Wonk Wagers

Seattle’s New Payroll Tax Is a Gamble

City council's latest business legislation levies companies the region is counting on to lead its recovery. Will they stay?

By Benjamin Cassidy July 21, 2020

100-dollar bills

The city needs this. But is the "JumpStart" tax the right way to get it?

It would be the talk of Seattle right now—if, you know, we weren’t fighting a pandemic, figuring out how to defund the police, and shaking our heads at a cracked bridge. 

Two weeks ago, Seattle City Council passed a new tax that will levy companies with more than $7 million in payroll expenses starting in 2021. A descendent of the repealed head tax of 2018, council member Teresa Mosqueda’s “JumpStart Seattle” plan is estimated to raise more than $200 million per year for the city. Affordable housing and pandemic relief are among the stated destinations for these funds, which could help compensate for coronavirus’s potential $300 million toll on the city budget. “Our community is hurting. Our economy is tanking,” Mosqueda has said. “We cannot wait for the feds or the state to step in. We have to act now to help Seattle.”

Unlike the controversial head tax that the council approved and repealed a month later, the new legislation does not impose a levy ($275) on the number of employees at big companies, defined then as businesses taking in over $20 million in revenue. Instead, about 800 employers with (debatably) high payrolls will only face taxes on the salaries of workers making at least $150,000 per year. The specifics:

  • Businesses with annual payrolls between $7 million and $99,999,999.99 will face a tax rate of 0.7 percent on the compensation of employees making $150,000–$399,999; the rate rises to 1.7 percent for employees making over $400,000.
  • Businesses with annual payrolls between $100 million and $999,999,999.99 will face a tax rate of 1.9 percent for employees making over $400,000. (The rate remains 0.7 percent for the $150,000–$399,999 range.)
  • Businesses with annual payrolls of $1 billion or more will face a tax rate of 1.4 percent on the compensation of employees making $150,000–$399,999; the rate rises to 2.4 percent for employees making over $400,000. 
  • Grocery stores are exempt from the levy, a talking point for head tax opponents fearing mass layoffs of cashiers and others back then. Health care nonprofits are mostly free from the tax over the next three years, too.

The tax feels more in line with a progressive council’s aims—a “boss tax,” as Seattle Times columnist Danny Westneat called it—than the head tax, which applied to employees of all income levels. But that doesn’t mean the JumpStart levy won't affect people from all economic classes. On Friday, mayor Jenny Durkan opted against vetoing the bill (she didn't have the votes to support her) but also refused to sign it, citing potential job losses as companies look elsewhere to run their operations.

Downtown Seattle Association president and CEO Jon Scholes agrees with Durkan. He doesn’t think a voter referendum campaign is nigh—too many hurdles to signatures during a pandemic—but resistance from a variety of businesses, some of which would not be taxed, is strong. “I think the long-term damage to Seattle's economy, our brand, our ability to recover, the ability of the city to generate and restore tax revenues, is going to be significant, and I think [the council has] gone about this entirely the wrong way,” says Scholes. “The reason that the city tax revenues have cratered is because our economy is cratered. The only way to get city tax revenues restored is to get our economy restored.”

He points to Nordstrom, which has had to lay off hundreds of employees, as a company that would qualify for the tax but is struggling nonetheless. And he’s concerned that organizations will consider moving to other cities, a fear in sync with commercial real estate hubbub. “They call it JumpStart Seattle—I think it's going to jump-start Bellevue and other places outside of Seattle,” says Scholes. “It's going to do more to help their economy than ours.”

Sharon Kioko, an associate professor in the University of Washington’s Evans School of Public Policy and Governance, isn’t so sure that will be the case. Kioko says that a “clever” part of the legislation is that its tax rates are low enough to prevent bigger companies from uprooting; simply put, moving costs may outweigh the tax expense. “The tax is not going to really change the fundamental operating costs of an organization,” says Kioko. For smaller “big” companies, however, it might make sense to relocate to a Seattle-adjacent city, she adds, if many of their employees and customers reside in that area.

A concern for Kioko is instead the tax’s incidence, or the parties that will ultimately bear its burden. Even though the tax is only applied to high salaries, businesses will naturally adjust costs elsewhere to compensate for their losses, transferring the levy’s toll to others. While the cancellation of a planned raise for a higher-up may not engender mass sympathy, reductions in job opportunities for janitorial services and other contractors would. And any big company movement could damage small businesses throughout the city, enough to make any subsequent relief extended from the city's coffers irrelevant.

Kioko says she hasn’t come across a tax quite like this one in her years researching public finance and budgeting. “It's an interesting strategy to try and have a taxation on income, which is a big challenge for, not just Seattle, but for the state as well.”

A challenge, in that a local or state income tax doesn't currently exist here. The region's regressive tax structure continues to be a thorn in the side of progressive politicians, forcing them to get, well, creative in their taxation legislation. Might pushback to the council's unique levy soon summon a traditional income tax? Kioko wonders. “Until we have that,” she says, “everything else is really going to be window dressing.”

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