Will Seattle Choose to Tax the Rich or Cut Services?

by Guy Oron

(This article was originally published on Real Change and has been reprinted under an agreement.)

A new work group report has presented Seattle policymakers with a stark choice: implement new taxes on the rich or face ruinous cuts to essential City services in 2025.

Last fall, the City convened a "Revenue Stabilization Workgroup" to identify potential new streams of income to fill a projected shortfall of about $221 million in 2025 and $207 million in 2026.

This gap is in part due to a projected slowdown of the economy due to the Federal Reserve's decision to hike interest rates, thus lowering consumer spending and limiting the housing development sector, which is highly reliant on credit. At the same time, costs for goods and services, as well as City worker wages and benefits, are expected to continue to grow alongside higher inflation. Seattle also has to find a replacement for one-time funding it used during the COVID-19 pandemic, including emergency reserves, federal grants, and the new JumpStart Payroll tax.

Seattle City Councilmember and Finance and Housing Committee Chair Teresa Mosqueda has repeatedly emphasized that this diversion of JumpStart funds is temporary and will not occur again after 2024. JumpStart tax revenues, which come from large corporations like Amazon with highly compensated employees, are allocated directly to affordable housing development, small business support, green new deal investments, and equitable development for communities that have faced redlining, housing discrimination, and displacement.

At an Aug. 10 committee meeting, Mosqueda said that the City needed to continue funding important social services that were initially paid for by federal grants at the start of the COVID-19 pandemic.

"But as those dollars are no longer available, we continue to see the need in the community without federal support for those funds," Mosqueda said. "So I appreciate that this is a good summary of how we used those dollars to plug holes in decreased revenue, but the increased need continues right now and into the future."

Members of the volunteer work group included progressive activists, nonprofit leaders, consultants, politicians, and representatives of business and labor organizations.

In the report, which was discussed at the meeting, work group members provided a number of options for new taxes on wealthy Seattleites. In total, nine potential taxes were floated in the report.

The first three taxes — expanding the JumpStart tax, implementing a citywide capital gains excise tax and enacting a CEO pay ratio tax — were deemed relatively easy to execute on technical and legal bases, allowable under state law and without a voter ballot initiative. These taxes were all considered progressive, meaning that the burden falls mainly on richer taxpayers as opposed to poorer ones. According to the Institute on Taxation and Economic Policy, Washington State has the most regressive and unfair tax structure in the country, hitting poor and working class people the hardest.

The existing JumpStart tax has generated about $250 million annually, though this is subject to significant variability. For example, about a dozen big tech companies are responsible for 80% of existing tax receipts. Because employee compensation often includes company equity, revenue decreases when stock prices decrease and vice versa when they rise. The City Council could choose to expand the JumpStart tax brackets or rates, yielding a significant but undetermined chunk of revenue.

A citywide capital gains excise tax is seen as one of the most feasible revenue options, essentially adding onto the state tax, which was affirmed as constitutional in March 2023. Applying to taxpayers who make more than $250,000 in the sale of intangible assets like stocks and bonds, a Seattle capital gains tax would only impact a handful of very rich residents. The City budget office estimates that levying a 1% capital gains tax could bring in about $25 million to $30 million annually, though this is subject to high variability given the small number of taxpayers and fluctuations in the stock market. In May, the state Department of Revenue reported estimated collections of $849 million, more than triple the forecast of $248 million for the tax in its first year.

The CEO pay ratio tax is similar to the JumpStart tax and would be levied on large corporations based on the difference between executive compensation and the lowest wages a company pays to its workers. This tax aims to simultaneously penalize wage inequality while bringing in progressive revenue. The way the tax is implemented would significantly affect how much money is brought in. For example, a CEO tax in Portland only affects firms with CEOs who live in the city, greatly limiting revenue to just about $4 million annually. Conversely, in San Francisco, a similar CEO tax applies to all companies located in the city — regardless of CEO residency — and is projected to make the city between $80 million and $160 million a year.

The next two taxes the work group proposed would relate to the real estate market. The first would be a vacancy tax, levied on property owners who leave their units unoccupied for an extended period of time. City staff estimate that the tax could raise between $5 million and $20 million, depending on how it's implemented. One of the main purposes of the tax would be to encourage landlords to rent out their properties more promptly, increasing supply in the housing market. However, more research would need to be done in order to determine how to implement it in accordance with the state constitution, the report said.

An increase on real estate excise taxes on properties sold worth more than $5 million would be extremely progressive and may generate $7 million to $14 million. According to the work group, this would require action from the state Legislature.

The work group also floated two taxes on rich people's assets upon death, mirroring existing state and federal estate taxes. A 10% estate or inheritance tax on assets in excess of $250,000 may raise around $5 million to $10 million and require state authorization and potentially a ballot initiative prior to implementation.

Another proposal was a congestion tax on traffic in certain parts of the city and at certain peak hours. This would penalize excessive driving and encourage the utilization of alternative transportation options such as the bus, the train, biking, and walking, ultimately lowering air pollution and greenhouse gas emissions. Similar schemes in Oslo, London, and Montral have been found to significantly reduce pollution levels. Though rich people are more likely to drive than poor people, a congestion tax would still be broadly applied and thus hit poor drivers worse. The tax would also require intensive surveillance infrastructure and implementation costs, making a revenue estimate moot at this point. It would also require state Legislature approval.

The final tax explored by the work group is a flat 1% income tax on all residents. This would get around the statewide prohibition on progressive income taxes, and potentially raise $670 million annually — far more than the other taxes that were discussed. However, such a tax would be regressive since it applies equally to poor and rich people. The work group recommended that, if the City were to implement such a tax, it could roll back even more regressive taxes such as the sales tax or give poorer taxpayers some sort of rebate to offset the increased burden. The work group also said that it would take years to set up the administrative capacity to implement such a tax and could require state authorization.

Despite an entire presentation on the need for increased revenue, not all councilmembers were convinced that Seattle needed to increase taxes on the rich to fund spending increases.

Conservative Councilmember Sara Nelson said that Seattle should consider cutting City services instead.

"I understand that there's some emotion about what I said," Nelson said. "However, I am simply suggesting that spending within our means is not austerity; it's our responsibility."

Outgoing Councilmember Alex Pedersen echoed Nelson's skepticism about taxing the rich, instead calling on the City to consider impact fees on new development as a way to help close the projected budget deficit. He suggested that, instead of proposing new taxes, the City could consider scaling down JumpStart investments.

"I think the next City Council could consider, once again, liberating those payroll tax revenues to handle that deficit, rather than locking up those dollars permanently for new programs or piling on another round of new taxes," Pedersen said.

Pedersen's and Nelson's comments were sharply rebuked by fellow outgoing Councilmember Lisa Herbold, who said that increased revenue was needed if the City wanted to provide good services.

"How can you possibly talk about the delivery of mission-critical City services, whether or not it's employees within City government or people we contract without City government?" Herbold said. "How can you talk about speeding up permitting times when, for instance, we have vacancies in every single department of the City and every single City-contracted service that we provide?"

As the Seattle City Council is poised to enter a new era with the upcoming November elections, the debate about whether to cut services or tax the rich will likely continue to rage on. This choice, which will be finalized next year in the 2025—2026 budget season, could have far-reaching consequences for the city's political direction in the coming decades.

📸 Featured Image: Seattle City Councilmember Teresa Mosqueda speaks at a rally for fair wage increases for Seattle Human Services Department workers, July 2019. Photo is attributed to Flickr user Seattle City Council (under a Creative Commons, CC BY 2.0 license).