Seattle City Councilmembers Lisa Herbold and M. Lorena Gonzalez came to West Seattle on April 19 to discuss the proposed Employee Hours Tax aimed at funding construction of housing to alleviate the homeless crisis. They got more than they bargained for. 

The frustrations of many businesspeople in attendance boiled to the surface repeatedly as the Councilmembers attempted to layout the options going forward and defended the City's efforts regarding homeless and working poor. 

In a report from the Progressive Revenue Tax Force on Housing and Homelessness (PTRF) that was formed last year and revised March 9 the options and features of the tax were explained.

The PRTF members identified the expansive need for funding and recommended that 80% of secured funds be used for the development of long-term, deeply affordable housing with 20% to be directed towards service areas like prevention, diversion and shelter programs.

To address these needs, the PRTF members recommended that $150 million in new progressive revenues be collected annually. Half of this, or $75 million, would be generated via an EHT, and the PRTF members offered the Council options to consider with respect to possible exemptions and several proposed taxation and implementation methods.

The PRTF members recommended generating the additional $75 million through other potential means of progressive taxation; however, they only recommend pursuing those additional funds if the currently-convened “One Table” group does not pursue at least $75 million in progressive revenues. The PRTF proposes massively increased annual investments in permanent housing as the most effective way to make a measurable reduction in homelessness as well as reduce the impacts of homelessness on Seattle’s neighborhood business districts.

Herbold wrote about the options in her constituent newsletter last week:

While the task force didn’t recommend a specific way to structure the tax they did lay out three options for the City Council to consider. Again, as mentioned above, according to Council Central Staff’s initial analysis, it’s anticipated that only approximately 5% of Seattle businesses would be expected to pay the tax.  Because the B&O tax has a lot of regressivity built into its structure, the task force tried to build in as much progressivity as possible. Option 1 below, built on a percentage of payroll, rather than a cost per employee hour, recognizes that some high grossing businesses, due to high labor costs, have very narrow profit margins:

Option 1: 
$10 million per year gross revenue exemption threshold
• Firms with 1-100 FTE employees pay 0.25% of all payroll (avg. $0.078/hr)
• Firms with 101-500 FTE employees pay 0.50% of all payroll (avg. $0.156/hr)
• Firms with 501+ FTE employees pay 0.75% of all payroll (avg. $0.234/hr)
• Firms with gross revenue between $500,000 and $10 million pay $395/year
 
Option 2: 
$8 million per year gross revenue exemption threshold
• Firms with 1-500 FTE employees pay $200/FTE/year ($0.104/hr)
• Firms with 501+ FTE employees pay $450/FTE/year ($0.234/hr)
• Firms with gross revenue between $500,000 and $8 million pay $395/year
 
Option 3: 
$8 million per year gross revenue exemption threshold
• Firms with 1-500 FTE employees pay $140/FTE/year + 0.1% of all payroll
• Firms with 501+ FTE employees pay $300/FTE/year + 0.25% of all payroll
• Firms with gross revenue between $500,000 and $8 million pay $395/year
 
One of the task force recommendations that is generating a lot of discussion is the “skin in the game” alternative tax rate.  The report states, “the housing and homelessness crisis is a matter of concern to the whole community, and businesses of all sizes should contribute towards the solution,” and that this alternative tax rate that should, “be done in a way that is not unduly burdensome for small businesses.” As purposed, this alternative tax rate of $395 would only apply to businesses under the EHT gross revenue threshold and would exempt very small businesses with revenue under $500,000.  I was heartened to see that it was the small and medium businesses on the task force who came up with the idea of a “skin in the game” alternative tax rate.

The proposal did not sit well with many business owners including West 5 owner Dave Montoure. Montoure asked, "Why are you taxing jobs?"

Herbold explained, "This isn't intended to be a tax on jobs. The per hour is the mechanism, much like other cities have a per hour charge to pay for health benefits. We are looking to move towards a payroll tax instead of a per hour tax."

The manager of VCA Animal Hospital which employs 12 people suggested that they might have to close the business, "If you add 24 more cents to us," explaining that competing veterinary services do not have the same cost structure and the tax would mean they could not afford to employ as many people since within the city limits they were forced to pay the new minimum wage.

Gary Potter asked, "Once you build this low income housing is this tax going to go away?" Herbold replied that a "sunset" for the tax has been discussed as well as reducing the tax over time but she said, "We are going to be using some of these dollars to do ongoing housing bonds and when you have a 20 to 30 year housing bond you have to have a revenue source to pay it off. For every $25 million in housing bonds we do we need about $2 million to pay off those bonds." She explained that the planning has been based on a ten year plan and that the full $75 million may not be necessary after that time. Gonzales explained that there may be alternative revenue sources in the future to help pay off the debt of the bonds.

Josh, a local landlord spoke out about his sense that a "greater good" measure such as this falls too heavily on landlords. "My problem is if it's good for everyone why are just business owners getting taxed? If it's a greater good cause then it should be a greater good tax." Herbold said, "The idea behind this tax is that we already have a regressive taxation system. What that means is that the people who earn the least are paying the most under our 'everybody pays the same system.'... People who earn under $40,000 a year, it takes them much longer to pay their annual tax bill."

Imants F. Holmquist, an attorney with Holmquist and Gardiner LLC, who represents hundreds of small businesses said he see this not as a homeless crisis but as a "local government crisis. A crisis in management, a crisis in budget management and a crisis in planning." While thanking Herbold and Gonzales for their efforts he said, "It doesn't change the fact that those before have made serious and egregious errors in their policy and how to handle the homeless situation... We've had a 26 percent increase in population in Seattle and the homeless population has gone up by 300 to 400 percent. We've done something completely different here to incentivize people to come to Seattle and any different view of that is objectively wrong. We've taken the wrong steps starting a decade and a half ago... I'd like to know what you are doing to change existing policies to be different than the way we've spent money in the past." He also asked about what the city is doing to enforce existing laws regarding camping on city streets, byways and parks.

Gonzales said the revenue from the tax would predominantly be targeted at building "deeply affordable housing" and continued, "We have a lot of work to do reforming our shelter system. Some of the population have told us they do not want to go to existing shelters because they do not feel safe there. They are making a choice to sleep outside, or in a car, or in an RV because they literally think that is safer. She said the city is taking steps now to improve the shelters. "We are now in an environment where we are requiring accountability metrics from our contractors," she said.

She also said that the city's human services department "has never had a wholesale audit of its homeless services investment division," something she has requested and is working on its scope. 

Herbold further explained that the HSD is now required to enter into contracts with "results based outcomes"

A question came up regarding a similar tax in the City of Chicago that was repealed. "How does de-incentivizing Seattle business growth...grow our economy and create more employment opportunities and help the current job stability and homeless problem?

Herbold explained that businesses move to a city for a variety of reasons but in part because of what the city does to make it livable. She said did not agree the measure would disincentivize potential employers since cities that don't have "People sleeping outside in tents or business doorways with people sleeping in them ,garbage and human waste throughout the city," but instead "has good schools, has good labor standards," are all part of what makes an employer want to move to a city."

A person in the audience said, "All of those things you listed are part of current policy not to interfere with the homeless people." Herbold shot back, "There is no current policy not to interfere with homeless people. We receive weekly reports from the city offices that manage encampment rules and there are over 400 encampments in a complaint system today. Every week the city goes out and they prioritize the encampments that most need removing according to complaints... safety, cleanliness and whether or not they are an obstruction... They are prioritizing them because the city cannot be everyplace all the time." 

Kieth Hughes asked about the ability of the city "to manage any of this.If I wrote you a check for $75 million tomorrow how long would it be before those houses were standing up and livable?" He went on to explain that the bureaucratic issues of permits and the bottleneck for getting approval on nearly any construction project delays the entire process. "I don't see you solving the homeless problem today by enacting policies that take five years to implement!" Herbold and Gonzales did not disagree. Gonzales said a law was being proposed that would address the red tape regarding development.

Peel and Press owner Dan Austin said he was concerned about the members of the panel who had never written a check to cover employment taxes as he has saying it looked as they stood to make money from the conclusions then asking "What study backs that $75 million is the magic number that's gonna cure this and said, "You guys can raise your budget by taxing us. I can't raise my sales by constantly throwing menu increases at the people...even if you think this tax isn't going to affect small business my produce providers and other suppliers are all going to get hit by it which is then going to make my profitability go down. That is going make my customers have to pay more so in a sense it is a regressive tax."

Herbold said that the $75 million is the target and explained that they are looking to get One Table to help provide matching funds "but even $150 million is not going to solve the problem. The number of housing units needed so people are not paying more than 30 percent of their income for rent... the housing gap is larger than $75 million a year is going to build. This is a number that we felt is a responsible target as well as a number that would make an appreciable difference in our ability to see an uptick in housing construction." Austin said he felt as if the task force looked like a "stacked deck" meaning those making the recommendations would likely benefit from the plans. Herbold explained that task forces such as this "routinely utilize experts... that is not self deaiing. These individuals are not going to personally profit from the legislation that we pass."

J.P. Vidicans co-owner of The Westy Sports and Sprits explained his perspective. In neighborhoods like West Seattle and Ballard where restaurants comprise a large segment of the local businesses and employers he said the profit margins are very slim. "If it's $400 per head and it's on full time equivalency... let's say I have 27 employees and 15 of which would be full time equivalent on $400 that would be $6000 per year extra tax revenue that I have to pay. If you look at the National Restaurant Association that states that the average restaurant profits 3 to 5 cents on the dollar and the 5 cents being the high point, that's now $120,000  you have generate over the next fiscal year to pay off that burden.'