Over the last decade Seattle officials have taken record tax revenue due to the successes of big companies like Amazon, Microsoft, Starbucks plus all the neighborhood small businesses that chose Seattle as their home.

Seattle leaders have assumed that the tax revenue would continue to increase year over year and for the recent past, that has been the case. However, there is a dark cloud on the horizon that is going to require a change of direction.

The short-sighted policies that the Seattle City Council has passed have a significant harmful impact on businesses, and in response business owners are voting with their feet. 

In the next few years, Seattle is facing a drop in tax revenue, not just in sales and B&O taxes, but in property taxes as employers reduce office space use or leave the city entirely. City policies that have increased spending significantly, reduced public safety and created over burdensome regulations have left Seattle with large, bloated public budgets and a dwindling private-sector tax base.

Additionally, the City Council will be tempted, during the post COVID era, to increase taxes to cover the reduction in tax revenue they are now seeing as a result of companies adjusting to work-at-home policies. A tax increase would provide an increase tax revenue, but it will be short lived.

Recently, Seattle Mayor Bruce Harrell acknowledged that the Seattle is adjusting to a smaller workforce in the city. This is having an impact in property taxes and sales taxes from companies that remain.   Additionally, those employees that are staying home to work, are no longer spending money at local restaurants and retail stores, resulting in additional reductions in tax revenue for the city.

The rampant homelessness and crime in Seattle is also diminishing the once attractive place to live and work.

Washington Policy Center predicted this shift in the working behavior in 2020. Despite the writing on the wall, Seattle leaders have continued to create new taxes and assume that the tech companies, who have invested a significant amount of money into real estate, would be unable to leave the city.  There is a tipping point, however, where the financial cost of leaving is less than the cost of staying. Amazon became one of the first companies to start the transition out of the city, choosing to move across the lake to Bellevue.

The 7% state income tax on capital gains, currently under appeal at the Washington Supreme Court, and the long term health care tax, scheduled to start July 1st, will only add to Seattle’s budgetary problems, should they be enacted.

A friendly business environment, with reasonable regulation, low taxes and safe streets could turn Seattle’s bleak budget picture around.

Seattle leaders should reduce taxes and regulations on business. It sounds counter intuitive that a reduction in the tax burden would actually increase tax revenue, but history has shown this to be the case. This principal was enshrined in the Laffer Curve, described in the 1978 article published in National Affairs. The Laffer Curve demonstrates that there is a point at which increasing tax rates generates no new tax revenue and, in fact, tax revenue begins to diminish. Seattle may be already at that point on the curve, so the next few years are critical for taxation policy decisions.

Seattle’s total budget is several billion dollars.  City leaders should carefully pick the services that the city adopts and funds appropriately, including public safety, transportation services and infrastructure improvements to encourage businesses back to the downtown core. Some tough choices are ahead for the Seattle City Council, including cutting non-essential services and focusing on creating safe neighborhoods and a business-friendly environment.