This morning, Council members Kshama Sawant and Tammy Morales jointly unveiled their legislation to impose a new payroll tax on businesses in Seattle.

UPDATE: Editor’s note — on the day of the announcement, two different versions of the tax bill were circulated by the City Council: one that said that the tax would be imposed on businesses with taxable gross income over $7 million, and one that says payroll over $7 million. Council staff now confirm that the correct version specifies payroll, not income.
The legislation is comprised of two bills: one that imposes the tax, and one that enacts the spending plan and oversight procedures.
The tax is consistent with what Sawant outlined in her original announcement on February 12, but fills in more of the details. It applies a 0.7% tax on payrolls of companies with taxable gross income payroll over $7 million, beginning January 1, 2021. Several kinds of organizations are exempted, including:
- grocery businesses;
- non-profits;
- businesses pre-empted from taxation by cities, including insurance businesses and their agents; businesses that sell, manufacture or distribute motor fuel; businesses the only distribute or sell liquor; and federal, state, and local governments and their agencies.
A business’s payroll, for the purposes of the tax, includes compensation not only to direct employees but also to independent contractors and temporary employees — even those contracted through an employment agency.
The $7 million threshold will be adjusted up annually by the local rate of inflation.
The payroll tax will be due annually in 2021, and quarterly in following years.
The bill prohibits employers from deducting the tax from employees’ paychecks. It also states its intent that the tax should be viewed as part of company operating overhead and not as a tax upon the customers of those businesses. There is, of course, nothing in the bill that prevents companies who will pay the tax from adjusting employee wages accordingly to account for the tax, or from raising prices to their customers.
The math behind the 0.7% tax is fairly simple: the city was told by King County and the state Employment Security Department that the 2021 estimated payroll tax base for companies above the $7 million income threshold is $43.8 billion (approximately accounting for the exclusions in the bill). Since the revenue goal was $300 million, they simply calculated that $300 million is .7% of $43.8 billion.
The spending bill dictates that revenues should be appropriated as follows:
- no more than 5% of the revenues shall be spent the first year on administration and overhead for implementing the tax. In future years, the administrative overhead is capped at 3%.
- Of the remaining proceeds, 75% will be spent “to develop and preserve permanently affordable social housing for households experiencing homelessness and those with incomes between zero and 120% of AMI. Newly constructed housing must be publicly owned or publicly rent-controlled and regulated, and must be built consistent with the city’s Green New Deal strategies and Priority Hire program. This part of the revenues may also be spent to support the ongoing operations and maintenance for permanent supportive housing units, including human services for the tenants.
- The final 25% will be spent on “Green New Deal housing related strategies.” That includes transitioning housing from heating oil and natural gas to electricity; solar installations; weatherizing existing residences; and investing in job training programs to ensure a just transition for workers currently employed in fossil-fuel-dependent industries.
The Green New Deal housing investments will be guided by recommendations by the recently-established Green New Deal Oversight Board. But the spending bill establishes a new Social Housing Board to provide recommendations for the social housing investments. The Social Housing Board has 23 members, 21 of which are representatives from the seven Council districts (3 per district). Initially, the 21 representatives will be nominated by their respective district Council members and confirmed by the Council for terms through December 31, 2023. But beginning in 2024, they are elected positions, with voters in each district selecting the members for two-year terms. That is a remarkable amount of government bureaucracy for a board that has no binding authority: it simply reviews the city’s social housing investments, makes recommendations on the implementation plan and related funding policies, and monitors implementation. The real work and authority is with the Office of Housing, which writes and implements the payroll tax’s Implementation Plan, and the City Council which approves the Implementation Plan. According to Council’s staff the required fiscal statement for the bills is still under development, so there is no estimate yet of what holding bi-annual elections for 21 board members would cost.
According to a memo generated by the Council’s staff, depending upon the exact mix of housing investments, the payroll tax could fund between 6,800 and 8,100 affordable homes in its first ten years. In addition, if all of the Green New Deal housing investments were directed to converting existing homes to electric heat sources, nearly 48,000 homes could be converted over ten years (assuming a cost of $16,000 per unit).
In the meantime, HB 2948, the state bill that would allow King County to impose a county-wide payroll tax but that some feared might pre-empt Seattle from imposing its own, seems to have stalled out in the dwindling days of this year’s state legislative session. It did not advance out of committee earlier this week when it was scheduled for executive session, and it is not currently scheduled for further action.
You can watch on the Seattle Channel the press conference this morning where Sawant and Morales announced the bills.
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