Seattle’s New Business ‘Head Tax’ Hurts Job Creators And Limits Economic Growth

Published June 6, 2018

In the past two years alone, Seattle has proposed new or increased taxes on everything from income, soda, parking, luxury real estate, and rental units. On Monday, the city council did another disservice to Seattleites after it passed a new tax on the city’s largest businesses, including the high-tech companies that have become the city’s economic salvation in recent decades.

In May, the Seattle City Council voted unanimously to tax the city’s largest employers to help address homelessness. The original tax would have imposed a 26.042-cent-per-employee-hour tax on large Seattle companies — those with at least $20 million in total annual revenue. This version would have forced businesses to pay a head tax of about $500 per full-time employee annually.

Because Mayor Jenny Durkan threatened to veto the original bill, the council then “reduced” the tax increase to $275 per employee. “Lowering” the rate and not allowing the tax to convert to a payroll tax makes the new version only slightly better than the original.

However, it still creates a massive new burden on Seattle employers. Seattle is now the only city to impose an employee tax and a business and occupation tax.

Unfortunately, this is not the first time such a tax has been imposed in Seattle — although it is considerably higher than the previous version.

Before 2009, Seattle imposed a short-lived $25-per-employee tax on Seattle businesses that was repealed during the recession. At the time, former Mayor Greg Nickels argued it was not appropriate to impose job-killing taxes during difficult economic times. In 2017, Seattle sought to resurrect a similar proposal, but the effort failed.

Chicago’s Bitter Lesson

As Seattle embraces this onerous business tax, the recent trend in other cities and states has been to move in the opposite direction. For example, in 2014 Chicago repealed its business head tax of $4 per month, or $48 per year.

Chicago Mayor Rahm Emanuel told the Chicago Tribune that the head tax destroyed jobs and needed to go. “The head tax is a job killer. Eliminating the head tax is the right thing to do for businesses big and small, and it’s the right thing to do to secure Chicago’s future,” Emanuel said.

Chicago’s tax was only a small fraction of what Seattle just imposed. In fact, no head tax in any city is anywhere near as severe as Seattle’s outrageous $275-per-employee levy.

Making matters worse, although Seattle attempts to contain the negative effect on employment by limiting the tax to large businesses, these businesses employ a disproportionately high percentage of the city’s overall workforce.

The tax will make it costlier to employ new and low-skill employees — leading to less hiring or more automation.

Local companies are already reacting to the tax, with many arguing it will affect both future hiring and expansion efforts in Seattle.

Company Pullbacks

Amazon has already pulled back on several projects in the city, erasing 7,000 potential new jobs. In fact, Amazon’s plans will cost the city an estimated $3.5 billion in economic impact, according to a study from the Seattle Metropolitan Chamber of Commerce.

Another company, Honda & Toyota of Seattle, estimates the new tax will cost “$113,500 for the first year, with 227 employees. So, it’s approximately $9,500 in (monthly) overhead that we weren’t anticipating.”

Because tech jobs are fairly mobile, the city must be especially careful not to alienate its thriving tech industry. As soon as the new tax becomes too burdensome, these companies can easily relocate.

And as is nearly always the case, this tax on large businesses will have far-reaching effects that go beyond its intended target. Eventually, countless small businesses, shops and restaurants will be negatively impacted when companies such as Amazon and Starbucks don’t expand or choose to relocate to escape the tax.

Instead of increasing taxes on successful businesses, elected officials in all cities should focus on making the city a more attractive place for businesses and workers — a goal that would best be accomplished by restraining spending, lowering tax rates and reducing unnecessary regulations.

[Originally Posted at Investor’s Business Daily]