City Council Weighs Funding Sources for Big Business Tax

by Chetanya Robinson

Seattle City Councilmembers Tammy Morales (District 2: South Seattle and Chinatown-International District) and Kshama Sawant (District 3: Central Area) say their proposed tax on two percent of the largest businesses in Seattle is intended to address a triple emergency facing the city: homelessness, housing affordability, and now the COVID-19 pandemic, which threatens to bring about an economic depression.

"I don't think any of us have the luxury of not knowing somebody who's deeply impacted by this crisis," Morales said in an interview Wednesday. "It's visceral and it is affecting our neighbors and our friends and our families, and the point of this bill is to try to address some of that suffering."

During Wednesday's City Council budget meeting, councilmembers discussed potential sources of revenue for some of the bill's emergency measures. In the first year, the tax would pay 100,000 low-income Seattle households $500 dollars per month for four months, to help those disproportionately hurt by the economic devastation of the coronavirus. In the following years, the revenue would be used to build an estimated 10,809 permanently affordable housing units over ten years, according to a summary of the proposed legislation, and implement measures in the Green New Deal for Seattle, such as converting housing units to electric heating, installing solar panels, and training people for jobs in the green economy.

Last week, councilmembers discussed the spending plan for the tax, one part of the package of three bills. The tax would collect 1.3% of the payroll of the 800 largest businesses in Seattle — those with payrolls of more than $7 million per year, or about two percent of Seattle businesses. All nonprofits, government employers, and grocery stores would be exempt from the tax.

Until this revenue is actually collected, the $200 million in emergency payments for low-income Seattleites would be borrowed from the City budget, and then repaid once tax revenues flow in. Although the City has borrowed in this way before, using what is known as interfund loans, Sawant and Morales's legislation has been a target of criticism from Councilmember Alex Pederson and Mayor Jenny Durkan, who say this borrowing is risky at a time when the coronavirus threatens to take a bite out of the City's budget.

Another concern from opponents of the tax — including some business owners and business advocacy organizations like the Downtown Seattle Association — is that it would hurt local jobs.

Public comment before the budget meeting was divided nearly evenly between supporters and opponents. Steve Claggett, co-founder of the low-income-housing nonprofit Common Ground, said Washington state is unusual in having no income or capital gains tax. "We so easily have the means to contribute more through taxation," he said, noting that Amazon stock has risen steeply over the last few years. "The companies can easily pay it."

The bill was introduced as emergency legislation, an apt choice, according to Emily McArthur, a renter in District 2 and member of the Tax Amazon movement. "I would challenge anyone to identify a more acute emergency," McArthur said. "The virus is killing our neighbors, the recession is putting working families in dire straits, and the pre-existing housing emergency is even more urgent than ever."

Speaking after her testimony, some opponents of the tax said it would hurt business in Seattle. "Large and small businesses coexist as part of the same economic ecosystem," said Taylor Hoang, business owner and executive director of the Ethnic Business Coalition. "A jobs tax will have a ripple effect throughout the business economy."

Ryan Smith, owner of a commercial real-estate investment company in Pioneer Square and board member on the Downtown Seattle Association, echoed this, saying the tax was "akin to proposing you build a wall around our city and hang a giant sign outside stating, 'No jobs welcome here, grow your economy elsewhere.'"

Molly Moon, CEO of Molly Moon's homemade ice cream, spoke in support of the tax, while calling for less "divisive" language against big businesses. Her business, which has just under $3.5 million in payroll expenses, would not be affected by the tax. "I think we need to ask our big businesses to pay to help our community survive," she said. "I think this tax, as written, is a pretty good way to do it." Moon spoke after public comment as a guest during a community panel on COVID-19 needs and responses convened by Councilmember Teresa Mosqueda, chair of the budget committee.

Councilmember Andrew Lewis asked Moon about a concern he's heard from small business owners worried about being indirectly hurt by the tax because their supply chain relies on larger firms. Moon's business is supplied by smaller companies that would be unaffected by the tax, but she says she could see how that "could be an issue" for businesses relying on supplies from companies subject to the tax. She suggested that company's distributing goods to grocery stores be added to the tax's grocery exemption. Her bigger worry is the exodus of small business owners who can no longer afford Seattle. Moon said businesses below $10 million in revenue should receive substantial relief from the business and occupation tax.

Councilmember Sawant argued the tax will have positive ripple effects, since new jobs will be created in building affordable housing. "It will help, for example, the neighborhood taco truck which can come back to business because the construction workers will be buying lunch from them," she said. "So in that sense, small businesses will be positively impacted."

Should the bill pass, emergency payments would be sent to low-income Seattlites starting this summer. But the tax would not actually be collected in 2020, and possibly not until 2022, meaning the payments would come from $200 million in interfund loans — borrowed from elsewhere in the City budget.

Dan Eder, deputy director of City Council Central Staff, explained that to make the payments, the City could borrow up to $50 million each from six existing funds: The Low Income Housing Fund, the Housing Incentive Fund, the Move Seattle Levy Fund, the Families Education and Preschool Promise Fund, the Parks Levy Fund and the 2019 Library Levy Fund. The loans would be repaid once the tax was collected. Not all of these six sources would not need to contribute the full $50 million; the legislation would allow the Mayor discretion to determine how much should be borrowed from each source.

This aspect of the bill has been attacked by critics, including Councilmember Alex Pederson, who expressed concerns about the interfund loan strategy in a piece for the Seattle Times, co-authored with Matthew Gardner, chief economist for Windermere Real Estate and member of Gov. Jay Inslee's Council of Economic Advisers. Pederson argued taking out the interfund loans is a risky strategy if the bill passes but is struck down by the courts. Pederson and Gardner also wrote that the City should not levy a new tax during a recession, and speculated it would encourage employers to move outside of Seattle.

However, the City borrowing from its own budget is far from unprecedented, said Eder during his presentation. "It has been a routine practice of the city to borrow between funds, to do interfund loans," he said. Recent examples Eder cited during the meeting include $85 million for the Seawall Replacement in 2015, $29 million for affordable housing in 2019, $26 million for the Mercer West project also in 2019.

The combined end-of-year cash balance in four of the funds is enough to lend $200 million toward the emergency financial assistance in the bill, Eder said. Information was not yet available about the Housing Incentive Fund and the Parks Levy Fund, but drawing from the other loans, the City would have $314 million to borrow at the end of 2020. "There appears to be enough money from the anticipated year-end fund balances to support a $200 million dollar loan without impacting planned spending from these funds," Eder said.

These amounts, however, do not reflect the potential budget impacts of coronavirus. The amount the City will have available for interfund loans, therefore, depends on how the City Council and mayor act to balance the budget. "You essentially have policy choices about what you want to do with the anticipated revenue," Eder said.

The City budget is facing a potential $300 million dollar shortfall in its general fund as a result of lost tax revenue due to the coronavirus pandemic, according to Ben Noble, director of the City Budget Office, during a presentation at an April 22 budget meeting. Potential reserves such as $60.8 million in the Rainy Day fund, and $66.9 million in the Emergency Fund, could help make up some of the balance. The City also ended 2019 with an extra $18.6 million in the general fund. Other revenue sources include federal and state funding for the COVID-19 response, and levy funding.

In an April 23 interview with King 5, Mayor Durkan argued the best use of interfund loans would be as a tool to balance the budget, and not for Sawant and Morales's tax proposal. When it comes for checks for low-income Seattleites, she told King 5, "Yeah, that is never going to happen, and I think it's irresponsible for anyone to say that that's even possible."

Sawant said Durkan's idea of covering budget shortfalls by borrowing from available funding is an example of austerity, essentially cutting tens or hundreds of millions of dollars to balance the budget. Using interfund loans that would later be repaid is quite different, according to Sawant. "Rejecting a progressive revenue source is not a smart strategy for us," she said.

Eder noted that the six sources for the interfund loan are mostly drawn from property taxes, which are expected to be a stable source of income for the City's general fund, unlike other sources such as sales taxes. "There are no examples in the past that I know of where we have not repaid an interfund loan," Eder said. The City used one to pay for the streetcar, which took longer to pay back than expected, but it was ultimately paid.

Councilmember Lewis asked for more details about the streetcar example, and said that given the size of the interfund loan proposed by Sawant and Morales's legislation, it will be important to look carefully at past examples of interfund loans, so as not to create a "timebomb" for the City budget.

Sawant noted that the Council has frequently voted to approve extending interfund loans without controversy. "This is no different from how the city does taxing and spending as usual," she said.

Responding to Durkan's comments that the emergency payments will never happen, Morales said in an interview Wednesday: "I think it is frustrating that there is such a quick dismissal of this idea."

"Families down here are really suffering, and need their leaders to be willing to take some bold action to solve these problems," Morales added. "Just trying to shift around the money that we already have isn't going to cut it."

The details of how the money would be distributed are still being hammered out. Of the $200 million the tax would raise for emergency assistance, half would be paid toward people receiving food vouchers, utility discounts, or other assistance programs, according to a summary of the legislation. The other $100 million would go to low-income people not enrolled in such programs, in an effort to reach immigrants and refugees at risk of deportation, people experiencing homelessness and others.

In his Seattle Times piece opposing the tax, Councilmember Pederson said it should not have been labelled an "emergency" tax when it will be collected every year, accusing Sawant of using the COVID-19 crisis as an excuse to levy the tax.

During the budget meeting, Sawant defended the emergency designation, and said rumors that the intention was to create a referendum-proof bill are false. "It is truly an emergency," she said. If the City Council does not pass the legislation, Sawant has filed an initiative to put the tax on the November ballot. She expressed confidence that this would be approved by voters, but concern that it would be an unacceptable delay. "It would just be way too late for many, many people," she said. Sawant cited a report from the University of Washington Civil Rights and Labor History Consortium on the Great Depression in Washington state, which caused a rise in poverty and homelessness during which Washingtonians had to wait too long for assistance from local and federal governments.

Morales said that after the COVID-19 crisis began, "and almost 200,000 Seattleites lost their jobs virtually overnight," she started thinking about how to provide emergency cash assistance for people.

"The original idea was to try to see if we could create a universal basic income type program and just provide some checks to people as quickly as possible, to provide a way to kind of weather the storm," she said. As she considered options for this, it made sense to add it to the previous bill she and Sawant introduced, which would raise $300 million per year for affordable housing and Green New Deal investments.

The legislation's emergency clause differs from a typical Council bill. It would need seven out of nine councilmembers to approve it, as well as the mayor's signature, without which it would not take effect. If passed, the legislation would go into effect immediately and would be immune from a voter referendum. If it doesn't pass, or if the mayor doesn't sign it, the bill cannot be reconsidered, but could be re-introduced, although not again as emergency legislation without major changes.

The City Council will take up the bill again during the May 13 budget meeting. Morales said discussions about adapting or compromising on the bill will begin soon. "I'm certain that the final product won't be identical to what we started with."

For Morales, the tax is an opportunity to think deeply about what recovery from the COVID-19 pandemic would really look like — how to make sure Black and brown families don't suffer the most the next time something like this happens, how to "make sure that land-use decisions that we're making now don't end up greasing the wheels for disaster gentrification," how to serve the homeless community better. "If we learn anything from this crisis, it's that we really need to start making the investment in our social safety-net infrastructure."

Chetanya Robinson is a Seattle-based journalist.

Featured image: photo courtesy of the Seattle City Council.