In a shortsighted effort to fight homelessness, Seattle’s city council has approved a new employee “head tax” on companies based in the city. The policy pits growth and progress against each other in a zero-sum game that will do far more harm than good.
The head tax is exactly what it sounds like: a straight levy of $0.14 per hour per employee—about $275 a year for a full-time worker—targeting every business in Seattle with revenues of $20 million or more. The proposal’s backers aim to raise around $48 million per year to fund various affordable housing initiatives in order to combat homelessness and provide low-income families with affordable options in the city.
These are laudable aims, but it’s hard to imagine a more destructive strategy for realizing them. The potential damage to Seattle’s economy from this blunt instrument runs into the billions of dollars. Some may believe that California businesses could still flee their high-tax environment for Seattle, but in reality, Seattle is competing with many other cities for this income. One example is Phoenix, which has posted the best income growth of any Metropolitan Statistic Area (MSA) since 1992. Phoenix has capitalized on its proximity to California by luring businesses and people with a low-tax environment that nets them $1,539 in income every single minute. Compared to Seattle, this is nearly $1,200 more per minute, or $70,348 more per day. The numbers are staggering, and Seattle can’t risk putting itself further behind.
Seattle’s $20 million benchmark for the new tax refers to gross receipts, not income, meaning it will hit high-volume, low-margin businesses (think grocery stores or construction wholesalers) just as hard as more lucrative counterparts, promising price increases for consumers as businesses pass along costs. Service industries with big headcounts are firmly in the crosshairs, threatening this key employment category for young and low-skilled workers. The list includes Starbucks — no surprise, there are quite a few coffee shops in Seattle — as well as big retailers like Walmart and grocery store chains, both national and regional. Other big, low-margin employers, including logging and agricultural cooperatives, are also on the hook. And the relatively low cutoff means hundreds of medium-sized enterprises are on the hook too.
Not that soaking the city’s global champions is a good idea, either—it’s a disaster, jeopardizing thousands of current and potential future jobs, as Seattle’s biggest employers and most dynamic companies look elsewhere for expansion. Exhibit A is Amazon’s decision, announced earlier this month, to halt construction of a new office tower just north of downtown, citing the proposed tax, which will cost the online retailer over $10 million per year. Although construction has resumed, Amazon blasted the “hostile approach and rhetoric toward larger businesses, which forces us to question our growth here,” it said, making it clear that Seattle’s relationship with its biggest employer is hanging by a thread. Amazon employs over 40,000 people in Seattle, or over 10% of the city’s current total workforce of 384,000, but the new tax on jobs provides no incentive to grow that number, and every reason to shrink it.
Amazon isn’t the only big employer eyeing the exits. Real estate portal Zillow, another new economy trailblazer, faces millions in additional tax burden. Alaska Airlines, Expedia, PayScale, Whitepages Inc., and Coinstar opposed the tax in vain, pleading in an open letter to the city council and mayor that taxing companies for creating jobs is like “telling a classroom that the students who do the most homework will be singled out for detention.” It may not be long until these tech companies pack their bags and move south for a city like Las Vegas, which boasts the second-largest wealth growth of any MSA since 1992, gaining $1,048 of income per minute thanks to its zero-income tax policy.
Perhaps the most frustrating part of this exercise in illogic is the city government’s failure to enact other commonsense measures to combat homelessness: zoning reforms and infrastructure improvements to facilitate construction of affordable housing; shifting funds from underperforming shelters to ones that deliver; and coordination of the city’s homeless strategy with other municipalities in King County. In a statement from Starbucks opposing the head tax, senior exec John Kelly emphasized that priority should be given to a raft of much-needed reforms, including revamping the shelter system and more outreach to homeless families, lamenting that “we’re missing the opportunity to reform and to focus on a compassionate need of hundreds of children sleeping in cars in Seattle… Our strong belief is quite simply reform first.”
Kelly and other advocates for reform are right. Seattle and other cities across America urgently need to tackle social ills like homelessness. But economic self-immolation is not the way to do it.