After days of heated testimony and tense negotiation, the Seattle City Council voted Monday to pass a new tax on the city’s largest businesses to increase spending on affordable housing production and homelessness services.
The employee hours tax is expected to raise roughly $47 million down from the $75 million version approved by the Finance & Neighborhoods Committee on May 11 and a third the size of the original $150 million proposal. Councilmembers reduced the burden of the tax after Mayor Jenny Durkan signaled at the 11th hour that she would veto the $75 million proposal out of concern for the impact on the business community.
The tax will also sunset after five years, forcing councilmembers to engage in the grueling process again should the homelessness crisis continue. A recent analysis by McKinsey & Company, first reported by The Seattle Times, suggests that it would take roughly $400 million per year to build enough housing to fix the problem.
The business community came out hard against the tax, despite the fact that only 3 percent of businesses in Seattle meet the $20 million in gross revenue threshold needed for the tax to apply to them.
It’s also possible that companies wouldn’t be on the hook for the entire bill, because they may be able to deduct it from their federal tax burden, tax experts say.
The original proposal for the tax included a payroll tax of .7 percent in 2021. Payroll taxes are deductible under federal tax law, and it’s possible the flat fee is too.
At the original $500 per full-time employee rate, businesses would pay roughly $395 after the company pays the 21 percent corporate tax rate, said Daniel Hemel, assistant professor of law at the University of Chicago Law School.
In Hemel’s example, the math works like this.
If an employee makes $30,000 a year and their employer fell under the proposed tax, the cost of that employee to the business is now $30,500 per year. Employers can deduct wages and payroll taxes from their federal tax burdens, the result of which is taxed at 21 percent after the Republican tax bill went into effect on Jan. 1.
The result is an effective tax of $395, the same amount as originally proposed when the Progressive Revenue Task Force wrote up its recommendations for the City Council.
The prospect of the deduction wasn’t discussed during task force deliberations, in part because the ramifications of the tax bill were still unknown given the unusual procedure used to pass it said Kirsten Harris-Talley, a co-leader of the task force.
“The timing on it just didn’t match up,” Harris-Talley said.
Payroll taxes like the hours tax came under greater scrutiny after the federal tax bill passed. The bill capped deductions on state and local taxes at $10,000, a blow to residents in deep blue states like California and New York who may face a higher burden due to state income taxes and property taxes.
In a paper, “The Games They Will Play,” a host of tax experts sought out ways to maintain the deductibility of state and local taxes over the $10,000 cap. An employer-side payroll tax, like the employee hours tax, was one prominent tactic because unlike state and local taxes in excess of $10,000, an employer-side payroll tax is still deductible for businesses.
The story for those states would not end there — other steps would be necessary to offset the additional burden of shifting the tax structure away from income taxes — but if implemented, the tactic would blunt the effects of the new federal tax policy on those states and make filing taxes easier on taxpayers who could then take the new, higher standard deduction rather than itemize.
The concept is gaining traction in some places, and the implementation plans vary, said Justin Marlowe, a professor at the Evans School of Public Policy and Governance at the University of Washington.
Ashley Archibald is a Staff Reporter covering local government, policy and equity. Have a story idea? She can be can reached at ashleya (at) realchangenews (dot) org. Follow Ashley on Twitter @AshleyA_RC
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