Tag: B&O tax

City Council, Taxes

Business Tax Will Be on November Ballot, Despite Council Objections Over Spending “Buckets”

By Erica C. Barnett

Over objections from some council members that the proposal was “rushed” or that it funds the wrong things, the Seattle City Council voted to place a tax increase for the city’s highest-grossing businesses on the November ballot. If it passes, the “Seattle Shield” proposal would direct new revenues toward housing, homelessness, food security, and other spending areas that are typically vulnerable during budget deficits and at risk of losing federal funding under the Trump Administration.

The proposal, which Counclmember Alexis Mercedes Rinck and Mayor Bruce Harrell rolled out in June, would raise the business and occupation tax exemption from $100,000 to $2 million in gross revenues, exempting most Seattle businesses from the tax, while increasing the tax rate for revenues above $2 million, netting about $90 million a year.

Amendments passed last week, including two from Councilmember Maritza Rivera exempting Children’s Hospital and Fred Hutchinson Cancer Center from the tax, reduced that total to about $81 million a year. Other amendments expanded the potential uses of the new tax to include substance use treatment, business workforce development and storefront repair, and—the broadest spending category—”transportation.”

An amendment from Bob Kettle would make the tax exemption up to $2 million a year permanent (otherwise, the exemption would revert back to $100,000) and reduce the higher tax on large businesses to make it revenue neutral, meaning it would only pay for the tax break for smaller businesses. The city estimates that in 2026, the tax breaks will cost around $61 million.

Councilmember Bob Kettle, who ultimately joined the unanimous vote to move the proposal to the November ballot, said he would much prefer that the council not stipulate how the increased tax revenues would be spent, instead sending a ballot measure to voters that asked them to approve an all-purpose tax that could be used for any need the mayor or council identifies in the future.

Comparing the ballot measure to the council-approved JumpStart payroll tax, which was originally earmarked for housing, Green New Deal priorities, and small business assistance, Kettle said the council only fixed that “problem” last year, when it formally eliminated all spending restrictions on the tax.

“I’m generally opposed to the use of categories or buckets, as some may say. I believe they were a mistake in the payroll expense tax, since over the years, conditions change, but the legislation remains the same,” Kettle said. “I also believe that categories, or buckets, in this B&O legislation was a mistake, in the sense that buckets begets buckets”—a reference to the expansion of the spending categories. “You know, our focus should be on the deficit. … And I think our focus should be for a clean bill to ensure that we are fiscally responsible, that meets the needs of our city.”

It is, of course, unknown whether voters would support a so-called “clean bill” that did not specify any purpose for a tax increase they were being asked to approve. But in general, every local ballot measure calling for a tax increase has had some purpose, whether it’s the transportation levy, the housing levy, the preschool and Seattle Promise levy, the tax we pay to fund emergency medical services, or any other voter-approved tax increase in local taxes.

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A levy “to fix the general fund deficit” would not only be a hard sell to many voters (who wouldn’t know whether new taxes would fund police hiring bonuses or food banks), it would incorporate the assumption that the city will continue going into each budget year with a deficit for the duration of the levy—not exactly “fiscally responsible” financial planning.

Rivera, too, appeared generally dissatisfied with the proposal, saying the six-week process to approve it was “rushed” and that she would also have preferred to send it to voters as a general tax increase to address the current deficit.

“Rather than single out items, this money should have just gone to the general fund and then when the mayor was putting together the budget that he sends us, he could have then considered this funding along with all the other funding,” Rivera said. “That would have been the good governance way to do this. But that is not how this moved forward.”

As I reported last month, Rivera was the first council member to publicly propose asking voters to approve a tax increase for undefined “general fund” purposes, arguing that the city can’t predict what needs will emerge in the future. Rivera has also suggested the city could take dedicated funds from the city’s housing levy and using them to backfill the general fund in the short term, paying back the loaned dollars later and foregoing some potential housing. Editor’s note: This story originally said Bob Kettle backed Rivera’s idea of using housing levy dollars to backfill the general fund; his office said this isn’t the case, so we’ve corrected the story to reflect that.

City Council, Elections, human services, Taxes

Business Tax Plan Moves Forward, Larded With New Exemptions and Spending Categories

By Erica C. Barnett

The Seattle City Council moved a heavily amended proposal to raise business and occupation taxes on larger companies one step closer to the ballot on Wednesday, approving the measure in the budget committee while leaving open the possibility that it could be amended further next week, when it goes to a full council vote.

The proposal would exempt all gross business revenue up to $2 million from local B&O tax, raising taxes on the highest-grossing businesses to offset the small-business tax relief and pay for programs that might otherwise be cut due to a projected $241 million budget deficit.

The potential ballot measure, proposed by City Councilmember Alexis Mercedes Rinck and Mayor Bruce Harrell late last month, was originally supposed to raise about $90 million a year to fund programs that support food access, gender-based violence services, small business supports, emergency shelter, homelessness prevention, workers’ rights and protections, and housing stability.

Rinck has been calling the proposal the “Seattle Shield” bill, because it’s meant to shield Seattle from the worst impacts of federal cuts to critical, life-saving services.

Thanks to amendments piled on Wednesday afternoon by Rinck’s colleagues Maritza Rivera, Joy Hollingsworth, and Rob Saka (plus a potential future amendment from Dan Strauss), the proposal is on track to bring in about $11 million a year less than originally estimated. The council’s amendments also broadened the measure so it can fund programs far outside its original scope.

Introducing two amendments that will exempt Seattle Children’s Hospital and Fred Hutchinson Cancer Care from the tax, at an estimated annual revenue reduction (or cost) of more than $9 million, Rivera argued that funding for cancer treatment and pediatric care represented “the very problem this bill is claiming to address—that is, impacts to our residents, including our kids, based on federal cuts and policy changes attacking those who need these critical services.”

Rivera added that when Rinck and Harrell first proposed the tax, “it was not clear that that nonprofits pay B&O tax.” In Washington State and in Seattle, most nonprofits are taxed exactly the same as for-profits, except that some of their fundraising activities are tax exempt. “These are nonprofits, these are not businesses,” Rivera said of the two hospitals she singled out for exemptions.

Strauss plans to propose an additional tax exemption for stevedoring—companies that load and unload cargo from ships—on the grounds that maritime trade is critical to Seattle. That exemption, which Strauss said he’d introduce on Monday, would reduce the proceeds from the new tax by another $1.5 million a year. In all, the new exemptions could reduce annual revenues from the tax by almost $11 million, or around 12 percent.

The city doesn’t have precise revenue estimates because businesses—including hospitals structured as nonprofits—don’t have to report their revenues publicly.

After voting for the two exemptions, Rivera and Nelson blanched at the idea of increasing the size of the tax to make up for lost revenue, saying they hadn’t had a chance to thoroughly study the impact of such a rate increase. “It’s unfortunate that this was sort of—that this landed in our laps at the sort of the last minute,” Nelson said. “It just feels rushed to me. … It’s unfortunate that this didn’t come to us earlier in the year.”

Rinck countered that the only reason she brought up the idea of increasing the tax rate was the last-minute amendments from Rivera and Strauss; had they not introduced new tax exemptions in the last week, she wouldn’t have proposed increasing the tax to offset the losses their exemptions would cause.

“If we had known about any tax credits coming sooner than on Monday, I think we would have worked quickly to try and understand what an adjusted rate would look like,” Rinck said.

In addition to the exemptions, the council also adopted several amendments expanding how the new tax, if it passes, can be used. The changes will allow this council, and future councils, to spend the so-called Seattle Shield dollars not just on human services and homelessness programs but on “transportation projects” of all kinds, arts and culture programs, anything related to public health, business workforce development, storefront repairs, and substance use treatment, among other new spending categories.

Rinck, and others who opposed expanding the proposal so far beyond its original purpose, noted that the city already has dedicated funds that pay for arts (the admissions tax), workforce development (the Families, Education, Preschool, and Promise levy), and transportation (the recently renewed transportation levy, which is the biggest in the city’s history). Saka justified including transportation on the potential spending list because Trump has threatened to pull transportation funds from cities, like Seattle, that have low marriage and birth rates.

The impact of adding so many new spending categories to the legislation is unknown. Public commenters, including advocates for people at risk of going hungry in Seattle, expressed concern about spreading the “peanut butter” of limited funding too thin by using the tax proceeds as a slush fund for individual council members’ priorities.

The committee also approved an amendment from Councilmember Bob Kettle, who was absent, that will require the mayor’s office to come up with high-level balanced budget proposals for two years beyond the scope of the biennial budget. Last year, Harrell proposed a budget that was balanced through 2026 but fell out of balance in 2027, with a total projected deficit of $158 million between 2027 and 2028. Another Kettle amendment passed that would remove a sunset date of 2033 (with the possibility of a four-year extension) and lower the tax rate beginning that year.

The full council will take up the proposal next Monday, just before the August 5 primary election that marks the deadline to get it the measure on the November ballot. On Monday morning, the city’s Office of Economic and Revenue Forecasts will present its latest revenue projections, which will reveal whether this year’s budget deficit is smaller or larger than the $241 million shortfall projected in April.

City Council, Elections, Mayor Harrell, Taxes

Proposed Business Tax Increase Would Raise $90 Million a Year While Exempting Most Small Businesses

By Erica C. Barnett

On Wednesday, City Councilmember Alexis Mercedes Rinck and Mayor Bruce Harrell proposed a ballot measure that would increase the city’s business and occupation (B&O) tax rates by about 50 percent and use the proceeds to fund programs that support housing stability, homeless services, food security, and small business sustainability.

The proposal, which could appear on the November ballot, would exempt businesses’ gross receipts up to $2 million, which would increase the number of businesses who don’t have to pay B&O taxes to about 16,500, or around 76 percent of businesses in Seattle. The remaining businesses would have to pay the tax on all revenues above $2 million. The exemption has been a longtime goal of the Seattle Metro Chamber of Commerce, which has argued that the current exemption is set too low, at $100,000, to provide tax relief to most of the city’s small businesses.

After accounting for the expanded exemption, which would cost the city about $30 million, the tax increase on larger businesses would bring in an estimated $90 million a year.

Speaking to PubliCola on Tuesday, Rinck acknowledged that the business and occupation tax is “not without shortcomings”— for instance, high-revenue, low-margin businesses like grocery stores and restaurants tend to increase prices in response to higher taxes, passing costs on to consumers. But, she said, the city is “looking at an urgent situation, where we’re being confronted with federal funding cuts” that stand to harm Seattle’s most vulnerable residents, including potentially steep reductions in federal spending on homelessness, housing, and human services.

“[The plan] creates some tax relief for small businesses, and it’s a really great opportunity for us to provide that support for small businesses while asking some of our large businesses to pay more of their fair share to keep the city running and help our most vulnerable neighbors,” Rinck said.

On Wednesday, Rinck said the tax increase, which she has dubbed the Seattle Shield law, will protect essential programs from Trump-era cuts. “And here’s what makes this moment special: We’re not imposing this on Seattle, we’re trusting Seattle,” Rinck said. “You choose whether we protect each other or abandon each other, and you choose what kind of city we want to be.”

State law prohibits the city from increasing the business and occupation tax without a public vote. One advantage of a voter-approved tax is that, unlike the council-approved JumpStart tax, it can’t be easily reallocated to new purposes based on the transitory whims of a mayor or city council.

The proposal includes specific spending categories—broadly, housing stability for low-income tenants; small business assistance; services for people facing homelessness, food insecurity, or gender-based violence, and protections for vulnerable workers through the city’s Office of Labor Standards. If the measure passes, these categories would have the force of law.

According to the most recent revenue forecast, the city is facing an unanticipated budget shortfall of more than $240 million over the next two years, with or without additional cuts to federal programs that fund services in Seattle.

The city has two business and occupation tax rates for different kinds of businesses; one, which applies to all retail businesses (and five other business categories) would increase from 0.222 percent to 0.34 percent if voters approved the new tax. The other, which applies to freight transportation and professional services, would increase from 0.443 to 0.65 percent.

By pairing a tax increase with a tax exemption, the proposal puts the reflexively anti-tax business community in a somewhat awkward position. In an email blast about the forthcoming proposal last Friday, Seattle Metropolitan Chamber CEO Rachel Smith praised the proposed exemption, while arguing that a new tax will harm Seattle’s economy and drive businesses away.

“While proposal details have not been released, one component would expand the B&O exemption for very small businesses with an annual gross under $2 million—a good policy that we support,” Smith wrote. “But taxing all of our other businesses to pay for it—when the city has $800 million in unspent revenue—is the wrong move.”

In a statement on Wednesday, Smith said the new proposal “has been rushed, [and] the beneficiaries and payers have not been sufficiently identified or engaged. Everyone deserves to understand the impact of any proposed tax restructuring with more than just 45 days of consideration before heading to the ballot.”

The Chamber’s $800 million estimate refers to the money allocated, but not yet spent, from the JumpStart payroll tax (which funds, among other things, the Equitable Development Initiative, programs to mitigate the impacts of climate change, and affordable housing); funds allocated by the Office of Housing through the voter-approved housing levy; and an estimated $200 million in budget funds that were allocated, but not spent, last year.

“Let’s be clear: Seattle isn’t facing a deficit, in fact, they can’t spend the money they have budgeted today,” Smith wrote.

Budget experts and proponents of the legislation confirmed that most of the money Smith identified can’t easily be moved from place to place—it isn’t possible, for example, to pull money allocated to a signed contract away from that project just because it didn’t get underway by the end of the year.

Additionally, the city’s annual “underspend” stretches across multiple city departments that have different reasons for failing to spend their full budget by the end of the year. It’s legitimate to ask city departments to explain why they aren’t spending all the money they get, and to establish polices to address this perennial issue, but the answers are bound to be complicated. Requiring city departments to unilaterally forego unspent money at the end of each year without knowing the reason each department ended up under budget could be a recipe for budget chaos.

Harrell, whose 2021 run for mayor got a big boost from Chamber members like Vulcan and Goodman Real Estate, stands to benefit politically from allying with Rinck on the taxing measure even as he risks pissing off his deep-pocketed business backers: His leading opponent, Katie Wilson, is outflanking him on the left with a campaign focused on progressive revenue, housing abundance, and access to safe, reliable transit. Recent polling described to PubliCola suggests that Harrell is vulnerable to a challenge from the left.

Wilson, a longtime proponent for progressive revenue, said in a statement that she’s “glad that Mayor Harrell is backing this proposal coming from Councilmember Rinck’s office,” because it will help the measure move through the mostly Harrell-aligned council.

“It’s clear that Harrell is terrified he won’t win re-election and he suddenly feels the need to show progressive leadership,” Wilson added. “It’s disappointing that it takes the threat of being unseated for our mayor to do the right thing.”

While progressives who support raising revenue to preserve city services and respond to federal budget cuts argue that a higher B&O tax that exempts smaller businesses is progressive, the tax is generally considered regressive because it has a greater impact on smaller businesses and those that operate on slim margins, and because businesses generally pass B&O tax increases on to consumers in the form of higher prices. Exempting most businesses from the tax arguably eliminates the first problem, but it doesn’t directly address the second.

Complicating matters, the city is planning to take up separate tax increase soon: A 0.1-cent sales tax hike to pay for public safety, which the state legislature authorized earlier this year. King County is currently considering its own 0.1-cent tax increase; together, the two tax increases, which do not require voter approval, would increase the sales tax in Seattle to 10.55 percent, the highest combined sales tax rate in the country.

Asked about the potential sales tax increase on Wednesday, Harrell said it’s “on the table for discussion, but because we understand the regressive nature of it, we are treading very carefully.”