Seattle Proposes a New Tax on Jobs

April 23, 2018

It will be difficult for Seattle to top 2017 for the sheer number of new or higher taxes considered: a city income tax, foreign buyers’ and luxury real estate taxes, soda taxes, short-term rental taxes, a higher parking tax, and a business head tax. But it won’t be for lack of trying. After a proposal for a 4.8 cent per employee hour tax fell short last year, the city council is back with a new version: a 26.042 cent per employee hour tax, or $500 per full-time employee per year. It is, in the literal sense, a tax on employment.

It’s also highly unusual. If this new proposal were adopted, Seattle wouldn’t be the only city with an employee head tax, but it would be one of a very few—and with rates that dwarf the others.

For years, Chicago had a per-employee head tax of $4 per month, or $48 per year. That tax, at less than 9 percent of the amount contemplated in Seattle, was decried as a job killer. In fact, those are the exact words of Mayor Rahm Emanuel (D), who ran for office on a pledge to kill the deeply unpopular tax: “The head tax is a job killer. Eliminating the head tax is the right thing to do for businesses big and small, and it’s the right thing to do to secure Chicago’s future.”

Some cities in Pennsylvania impose employment-based “local services taxes” (remitted by the employee) at rates of $10 to $52 per year. Denver has a $4 per month head tax. Such taxes are uncommon and often maligned (in Pennsylvania, the tax is frequently regarded as a “nuisance tax”), but not unprecedented.

What would be unprecedented is such a high rate. At $500 per employee per year for eligible businesses, what Seattle is considering is an order of magnitude larger than what other cities have tried. It’s 10 times the size of a tax Chicago abandoned for contributing to unemployment.

(Like the Denver and former Chicago taxes, but unlike Pennsylvania’s, Seattle intends to institute a threshold to exempt smaller businesses. However, large businesses employ a substantial percentage of the city’s overall workforce.)

And it’s 20 times the rate of a previous head tax Seattle repealed back in 2009. At the time, then- Mayor Greg Nickels (D) cited the recession for his decision to support repeal, saying that “[i]n these tough economic times, we want to do everything possible to create jobs and help businesses grow.” Councilman Tim Burgess (D) noted the tax’s complexity and compliance costs, and said that, on a symbolic level, the tax “inadvertently sent the sign that job growth and a strong business environment weren’t important to the city.”

For now, at least, the economy is doing a lot better than it was in 2009, but if a $25 a year head tax was thought an impediment to job creation in 2009, one has to wonder what a $500 head tax would be a decade later.

Proponents of the new head tax want it to transition to a payroll tax in the third year, but at least initially—and it’s perhaps a mistake to be confident the transition would happen—the tax would be indifferent to pay scale, with the same cost for a minimum wage employee as for a highly-compensated executive. An employee has to earn $36 per hour before a payroll tax raising the same amount imposes a similar burden.

The tax would make it costlier to employ new or low-skill employees, potentially nudging employers further in the direction of automation, or into hiring a smaller number of higher-compensated employees to do work that might otherwise have been distributed among lower-skill (and lower-wage) employees.

Governments usually shy from taxes which expressly penalize employment, and for good reason. (Many actually offer incentives for creating jobs, though these are typically highly inefficient in their own right.) Payroll taxes fund unemployment insurance, but beyond that, taxes on jobs are rare.

Were Seattle to move forward with this proposal, the city would certainly stand out—but not in a good way.

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