What Seattle Businesses Are Saying About the Proposed 'Head Tax' and Why the Tax Will Go Forward

Key takeaways and news and notes from the surprisingly frank discussion at the Seattle City Council's extended roundtable session on the employee-hours tax that would pay for homelessness services
Posted: Apr, 19 2018
 
 

This story originally ran on SCC Insight. All photos below by the author. 

On the afternoon of April 18, the City Council held a three-hour roundtable session with representatives from a variety of Seattle businesses and nonprofits, to hear their thoughts on the recommendations for a new employee-hours tax to pay for homelessness services. It was a surprisingly frank conversation.

In total, sixteen people took turns sharing their thoughts across five groups loosely grouped by industry sectors (retail, technology, hospitality, life sciences, nonprofits, manufacturing, development, and industrial). Despite the wide range of businesses, their messages were largely the same:

The business environment in Seattle today is much tougher than it looks. Margins across many industry sectors — and especially retail, hospitality, and non-profits — are razor thin.  Destiny Sund, owner of The Confectional in Pike Place Market, said that her entire profit in 2017 was $3000, and so far this year she has lost $20,000 . “I feel like Seattle doesn’t care if my business survives,” she said.

Margaret McCormick of the Benaroya Research Institute at Virginia Mason and Marc Cummings of the trade association Life Sciences Washington pointed out that the business model for most life sciences companies involves years of R&D without sustaining revenues just to develop products that might one day sell. That means even many medium to large sized biotech companies that are scaling up to reach production level are dealing with money crunches for several years, and a head tax would be particularly painful for them. McCormick also noted that just in the past year the tax climate for biotech has worsened, as the state rescinded its R&D tax credit and the City of Seattle let a tax law expire that granted some B&O tax relief to subcontractors on federal grants (Benaroya is a subcontractor on several grants through organizations such as Childrens Hospital).

The speakers also discussed the challenges in finding affordable commercial, industrial, performance/arts, and laboratory-grade spaces to lease in Seattle putting further pressure on their businesses.

All were good reminders that revenues are not the same as profits, and business size (measured in either revenues or employees) doesn’t equate with business success.

Many Seattle businesses are already investing in their communities. Some of this is informal; Gail Stringer, owner of the Hawaii General Store in Wallingford, told of how she brought the tenants of her building together for dinner after a late-night incident shook the small community. McCormick noted that Virginia Mason annually provides $25 million in uncompensated healthcare services to people in Seattle. Sara Osborne of Safeway related how the company gives out almost 2 million pounds of food each year on top of $1 million in grants, while Steve Hooper of Kigo Kitchen spoke to his restaurant company’s partnership with Union Gospel Mission and other local nonprofits. Sund spoke of how she donates cheesecakes to local nonprofits as auction prizes.

There was much discussion of how jobs are one of the primary contributions that companies make. Frank Foti of Vigor Shipyards described the jobs training program that his company runs in South Seattle, as well as their practice of hiring unskilled labor through a women’s shelter close to their facility. Hooper and others emphasized that the hospitality and retail sectors are the industries of “first jobs and second chances.” “We’re not alone,” Foti said. “I wish you could see the business leaders I see.”

They see severe impacts of a new tax on employers. They were not bashful in describing how a new tax might be the tipping point for their businesses. They shared a grave concern for what a new tax might mean for jobs. Saul Spady, owner of the Cre8tive ad agency, put it bluntly in comparing it to the recently-imposed soda tax which was intended to decrease soda consumption: “If we do a jobs tax, we’re deciding that jobs are bad for you and we should have less… a per-jobs tax will discourage the number of jobs. Money is finite.” Michael Schutzler of the Washington Technology Industry Association agreed, explaining the logic from a business owner’s perspective: “If you’re running a business, you’re trying to minimize expenses… If you tax jobs incrementally, you will decrease the number of jobs.”

Safeway’s Osborne dug deeper into the link between employment expenses and jobs. She noted that with the $15 minimum wage (a frequent point of comparison in the discussion) Safeway chose to absorb the cost of the minimum wage instead of cutting jobs or passing the costs on to consumers, but that made Seattle Safeway stores’ profit margin half as much as stores in other locations. Jenne Oxford of Kimpton Hotels further explained that the minimum wage increase forced Kimpton to reduce the number of entry-level jobs in favor of hiring more senior people into those positions because they needed more experienced people with higher productivity in those positions to keep the business running.

Some of the speakers shared their concern that a new tax on employers to pay for the homeless response will mean that businesses will reduce their own philanthropy, if for no other reason than to balance the books.

Stringer said that she felt like she was being “taxed to death,” likening the situation to the Shel Silverstein book The Giving Tree, with only one apple left on the tree. “We’re just exhausted.”

The current proposal needs a lot of work. The panelists shared several specific critiques of the Progressive Revenue Task Force’s recommendations.

They included:

  • There is no credible plan for how the money would be spent. This was the most common complaint.  They pointed out that in the business world, if you are asking someone to give you money, you need to have a detailed plan of what you will do with the money, one that convinces people it has a reasonable chance of success in addressing the problem. To date,  the city has not articulated such a plan. McCormick also pointed out that you need to show a proven track record of success so that people trust that you can actually execute on the plan, and so far in spite of the huge sums and efforts the city has put into addressing homelessness, the problem continues to worsen. Dave Gering of the Manufacturing Industrial Council doubled down on that point, saying, “I don’t think I’ve ever seen a tax proposal more unanimously opposed than this one in the industrial business community.” He attributed it to what he saw as “broken promises” from the city: the very visible presence of people living in RVs  in the SODO industrial area, the crime, and what he interprets as the inability of the Seattle Police Department to do anything about it.
  • If the tax goes forward, there was a strong preference for a payroll tax instead of an employee-hours tax. Many business owners saw a fundamental unfairness in taxing the same amount for a senior technical employee at a tech company and a minimum wage retail worker; a payroll tax would address that. “A straight-up head tax would be devastating,” said Gering, and Schutzler called a head tax “stupid public policy.” On the other hand, some wondered whether benefits would be subject to a payroll tax, since that would create a disincentive to providing benefits to employees.
  • There was wide agreement that small businesses should be exempt, and that the “skin in the game” tax proposed by the task force was a poor idea. That said, Barb Wilson of Vulcan, Inc. pointed out that small and large businesses are all part of the same ecosystem: Charlie’s Produce probably wouldn’t be exempted from the tax, and would pass the extra costs down to the small grocers it supplies. Likewise, large contractors would pass their higher costs to developers, who would then pass them on to tenants. “You can’t just draw a box around small businesses and call it done,” she said.
  • In the same vein, Osborne suggested that since both food and shelter are basic necessities, it  makes little sense to take from one to give to the other.
  • Spady suggested that instead of focusing on taxes, the city should instead try to create incentives for companies to contribute to solving the problem. He noted that Amazon has dedicated several floors in a new building to a new shelter run by Mary’s Place, and argued that Seattle ought to incent more programs such as that.

Several Council members were present for some or all of the session, including Bagshaw, Gonzalez, Herbold, Mosqueda, Sawant, and O’Brien. All of them asked questions, though Sawant and O’Brien directly challenged panelists at times. In fact, Sawant was openly hostile to a couple of the speakers, directly attacking their credibility (more on that at the end).

At one point, Gonzalez defended her advocacy for a new tax by referring to her oath of office and quoting the preamble of the City Charter that she swore to uphold:

Under authority conferred by the Constitution of the State of Washington, the People of the City of Seattle enact this Charter as the Law of the City for the purpose of protecting and enhancing the health, safety, environment, and general welfare of the people; to enable municipal government to provide services and meet the needs of the people efficiently; to allow fair and equitable participation of all persons in the affairs of the City; to provide for transparency, accountability, and ethics in governance and civil service; to foster fiscal responsibility; to promote prosperity and to meet the broad needs for a healthy, growing City.

Gonzalez said that those words weighed heavily on her, along with the responsibility of the city’s government to meet the basic needs of those who can’t provide for themselves. “That’s what’s driving this for me. I take this mandate very seriously. I’m trying to thread the needle between that and coming up with a policy that is fair and equitable given that we don’t have a set of tools and resources to meet the need.” She also said that she was trying to be fiscally responsible and to meet the business need.

So what are the big take-aways from the roundtable discussion?

  1. The tax will go forward. It will probably be a payroll tax. Nothing that was said was significant enough to derail that.
  2. It will exempt small businesses up to some threshold of revenues (because that’s the only thing the city can measure; it has no way to look at income or profits). It will also likely exempt some subset of nonprofits.
  3. The businesses that are subject to the new tax won’t be well-targeted; some will be thriving, and some will be struggling.
  4. The business community wants to see a real plan for how the money will be spent, that is tied to a specific request for new tax revenues to pay for that plan. That’s how they are used to operating.
  5. The city has little to no credibility with the business community, both because it seems incapable of producing a detailed plan and because it has a poor track record of achieving any meaningful results to-date in addressing homelessness despite spending tens of millions of dollars.

Here are a few post-meeting notes:

  • Council member Bagshaw acknowledged that there seemed to be a strong preference for a payroll tax over an employee-hours tax, but the city’s Finance and Administrative Services department has said that it would take them up to two years to put the administrative systems in place to collect a payroll tax. The City Council is unlikely to be willing to wait that long to start seeing revenues that can be applied to the homelessness crisis.
  • I asked Council member Gonzalez, one of the co-authors of the legislation, whether based on the input she was leaning in the direction of a payroll tax, and she was also noncommittal about what was getting written into the bill. “We are not quite ready to talk about it,” she said. Expect more later this week.
  • I also asked Gonzalez about the status of the Racial Equity Toolkit analysis on the task force recommendations that she had requested. When the task force first delivered their report, Gonzalez indicated that she wanted a RET analysis before introducing legislation. However, despite actively working on writing the legislation this week, she had not received the RET analysis and was unaware of its status.
  • Next Monday evening at 6pm, the Council will hold a public hearing on the proposed tax. The legislation is expected to be officially introduced that afternoon. Next Wednesday will be the first briefing on the legislation in the Finance and Neighborhoods Committee; another committee meeting will be held on May 2 to continue working on it, and they expect to finish it up and vote it out of committee on May 9th. If that goes according to schedule, the final tax bill will come before the full Council for final approval on Monday, May 14th.

Finally, let’s return to the less-than-warm reception that the business roundtable participants received from Council member Sawant, and to a lesser extent, from Council member O’Brien. Both of them reacted defensively to the vocal assertions from Cre8tive’s Saul Spady (and others) that an employment tax could be detrimental to jobs. O’Brien argued that “not every tax is a sin tax,” and brought up a counter-example of property taxes (a poor example, since high property taxes are one of several well-documented impediments to broader home ownership). Sawant challenged Spady to produce evidence that ties employment taxes to reduced jobs, arguing that the same proposition had been suggested for the minimum wage increase. (aside: it took me 30 seconds on Google to find this) At this point decorum broke down and a shouting match ensued over the dueling studies last year on the early outcome of the minimum wage increase.

Sawant reserved her most direct attacks, however, for Safeway’s Sara Osborne and WTIA’s Michael Schutzler. She took her best shot at undermining the credibility of both organizations. For WTIA, an organization with about 1000 tech company members of whom Schutzler claims about 850 are small businesses, Sawant read off a list of some of its President’s Club sponsors from its annual reportsuch as Amazon and Microsoft, and asserted that he therefore was not primarily representing “struggling businesses.” Here’s a full listof WTIA member companies.

The knife really came out with Safeway, though, and this is also where Sawant went off the rails. Provoked by a comment by Spady that “any taxes that causes Safeway to lose jobs is a bad one,” Sawant responded with a prepared talking point that Safeway is owned by Albertson’s, which has $59 billion in annual revenues. This time the response came from the audience instead of Spady, when several people retorted that revenues are not profits. Sawant simply responded, “It’s not a struggling business,” to which the audience shouted back that it is. At the end of the next panel session, Sawant returned to the topic, reading another prepared talking point that Albertson’s is on Forbes’ “top companies” list, so it couldn’t possibly be struggling. Then she left the meeting.

Let’s fact-check her claims about Albertson’s.

Albertson’s is a privately held company (it’s on Forbes’ Largest Private Companies list, as measured by revenues). Since 2015 it has been attempting to go public, but that effort has stalled out twice — the second time when, during the run-up to its IPO, Amazon announced that it was buying Whole Foods. Nevertheless, Albertson’s has continued to publish quarterly financial information in the hope that it can revive its IPO sometime in the near future.

Its latest annual report, published just last week, tells us that it had a rough 2017 fiscal year. If not for the “Trump Tax” reduction for corporations, it would have lost $917 million. Thanks to Trump, however, it had a profit of $46.3 million on revenues of $59.9 billion. That’s a profit margin of .08% — about as razor-thin as it gets. It is currently attempting to merge with Rite-Aid to improve its business outlook, but even that is not going smoothly.

Sawant is dead-wrong on Albertson’s. It is very much a struggling company, and with increased pressure from Amazon, it’s no wonder it hasn’t gone public yet. As an economist, Sawant knows that revenues aren’t the same as profits, and that company size doesn’t correlate with profitability. Yet she is once again willing to ignore clear evidence, spout misleading talking points and draw unfounded conclusions to try to score political points and discredit people who disagree with her.

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