This afternoon the City Council voted out of committee a proposed payroll tax, setting it up for final adoption next Monday.
As expected, the Council backed Council member Mosqueda’s “Jump Start Seattle” package, rather than the “Amazon Tax” backed by Council members Sawant and Morales. Mosqueda’s plan raises less than half the revenues than Sawant’s, but had the backing of labor, some in the business community, and most of Mosqueda’s colleagues. Nevertheless, the Council members plowed through a long list of proposed amendments over the course of the four hours they deliberated on the bill today, often competing changes to the same provision in the bill. In the end, they adopted four amendments:
- one proposed by Mosqueda and Morales that adjusted the tax structure and rates. It added a new middle tier for companies with total Seattle-based salaries between $100 million and $1 billion, adjust the threshold for higher salaries from $500,000 down to $400,000, and increased the tax rates across the board for the higher salary tier. The new rates look like this:
The amendment increased the expected 2021 revenues from $175 million to $214 million. - one proposed by Sawant that removed the 10-year sunset on the tax. The original version of the amendments made other changes as well, but those were stripped out leaving just the removal of the sunset clause. This amendment barely passed, by a 4-3 vote with two abstentions.
- one proposed by Mosqueda that tweaks the “level playing field” language in the bill, saying that the Council intends to monitor county and state efforts to pass progressive legislation to ensure that Seattle businesses aren’t placed at a disadvantage due to being taxed more than businesses in other jurisdictions, and potentially lower or even repeal the Seattle payroll tax if new county or state progressive taxes fully replace the revenues.
- one technical amendment that fixes a drafting error in the definition of “compensation.”
Equally notable were the amendments that failed, including :
- a series by Sawant that would have essentially morphed Mosqueda’s bill into Sawant’s competing proposal;
- one by Herbold and Sawant that would have moved up the effective date of the tax from January 1, 2021 to August 1, 2020. It would have generated another $74 million for the city, but there were concerns about the effect it would have on businesses struggle to stabilize right now. Only Sawant, Morales and Herbold voted for it.
- one by Pedersen and Juarez that would have placed the bill on the November ballot for voter approval. Juarez cited the history of Seattle voters in electing to tax themselves, while Mosqueda said that she believes they can’t wait until November, Gonzalez said that she believes “the sentiment of the public has changed” since the “head tax” debacle two years ago, Morales said that she thinks they were elected to make hard decisions like this one, and Herbold said that while earlier this year she supported sending it to the voters, she has since flipped on this bill because she believes the bill is different and she see the urgency of passing it now. Pedersen and Juarez were the only “yes” votes.
- one by Pedersen that would exempt all 501(c)(3) nonprofits. Mosqueda opposed it, saying that the stakeholders she spoke with didn’t raise this as a concern; Strauss also opposed it,s saying that “nonprofit” is just a tax status and said “not all nonprofits are providing a benefit to the community.” Lewis, Pedersen and Juarez were the only three “yes” votes, though Mosqueda and Pedersen are continue to work on an amendment that would exempt hospitals and healthcare organizations that serve Medicare and Medicaid patients.
The Council members voted 7-2 to vote it out of committee, with Pedersen and Juarez the two “no” votes. The payroll tax bill will come up for final approval by the full City Council next Monday, July 6.
The Council also voted out of committee the accompanying “Jump Start” spending bill, after stripping out most of the quantitative commitments in the bill. The final version simply lists a number of categories of spending, with an expectation that the City Council will make exact appropriations annually as part of the budget process. Mosqueda intends to write the first year’s spending plan into a resolution, which she will bring forward for a vote on July 15th.
Pedersen offered two amendments, both of which passed unanimously. The first added a requirement for new programs funded in the spending plan to be evaluated and reported back to the Council. The second placed restrictions on membership on the related Oversight Committee to prevent rampant conflicts of interest by limiting the number of members who work for organizations receiving funding from the tax revenues.
The final bill passed by an 8-0-1 vote, with Pedersen abstaining.
Despite Council member Herbold’s pleading with the business community today not to organize a referendum campaign against the bill, it may still be challenged in court, particularly over its “top tier” higher tax rates which seem to apply to just one company: Amazon.
The third bill in the Jump Start package, which takes money from the city’s Emergency Fund and “rainy day” fund for COVID-19 relief, will come up for a vote on July 15, according to Mosqueda.
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Thanks for the great summary as always. I’m curious about a few details. Does the tax threshold of $150k mean compensation (salary plus bonus) or does it include the fully loaded employment costs such as benefits as well? I think most people assume the $150k is salary. Is there a threshold similar to Uber drivers of time spent working in the city before an employee counts against the tax? Now that working at home for tech workers is becoming a norm could a company only have an employee in the office 2 days a week and avoid the tax? The previous spending plan was all slated to be new spending. I’m assuming with the changes the council is now free to spend on almost anything as long as it fits their specific categories? If the tax amazon referendum keeps moving forward and is approved at the ballot would that replace the Jumpstart proposal or would that be in addition? Finally in the unlikely event the business community attempts to get this on the ballot any idea what their timeline would be to gather signatures?
See my other comment on this, where I cite the relevant passages in the bill. Compensation is defined as “remuneration” under state law https://app.leg.wa.gov/rcw/default.aspx?cite=50A.05.010 It definitely includes bonsues, and possibly some types of benefits.
If I remember correctly, a referendum effort would hvae 30 days after the Mayor signs the legislation or returns it unsigned to gather enough signatures to get it on the ballot. If they were to get that done by the early August deadline it could end up on the November ballot, but otherwise it would be on the ballot in the following election in eearly 2021.
My knee jerk reaction, this is a non uniform income tax disguised as a payroll tax. But, have nobody else has brought it up so I’m probably missing something obvious.
, right?
It doesn’t tax income, it taxes payroll. The amount of the tax is based on payroll, and the elegibility is based on payroll, not income or revenues.
Thank you for the in depth analysis. 2 questions you are probably best equipped to answer:
1) How is equity based compensation treated by the tax? The erstwhile primary target for this whole scheme, Amazon, famously has lower than market “salaries” and high equity grant based compensation.
2) If a company is based outside of Seattle but a taxable employee lives in Seattle, how does the plan treat this situation?
Here is the definition of “compensation” in the bill:
“Compensation” means remuneration as that term is defined in RCW 50A.05.010. ., net distributions, or incentive payments, including guaranteed payments, whether based on profit or otherwise, earned for services rendered or work performed, whether paid directly or through an agent, and whether in cash or in property or the right to receive property. “Compensation” does not include payments to an owner of a pass-through entity that are not earned for services rendered or work performed, such as return of capital, investment income, or other income from passive activities.
The bill taxes Seattle-based payroll expense, defined as:
“Payroll expense” means the compensation paid in Seattle to employees. Compensation is paid in Seattle to an employee if:
1. The employee is primarily assigned within Seattle;
2. The employee is not primarily assigned to any place of business for the tax period and the employee performs 50 percent or more of their service for the tax period in Seattle; or
3. The employee is not primarily assigned to any place of business for the tax period, the employee does not perform 50 percent or more of their service in any city, and the employee resides in Seattle.
“Primarily assigned” means the business location of the taxpayer where the employee performs their duties.
Keep in mind that companies are exempt if they have less than $7 million in Seattle-based compensation, and it only taxes compensation to an individual if that compensation is above $150,000 in a given year. So a Bellevue-based company with 10 employees working out of their homes in Seattle who make $200,000 per year is still exempt.
Thank you Kevin, very helpful additional information.
Per item 3) does this mean that if there are large corporations who do not have any presence in Seattle themselves, but have a handful of highly compensated employees who happen live in Seattle (as long as those employees have greater than $7M in aggregate compensation), those corporations would be liable for registering with Seattle, filing periodically, and paying the payroll tax? Examples include Airline Pilots who live in Seattle, remote sales reps for non-US companies, remote workers for companies based elsewhere in the US but with no corporate presence or property in Seattle.
If so, in this case, it seems hard to wrap ones head around it as a payroll tax on “employers only” as it is it’s based almost exclusively on the employee, where they choose to live, and their compensation (and their peers who also happen to choose to live in Seattle.)
In those cases, the company seems to have little control over the process – unless they create a policy that states remote employees may live anywhere other than Seattle.
Or, more likely, companies will allow employees to live where they wish, but will just include the tax impact in their location based salary + cost adjustments (as Facebook as already announced they will do with other geographically based salary adjustments for those choosing to work remotely elsewhere.)
Any way one slices it, it’s hard to believe that employees will not bear a pocketbook impact of this tax over time. That is fine, but the Council should just be honest about it.
If they need more revenue, they should make the case, tell people the true impacts of what they propose, and convince them the money will be spent wisely. But, it seems the Council is afraid of the answer they may get if they were to do that.
Yes, it means that they would need to do that. I’m not sure specifically what it means for airline pilots because they are usually “based” out of an airport. But it would almost certainly apply to remote sales reps and remote workers.
And yes, despite the Council’s wishful thinking, companies will pass the tax on — either to employees or to customers.
This bill is a “create a tax court” bill, the “Tax Amazon” part only affects a small number of businesses.
The bill is creating a tax court which has the power to send individuals to jail for up to a year.
It includes for Chapters 5.30, 5.32, 5.35, 5.38, 5.39, 5.40, 5.45, 5.46, 5.47, 5.48, 5.50, 5.52, or 5.53 ( so Sugary Beverages, Business License,…).
The tax court can send anyone to a “business premises” to inspect/examine documents. The tax court can require the appearance of anyone. In the bill’s own words, it covers “All books, records, papers, invoices, ticket stubs, vendor lists, gambling games, and payout information, inventories, stocks of merchandise, and other data, including federal income tax and state tax returns, and reports”.
All of this applies to employees directly, not just the employer. Employees can go to jail for not cooperating with the court. They do not spell out the right to have any attorney appear for you.
The powers of the court can also be expanded by rule making.
I wonder how many people are nodding their heads to “Tax Amazon” and not realizing that the bill has far more meaning.
It affects anyone who does any business in Seattle and their employees directly.
I’m not seeing that in the bill. Can you cite a specific section that has that effect?
Basing qualified income on where the “employee” lives and the progressive tax rates will be the basis of the inevitable lawsuit.
Sawant likes to promote this an an Amazon tax to hide the fact that its actually a huge new tax on more than 800 Seattle businesses, many of which are laying off thousands of employees as they struggle to stay in business. Seems like what we need now is more jobs not a job killing tax. This is just going to accelerate the migration of companies like Amazon to Bellevue, Kirkland and Redmond. Its a very bad idea, but bad ideas seems to Sawant’s stock and trade.
Sawant’s version didn’t pass out of committee — Mosqueda’s did. Mosqueda’s not only exempts any company with a total Seattle payroll under $7 million, but it also only taxes an employee’s compensation if that employee makes over $150,000 per year. The base tax rate, 0.7%, is $1,050 for a salary of $150,000, so it’s really not that much in the grander scheme of things. No doubt it’s going to soak Amazon for a lot of money every year, and the other big tech companies will pay a goodly amount too, but it’s fundamentally a high-earners tax and won’t be a big deal for most companies.
I do agree, though, that it will make the eastside cities more attractive for new hiring, and that despite the Council’s wishful thinking it will absolutely get passed through to customers as higher prices and to employees as smaller raises.