AWB warns of unintended consequences from new overtime rule. An additional drag on small business hiring?

The state’s new overtime rule presents significant challenges to employers. In a statement, Association of Washington Business president Kris Johnson says,

We’re disappointed officials chose to raise the overtime threshold by such a large amount. The current rule needed updating, but this new rule will require employers to pay salaried workers more than $83,000 per year by the time its fully implemented. This is a huge increase over the current rule, and one that is likely to carry unintended consequences, especially for small businesses and nonprofit organizations.

For small businesses and nonprofits that can’t afford to pay overtime, the new rule could lead to a reduction in services or program offerings. It could also force some organizations to reclassify employees from salaried to hourly positions, leaving employees with fewer opportunities for advancement and a loss of schedule flexibility.

The Spokesman-Review also reports on business response to the change.

Bob Battles, general counsel and government affairs director for employment law for the Association of Washington Business, agreed the old state thresholds were out of date. But the newer higher levels in the later years could have unintended consequences, he said.

“Small businesses and nonprofits are not going to be able to afford this,” Battles said, while some employees might lose chances for advancement that come through working extra time and learning a business.

The L&I action may not be the last word.

Because the new state thresholds will remain below the federal thresholds through 2020, the Legislature will have “a window” to make adjustments to the rules that the AWB could support, he said.

Significantly, the revised overtime rule comes at a time when small businesses continue to struggle to find qualified workers, even as they boost compensation. The Associated Press reports,

Two reports last week show that small business hiring still lags behind the strong job growth reported at larger companies, and that owners are unlikely to increase their staffs significantly in 2020.

Payroll processor ADP said its customers with up to 49 employees added 11,000 jobs in November, one of the weakest showings this year…

A quarterly survey released last week by the U.S. Chamber of Commerce and MetLife showed that owners are sticking to their cautious hiring.

Reflecting a theme sounded by AWB, the AP points out small business face particular challenges in hiring.

Small businesses have reported for several years that they’ve been unable to find qualified candidates for their job openings. That’s a problem large companies also face, but they have an advantage over smaller employers because they’re able to offer higher salaries and more attractive benefits, putting the smaller players at a disadvantage in recruiting and retention. Many small businesses are also conservative about hiring, and don’t take on new staffers until they already have the revenue to justify the added expense and risk of expanding their payrolls.

Johnson closes his press release saying,

We look forward to working with legislators in the upcoming legislative session to address the concerns this raises, both for employers and employees.

The negotiations should continue.

State adopts new overtime rules, expanding coverage and significantly increasing salary threshold.

After months of hearings, the Department of Labor and Industries has adopted new overtime rules. The L&I press release states,

The Department of Labor & Industries (L&I) has updated the employment rules that determine which workers in Washington are required by law to be paid at least minimum wage, earn overtime pay, and receive paid sick leave and other protections under the state Minimum Wage Act. These changes will affect executive, administrative, and professional (EAP) workers as well as outside salespeople and computer professionals across all industries in Washington…

Under the approved changes, the minimum pay a salaried worker must receive to be considered exempt would increase incrementally to 2.5 times the state minimum wage by 2028. Small employers (with 1-50 employees) will have a more gradual phase-in schedule to give them additional time to comply with the new rules compared to large companies (51 or more employees). The effective date for the first threshold increase is July 1, 2020.

Business groups had generally agreed that the rule needed an updated, but expressed concern that the increase went too far, too fast. We linked to detailed concerns here.

The department received substantial feedback.

L&I updated the overtime rules through a rulemaking process that began in March 2018. The public submitted almost 2,300 comments by email, fax, and mail, and 182 people testified during public hearings during this process.

The Associated Press reports,

The Department of Labor and Industries finalized the rules Wednesday and will phase them in by 2028. By that time, salaried workers making up to about $83,400 a year will be entitled to time-and-a-half pay if they work more than 40 hours per week.

Workers making more than that could also get overtime unless they are certain types of professionals — such as those with higher degrees — or unless they are truly managers or executives, as demonstrated by their ability to hire and fire, direct other people’s work or make significant business decisions.

Many job categories will be affected, including shift managers at restaurants and retail establishments, office managers, some medical workers and other white-collar staff, officials said.

The implantation schedule was modified in response to feedback, though other concerns were not addressed.

Business groups in Washington have agreed that the state’s rules needed to be updated, but they criticized the plans as drastic. The Association of Washington Business warned when the proposed rules came out in June that they would be a shock to many businesses and that they could particularly hurt nonprofits.

The organization said many businesses might convert salaried workers to hourly ones, reducing scheduling flexibility.

After hearing extensive public comment, the department added two years to the phase-in period. The threshold will increase incrementally until it reaches 2.5 times the minimum wage — about $83,400 — by 2028. The rules will phase in more slowly for businesses with fewer than 50 employees.

The AP reports that Washington’s new rule exceeds changes adopted in any other state.

The federal government and several states, including California, New York, Pennsylvania, Colorado, Michigan and Massachusetts, have recently updated or started to update their overtime rules, but none have adopted a target threshold as high as Washington’s, said Paul Sonn, state policy program director with the National Employment Law Project.

According to The News Tribune,

“We recognize how all this might impact businesses,” Sacks said at a media briefing. “That’s why the implementation of the new state rules won’t begin until next July, and they will be phased in over several years.”

We’ll see. More on responses to the new rule later.

Tax Foundation ranks Washington’s property tax No. 27 in the nation.

The Tax Foundation calculates that Washington overall ranks No. 27 on property taxes. 

Today’s map shows states’ rankings on the property tax component of the 2020 State Business Tax Climate Index. The Index’s property tax component evaluates state and local taxes on real and personal property, net worth, and asset transfers. The property tax component accounts for 16.6 percent of each state’s overall Index score.

Property taxes matter to businesses for several reasons. First, businesses own a significant amount of real property, and tax rates on commercial property are often higher than the rates on comparable residential property. Many states and localities also levy taxes not only on the land and buildings a business owns but also on tangible property, such as machinery, equipment, and office furniture, as well as intangible property like patents and trademarks. Across the nation, property taxes impose one of the most substantial state and local tax burdens most businesses face. In fiscal year 2018, taxes on real, personal, and utility property accounted for 38 percent of all taxes paid by businesses to state and local governments, according to the Council on State Taxation.

This map and associated commentary draw on the 2020 State Business Tax Climate Index, which we discussed here. Washington ranked No. 19 in the 2020 SBTCI, uncharged from the prior year. 

The criteria for evaluating property taxes are described in the SBTC”I methodology section.

The property tax portion of the Index is composed of two equally weighted subindices devoted to measuring the economic impact
of both rates and bases. The rate subindex consists of property tax collections (measured both per capita and as a percentage of personal income) and capital stock taxes. The base portion consists of dummy variables detailing whether each state levies wealth taxes such as inheritance, estate, gift, inventory, intangible property, and other similar taxes.

The Tax Foundation dings Washington for levying a tangible personal property tax, a real estate transfer tax, and a transfer tax.

Brookings finds 5 tech centers, including Seattle, account for 90% of job growth, calls it a “grave national problem.”

Metro Seattle has long been a widely acknowledged winner in the innovation economy. A new report from The Brookings Institution confirms the perceived trend, finding that Seattle is one of just five tech hubs accounting for 90 percent of tech center job growth from 2005 through 2017. (Press release, executive summary.) The region’s good fortune, the report says, comes at the expense of other parts of the country to such an extent that it constitutes a “grave national problem” requiring a major Congressional intervention. 

Based on “winner-take-most” network economies, the innovation sector has generated significant technology gains and wealth but has also helped spawn a growing gap between the nation’s dynamic “superstar” metropolitan areas and most everywhere else.

Neither market forces nor bottom-up economic development efforts have closed this gap, nor are they likely to. Instead, these deeply seated dynamics appear ready to exacerbate the current divides.

Which is why the nation requires a major push to counter these dynamics. Specifically, the nation needs—as one initiative among others—a massive federal effort to transform a short list of “heartland” metro areas into self-sustaining “growth centers” that will benefit entire regions.

While the recommendations are clearly arguable: the record of Congressional action to spur economic vitality is, at best, spotty and there’s evidence that the desired dispersal in already taking place, albeit slowly. And heartland communities are working hard to provide incentives, improve their talent pools, and upgrade infrastructure required by tech employers.  But there’s no question that the authors’ concern with concentration is backed up by some key numbers. The chart below shows the top five. 

The map below shows the employment trends in the innovation sector.

The report

proposes that Congress establish a major new initiative to select a set of promising metro areas to receive a major package of federal innovation inputs and supports that would help these areas accelerate, transform, and scale up their innovation sectors. The report envisions the designation of eight to 10 potential growth centers (all at a location removed from existing successful tech hubs) that would receive substantial financial and regulatory support for 10 years to get “over the hump” and become new, self-sustaining innovation centers.

Among the “takeaways” identified:

1. Regional divergence has reached extreme levels in the U.S. innovation sector. The innovation sector— comprised of 13 of the nation’s highest-tech, highest-R&D “advanced” industries—contributes inordinately to regional and U.S. prosperity. Just five top innovation metro areas—Boston, San Francisco, San Jose, Seattle, and San Diego—accounted for more than 90% of the nation’s innovation-sector growth during the years 2005 to 2017.

2. High levels of territorial polarization are now a grave national problem. Many Americans reside far from the opportunities associated with the nation’s innovation centers, undercutting economic inclusion and raising social justice issues. Moreover, the costs of excessive tech concentration have meant less overall innovation industry activity in the United States, in part because companies increasingly move activity from high-cost U.S. tech hubs to medium-cost foreign hubs. Creating tech hubs in the heartland will provide an opportunity to reduce “innovation offshoring.”

The Washington Post reports,

Just five metro areas – Boston, San Diego, San Francisco, San Jose and Seattle – snapped up 90% of the 256,063 tech jobs created from 2005 to 2017, according to a study released Monday from The Brookings Institution. The remaining 10% was divvied up among 377 urban areas.

The share of those jobs shrank dramatically in would-be hubs like Chicago, Durham, North Carolin; Philadelphia, Dallas and Wichita, Kansas, researchers found, with the bottom 90% of U.S. metro areas collectively losing one-third of these positions in the same period…

The trend creates its own set of problems for the tech hubs, the authors note, including skyrocketing housing costs, worsening traffic, and wage expectations that can freeze out smaller companies.

But the economic prosperity is significant: in the 20 cities with the most employment in innovation industries, the average output per worker is $109,443, according to the report. That’s one-third more than the other 363 metropolitan areas nationwide.

Geek Wire reports,

The consequences of this stratification are being felt in Seattle and other top cities for tech jobs.

“These range from spiraling home prices and traffic gridlock in the superstar hubs to a problematic ‘sorting’ of workers, with college-educated workers clustering in the star cities, leaving other metro areas to make do with thinner talent reservoirs,” the report says.

Tech concentration is driven by handful of factors, and tends to be self-reinforcing, according to the report. Cities like Seattle, for example, have major job creators like Amazon and Microsoft which spawn startup ecosystems of smaller tech companies. The city also has a major research institution in the University of Washington, which continues to feed the talent pipeline. In other cities with major universities but fewer tech employers, talent is often exported.

There’s a lot to absorb in the report, which is likely to receive significant attention during an election year that has already seen discussion of the effects of tech concentration. Something to watch.

 

Business economists continue to anticipate slow US growth, with significant downside risk. Recession odds remain low.

Today’s economic outlook from the National Association of Business Economists continues to reflect the prevailing view: slower growth, heightened downside risk, and a slim likelihood of a recession in the next six months.

From the survey:

HIGHLIGHTS

• Panelists expect economic growth—as measured by inflation-adjusted gross domestic product (real GDP)—to continue. The median forecast for GDP growth in 2019 is 2.3%, unchanged from the October survey. Respondents anticipate GDP growth will register 1.8% in 2020, also unchanged from the October survey. Real GDP increased 2.9% in 2018.

• On a year-over-year basis, the median projection is for real GDP to rise 2.1% from the fourth quarter (Q4) of 2018 to Q4 2019 and by 1.9% through Q4 2020. In comparison, real GDP increased 2.5% year-overyear in Q4 2018. No panelists forecast a recession in 2020 (two quarters of negative GDP growth), although the median of the five most pessimistic forecasts indicates a decline of a 0.1% annual rate in Q4 2020.

• Overall, the view for the future improved compared to the October survey. In that survey, 81% of panelists indicated the balance of risk was tilted to the downside, compared to 71% in the December survey. Furthermore, 19% of the panelists currently believe the balance of risk is to the upside—an increase from the 8% of respondents who held this view in October. The share of panelists that believes risks are equally balanced remains at 10%.

• The odds of a recession occurring through the first half of 2020 remain generally low. Panelists put the odds of a recession starting in the second half of 2019 at 5%, rising to 21% by the first half of 2020 and 43% by the end of next year. Respondents put the odds of a recession starting by mid-2021 at 66%. The odds of a recession beginning after mid-2021are 34%.

The Associated Press reports,

The economists expect American consumers to continue driving the economy. Consumer spending, which accounted for almost all U.S. economic growth from July through September, is expected to grow a healthy 2.6% this year and 2.4% in 2020.

On top of last week’s strong jobs report, this about as good as we can expect this year. Plenty of caution flags still flying.

More on the state tax structure work group and possible tax changes resulting from I-976

Yesterday, we wrote about the first meeting of the Tax Structure Work Group. Washington Research Council economist Kriss Sjoblom provides additional context on the work group’s charge and likely approach. 

ESHB 1109 requires the Department of Revenue to prepare a report that updates the data and research that informed the analyses and recommendations of the final report of the 2002 Washington State Tax Structure Study Committee (WSTSSC). For each alternative tax system recommended by WSTSSC, this report is to estimate the amount of revenue that system would have generated during the 2017–19 biennium and to estimate the distribution of tax burdens across households by income level and across businesses by industry.

The DOR report is also to analyze several alternatives identified by the 2018 House Tax Structure Work Group. These alternatives include replacing the business and occupation tax with either a corporate income tax or a margins tax (a type of business tax used in Texas), and replacing the current one percent limit on revenue growth from the state property tax with a limit based on population growth and inflation.

He points out the legislation anticipates an extended timeline, with some uncertainty after the work is completed.

The work group is to present the preliminary report to legislative fiscal committees during the 2021 legislative sessions. Following the 2021 session the work group is hold a series of public meetings across the state, presenting DOR’s analyses of the various alternatives and receiving feedback.

ESHB 1109 is silent as to whether anything further will happen following this series of public meetings.

As we suggested yesterday, the extended review may dampen legislative enthusiasm for tax changes in the short, election-year session, particularly in a biennium with strong revenue growth and voters’ approval of I-976.

But, there are some I-976 implications to watch, as WRC analysts Emily Makings writes

Also this week, Sen. John Braun proposed dedicating the current state sales tax on motor vehicles to transportation. According to Sen. Braun, this would increase transportation funding by $30 billion over 20 years. He notes, “Car tabs were just slashed by voters, part of a twenty-year consistent message from the public on the issue. The gas tax, with increasing fuel-efficiency and the rise of hybrid/electric cars, is a declining long-term revenue source, absent increases in the tax rate.”

The proposal has been prefiled as SB 6041.

Read her post for more detail. She also writes of a proposed insurance premium tax.

Commissioner of Public Lands Hilary Franz has proposed an insurance premium surcharge to help fund wildfire response. The draft legislation would require property and casualty insurers (except medical professional liability businesses) to collect a “wildfire surcharge” of $5 per policy annually. Each property and casualty insurer would have to make a payment of at least $1,000 a year.

She writes a similar proposal passed in the Senate last session, but did not make it through the Legislature.

Writing in Crosscut, Melissa Santos takes a close look at other possible legislative responses to I-976.

State Rep. Jake Fey, a Tacoma Democrat who chairs the House Transportation Committee, said state officials will most likely continue to collect car-tab fees as the courts have allowed, but set the money aside in an escrow account of some sort. 

That would force legislators to trim hundreds of millions from the state budget in the short term, Fey said. That could further delay planned highway projects, or perhaps cut ferry service and limit ferry routes, he said…

Fey said passing new taxes to stave off transportation cuts isn’t a realistic option in the upcoming 60-day legislative session, which is set to begin Jan. 13. In the past, agreeing on a package of gas-tax increases, tolls, and other measures to pay for roads and transit has required years of negotiation, he said.

Legislators also will want to avoid raising taxes in an election year, said state Sen. Steve Hobbs, a Democrat from Lake Stevens who chairs the Senate Transportation Committee.

Fey’s thinking is more long-term, Santos writes.

Fey said he plans to come back in 2021 with a proposal for a new gas-tax package that could get some of the delayed projects back on track, as well as pay for other transportation needs, such as a new crossing on Interstate 5 over the Columbia River and about $3 billion to replace culverts that are blocking fish passageways.

By that point, the state will also have more certainty about I-976, Fey said. Until the courts rule on the constitutionality of the initiative, lawmakers don’t know whether they have to replace one year’s worth of lost revenue or several, meaning they won’t know how big of a tax package would even be needed to offset any cuts, he said.

So, we wait. A swift ruling on the constitutionality of I-976 would clearly be helpful.

Another strong national jobs report: 266,000 new jobs. Plus, small business owners plan compensation hikes.

Despite uncertainty, global and national, U.S. employers continue to create jobs at a record-setting pace. The Bureau of Labor Statistics reports 266,000 new jobs were created in November.

Total nonfarm payroll employment rose by 266,000 in November, and the unemployment rate was little changed at 3.5 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in health care and in professional and technical services. Employment rose in manufacturing, reflecting the return of workers from a strike.

The Wall Street Journal reports,

The U.S. job market strengthened in November, as hiring jumped and unemployment fell to a half-century low, adding fuel to the economic expansion

“This is a ‘who would have thought moment?’” said Becky Frankiewicz, president of staffing company ManpowerGroup’s North America division. “No one would have ever guessed we could be sitting at 3.5% unemployment with 110 months of job gains.”

From the Associated Press:

Steady job growth has helped reassure consumers that the economy is expanding and that their jobs and incomes remain secure. Consumer spending has become an even more important driver of growth as the Trump administration’s trade conflicts have reduced exports and led many businesses to cut spending.

“Today’s jobs report, more than any other report in recent months, squashed any lingering concerns about an imminent recession in the U.S. economy,” said Gad Levanon, an economist at the Conference Board, a business research group. “Consumers are entering the holiday season with both the ability and the willingness to spend.”

To that excellent news, add today’s report from NFIB that small business owners are raising compensation.

Thirty percent of small business owners reported raising compensation and 26% plan to do so in the coming months, the highest level since December 1989, according to NFIB’s monthly jobs report. Owners are adding an average addition of 0.29 workers per firm in November, which is the highest level since May. However, finding qualified workers has remained the top issue with 26% of owners reporting it as their No. 1 problem.

“Despite a tight labor market, small business owners are doing exactly what they said they would do thanks to tax relief. They’re creating new jobs and raising compensation at record levels,” said NFIB President & CEO Juanita D. Duggan. “The only thing holding them back continues to be finding qualified workers, but in spite of that challenge the small business economy is roaring.”

Excellent.

State Supreme Court continues hold on I-976. Car-tab fees remain in effect until final ruling on measure’s legality.

The state Supreme Court voted to let car-tab fees remain in place pending final judicial review. The Seattle Times reports,

Car-tab tax cuts once expected to take effect Thursday will remain on hold despite a last-ditch effort from the Washington State Attorney General this week.

The state Supreme Court issued a short order Wednesday evening denying a request from the Attorney General to allow the voter-approved tax cut to go ahead. The Supreme Court’s order means Initiative 976 will not take effect Thursday, but the order is not the final word on the initiative itself. The legal dispute could go on for weeks or months.

In late November, a King County Superior Court judge halted implementation of the initiative pending final review, finding that there was a reasonable likelihood the measure would fail to pass muster with the court. The ST reports,

In denying that request Wednesday, the Supreme Court’s majority offered no legal reasoning in its written decision.

Three justices who dissented called delaying a voter-approved initiative “an extraordinary measure.” The minority said the state would suffer more if the initiative were paused than Seattle and others would if it took effect, including the “potential harm to voters’ confidence in the initiative system and our democratic process as a whole.”

It continues.