Seattle Chamber challenges Seattle’s payroll tax in new lawsuit; similar tax has been eyed by some state legislators.

The Seattle Metropolitan Chamber of Commerce today filed a lawsuit challenging Seattle’s controversial payroll tax. The Chamber writes,

“This illegal tax puts Seattle’s economic recovery at risk, now and years into the future,” said Alicia Teel, the Chamber’s senior vice president of public affairs and communications. “The Seattle City Council overstepped when they rushed this tax through. By playing fast and loose with its taxing authority, the Council added another headwind to Seattle’s economic recovery.”

The Seattle Times provides a link to the lawsuit and reports

The Chamber’s lawsuit, filed Tuesday in King County Superior Court, claims the measure passed by the City Council in July “taxes the right to earn a living.”

Businesses with at least $7 million in annual payroll will be taxed 0.7% to 2.4% on salaries and wages spent on Seattle employees who make at least $150,000 per year, with tiers for various payroll and salary amounts. For example, a company with an $8 million payroll and one employee making $180,000 would pay a tax of 0.7% on $180,000 — or $1,260.

The tax could apply to perhaps 800 businesses; government entities and grocery stores will be exempt as long as the tax is in place, as will certain health care nonprofits for at least three years.

The 2.4% rate, meant to apply to a company like Amazon, will apply to salaries of at least $400,000 at companies with at least $1 billion in annual payroll. Stock grants will be taxable, but not stock options, council staff have said.

The lawsuit had been anticipated since the Seattle City Council adopted the measure months ago. Excerpts from the suit state,

This case is about the City unlawfully imposing an unconstitutional tax on the right to earn a living.

Amid one of the most severe financial crises the City has ever experienced, and while Seattle businesses reel from the havoc wreaked by the COVID-19 pandemic, the Seattle City Council (the “Council”) passed Council Bill No. CB 119810 (the “Bill”) on July 6, 2020. The Bill was returned to the Council unsigned by the mayor and became Ordinance 126109 (the “Ordinance”). The Ordinance imposes a “payroll tax” on employing workers in the City.

Further,

More than 200 stores and businesses have shut down permanently and tens-of- thousands of jobs have been lost due to the pandemic. Adding a new tax on jobs creates another headwind that could prove fatal to the recovery of downtown Seattle and the local business community.

Instead of carefully evaluating the City’s spending and its $1 billion-plus general fund, the Council rushed to pass a new illegal tax devoid of any spending accountability. The Council offered no viable plan to deliver results with the funding they already have, and the spending outline offered for the new funding fails to clarify the objectives or expected results. The tax is illegal, punitive, and fails to address the most pressing issues facing the City.

We recommend reading the whole 9-page brief. Geek Wire reports

Matt McIlwain, managing director of Madrona Venture Group, told GeekWire during a podcast last week that the different tax policy attempts over the past few years were “unfortunate.” The Seattle venture capitalist noted that the policies drive technology companies out of the city.

“These sorts of things are discouraging people from placing their teams and operations in Seattle,” McIlwain said. “And 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. And think about the second- and third-order consequences of that for all of the small businesses around them.”

Still more,

The Chamber, which represents 2,600 companies and a regional workforce of approximately 750,000, argues that the payroll tax will drive out the jobs that create the revenue the city is hoping to capitalize on and make Seattle less attractive relative to other cities in the region.

That fear is in line with action the Downtown Seattle Association took in August, when it asked the Seattle City Council to reconsider the tax following a report that Amazon had polled employees about which communities they’d prefer to work from elsewhere in the region.

Some state lawmakers have expressed interest in imposing a similar tax statewide, reports Jason Mercier with the Washington Policy Center. Follow the link for his analysis. 

This is an issue to watch.