Council takes up payroll tax this week; here’s what to expect

On Wednesday, the Seattle City Council will begin its deliberations on the proposed “Amazon Tax” on payroll proposed by Council members Sawant and Morales. But there are many issues on the table that will need to be hashed out before a bill is adopted.

To review: here’s the original proposal by Sawant in early February, for a 1.7% tax on payroll for companies whose payroll exceeds $7 million annually, starting in January 2021. 75% would go to affordable housing, and 25% to “Green New Deal” related projects. And here is the modified proposal as officially introduced two weeks ago, for a 1.3% payroll tax for payroll over $7 million, starting June 1, 2020, and now expected to raise $500 million annually. The first $200 million raised in the first year would go to COVID relief payments of $500 per month for four months to 100,000 households; but since no tax revenues would be collected until the end of 2021, the legislative package authorizes inter-fund loans of up to $200 million in total from six other pots of money under the city’s control, to be repaid at the end of 2021 when the revenues hopefully start rolling in. The bills are deemed emergency legislation, which means that they would go into effect immediately and would not be subject to a referendum.

Let’s dive into the long list of issues the Council (and Mayor) will need to grapple with.

1. Is it really emergency legislation? Declaring the payroll tax to be emergency legislation is a procedural maneuver to get around two obstacles. First, there’s the Governor’s emergency proclamation that suspended parts of the Public Records Act and Open Public Meetings Act, but in so doing also prohibited the Council and other public agencies from taking action during the state of emergency on matters that aren’t either “necessary and routine” or required for the response to the COVID-19 emergency. A new payroll tax of this magnitude is certainly not routine, and there are serous doubts about whether this is truly a response to the COVID-19 emergency. Most of the tax and spending plan are unchanged from Sawant’s original proposal, which was unveiled weeks in advance of the Mayor’s declaration of emergency and had no mention of the coronavirus. The tax will raise half a billion dollars in revenues annually, in perpetuity; does redirecting the first $200 million to COVID response really make it an exception to the Governor’s prohibition? If so, then the proclamation is weak; the Council could pass nearly anything just by attaching some ancillary COVID-related provision. It certainly violates the spirit of the Governor’s prohibition, which recognized the public’s limited ability to keep appraised of and participate in local government deliberations right now — especially pivotal ones like this.

Second, as I have written previously, invoking the emergency legislation provisions makes the bill immune to referendum. This is notable because two years ago the Council passed and then quickly repealed the “head tax” after polling showed that a referendum effort was very likely to succeed. The head tax was for less than a tenth of the amount of this newly-proposed payroll tax, and yet there was significant public opposition.  Buried in the text of the payroll tax bills is an attempt at a justification: they can’t borrow $200 million internally and spend it now on COVID relief if it’s possible that a referendum could kill the means to repay the borrowed funds. That’s true, but the core issue with the bill when it comes to using emergency legislative powers is that it combines a $500 million tax in perpetuity for purposes unrelated to COVID, with what is effectively a $200 million one-time tax to pay for COVID relief. There’s no reason that the Council needs to consider those as one bill; it could separate them out, vote through the short-term one as emergency legislation along with the inter-fund loan, and handle the long-term payroll tax through its normal legislative process. But let’s be honest here: the reason Sawant and Morales have chosen not to do that is because they know that there is a very good chance that a referendum on the tax will succeed — especially given the huge toll that the COVID-19 pandemic has taken on businesses. And they don’t want to give voters that opportunity. The irony is that their backup plan, if the tax fails to pass the Council, is to try to submit it to a ballot initiative. Apparently it’s fine to put an issue in front of the voters if the Council doesn’t do what they want, but if the Council goes along with them then it’s perfectly acceptable to disenfranchise voters.

But there’s a catch: according to the City Charter (article IV, section 1.I), passing emergency legislation requires affirmative votes from 3/4 of the Council members (seven out of nine), AND the approval of the Mayor. If the Mayor vetoes a bill passed under emergency rules, there is no provision for the Council to override that veto. So if the Council wants to try to sneak the payroll tax through without fear of a referendum, then the Mayor holds all the cards and can negotiate whatever terms she wants in the legislation. That is a significant wrench in the works for Sawant and Morales, and it means that there will be critical back-room negotiations to try to get a deal done. So far the Mayor has not expressed support for passing a payroll tax at this time.

2. Are the interfund loans legal? The bill authorizing the inter-fund loans names six different funds to borrow from:

• the Low Income Housing Fund;
• the Housing Incentive Fund;
• the Families, Education, Preschool and Promise Fund;
• the Move Seattle Levy Fund;
• the Seattle Park District Fund;
• the Library Levy Fund.

Several of those are voter-approved levies, with attached spending plans that specify what the revenues may be used for. They might not authorize inter-fund loans (at least not explicitly), in which case we might see some lawsuits if the legislation passes.

3. Who gets the COVID relief money? The spending plan says that the first $200 million will be spent on $2000 payments ($500 per month for four months) to 100,000 Seattle households. But the state Constitution specifies that cities can’t give or loan their money other than “in support of the poor or infirm.” Thus the spending plan says that up to $100 million “will be distributed first to low-income households enrolled in existing City assistance programs, or State assistance programs administered by the City, that provide a direct financial benefit,” and up to $100 million “will be distributed to low-income households economically impacted by the COVID-19 crisis but not enrolled in existing City assistance programs that provide a direct financial benefit.” The first group of people may not even be impacted by the COVID-19 crisis; as to the second group, the legislation provides some guidance on which under-served groups to prioritize, but gives little guidance on how to determine whether a household has been economically impacted by COVID. It simple says that the executive branch “shall establish eligibility criteria.” Implementation of this is likely to be a mess; don’t be surprised if several Council members offer amendments to tighten up this section.

4. There’s no city budget relief. Wednesday morning’s Council committee meeting is scheduled to begin with a presentation from the City Budget Office on the economic and fiscal impacts of the COVID-19 pandemic on the city budget, and based on early reports, there is expectation of a revenue shortfall of at least $100 million this year. But there is nothing in the Sawant/Morales tax package to offset that. The city has a rainy-day fund set aside that can partially compensate for the revenue shortfall, but there will still be a deficit that either needs to be funded by other new revenue sources, or offset by cutting expenses. The prospect of passing a huge new tax, and then still having a huge budget hole to fill, likely will not sit well with some of the Council members. And there’s also the looming expense of repairs to the West Seattle Bridge to factor in. We should expect several proposals for other uses for the payroll tax revenues.

5. Should the city add a big new tax during a recession? Despite Sawant’s repeated assertions that a payroll tax is not a “tax on jobs,” the more employees that a company hires, the higher its payroll tax bill will be. When the shutdown ends, we will want companies to hire back as many employees as possible, as soon as possible. Making hiring employees more expensive is not a great way to do that. The recession also calls into question the revenue estimates for the tax, since we don’t know how long the shutdown will last or how quickly businesses (and employment) will return. There may be attempts to significantly reduce the overall size of the tax.

6. Calling it an “Amazon tax” is dangerously misleading. Yes, Amazon will be the biggest payer of the new tax — assuming its 40,000 headquarters employees average out to the local median wage of about $70,000, it will see an annual payroll tax bill of about $36 million. Amazon is doing fine through the COVID crisis, and will not have trouble paying the bill — though expect it to think harder about hiring more people in Bellevue, Washington D.C., New York and other locations instead of in Seattle. But it would be more accurate to call it the “Amazon and 799 other companies we won’t name Tax.” The biggest tech companies such as Microsoft, Facebook and Google will also do fine, but after that there are many local companies that have been hit hard by the COVID shutdown but are still big enough to have to pay the payroll tax. Nordstrom. Expedia. Weyerhauser. Pagliacci Pizza. Ethan Stowell Restaurants, and Tom Douglas Restaurants. Construction companies. Tourism related companies. Local hotels. It takes about 100 employees at the median wage to hit the $7 million threshold. The local business associations are gearing up to fight the payroll tax on behalf of their members.

7. The $7 million threshold is constructed in the worst possible way. Because of the way that the tax is structured, every company that has an annual payroll of at least $7 million pays a 1.3% tax on its entire payroll. That means a company with a $6.99 million payroll pays nothing, while a company with a $7 million payroll pays $91,000. That is a very strong incentive for small businesses to stay below the $7 million threshold: going barely above it means that they can afford to hire 1-3 fewer employees. The smarter way to structure it is to exempt the first $7 million of payroll from the tax, so that the incremental cost of growing payroll beyond that point is small. Of course, that would reduce the tax revenues by $72.8 million, unless the tax rate were increased to compensate. Don’t be surprised if a Council member proposes this change as an amendment (I would bet on Herbold).

8. It comes with its own bureaucracy. The bill proposes creating a 23-member Social Housing Board to provide guidance on how to spend the 75% of revenues allocated to affordable housing. Initially it proposes that the members be appointed  — three by each of the seven district-based Council members to represent their district — but it anticipates over time converting those into elected positions. Yet the board doesn’t have any official responsibilities other than monitoring and providing recommendations; at the end of the day it will still be up to the City Council and the Office of Housing to decide how to spend the money. I suppose the good news is that this would only be about half the size of the proposed Rent Control Board that Sawant included in her rent control bill. Expect the Social Housing Board to get revised to something lighter weight– or perhaps stripped out entirely.

9. Public sentiment. As I wrote earlier, two years a go the $45 million “head tax” was repealed when polling data made clear that a referendum being organized was likely to succeed. This payroll tax is ten times bigger, and the economy is much weaker; however, last fall’s City Council election dealt a visible blow to the perceived political power of local business interests — though that is not stopping them from wading into this debate. There are dueling petitions at the moment, collecting names of people in favor of and against the payroll tax. Expect to get phone calls from polling companies in the coming weeks too as the players (including local officials) try to determine which way the public is leaning.

And now that the City Council has apparently figured out a mechanism to conduct public comment at its online meetings, we can look forward to both sides trying to “pack City Hall” — or at least the virtual one — with advocates.

As usual, in the end it may end up with the most powerful political force in Seattle — organized labor — calling the shots. Unions (and their PACs) played a big part in getting several of the new Council members elected. And yet the labor leaders also know that their strength is tied to employers’ ability to hire employees: two years ago the head tax split the labor community, and this payroll tax might do so again.

And let’s not forget that a year from now we will be holding local elections again, for Mayor, City Attorney, and the two city-wide Council positions currently held by Mosqueda and Gonzalez. Just as the 2018 head tax debacle affected which sitting Council members decided to run for re-election, what happens this year with the payroll tax will likely have repercussions next year.

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This will be the first big legislative test for the new Council members (the COVID crisis has taken up a lot of the Council members’ time and disrupted their work, but they have yet to make any major decisions related to it). While most campaigned to the left of their general-election opponents, it hasn’t been clear how far to the left several of them would lean once in office. Now we get to see not only which direction they will move, but what happens when Sawant’s “red army,” the unions, and the business community come out in force over a pivotal issue. Regardless of the political machinations, expect that the payroll tax legislation will see significant change before it comes up for a final vote.

Wednesday’s meeting will have a presentation from the City Budget Office, followed by an overview and discussion of the three bills making up the legislative package. There will no doubt be speeches and political posturing (and an extra-long public comment session), but there won’t be discussion of amendments or voting on anything.

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