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

Increasing the city's business and occupation tax will voter approval. The city's biggest business group is already sending out talking points against it.

By Erica C. Barnett

At 1:00 this afternoon, City Councilmember Alexis Mercedes Rinck and Mayor Bruce Harrell will propose 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 with gross receipts of $2 million or less—about 75 percent of businesses in the city— from the city's B&O tax. 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. A

After accounting for the expanded exemption, which would cost the city about $30 million, the tax increase on larger businessees 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.

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.

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 o.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."

That $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.

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.”

Harrell was reportedly eager to appear alongside Rinck (who is also up for reelectino) in support of the tax proposal Wednesday afternoon. His office did not respond to PubliCola's equest for comment.

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.

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 small 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.

This is a developing story and will be updated. Go to PubliCola.com for the latest.