Seattle Moves Toward Tax Fairness with Tax on High Incomes
The City Council has unanimously voted to begin addressing the regressive nature of our tax system, and move toward tax fairness. On Monday, July 10 the Council passed legislation that I co-sponsored to establish a tax on high incomes.
This vote occurred after a public hearing and discussion over four meetings in the Affordable Housing, Neighborhoods and Finance Committee.
This legislation is an important step for Seattle as well as Washington State. In Seattle, we have an increasing affordability gap between the have and have nots. The middle class is being squeezed as well. And one of the reasons is our outdated, regressive and unfair tax structure. In Washington State, we have the most regressive tax structure in the nation. Local economist Dick Conway has noted we finish last when you consider fairness, transparency, adequacy, stability, and economic vitality.
The importance of lowering the property tax burden in Seattle was placed in stark relief by the state legislature’s passage of a school funding measure that will increase property taxes by $460 for a median home in Seattle. 63% of Seattle voters supported Initiative 1098 for a comparable state tax; a KING 5/KUOW poll in June showed 66% support, with 23% opposed.
The Institute on Taxation and Economic Policy (ITEP) found in 2015 that state and local taxes paid by the 20 percent of Washington families with the lowest incomes amounted to 16.8 percent of their income. In contrast, the tax burden for the top one percent of families with the highest incomes was 2.4 percent of their income, less than ½ the 5.6 percent average of the 41 states with an income tax. A similar dynamic exists for business taxes, with the smallest 20% of businesses paying 4.8%, and the top 1% paying 0.7% in taxes. That’s why I supported an amendment to include potential reduction of the B&O tax for smaller businesses.
The Washington State Republican party recently sent out a document full of half-truths and scare tactics, while encouraging Seattle residents to break the law by not paying the tax. Here is my response.
WHO IS TAXED?
The legislation would establish a tax of 2.25% on only the income of Seattle residents over $250,000 for single filers, or income above $500,000 for married couples filing jointly. So for a single filer with income of $300,000, only the $50,000 over $250,000 would be taxed, for a total of $1125, or 0.038 percent of their total income.
Some suggested that instead of taxing Seattle residents we tax income earned in Seattle. This approach would create be significantly more complicated to administer, would require businesses to withhold income, and cost much more to implement. That seemed neither feasible nor desirable.
The Council received late-breaking concerns about the impact of legislation on LLCs, S-Corporations, and Sole-Proprietorships; here’s a link to a document that addresses concern regarding business income. In short, the tax will not be levied against business revenues that are used to offset business expenses or losses.
Further, local income taxes are deductible from federal income taxes, provided you do not deduct sales tax.
WHAT WILL THE INCOME TAX REVENUE FUND?
The legislation restricts the tax revenue used to: (1) lowering the property tax burden and the impact of other regressive taxes, including the business and occupation tax; (2) replacing funding lost through federal cuts or responding to changes in federal policy; (3) providing services, including housing, education, and transit; (4) creating green jobs and meeting carbon reduction goals; and (5) and implementing the tax.
HOW WILL THE TAX BE ADMINISTERED?
Only residents with qualifying incomes will need to file with the City. The legislation was designed to minimize the cost of implementation and reporting requirements. Residents with qualifying incomes will file their income as listed on line 22 on IRS form 1040.
The tax will go into effect on January 1, 2018 with reporting due by April 15, 2019. Extensions for filing granted by the IRS will automatically apply.
Early estimates indicate it will raise approximately $140 million from about 11,000 tax payers. The Department of Finance and Administrative Services (FAS), which collects city taxes, will be responsible for administration, and developing more detailed rules for implementation. FAS administers taxes for over 50,000 businesses, and is bound by the strict confidentiality requirements included in the legislation. Administrative costs are estimated at $5-6 million annually, with one time IT costs at $10-13 million.
WHAT ABOUT THE LEGAL CHALLENGE?
There has been public discussion of potential legal challenges. The final ordinance, as passed on Monday, stuck to the commitment made in Resolution 31747, passed by the Council in May, promising that legal viability would be the primary consideration in developing and constructing the legislation. Recently former Washington State Justice Phil Talmadge, said to King-5 News, referring to a 5-4 case in 1935 and other old cases, “I thought those older cases should no longer be viable.” He went on to say that the current justices must decide whether the principle upheld in those cases “is somehow now actually harmful and contrary to law and therefore something that it should abandon.” This was a position he took himself in a dissenting vote on the State Supreme Court.
WON’T THE WEALTHY MOVE OUT OF SEATTLE?
A 13-year tracking study released last year by researchers from Stanford University and the US Treasury Department studied whether income taxes on high incomes resulted in millionaires moving. The study found that 2.4% of millionaires move each year, compared to 2.9% for the general population, and 4.5% for those earning only $10,000. So, millionaires move less than others, even with income taxes. And remember, every state but seven have State income or investment taxes and more than 4,000 jurisdictions have taxes on local income. With Seattle paving the way, it’s possible that other jurisdictions in Washington State may follow suit.
CITY SPENDING HAS GONE UP, WHY DOES SEATTLE NEED MORE TAX REVENUE?
As mentioned above, Washington has one of the most inadequate tax systems in the nation (Table 7). Between FY 1995 and FY 2014, our state and local effective tax rate fell from 11.4 percent (the eleventh highest in the nation) to 9.4 percent (the thirty-sixth highest). No other state in the nation experienced a greater decline over this period. If the state and local effective tax rate had equaled the 10.5 percent national norm in each year from FY 2005 to FY 2014, Washington state and local governments would have collected an additional $23 billion in tax revenue (Table 8).
SPU Strategic Business Plan, Update 3
Last week I wrote about the proposed Strategic Business Plan (SBP) for Seattle Public Utilities (SPU), including the history of rate increases from SPU, the origins of the SBP, and what is proposed in the update to the SBP.
This week, Director Mami Hara and her staff, along with the Customer Review Panel (CRP), presented their process to-date, which has included input from hundreds of utility customers from seven community meetings which were held in several different languages as well as an online survey. You also received a postcard that showed the Executive’s proposal of a 5.5% average annual increase. Upon my request, this post card was mailed to 325,000 customers. Since the card was mailed out, I have received over 170 emails and half as many phone calls. There are many concerns I have heard from you:
- Affordability is foremost in everyone’s mind. Specifically, concern from and about seniors and those on fixed incomes.
- A request that we thoroughly vet the proposal to cut unnecessary projects and ensure efficiencies are met.
- Concerns about compounding and rising costs of living.
- Requests that we work to smooth out the peak increases in 2019 and 2020.
However, I also heard from many people that they understand the need to upgrade our aging infrastructure. On average our water lines are 70 years old, and the drainage lines are 80 years old.
I have also heard from many people that are concerned about the increase beyond the inflation rate. Below is a graph that was part of the presentation to my committee on Tuesday and breaks out inflation verses other costs. As you can see there is an inflation rate of 2.4%, 0.7% in increased operational costs (O&M), 0.5% in increased taxes, 0.5% for increases in contracts that SPU manages, and 1.4% increases in capital financing.
The proposed average annual increase of 5.5% over 6 years includes a 8.2% increase in 2019 and 9.5% in 2020. I believe that these increases are too high, and I have already begun working with Council staff to develop ways to bring those increases down. Specifically, the CRP outlined two ideas to expand revenue streams for the utility without a general rate increase. The letter speaks for itself:
“As the Customer Review Panel urged three years ago, the City should implement expanded revenue streams for the Utility through expanded use of system development fees and connection charges. This action item was included in the 2015 Plan but failed to gain traction. Most cities depend on such charges to help fund system improvements needed to accommodate growth and in turn, keep utility rates more affordable to existing customers. Seattle is growing quickly—as a quick count of construction cranes will readily confirm. Yet SPU’s drainage and wastewater utilities have neither any connection charges nor any system development fees in place. SPU does have a water connection charge, but this contributes less than 0.4% of water revenues — and the charge does not fully recover the cost of connections. Overall, the City lags far behind other cities in our region in asking new development to contribute to these costs. We endorse the premise that growth should pay for growth and believe such charges can be structured in a manner that does not significantly impact the goal of housing affordability.”
I agree with the CRP, growth should pay for growth. I will pursue an amendment to the SBP to expand the use of system development fees and ensure that water connection charges fully recover the cost of installation. Early estimates indicate that increased water connection charges will result in an additional $80 million in revenue which could reduce rates. The CRP presentation highlighted these concerns and showed us that Seattle has some of the regions lowest water system development charges.
While these ideas focus on reducing the rate increase by adding additional revnue through other means, I will also be looking at SPU’s Capital Improvement Project (CIP) list and examining whether or not there are projects that can be deferred in order to reduce the rate path.
I would also, again, like to ask that you review the documents that SPU has provided and send me suggestions that you have for potential reduced spending so that I can share them with SPU and the Executive and incorporate them in to the SBP.
On Tuesday, the Civil Rights, Utilities, Economic Development and Arts (CRUEDA) Committee unanimously adopted amendments to the 2015 Priority Hire legislation. The Priority Hire Program helps women, people of color, and those from economically disadvantaged zip codes to develop careers in the construction industry by requiring contractors to meet hiring goals on City funded public works jobs. The program requires public works construction project contracts totaling $5 million or more to be covered by a master community workforce agreement. See my previous blog post.
Earlier this year, the Department of Finance and Administrative Services (FAS) issued a 2016 Priority Hire Annual Report with recommendations for improvements. Another report from the Priority Hire Advisory Committee (PHAC) also recommended changes.
On March 31, the CRUEDA Committee discussed the proposed legislative changes and learned that the proposed changes were not supported by the PHAC. In response to these concerns, I asked FAS to reconvene the PHAC. Subsequently, the PHAC discussed the proposed changes, resulting in the following new recommendations, that the CRUEDA committee voted to support on Tuesday:
- Reduce from five to three the number of “core employees” open-shop contractors may include on a project before hiring through the Priority Hire hiring process.
- Allows open-shop and Women and Minority Business Enterprise (WMBE) contractors to bring 3 core employees and 2 apprentices from state approved training programs that are either:
- a worker from a disadvantaged zip code,
- a pre-apprenticeship graduate, or
- a women or person of color.
Fair Chance Housing Legislation
On Thursday, July 13, 2017, the Civil Rights, Utilities, Economic Development and Arts (CRUEDA) Committee hosted a informational briefing, panel discussion, and public hearing on the proposed Fair Chance Housing legislation. Fair Chance Housing is meant to address barriers people with criminal backgrounds face when attempting to secure rental housing. Representatives from the Urban League, Columbia Legal Services, the FARE Coalition, the Rental Housing Association of Washington and Pioneer Human Services participated in a panel discussion to discuss their perspective on the legislation.
The Fair Chance Housing ordinance would prevent landlords from screening applicants based on criminal convictions older than two years; arrests that did not lead to a conviction; convictions that have been expunged, vacated or sealed; juvenile records; or status of a juvenile tenant on the sex offender registry. In addition, the legislation supports a new Fair Housing Home Program to help landlords learn how they can implement practices that will affirmatively further fair housing by reducing racial and other biases in tenant selection. The City of Seattle will also work at the state level to reduce the impact of criminal convictions.
Studies show that criminal history is not predictive of successful tenancy. Other studies demonstrate that when people are housed the incidents of recidivism goes down significantly. This law does not limit the ability of landlords to use income ratios, employment verifications, security deposits, credit reports, other judgments, and past landlord references in screening tenants.
It is estimated that 30% of Seattle residents over 18, or more than 173,000 people, have an arrest or conviction, with 7 percent having a felony record. One in five people who leave prison become homeless soon thereafter. In the 2017 Count us In survey: 55 percent of survey respondents reported their criminal background as a barrier to accessing housing. In other words, the current practices in this City for how we allow criminal records to be used to screen tenants is – in a large part – responsible for why we are experiencing so much homelessness in our city.
The need for this type of legislation is informed by the City’s homelessness crisis and compounded by the racial disparities in our criminal justice system. Even though there is not a greater rate of crime committed by people of color as compared to white people, detentions in King County disproportionately impact people of color. Less than 13% of King County youth are black but black youth comprise 50% of the youth held in King County ‘s juvenile detention center. In WA, people of color receive longer sentences than similarly situated white defendants.
These are people who were either never found guilty of a crime and others who have fulfilled the punishment required by the courts. They are suffering a continued extrajudicial punishment when they are denied housing. If we believe in the rule of law, that only the courts should be permitted to punish people for their crimes, why wouldn’t we pass a law to stop people for being punished when they have been found innocent or have paid their price to society?
This issue will also be discussed on July 25 and August 8 at 9:30am in the CRUEDA Committee. To track this issue please sign up to receive CRUEDA meeting agendas.
Duwamish Head Greenbelt Restoration
You may recall that the City reached a settlement in April for one of the two lawsuits about illegal tree cutting in the Duwamish Head Greenbelt.
The Parks Department has announced they will begin mitigation and restoration work, and will host two information open houses about that work. They will take place at 3201 35th Avenue SW at the dead end of 35th Avenue SW north of Hinds Street. They will be from 7:30 to 9:30 a.m. on Tuesday, July 18, and Wednesday, July 19.
Remediation and erosion control work will occur from July to December, with plantings from November through March, 2018. Monitoring and additional restoration work will continue through 2022.
The High Point Farm Stand has opened for the season, with fresh produce from P-Patch market gardens grown by low-income residents at High Point. Its open on Wednesdays through September 29, from 4 to 7 p.m. at 32nd Avenue SW and SW Juneau Street.
They accept EBT cards and participate in Fresh Bucks, which doubles consumers’ first $10 spent on the card. The High Point Farm Stand will again host ROAR, the mobile farm stand that sells produce to neighborhoods with limited access to healthy food. Come see the gardens, meet the farmers, and enjoy their fresh produce.
A similar program is operating at New Holly; go here for more information.