SEATTLE — A Seattle workgroup released its final report on revenue options Wednesday as the city prepares for an anticipated widening budget gap.
The Revenue Stabilization Workgroup, tasked with providing feedback about new revenue options, identified nine new or expanded taxes for further consideration to increase revenue. The report comes as general fund expenses are expected to outpace revenue starting in 2025.
The city passed a balanced budget for 2023-24 by using higher-than-expected revenue from the JumpStart Payroll Expense Tax. However, if the city operates and maintains services at the current level, the general fund will outpace revenues by about $221 million in 2025 and $207 million in 2026, according to the report.
The city's current overall budget is $7.4 billion. However, most revenue is restricted to certain uses. The general fund is $1.6 billion and is used for critical services to residents, businesses and visitors.
The nine potential revenue sources identified by the workgroup include:
- Changes to JumpStart Payroll Expense Tax
- City-level capital gains tax
- High CEO pay ratio tax
- Vacancy tax
- Progressive real estate excise tax
- Estate tax
- Inheritance tax
- Congestion Tax
- Income tax
As noted in the report, city leadership is also looking to balance the budget by cutting expenses by:
- Eliminating lines of business
- Consolidating existing services
- Reducing/ eliminating services that do not meet outcomes, are not aligned with the City’s current priorities, or have grown faster than real-world demand
Here's a look at each of the options suggested by the workgroup for increasing revenue:
Payroll Expense Tax
Without voter approval, the city could increase tax rates for businesses already paying the tax, which includes those with a payroll expense of $8,135,746 or more for 2022 and if annual compensation to at least one employee is $174,337 or more.
The city could also increase the number of businesses required to pay the tax, increase the number of employees for whom businesses must pay the tax, or make other policy changes.
The workgroup found the existing tax and changes under consideration are "extremely progressive," and are unlikely to have an impact on BIPOC communities and limited impacts on economic activity or small businesses.
The workgroup notes it could influence large businesses on decisions about whether to locate or expand in the city.
The current tax generates about $250 million a year.
Capital gains tax
The city would not need voter approval and may be able to implement the tax without further state authorization, according to the report.
The city could implement a new tax on long-term capital gains above a certain threshold.
The tax could generate up to $30 million a year.
High CEO pay ratio tax
The tax could be implemented as a surcharge to the existing JumpStart Payroll Tax. The workgroup considered a local tax on businesses that have a high ratio of CEO pay to median worker compensation.
A similar tax in San Francisco is expected to bring in up to $140 million annually - the surcharge on the corporate income tax is on all companies regardless of where the CEO is located.
Portland's CEO tax on publicly traded companies with CEOs located in the city has generated $4 million.
Vacancy tax
The city could evaluate a tax on vacant units - residential and/or commercial. Such a tax could generate up to $20 million annually, depending on how it's defined.
The intent of the tax would be to provide a disincentive for property owners to leave properties vacant.
Progressive real estate excise tax
The tax would be implemented on sales of properties over a certain price. It would require state action granting the city authority to do so.
The revenue potential would be up to $14 million a year.
Estate tax
The tax would be levied on the estate - not the beneficiary - based on total assets after allowable expenses and debts have been paid.
The state's estate tax uses a graduated rate schedule from 20-20%.
The tax could generate up to $10 million a year.
Inheritance tax
Similar to an estate tax, except taxes are paid by the beneficiary.
No U.S. cities currently impose an inheritance tax. The workgroup modeled the city-level tax on state inheritances taxes elsewhere in the country.
Washington state had an inheritance tax until it was repealed in 1981 and replaced with the estate tax.
Congestion tax
The workgroup considered tolling congested roads and corridors in the city.
Congestion fees would require state approval if impacting a state highway.
A study of congestion fees in 2019 found that higher-income people are more likely to drive in the city, however, the study could not determine the magnitude of the impact on lower-income drivers, the workgroup points out.
It's unclear how much revenue would be generated at this time.
Income tax
Though cities cannot impose a progressive income tax that would increase with total income, a flat 1% income tax could be imposed, according to the workgroup's report.
The tax would be more progressive if the city imposed a rebate or rolled back/eliminated a regressive tax in conjunction with imposing this tax.
The workgroup cautioned more work needs to be done to understand if this would lead to more people leaving the city.
The tax would tax several years to implement.
A flat 1% income tax would generate up to $670 million a year.
Calls for further evaluation
Multiple Seattle City Council members and work group members said despite revenue being one way to decrease the deficit, they believe that city spending needs to be looked at first.
"If the city has a budget problem, I think the facts would suggest that that is a spending problem, over a revenue problem," said Rachel Smith, the CEO and president of the Seattle Chamber of Commerce and a workgroup member. "First, let's generate economic activity, then let's look at those restricted funds, then let's get our spending in check, and then, and only then, should we look at new revenues."
Another workgroup member, and the CEO of of Tutta Bella, Joe Fugere put out a statement:
“I appreciate that city leaders are working to find ways to align their growing revenues with expenditures and that they invited a small business voice to be part of the group. The group did good work, and one takeaway for me is that there is even more work to be done. As a small business owner, before implementing new taxes, I’m interested in understanding why costs are anticipated to grow so much. Furthermore, I’d like to ask the question -- are our programs and services getting the outcomes our community needs? And finally, we need to ensure that we are doing everything we can to generate more economic activity in our city. I hope to continue to be involved in the conversation going forward.”
One of the Seattle City Council members who raised concern over budget discussions at a Thursday morning committee meeting reviewing the findings was Councilmember Alex Pedersen. He said he thinks the city also needs an expenses workgroup, saying that the city has a spending problem, not a revenue problem. He sent a statement ahead of the meeting that said, in part:
“To this day, Seattle has never replaced a regressive tax with a progressive one. While I appreciate the hard work of city hall’s revenue group, I am concerned that their search for new revenues overshadows the need to reduce our city’s harmful, regressive taxes."