale for supporting the head tax is because they have not seen any studies that say it will have negative effects. But if there have been no studies conducted, how can one come to this conclusion?

 

  1. A tax on revenues is totally inappropriate. This tax, in a similar fashion to Business & Occupation taxes, is based on revenues (gross sales), and not profits. Consider the company that breaches the $20 million threshold in revenues, but their actual profits are well below that figure. A tax like this could cause those companies irreparable harm, resulting in them leaving Seattle altogether.                                                                                                                                                                                                            It is also important to understand that different business sectors have very disparate profit margins – some much thinner than others. For example, the retail sector is particularly susceptible to such a tax as they typically have thin margins. They, along with other thin margin sectors, also employ the lower skilled workers who are supposed to benefit from the tax revenue raised. But if their employer is now being hit by a new head tax, it’s not a stretch to surmise that many of these workers will eventually lose their jobs due to a loss of revenue.

 

  1. A head tax will undoubtedly exacerbate the housing affordability crisis. Taxpayers and businesses alike must understand that the proposed headcount tax turns into a payroll tax in 2022, and it is generally understood that payroll taxes are a much heavier burden on the middle classes because they tend to decrease earnings. There are a plethora of academic papers on this topic that should be considered by the Seattle City Council[1].

                                                                                                                                                                                      Additionally, a payroll tax could quite possibly exacerbate the housing affordability crisis that already exists in Seattle. Ignoring for a moment that this tax is intended to assist in reducing the homeless population, it is proposed to revert from a head tax to a payroll tax after the first two years. Such a tax will lower incomes for employees of the companies that are impacted. With housing costs in Seattle rising quickly, more personnel may have to leave the city just to afford to live. Is this really helping with workforce housing?

 

  1. Seattle already taxes its businesses substantially. When it comes to business, it is commonly known that Seattle has some of the most regressive tax policies in the nation. High Business & Occupation taxes, ST-3 property taxes, soda taxes, short-term rental taxes – all hit companies of every size. There are also proposals under discussion for an income tax, luxury real estate tax, and a tax to drive on Seattle streets – not to mention the increase in the minimum wage that has gone into effect. Seattle businesses currently account for almost 60 percent of the total city budget.[2] At what point will companies decide that it’s just too expensive to operate here?

 

  1. How is the City of Seattle spending its current funding on addressing homelessness? According to data from the City of Seattle[3], funding to address homelessness has already increased by 60 percent from $39 million to more than $63 million over the past four years. Additionally, according to the Greater Seattle Business Association in a Seattle Times op-ed, the city’s budget increases have done nothing to address the problem they are spending to solve, as there has been a 37 percent increase in the homeless population during the same period.

                                                                                                                                                                                        With such an increase in homelessness, it makes one wonder how well Seattle is managing the funds they already have. As Starbucks stated in a May 10, 2018 story in the Seattle Times, it makes sense to have a plan in place before any additional taxes are imposed. We wholeheartedly agree with this position.

 

  1. The Seattle City Council claims that large businesses should “Pay their fair share”. Seattle is considered one of the most philanthropic cities in the country and a majority of businesses already donate generously to non-profit organizations that provide services to the homeless. For example, it is well known that Amazon donated more than 47,000 square feet of space within one of their buildings to create a permanent home for the Mary’s Place Family Shelter. Along those same lines, more than $6 million has been raised for the “No Child Sleeps Outside” campaign, thanks in large part to Seattle area businesses. Any additional taxes on companies will very likely curtail this type of giving.

 

  1. Jobs are vital to the health of any city – and Seattle is no exception. There have been head taxes levied in other cities and their examples should be considered. For instance, Chicago had a per-employee head tax of $4 per month, or $48 per year. That tax (which represents less than 9 percent of the amount contemplated in Seattle) was decried to be a job killer by Mayor Rahm Emanuel[4]. Keep in mind, the Seattle head tax proposal is 11 times the size of the tax Chicago abandoned for contributing to unemployment.

 

  1. Head taxes are not unique, but the level of tax Seattle is proposing is. Some cities in Pennsylvania impose employment-based “local services taxes[5]” at rates of $10 to $52 per year. Denver has a $4 per month[6] head tax. Such taxes are uncommon and often maligned as nuisance taxes, but they are not unprecedented. What is unprecedented is taxing Seattle companies approximately $42 per month per employee.

                                                                                                                                                                              Seattle’s proposed head tax would make it costlier to employ new or lower-skilled employees, potentially nudging employers further in the direction of automation, or into hiring a smaller number of higher-compensated employees to do work that might otherwise have been distributed among lower-skilled, lower-wage employees.

 

Let’s be clear, this is not just a tax on Amazon although, given their size, they are certainly central to both sides of the argument as they will be contributing roughly one third of the annual tax. The real question is do we really want businesses moving out of Seattle in favor of other cities? Ultimately, I believe that the proposed tax gives businesses an incentive to either layoff personnel, slow/stop proposed growth (think Amazon), or leave the city entirely and move to a more business-friendly location like Bellevue or Kirkland.

 

The City of Seattle has grown dramatically over the last few decades and nobody would argue that such growth brings with it a unique set of issues. That said, the implementation of a regressive tax that, arguably, will do nothing to solve the issues that the city faces, is naive and bad policy. A scattergun policy of “shoot-aim-ready” is not a solution.

 

To conclude, homelessness and housing affordability are certainly very big issues that need addressing; however, we believe that these are issues that should be addressed at the regional level and not by simply adding more taxes to Seattle businesses that are almost entirely responsible for the economic vitality of our city.

 

Seattle-based Windermere Real Estate is the largest real estate company in Seattle with 20 offices within the city limits. Last year, these offices donated a collective $465,000 to organizations that provide services to low-income and homeless families.

 

 


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