City Officials in Washington State Boost Head Tax by 567%

Published December 13, 2010

With both state and city budgets facing tough times  as a result of the recession, one city in Washington State decided recently to try saving about 75 city jobs—by drastically increasing a fee that could cost private-sector jobs.

The city of Lynnwood, Washington, about 15 miles north of Seattle, is home to 37,000 people. Like many city and municipal governments, it is facing a budget shortfall. City officials decided to try closing the $22 million shortfall through several targeted cuts, but also by raising various taxes and fees, including a huge increase in the city’s business license fee, which is based on the number of employees a company has.

The business license fee is soaring from $15 per employee to $85—a 567 percent increase in the city’s employee head tax.

The City Council also raised property taxes and utility taxes and implemented a new car license fee of $20 per vehicle.

Layoffs Coming Anyway
Even with the tax increases, Lynnwood Council President Mark Smith acknowledged 25 city jobs would have to be eliminated because of budget problems.

Residents have expressed plenty of concerns about the property and utility tax hikes, and Lynnwood residents already pay a 9.5 percent sales tax rate. (Washington has no state income tax.) But the main concern is about the increase in business costs, particularly because Lynnwood’s major employers are primarily retailers and rely heavily on part-time workers, especially during the holiday season.

The old calculation was $15 dollars per full-time employee. The new calculation uses the full-time equivalent (FTE) calculation, which means businesses that use part-time workers will have to count them in calculating the fee. Two employees who each work 20 hours a week, for example, would equal one FTE and therefore be subject to the fee.

Don’t Address Long-Term Budget
Jean Hales, president and CEO of the South Snohomish County Chamber of Commerce, said she worries the tax hikes still do not address the need for a long-term, sustainable budget.

“The simple fact is that city expenses continue to outstrip revenues, and rather than make the tough choices to reign in spending, they decided to place a larger burden on the back of the taxpaying public and local businesses,” Hales said.

Jim Morino, who owns the Acura of Lynnwood car dealership, said he is dismayed at the prospects for 2011 resulting from the city’s actions.

‘Can No Longer Squeeze Business’
“The city has increased our utility bill by $2,125 per year, said Morino. “The increase in the [head tax] will cause our business permit to be increased by $4,340. That is assuming I am able to keep my current employee count. My property tax will go up $6,000 to $7,000. . . . That will be an increase in expenses of $12,000 to $13,000 with a reduction in sales of over 30 percent since 2007.”

Morino says this course of action doesn’t make sense.

“It is unfortunate that we have to reduce employee count, reduces expenses, and do away with programs, but the city can no longer squeeze business and expect us to stay in business or stay in Lynnwood.”

The worry among businesses and policymakers is that local governments, which often have fewer taxing tools, will continue to look at increasing taxes or fees on the business community to help recoup drastic reductions in revenue caused by the recession.

That’s the wrong approach, says Jason Mercier, a budget policy analyst for the Seattle-based Washington Policy Center.

‘Governments Must Prioritize’
“Local governments, just like state governments, must prioritize their spending first, before increasing costs on taxpayers, which includes the business community. Such a drastic increase in taxes and fees shows that city officials are unable to balance budgets in a way that doesn’t hurt the business community.”

Lynnwood is one of only six Washington cities that imposes an employee head tax. Three others are just a few miles east of Seattle—Redmond (home of Microsoft), Renton, and Kirkland. Two other cities in eastern Washington impose an employee head tax—Richland and Kennewick.

However, Richland and Kennewick’s fees are $12 and $5 per employee respectively, while the other cities’ fees range from $55 to more than $100 per employee.

Seattle Ended Its Head Tax
From 2005 through December 2009 the city of Seattle imposed an employee head tax, until city officials decided it sent the wrong message to the business community during the worst economic recession in 80 years. In late 2009 the Seattle City Council voted to repeal the $25 per employee head tax from 2010 onwards, much to the approval of the business community.

Mercier also expresses concern about the collateral damage Lynnwood’s head tax hike may cause in other municipalities.

“We were all pleasantly surprised that the city of Seattle, not known for being the most business-friendly city, decided to ditch its employee head tax. It is unfortunate Lynnwood went the opposite route,” Mercier said. “We are concerned this may send a message to other city governments that penalizing the decision to employ a worker via a head tax is a viable alternative to enacting tough spending choices.”

Carl Gipson ([email protected]) is director for small business and technology research at Washington Policy Center.