Seattle's Misguided Worker Tax On Large And Mid-Sized Employers

Cities and counties all over the US have been offering Amazon billions of dollars in tax cuts to lure the firm’s second headquarters—and its 40,000+ high-paying jobs. Yet, the city that is the current home to the online giant wants to raise taxes on the firm, apparently because it has too many employees. Go figure.

The city is Seattle. And it has proposed a per employee tax on all city firms that gross at least $20 million annually. The plan’s sponsors estimate that companies would pay an average of about $500 per full-time employee and the tax would raise roughly $75 million. After several years, the levy would convert to a payroll tax.

The city estimates 500 to 600 firms would pay the tax but the biggest, and highest profile, is Amazon. It employs 45,000 people in Seattle and would owe about $20 million-a-year from the new tax. The city council is planning to vote on the plan later this week or early next week.

Rule #1

Here’s the problem: Rule #1 of tax economics is “If you want less of something, tax it.” Thus, whether it intends to not, Seattle would be saying it does not want so many people working at mid-sized to large firms in the city. Really?

This is especially true for Seattle’s proposed head tax since it would be relatively easy for many firms (though perhaps not Amazon) to avoid the levy simply by moving a few miles away. To help make the point, Amazon has put construction of a new downtown Seattle office building on hold pending a city council vote on the tax. And business advocates in neighboring communities, which are not contemplating such a tax, are thrilled at the prospect of poaching some businesses—and their employee—from Seattle.

Fixing a homeless problem

So why would Seattle want to tax large and mid-sized firms that employ lots of workers, especially since their employees tend to be well-paid? Well, Seattle has a large homeless population and limited affordable housing options. According to the logic of the backers of the tax, well-paid workers who want to live in the city drive up housing costs and chase more low- and moderate-income people out of their homes. Thus, the city would use the new tax to finance $50 million for affordable housing, $20 million for homeless services, and $5 million for administrative costs.

In reality, the tax’s unintended consequences are likely to drive away businesses and hurt low- and moderate-income residents. Using local tax subsidies to encourage economic development may be a foolish waste of resources, but using tax increases to discourage economic growth may be even dumber. Would you rather have a city with a vibrant downtown and a strong tax base? Or a city with fewer jobs and lots of low-income housing? Seattle might ask, say, Baltimore.

How to raise taxes?

In an ideal world, you’d have both. Economic diversity is not only a nice liberal ideal, it provides a labor market for jobs that may pay relatively little but are critical to the modern service economy. Think restaurant workers, Uber drivers, and maintenance and health care workers.

In fairness, Seattle faces severe constraints when it comes to raising revenue. It has no income tax (which is illegal in Washington State). The courts slapped it down when it tried to impose one a few years ago. In 2016, the city voted to raise property taxes by $290 million over seven years to fund homeless programs. But there are only so many times it can go to that well.

The lessons

Other cities have tried commuter taxes—imposing levies on non-resident workers who use city services such as roads. And a head tax such as Seattle’s is a kind of indirect, and less efficient, commuter tax. The big differences: It would be imposed only on large and mid-sized firms but all their workers would be taxable, even those who live in (and already pay taxes to) the city.

The only positive about this tax is that it is imposed on employers and not employees, which makes sense since the Tax Cuts and Jobs Act capped the deductibility of state and local taxes from federal individual income taxes. But that’s a bit like praising a hurricane for ending a drought.  

Sadly, the laws of economics being what they are, Seattle is not likely to tax its way out of its low-income housing problem. Some firms will move up or down I-5 to avoid the tax (and the city’s hideous traffic).Others may stay but trim wages, effectively shifting some of the burden of the tax to their employees. A few may even replace some taxable human workers with tax-free robots. And the tax, along with the city’s $15-per-hour minimum wage, certainly won’t make it any easier to hire the unskilled workers who need jobs as well as affordable housing.

From Seattle’s point of view, none of these outcomes is great. But they help explain why the tax is unlikely to achieve what its sponsors have in mind.  

And what about all those other cities and counties that are scrambling to woo Amazon’s HQ2? Well, for them, the lesson of Seattle’s tussle with Amazon may be that 40,000 new highly-paid jobs may not be quite the win/win they think.