December 5, 2022

Silicon Business

Business 500

Seattle’s big business tax, 1 year later: Controversial policy generates unexpected surplus

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(Flickr Photo / Daniel X. O’Neil)

Business leaders expressed concern when lawmakers approved a new payroll tax in 2020 on Seattle’s largest companies, part of a longstanding effort to increase funding for affordable housing and homeless services.

Now that the controversial payroll tax, dubbed JumpStart Seattle, has been in effect for a full year, it’s possible to assess some of those claims.

JumpStart brought in $248.1 million in its first year — $48.1 million more than projected, a 24% jump. Its backers say that’s proof the tax is a success. Whether the extra funding comes at the cost of Seattle jobs or employers remains unclear.

It’s difficult to measure the impact of a new tax that is assessed smack in the middle of an unprecedented pandemic. But the elected officials behind JumpStart say that the tax was essential for helping the city survive the COVID crisis. And they view the excess revenue JumpStart generated, in spite of the massive shift to remote work and other disruptions driven by the pandemic, as proof that it was the right way to fund critical services when the city needed them most. 

Not everyone is convinced, particularly those who keep a close eye on the city’s largest private employer: Amazon. The company has been open about its frustration with the City Council, speaking out about a “hostile” attitude toward business and funding an effort to elect more moderate candidates. Amazon repeatedly cites its rocky relationship with Seattle’s government as one reason the company is accelerating hiring in neighboring cities. 

We spoke with government and business leaders in Seattle to find out how JumpStart’s first year went, how the unexpected surplus funds will be used, and whether fears about the tax’s impact on the tech community were justified. 

Seattle jumpstarts a dead tax

Supporters of the so-called head tax in 2018 rushed the City Council chambers during a vote to repeal the controversial legislation. (GeekWire Photo / Monica Nickelsburg)

For a wonky piece of legislation that only taxes a percentage of payroll at a few hundred companies, JumpStart has become a lightning rod in the debate over how Seattle should navigate inequality. That’s partially because of the long and winding road JumpStart took to become law. 

The policy evolved out of a years-long battle over what became known as the “head tax,” pitting Seattle progressives against Amazon and other employers in the city. Unlike the payroll tax, its predecessor would have required companies to pay a per-employee sum, which opponents slammed as a “tax on jobs.” The City Council passed the head tax in 2018, only to repeal it a few weeks later when faced with a costly referendum battle and threats from Amazon to all but pack up shop in Seattle.

Many thought that was the end, but councilmember Teresa Mosqueda and her colleagues managed to pull a policy from the ashes — and this time it survived.

Seattle City Councilmember Teresa Mosqueda. (Photo via Seattle.gov)

Unlike the head tax, JumpStart targets payroll rather than headcount. It taxes salaries exceeding $150,000 per year at companies with annual payroll expenses of $7 million or higher. The tax rate varies, with the largest companies paying the most. 

It’s not clear how much of the $248.1 million Amazon paid. The city’s Department of Revenue keeps that information confidential.

The tax applies to salaries paid to employees who spend most of their time working in Seattle — whether at home or in an office — regardless of where the company is headquartered. That means some of the more than 120 out-of-town tech companies that have set up engineering centers in Seattle to mine the city’s tech talent were subject to the tax.

Spokespeople for Meta and Google, which employ more than 14,000 people combined in the Seattle region, confirmed to GeekWire that the companies paid the JumpStart tax for last year.

Seattle began collecting the tax in January 2021. In March, the city reported the final tally from JumpStart’s first year was $248.1 million, significantly more than the $200 million the tax was expected to raise.

The extra $48.1 million will go toward replenishing Seattle’s reserves. The majority of the $200 million Seattle planned to collect will fund affordable housing projects in the city. About 20% will go toward environmental and economic development projects, including workforce training and childcare. Overall the city’s 2021 general fund revenue was $110 million higher than initially forecasted, including the $48.1 million generated by JumpStart. 

For 2022, JumpStart is expected to bring in more than $277 million, according to the latest forecast numbers reported last month — $43.6 million beyond what was expected in November.

“We can support good living wage jobs and employers that are creating good environments for employees, while also assessing those companies that are doing really well, to make this a great place for everybody to live,” Mosqueda said in an interview with GeekWire.

The tax is heavily reliant on just two sectors, as Information and Professional & Business Services accounted for more than 82% of JumpStart tax receipts.

The latest Washington state revenue forecast also shows more money than anticipated for the current budget, with an expected net surplus of nearly $3 billion.

Taxing physical location in a digital city

Although JumpStart applies to salaries paid to workers who live in Seattle, many of their employers are global in scale and footprint. That posed a unique challenge for policymakers, even before the pandemic suddenly shifted thousands of employees to remote work. 

To overcome that obstacle, the City Council gave employers a choice. They could tally up their employees who live in Seattle city limits and meet the salary threshold, or they could just pay the tax based on all of their workers earning more than $150,000 per year, regardless of where they are located. 

“Even with that option, we’re still coming in with those higher-than-anticipated returns, which I think is a good indication that while some folks may have worked outside of the city limits, we continue to see growth in Seattle and we continue to see growth in, notably, the tech sector,” Mosqueda said. 

The administrative and logistical challenge of identifying where employees work most of the time has become a headache for employers, according to Grant Shaver, a senior manager at accounting firm Clark Nuber. Shaver has been advising mid-sized companies on their efforts to comply with JumpStart.

“Most of them have been very frustrated by it because there are not many companies that have the infrastructure in place to track the location of their employees and where they’re working,” he said. “Especially during COVID, where people are working from home more often.”

The ‘Amazon Tax’

Amazon’s Spheres and Day 1 tower at its Seattle HQ. (GeekWire Photo / Kurt Schlosser)

As the company with the highest tax obligation under JumpStart, many look to Amazon as a bellwether for Seattle’s tech industry. But Amazon’s tax battle with its hometown began long before the payroll tax was written.

Over the past five years, the policy debate over taxing Seattle’s biggest businesses has become bogged down in rhetoric. Led by council member Kshama Sawant, the left has been advocating for an “Amazon Tax” and holding protests at the company’s headquarters for years. They see the homeless encampments that share streets with companies valued at more than $1 trillion as a sign that Seattle’s tax structure needs reforming.

Amazon has responded with heated rhetoric and political maneuvering of its own. The company paused construction on Seattle office buildings during the head tax debate and spent more than a million dollars in a largely unsuccessful effort to reshape the City Council.

JumpStart’s approach is more measured than the big business taxes Sawant has proposed, but it still rankles Amazon. The company hasn’t expanded its footprint in Seattle in recent years and backed out of plans to occupy the massive Rainier Square tower it had leased, instead subleasing the property to other tenants.

Amazon is growing fast in cities surrounding Seattle, most notably nearby Bellevue, which does not have a similar tax on big business. At the end of last year, Amazon had 7,500 employees in Bellevue and plans to grow to 25,000, the same number as its second headquarters — or HQ2 — in the Washington D.C. area. Amazon is also adding 1,400 employees in Redmond, Wash.

Amazon declined to be interviewed for this story, but pointed to CEO Andy Jassy’s comments during the 2021 GeekWire Summit, when he described a rocky relationship with the Seattle City Council.

“First of all, we don’t think of HQ1 being Seattle any longer,” Jassy said. “We really think of it as Puget Sound. We have a lot of people in Seattle, but we also have a lot of people in Bellevue and it is where most of our growth will end up being.”

Andy Jassy, Amazon CEO, speaks at the 2021 GeekWire Summit. (GeekWire Photo / Dan DeLong)

Amazon’s plans are part of the ongoing tech boom in Bellevue. Meta, TikTok parent ByteDance and other tech giants are also scooping up office space on the Eastside. Tech recruiters say it’s becoming much easier to recruit talent to Bellevue, once a difficult place to pitch to young tech workers who would rather be in Seattle. The eastside tech scene is undeniably growing, but what’s less clear is whether Bellevue’s gain is Seattle’s loss.

Shaver said he’s heard rumblings, from large companies that already have a Bellevue footprint, about shifting some positions to the eastside but he said the tax isn’t their primary concern.

“There are likely some companies that will choose to move Seattle employees making more than $150,000 annually outside of the Seattle city limits to locations like Bellevue as a result of this tax,” he said. “Although, that’s most likely to be a secondary issue for companies that are primarily struggling to determine if they will require employees to come back to the office at all.”

Boost or bust for Seattle’s economy?

When JumpStart finally passed, Amazon polled employees about which cities they would prefer to work for in the region, outside of Seattle. The survey fueled concerns that the tax would push jobs out of Seattle during a time of economic uncertainty. Downtown Seattle Association CEO Jon Scholes called the poll an “early warning of the long-term, damaging impacts that Seattle’s tax on jobs will have on recovery, the city’s future economic health, and local tax revenues to fund critical municipal services.”

The Seattle Metropolitan Chamber of Commerce, which represents more than 2,000 companies in the area, filed a lawsuit challenging JumpStart in late 2020. The complaint claimed the tax was unlawful, citing a previous case in which the Washington Supreme Court ruled a city could not tax the ability to earn a living. A King County judge dismissed the lawsuit last summer and the Chamber filed an appeal. Oral arguments at the Washington state Court of Appeals are scheduled for Friday.

“The biggest concern we’re hearing is that the tax is illegal,” said Alicia Teel, senior vice president of public affairs and communications at the Chamber. “A related piece is the complexity of administering the tax, which we anticipate could increase this coming year as many folks begin returning to office.”

“We know it’s rarely one thing that causes an employer to shift jobs or to close a business location.”

As the tax was about to go into effect, Madrona Venture Group Managing Director Matt McIlwain warned it could discourage employers from “placing their teams and operations in Seattle.”

“I just know already from our portfolio companies that many of them have already let their leases expire and they have no intention of going back to that physical space,” he said at the end of 2020. “Think about the second- and third-order consequences of that for all of the small businesses around them.”

When GeekWire followed up with McIlwain for this story he did not provide specific examples of companies that have left Seattle due to JumpStart but he said it is a difficult time to break office leases. McIlwain noted that Seattle startup Suplari let its lease expire before it was acquired by Microsoft and said Qumulo is exploring its options because of downtown crime, as GeekWire reported in February.

There is little evidence that JumpStart alone has pushed companies out of Seattle or depressed wages. Earlier this year, Amazon more than doubled its max base pay for corporate and tech workers, many of whom are based in Seattle. Amazon currently employs more than 50,000 people in Seattle proper.

And the area’s startup scene is arguably hotter than ever, with now nearly 20 unicorns, or startups valued at more than $1 billion. Of that growing group, nine are based in Seattle.

A taxed downtown

Although the business leaders we spoke to for this story are concerned about JumpStart, they see a much bigger threat to the long term viability of Seattle’s urban core. Employers are trying to balance their return to office plans with a sharp rise in crime over the past year.

City officials say gun violence increased 40% in 2021 and a series of recent incidents led Amazon to provide alternate office space for workers assigned to one downtown office building.

As pandemic restrictions lift, employers are urging Seattle to address safety issues downtown so that they can feel confident bringing workers back to the office. Everyone we spoke to for this story from the business community cited safety, over JumpStart, as the biggest concern when it comes to their Seattle workforce.

“We know it’s rarely one thing that causes an employer to shift jobs or to close a business location,” Teel said. “Businesses operate in an ecosystem, and so there are many issues that factor into location choices, including quality of life issues like public safety, homelessness, transportation, and commercial affordability.”



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