Over the past decade, Seattle officials have cashed in record tax revenues due to the successes of big corporations like Amazon, Microsoft, Starbucks, and all the small businesses in the neighborhood that call Seattle their home.
Seattle leaders assumed that tax revenue would continue to rise year after year, and in recent years that has been the case. However, there is a dark cloud on the horizon that will require a change of direction.
The myopic Strategies that the Seattle City Council passed have a significant detrimental impact on business, and in response, business owners are voting with their feet.
Over the next several years, Seattle will face declining tax revenue, not just from sales and B&O taxes, but also from property taxes, as employers reduce the use of office space or leave the city altogether. City policies that have dramatically increased spending, reduced public safety, and created overly burdensome regulations have left Seattle with large, bloated public budgets and a shrinking private sector tax base.
Additionally, City Council will be tempted in the post-COVID era to raise taxes to cover the reduction in tax revenue they are currently seeing due to businesses adapting to work-from-home policies. A tax increase would increase tax revenue, but it would be short-lived.
Recently, Seattle Mayor Steve Harrell recognized that Seattle adjusts to a reduced workforce in the city. This impacts the property taxes and sales taxes of the remaining businesses. Additionally, employees who stay home to work no longer spend money at local restaurants and retail stores, resulting in further tax revenue reductions for the city.
The rampant homelessness and crime in Seattle is also diminishing the once attractive place to live and work.
Washington Policy Center predicted this shift in work behavior in 2020. Despite the writing on the wall, Seattle leaders continued to create new taxes and suppose that the tech companies, which have invested large sums in real estate, could not leave the city. There is, however, a tipping point where the financial cost of leaving is less than the cost of staying. Amazon became one of the first companies to start transition out of town, choosing to cross the lake to Bellevue.
The state of the 7% capital gains taxcurrently on appeal to the Washington Supreme Court, and the long-term health care tax, scheduled for July 1, will only aggravate Seattle’s budget problems, if passed.
A friendly business environment, with reasonable regulations, low taxes and safe streets could turn Seattle’s bleak budget picture upside down.
Seattle leaders should reduce taxes and regulations on businesses. It seems counterintuitive that a reduction in the tax burden would actually increase tax revenue, but history has shown that it does. This principle was enshrined in the Laffer curve, described in the 1978 paper published to National Affairs. The Laffer curve demonstrates that there is a point at which increasing tax rates no longer generates new tax revenue and, in fact, tax revenue begins to decline. Seattle may already be at this point on the curve, so the next few years will be crucial for tax policy decisions.
Seattle’s total budget is several billion dollars. City leaders must carefully choose which services the city adopts and funds appropriately, including public safety, transportation services, and infrastructure improvements to encourage businesses to return to downtown. Tough choices face the Seattle City Council, including cutting non-essential services and focusing on creating safe neighborhoods and a business-friendly environment.
