By Jared Bernstein, PostEverything, Perspective, May 16, 2018<\/p>\n
Let\u2019s talk about this \u201chead tax\u201d on large businesses \u2014 those with gross revenue above $20 million \u2014 that the Seattle City Council unanimously passed<\/a>\u00a0this week to help deal with the city\u2019s worsening homelessness problem. Businesses like Amazon.com and Starbucks will face an annual tax of $275 per full-time employee, which was scaled back from $500 after Seattle Mayor Jenny Durkan threatened to veto the proposal and Amazon threatened to suspend major expansion plans in Seattle. (Amazon chief executive Jeffrey P. Bezos owns The Washington Post.)<\/p>\n The council\u2019s taking a lot of flak for the measure, most publicly from Amazon, which has been complaining loudly about the hostile business environment created by the tax. And, as I\u2019ll point out below, there are problematic aspects to this tax. But the reason I want to talk about it comes from the question raised by two tax analysts \u2014 Steve Rosenthal and Richard Auxier (R&A) \u2014 in this commentary<\/a> on the idea: \u201cHow are fiscally constrained cities supposed to find revenue as their populations and services grow?\u201d<\/p>\n I might replace \u201ccities\u201d in the quote with \u201ccountries,\u201d and the country I have in mind is this one. Simply opposing the tax as a \u201cjob killer\u201d doesn\u2019t cut it. Rational people, which sadly excludes many running the country, must answer their question, and not just for Seattle, but for the nation.<\/p>\n Consider these facts:<\/p>\n \u2022 The state of Washington prohibits taxing income or wealth.<\/p>\n \u2022 Seattle has had a serious homeless problem since at least 2015; according to the American Prospect<\/a>, \u201cbetween 2015 and 2017, the rate of homelessness in the city grew by 44 percent.\u201d That gives King County the third-largest homeless population in the nation<\/a>.<\/p>\n \u2022 According to ITEP<\/a>, Amazon paid zero federal tax in 2017 and is expected to claim a $790 million windfall from the tax cut.<\/p>\n \u2022 Amazon would face a tax of about $10 million per year because of the head tax. Its first-quarter net income<\/a> was $1.6 billion. With a \u201cb.\u201d<\/p>\n Do these facts provide a rationale for asking large businesses to help pay for a serious social problem like homelessness? These companies are better known for putting their hands out for tax breaks in exchange for the added economic activity they bring to the places where they locate. But while such activity is welcomed by many, it also creates greater demand for public services, for schools, police, infrastructure, maintenance, etc. It also raises housing prices in these areas. So, yes, I think there\u2019s a solid rationale for asking them to offset some of the social costs to which they contribute.<\/p>\n The question then, as with all taxes, comes down to incidence, meaning who pays the tax. If businesses relocate to avoid the tax, the whole city pays the price of the tax in diminished jobs and commerce. As noted, Amazon\u2019s threats to this effect led the city to scale back the tax. However, businesses\u2019 location choices are not solely a function of the tax liabilities. State and local taxes amount<\/a> to 2 percent of business costs, on average, and amenities like a well-educated workforce, school quality, affordable housing and proximity to markets or transportation hubs matter, too.<\/p>\n My incidence concerns are for lower-wage workers. Because the head tax is a larger share of the cost of lower-paid workers, it could well have a larger impact on the marginal decision to hire or fire such workers than the payroll tax of 0.7 percent that is supposed to replace the head tax after a few years (R&A therefore suggest Seattle punts on the head tax and jumps right to the payroll tax).<\/p>\n