Seattle's new employee hours tax: is it worth it?

To stem the ever-increasing income gap between Seattle's affluent and other residents, Seattle City in Washington State has recently passed a law that places a head tax on some of Seattle's biggest companies. The new legislation is sought to address homelessness in Seattle.

“This legislation will help us address our homelessness crisis without jeopardizing critical jobs. Because this ordinance represents a true shared solution, and because it lifts up those who have been left behind while also ensuring accountability and transparency, I plan to sign this legislation into law," Mayor Jenny Durkan said.

The Seattle City Council approved a new business tax, which is expected to take effect as early as 2019, which targets taxation on big companies while exempting small-and-medium companies. The new tax scheme would require large companies to carry a head tax for its employees.

The large companies targeted are those that make more than $20 million yearly in gross receipts. These are about 585 businesses, or about 3 percent, in Seattle that are to be affected by this new scheme. So how exactly does the new tax scheme affect businesses?

The approved scaled-down employee tax in Seattle

The city council unanimously voted for the bill (9-0), which only required a minimum of 6 votes to override any mayoral veto. The ordinance will introduce a $275 tax annually for each employee, which will be shouldered by their employers. This figure is way below the $500 proposed in the original legislation which Mayor Durkan threatened to veto.

The tax is expected to generate about an annual income of $48 million for the city from 2019 up until 2023 when a vote for renewal is required. The figure is a drop from the expected annual revenue of about $78 million that the original legislation would have had brought in.

Is the new tax ordinance a threat to Seattle's companies?

Several companies have openly criticized the new legislation. Particularly, Amazon and Starbucks have voiced their concern about the new head tax, and stated that this scheme would have a greater effect in their growth. Amazon said in a statement that the ordinance is a "hostile approach to larger businesses that forces us to question our growth here." In fact, Amazon and Starbucks, among others, have pledged to raise $350,000 to push for a referendum to repeal the approved bill.

The large companies believe the bill is misguided and fast-tracked without much consultation. They claim that more taxation won't solve the city's housing problem. They feel that they are specifically singled out since the legislation mainly covers them. They believe that the pushing of the bill was a result of inefficient spending by the city's resources, and referenced partly the officials management inefficiency.

"This city continues to spend without reforming and fail without accountability, while ignoring the plight of hundreds of children sleeping outside. If they cannot provide a warm meal and safe bed to a five year-old child, no one believes they will be able to make housing affordable or address opiate addiction. This city pays more attention to the desires of the owners of illegally parked RVs than families seeking emergency shelter," John Kelley, Senior vice president for Starbucks Global Public Affairs and Social Impact, said in a released statement.

Most of these big companies are rethinking their growth in Seattle. Amazon initially halted construction of their Block 18 and further expansion of other offices. While they continued construction after the revision of the tax scheme, their representatives have said that they will analyze the situation further. This could mean that the companies will have to relocate or outsource their human resources.

Similarly, small companies fear of business growth, as they could fall under the new tax bracket in the future. Big and small businesses alike are being forced to rethink whether growing in Seattle is worth it.

What can businesses do to prevent the new head tax?

Companies could either swerve to the following routes to prevent this taxation scheme:

Outsource services

Outsourcing presents an ideal opportunity for companies. Businesses will likely outsource their services to employees outside Seattle. Outsourcing will result in the company having very few employees as the work done within the company will be significantly reduced.

Subsequently, this will result in the company drastically reducing its employees which will lower the employee tax they will be liable to pay. Through outsourcing, the company could cut down the number of employees required for non-core activities, while ensuring that they maintain a minimal number of personnel for the core activities.

Relocation

Another alternative for businesses to lower the employee tax is by relocating their services. While Seattle City has employee tax, other cities offer incentives such as tax reliefs, which immensely propel business attractions, as cost for doing business becomes minimal.

Companies may choose to expand and outsource on-shore or off-shore. The endeavor will take a majority of their workforce outside Seattle which in turn could drastically minimize operational costs.

While growth is a fundamental part of any business, growth in Seattle is likely to be a challenge to companies, as it means larger costs in the long run. Eventually, the process will affect large, and small-and-medium business owners. Therefore, the Seattle's head tax scheme forces companies to move their business operations in other cities or even overseas.

The approved legislation in Seattle would have tremendous negative effects in all businesses in general. Outsourcing would be one good solution to allay fears of growth.