We’ve written some and read more about the Seattle income tax proposal, the lawsuits it has generated and the arguments about income inequality. But Steven Malanga, a fellow at the Manhattan Institute and senior editor of City Journal, raises an issue we’ve not seen discussed.
In an article headlined “What Seattle’s Income Tax Fight Says about America’s Pension Mess,” Malanga writes,
Although the case is being portrayed in the media as a legal face-off, one underlying but rarely mentioned factor in Seattle’s search for more revenues is the city’s huge pension bill. Seattle’s retirement system, like those of many local governments, is woefully underfunded, and the added cost of trying to fix the system will consume big chunks of the city’s tax revenues in coming years, squeezing the budget.
He cites some impressive and troubling numbers.
But looking over Seattle’s pension woes, what’s striking is how much tax money the underfunded system is already gobbling up, and how much more it will require. Like many cities and states, Seattle guaranteed its workers generous pensions based on optimistic assumptions that have proved faulty.
The stock market crash that began in late 2007 devastated the retirement system, robbing it of hundreds of millions of dollars in assets. Its debt subsequently soared from $175 million in 2008 to more than $1 billion two years later. Despite a 9-year bull market, the retirement system’s funding level has failed to rise significantly, and today it has only 68 percent of the money that it has promised to workers.
A study earlier this year by Stanford University finance professor Joshua Rauh ranked Seattle as having the ninth worst funded system among the nation’s 40 largest cities. Though Seattle says that today it owes about $1.2 billion, Rauh says the bill could be as high as $3.2 billion.
As Malanga points out, city officials have said the new tax revenues would support services for the homeless, affordable housing, green jobs and other local priorities. The pension problem is not explicitly mentioned.
Of course, as Jason Mercier, with the Washington Policy Center, points out, local income taxes are illegal in Washington state. At least, so far.