Citing the need for more revenue to finance planned spending on affordable housing and growing homelessness, the Seattle City Council recently proposed a new Progressive Tax on Business.
If enacted, the tax would do little to address housing affordability but would have a range of adverse consequences for affected workers and companies. Instead of this ill-advised new tax, Seattle should consider relaxing strict zoning and land-use regulations that impede housing construction.
The potential tax, based on a report from the city’s Progressive Revenue Task Force, would apply to businesses with $20 million or more in taxable gross receipts. According to estimates in the related memo, the Seattle government projects that about 3 percent, or 585, of Seattle’s businesses would be affected, although these businesses account for a disproportionate share of the workforce.
These businesses would be required to pay over 26 cents per employee per hour worked within Seattle, excluding any vacation and sick leave hours. Assuming an employee worked 40-hour weeks for 50 weeks in a year, this would equate to about $520 per employee per year.
This tax would be particularly burdensome for large businesses that employ low-wage workers, those who need affordable housing. If their hours are reduced, or jobs become harder to come by as businesses shift operations to minimize their exposure to the tax, these workers would be worse off. They might have government-provided homes but no jobs.
Some businesses with enough taxable gross receipts to be subject to the new tax could have thin operating margins that would make it difficult for them to adjust to the new tax. The temptation would be to substitute higher-paid workers who work fewer hours for lower-paid workers who work longer hours, and put off raises.
Unfortunately, Seattle has not learned from previous experience. The city repealed a previous employee hours tax in 2009, a $25 per head tax that raised about $4.5 million in 2008.
Economic conditions were worse in 2009 than they are today, but the scale of the proposed tax is more than 20 times larger for businesses. In addition, it might be easier for proponents to shrug off concerns about negative effects on jobs when the unemployment rate in Seattle is 3.8 percent. The pain would be more keenly felt in less-rosy economic times.
A full council vote is scheduled for May 14 after a series of committee meetings. According to The Seattle Times, four of the nine council members have put their names to the bill while a fifth has indicated support. If the legislation were to pass, it would take effect in January 2019.
In 2021, the employee hours tax would be replaced by a business payroll tax of 0.7 percent on all payroll for work done in the city for these same larger businesses.
How big a dent would the new revenue, approximately $75 million per year, put into the city’s housing problem? According to the Seattle city Council, 75 percent of the annual revenue would go towards building 1,780 affordable housing units over a period of five years.
Another tranche consisting of 20 percent of the annual revenue would be spent on services for the homeless, with housing-related components including the creation of 100 tiny homes and maintaining an additional 362 shelter beds per year. According to the council’s own estimates, the area needs more than 140,000 units, so the units financed by the Progressive Tax on Business would be only a drop in the bucket, accounting for about 1.3 percent of the needed units, at most.
Seattle’s politicians have gone through admirable contortions to address the problems of expensive housing while pointedly ignoring the zoning regulations that make it difficult to build. As Jared Walczak at the Tax Foundation points out, the city council considered a less-aggressive 4.8 cent per employee hour tax last year, in addition to soda taxes, short-term rental taxes, luxury real estate taxes, and a city income tax, among others.
Meanwhile, according to the Wharton Residential Land Use Regulation Index, the Seattle area ranked 5th out of 47 metro areas in terms of strictness of land use regulations. Seattle residents and policymakers concerned about housing should relax some of those restrictions and allow more housing to be built.
Seattle’s new proposal would levy a tax of about $520 per employee per year on affected businesses, while doing little to alleviate housing affordability. Instead, the burden of the tax would ultimately fall on workers, and induce some businesses to reduce employment. While concerns about Seattle’s affordability are well-founded, this new proposed tax is no solution.
Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on Twitter @CharlesHHughes.
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