Will Seattle tax itself into trouble?
Seattle is in a slow-motion tax crisis.
The problem is multifold.
Our appetite to do and be good — a progressive model for the nation to show that government works, says Mayor Ed Murray — is expensive. We're adding universal pre-K, we're boosting the minimum wage, we're growing the parks department, we're adding transit and paying for it out of our own pockets, we're rebuilding the waterfront, we're adding new city offices to oversee various initiatives (education, wage enforcement), and we're undertaking an expensive reform of the Seattle Police Department. Between new government services and public works, we're living in a post-recession burst of New Deal-style municipal government.
Whether all of the spending is fair, moral or really solving problems is open to debate, but for the most part Seattle voters are on board. This year we're approved lots of new parks, transit and education spending. The main tax in recent memory Seattle voters have resisted was a tax on coffee drinks. Don't touch our Pumpkin Spice Lattes!
But we're touching everything else that we can: car tab fees, sales taxes, property taxes. What the city can tax is limited, the Legislature hasn't yet given us more flexibility on raising revenues. So our ambitions are funded by taxes we can raise, whether they're regressive or not, whether it's good policy or not.
We're also carving out areas of spending to fund from sources other than the general fund. The new Parks District is one such entity. The Transit Benefit District, which will handle the additional bus funding, is another. Such entities arguably Balkanize accountability or commit us to problematic funding mechanisms. At some point, that could catch up with us. For one thing, more tax levies are coming to the ballot, more bond issues that will come up for renewal. Will generous Seattle reach a limit? Will low-income taxpayers revolt?
It should be no surprise that there are pockets of the city that don't like regressive taxes — the plastic bag fee, the soda pop tax. Not just the tiny, few Republican enclaves, but diverse, liberal, working class areas like South Seattle where the regressive nature of tax increases really hurt. Last year, Washington state was calculated to already have the most regressive tax system in the U.S. Poor families pay up to six times more of their share in income as wealthy families. The strain is increasing for Seattle families.
Ultimately, we have to ask the questions: Are we really making Seattle more progressive through more regressive taxation? Are we making Seattle more livable with a tax burden that is increasingly unaffordable?
One option would be to scale back our appetites — a more modest, incremental waterfront makeover, for example — but don't hold your breath. Seattle likes to dream big, and always has. Periods of restraint seem to be mere interregnums.
Another option is to reform the state tax system with an income tax and/or allowing cities to impose more progressive taxes, including an income tax. The city council last week decided to explore the latter option when it voted to ask the city's lawyers to see if it was possible to impose an excise tax — don't say income tax! —— on high-wage earners (over $1 million per year) in the city. Call it a "millionaire's tax."
City Council President Tim Burgess said he knew what the lawyers will say about the excise tax — that it's not legal; Kshama Sawant insisted it was "the right thing to do" as income inequality is growing in Seattle. Councilmember Tom Rasmussen wanted to know what all the options are for more progressive city taxation within current law. All agreed it was worth looking into. (See the discussion here at about the 38-minute mark.) A city with Seattle's spending appetite needs to cover all its bases when it comes to dreaming up new revenue sources.
I broached the idea of a city income tax a few years ago, and while Washington voters have turned down an income tax — even one restricted to high-earners and dedicated to education spending — there is some support for it statewide, and progressives continue to work the angles using the model of same-sex marriage (once unthinkable) by working at changing public opinion incrementally.
Part of the problem with making it happen is to get Olympia to allow cities to impose such taxes. With the GOP in control of the state Senate and a smaller majority in the state House, that seems unlikely, even though one would think that returning local control over taxation to cities and counties would be a very conservative approach to governing. But the tangle remains both locally and statewide: The people who can afford the taxes least are paying more than their fair share, and the people who make the most pay less, proportionately. The gap between rich and poor is stark and growing.
At the city council budget meeting where the idea was discussed, Sawant cited the figure that there were 68,000 households in King County that made $1 million or more per year last year. That appears to be based on a 2007 figure that estimated there were 68,000 households in the county that had a net worth of $1 million or more after excluding the value of their primary residence, making King County one of the top in the country for wealthy individuals. Seattle would have only a portion of those households, and income is different than net worth.
Still, we are affluent and the affluence is very disproportionate. A study conducted by the state Office of Financial Management and released in 2012, "The Distribution of Income, Wealth and Taxes Across Washington Households," concluded "The top 5 percent of wealth holders own over half the total wealth in Washington state," and indicated that was probably understating the matter. The top one percent of the state's wealthy held 10 percent of the state's wealth — if you excluded the richest individuals, like Bill Gates, Jeff Bezos, Paul Allen, et al. If you included the seven Washingtonians on the Forbes richest list, however, the top 1 percent's share of state wealth nearly doubled to 19 percent. In other words, seven individuals in this state had as much as the rest of the top 1 percent combined.
In terms of income, "In 2009, 54.8 percent of total Washington income went to the top 20 percent of households, 1.6 percent of income went to the bottom 20 percent. The second-to-lowest quintile earned 7.5 percent of income." By 2011, during the recovery, the top 20 percent were getting 57 percent of income and the bottom 20 percent a mere .7 percent, while the second to lowest stayed the same at 7.5 percent. In other words, the richest are getting richer while the poorest are getting poorer. (The OFM report and a 2013 update can be found here and here.)
In other words, there's plenty of reason the people of Beacon Hill, Yesler Terrace and other Seattle neighborhoods are tax-resistant. They are getting clobbered on the income side and the tax side.
The city council, I believe, is right to pursue a way out of the taxing conundrum. That's crucial to the city's long-term health. We have to get our ambitions on a fairer footing. But at the same time, we have to think about how much worse things are getting for the people we're trying to help — and the $15 dollar wage is a drop in the bucket. The city needs a smart, persuasive coalition strategy to move Olympia; it must hope, and perhaps prod its lawyers, to find some clever new approaches (or loopholes) that open more progressive revenue options. But the city must also watch its appetite for spending which, short of reforms, could build toward a backlash down the road.
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