By Erica C. Barnett

A comprehensive, 127-page report on the city’s business and taxing climate recommends that Seattle start taking steps to diversify its tax base beyond the handful of large tech firms that now dominate the city, by cultivating startups in areas like AI, green energy and the maritime industry and helping them grow into mature, mid-size companies that stay in Seattle instead of expanding somewhere else.

“While Seattle’s startup activity is modest and declining, its ability to grow firms is mediocre at best,” the report, published by a group of researchers headed up by a Brookings-affiliated researcher named Ryan Donahue, says. Of 303 tech companies that were founded in the Seattle area between 2015 and 2019, only 33 have grown to more than 50 employees. At the same time, Seattle has failed to attract midsize firms, adding just 16 net new midsize tech companies between 2017 and 2023, compared to 104 in San Francisco and 51 in Austin. “Scaling that missing middle is the challenge around which economic development should be organized.”

“Seattle needs firms that are economically distant enough from the tech sector for their fates to be disentangled, yet economically close enough that access to tech talent and customers justifies Seattle prices. Envision a battery or satellite company that wants to engineer and assemble prototypes that could eventually be produced at scale, but also needs a few top-tier AI researchers at hand.”

Failing to diversify, the report notes, keeps Seattle dependent on the decisions of the handful of companies that make up its tax base. If those firms shrink or relocate, other local businesses that depend on wealthy tech workers, like restaurants and retail, will also take a hit.=

The situation the report describes won’t be too surprising to anyone who has followed the ups and downs of Seattle’s JumpStart tax, which gets 75 percent of its revenue from just 10 companies, all but one in tech. (JumpStart taxes large Seattle businesses based on individual employee compensation above an annually adjusted threshold; revenue from the tax depends not just on how many highly-paid employees are at each firm but how the value of companies’ stock in any given year.)

The tax, which was created to fund affordable housing and other progressive priorities but now goes largely to the city’s general fund, has proven to be extremely volatile—less of an issue if it’s funding one-time adds, more of a crisis if the entire budget depends on its stability. “The report puts it bluntly: “The city’s fiscal health now depends on the marginal location and compensation decisions of a handful of employers. I

“The strategy is to move them deliberately: helping software-adjacent ‘hardtech’ firms in areas like cleantech, commercial space, maritime, and life sciences scale in the city; enabling mid-career engineers leaving anchor firms to start and join new companies rather than leave town; and using climate policy and the City’s control of Seattle City Light as an accelerant for deployment of clean energy technologies, enabling growth and stimulating innovation.”

The report includes a number of specific recommendations—like creating a public development authority that can issue contracts and make investments, investing in child care construction as well as child care subsidies, eliminating parking requirements and increasing density, and and reducing the amount of time it takes businesses to get permits.

In response to the report, Wilson announced a series of actions, via executive order, designed to spur startup development. They include:

• A new “Seattle Strategic Initiatives Fund” designed to “make a meaningful impact in diversifying our economy and supporting new business creation and growth in targeted sectors”;
•  A “Resilient Seattle Economy Task Force” that will come up with recommendations for Seattle attract, retain, and grow businesses, “particularly in key and innovative industries where City action can tip the scales towards success including cleantech and the creative economy”; and
• Regulatory and permitting changes designed to a to make it easier for businesses, from emerging “cleantech” companies to child care, to get started and grow.

As the report notes, any strategy to steer a city’s entire economy in a different direction is a long-term project—and mayors only have four-year terms. Another challenge is the city’s ongoing “structural” deficit, which is approaching $200 million.

While the report lays out potential solutions to the city’s unbalanced dependence on a few tech companies, it also includes a number of fascinating insights into Seattle’s economy and budget that make it clear that the sky is not actually falling—at least not in the way that many of the region’s reactionary centrists tend to claim. Some key stats from the report:

Wages grew faster in Seattle than in almost any other US metropolitan area, across the entire income scale—but costs grew faster. “Workers at the 25th percentile earn roughly 15 percent more after adjusting for cost-of-living than peers in places seen as more hospitable to middle-income earners like Atlanta, Charlotte, or Minneapolis,” which translates to about $6,000 a year.

At the same time, the cost of living grew faster here than in most places, making it much more expensive to be poor or middle-class here than in other parts of the country. For instance, even though the lowest-paid quarter of Seattle workers make more than they do in Austin or Denver, the gap between an “affordable” rent and what they earn is more than $1,500 a month.

Having kids nearly doubles the annual cost for a couple to maintain a “basic standard of living,” driven largely by the $41,000 average annual cost for child care. This is one reason the report recommends treating child care businesses “as workforce infrastructure rather than a social service.”

Adding more people, and allowing them to live densely, is necessary. This isn’t just growth for the sake of growth—it’s the way Seattle will keep its economy afloat and close its budget deficit.

“Seattle needs more people to move to the city and more businesses to start and grow in the city because Seattle’s tax revenue, especially property and sales tax revenue, depends on it. If the city stopped growing, the only way to increase revenue would be to increase the tax burden on existing residents and businesses. … A growing economy, by contrast, generates new revenue even at stable tax rates.”

The barriers to adding more people are familiar: Seattle makes it too hard to build new housing, which drives up costs. The report recommends allowing 12-story apartment buildings within two blocks of major transit corridors and getting rid of most minimum parking requirements, two changes Seattle has historically been reluctant to make because of homeowner opposition.

Much as businesses complain about taxes across the board, Seattle’s taxes are “middle of the road.” However, tax increases in recent years have been heavily weighted toward the largest tech companies in ways they perceive as unfair, and Bellevue is a viable, lower-tax option for firms that don’t want to leave the region entirely.

“Taxes are relatively low, and they are increasing extremely quickly for the firms that Seattle policymakers targeted with recent tax policy changes,” the report says. Jumpstart alone adds about $17,000 in taxes for a senior software engineer making $650,000 a year, “while San Francisco imposes no per-employee tax and New York City’s equivalent is under $6,000.”

Taxes are also significantly lower in Bellevue, which the report identifies as Seattle’s key competitor for tech jobs. For Amazon, identified as “the mega tech company” in the report, moving to Bellevue would save it a total of $400 million a year, including about $12,000 per employee in Seattle-only taxes. Most companies don’t decide where to locate based primarily on tax rates, according to the report, but Seattle may be nearing the limit of its ability to increase taxes on businesses without facing consequences.

Wilson’s executive order sets a deadline of next September for most of the its goals, meaning that the city may not start implementing any changes until halfway through the mayor’s term. This is an inherent problem with long-term initiatives pushed by individual leaders, especially mayors, who (in Seattle) tend to serve a single term. If the goals recommended in the city-commissioned report are the right ones, it would almost certainly be more effective to move quickly, especially on ideas—like goosing housing construction through regulatory reform—that have been percolating in Seattle for years or decades.