The Washington State Legislature is considering Senate Bill 5796 (SB 5796) that would further erode our state's competitive edge and place an undue burden on businesses. Senate Bill 5796, sponsored by Senators Saldaña (D) and Robinson (D), proposes a new payroll expense tax that will impact employers and, ultimately, harm Washington's economy.

The proposal comes after Seattle’s payroll tax has completely failed to generate the anticipated tax revenue, falling short by $47 million. Officials in Seattle are now scrambling to either cut services or find another way to pay for the burgeoning city expenditures. As predicted, businesses that can avoid the tax have moved employees out of the city.

SB 5796 would introduce a 5% payroll expense tax on the amount of each employee's wages that exceeds the Social Security wage base. The tax would begin on July 1, 2026, and is intended to fund public schools, healthcare, and social services. While these are important priorities, the payroll tax method of funding them is deeply flawed.

The bill's language attempts to create a fairer tax system and reduce reliance on the business and occupation (B&O) tax. It includes an exemption for businesses with less than $7 million in annual payroll expenses. Of course, it’s effects medium to large employers now, but given Olympia’s desire for new taxes, the $7 million limit is sure to be reduced in subsequent legislative sessions. These are the very businesses that drive much of Washington's economic activity and job creation.

Washington already struggles with a high cost of doing business. This new tax would make it even more expensive for companies to operate here, potentially leading them to reduce investment, slow hiring, or even relocate to more business-friendly states.

By targeting payroll expenses above a certain threshold, SB 5796 penalizes companies that provide good-paying jobs. This disincentivizes business growth and rewards mediocrity and while proponents claim only 17% of businesses will be affected, those 17% are likely responsible for a significant portion of the state's employment and economic output. The impact will be far greater than the numbers suggest.

Instead of resorting to new and damaging taxes, the legislature should focus on responsible budgeting, prioritize spending, and create a more attractive business climate. This includes:

• Reforming the B&O Tax: Addressing the flaws in the B&O tax structure, which disproportionately burdens small and low-margin businesses.
• Reducing Regulatory Burdens: Streamlining regulations and reducing bureaucratic red tape to make it easier for businesses to operate and grow.
• Investing in Infrastructure: Focusing on essential infrastructure improvements that support economic growth and improve the quality of life for all Washingtonians.

SB 5796 is a misguided attempt to solve the state's budget challenges. It will harm Washington's economy, discourage job creation, and make our state less competitive.

Senate Bill 5796 is bad policy and will destroy jobs in Washington and as in Seattle, businesses that can move employees out of the state to avoid the tax, will.

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