Let’s talk about this “head tax” on large businesses — those with gross revenue above $20 million — that the Seattle City Council unanimously passed this week to help deal with the city’s worsening homelessness problem. Businesses like Amazon.com and Starbucks will face an annual tax of $275 per full-time employee, which was scaled back from $500 after Seattle Mayor Jenny Durkan threatened to veto the proposal and Amazon threatened to suspend major expansion plans in Seattle. (Amazon chief executive Jeffrey P. Bezos owns The Washington Post.)
The council’s taking a lot of flak for the measure, most publicly from Amazon, which has been complaining loudly about the hostile business environment created by the tax. And, as I’ll point out below, there are problematic aspects to this tax. But the reason I want to talk about it comes from the question raised by two tax analysts — Steve Rosenthal and Richard Auxier (R&A) — in this commentary on the idea: “How are fiscally constrained cities supposed to find revenue as their populations and services grow?”
I might replace “cities” in the quote with “countries,” and the country I have in mind is this one. Simply opposing the tax as a “job killer” doesn’t cut it. Rational people, which sadly excludes many running the country, must answer their question, and not just for Seattle, but for the nation.
Consider these facts:
• The state of Washington prohibits taxing income or wealth.
• Seattle has had a serious homeless problem since at least 2015; according to the American Prospect, “between 2015 and 2017, the rate of homelessness in the city grew by 44 percent.” That gives King County the third-largest homeless population in the nation.
• According to ITEP, Amazon paid zero federal tax in 2017 and is expected to claim a $790 million windfall from the tax cut.
• Amazon would face a tax of about $10 million per year because of the head tax. Its first-quarter net income was $1.6 billion. With a “b.”
Do these facts provide a rationale for asking large businesses to help pay for a serious social problem like homelessness? These companies are better known for putting their hands out for tax breaks in exchange for the added economic activity they bring to the places where they locate. But while such activity is welcomed by many, it also creates greater demand for public services, for schools, police, infrastructure, maintenance, etc. It also raises housing prices in these areas. So, yes, I think there’s a solid rationale for asking them to offset some of the social costs to which they contribute.
The question then, as with all taxes, comes down to incidence, meaning who pays the tax. If businesses relocate to avoid the tax, the whole city pays the price of the tax in diminished jobs and commerce. As noted, Amazon’s threats to this effect led the city to scale back the tax. However, businesses’ location choices are not solely a function of the tax liabilities. State and local taxes amount to 2 percent of business costs, on average, and amenities like a well-educated workforce, school quality, affordable housing and proximity to markets or transportation hubs matter, too.
My incidence concerns are for lower-wage workers. Because the head tax is a larger share of the cost of lower-paid workers, it could well have a larger impact on the marginal decision to hire or fire such workers than the payroll tax of 0.7 percent that is supposed to replace the head tax after a few years (R&A therefore suggest Seattle punts on the head tax and jumps right to the payroll tax).
So far, I’ve heard two ideas offered as alternatives to the tax. First, in a debate on CNBC Tuesday, Jimmy Pethokoukis argued that if the city would just revamp its restrictive zoning laws, more affordable housing would be built. I don’t doubt that claim, and Seattle is one of many cities wherein housing costs are inflated by such restrictions. But that’s just not a workable solution to Seattle’s real-time homelessness problem. Those zoning debates go on forever, and even in the unlikely event that restrictions were quickly loosened, it would be years before there was enough affordable housing to make a difference.
Second, I heard Amazon reps argue that Seattle inefficiently spends its current revenue take. The city doesn’t need more revenue; it just needs to do a better job with what it’s got. Sitting here in the other Washington, I won’t presume to be able to evaluate this claim. But it does sound uncomfortably close to the “just cut out the waste, fraud, and abuse!” admonition one hears all too often in budget discussions, as if there’s a budget line for those items that no one ever thought of cutting.
I therefore agree with R&A’s conclusion that “there are no good alternatives for Seattle.” Especially given the state’s prohibition on income taxes, the solution set to this problem is highly constrained. Moreover, Amazon is unwittingly trying to teach an important lesson to all those cities bidding for its HQ2. When you sacrifice your tax base to win this contest, you will likely find yourself needing more revenue to accommodate the new jobs you won. Then, when you reasonably go to the companies to ask for their help, they might just tell you that’s your problem, not theirs.
Finally, this is all a local microcosm of a bigger problem. We act, in this country, as if we can magically support our transportation infrastructure on a gas tax that’s been frozen since 1993. With even more powerful magic, we pretend we can maintain the public insurance programs that support our aging population while cutting taxes to the tune of $2 trillion over the next decade. Climate change, geopolitics, inequality, infrastructure, education — all the public goods related to these issues will somehow be magically supported while we indulge in government dysfunction and fiscal recklessness.
It can’t be done, either in our cities or in our country.