Seattle’s new plan to tax top salaries at the city’s highest-paying businesses is raising questions from the region’s tech community. How will the novel approach work in practice? Who gets taxed exactly? Will this effort succeed where others have failed?
We’ve been researching and reporting on the issue, and we have answers to these and other key questions.
But first, the background: Over the past decade, income inequality has become an acute issue in Seattle as the booming tech industry generates big fortunes while middle- and low-income communities are squeezed. The coronavirus pandemic is exacerbating the issue. While thousands file for unemployment, knowledge workers are often able to make the remote shift without much disruption.
Previously: Seattle passes big business tax on salaries of top earners after years of false starts
The new payroll tax would provide relief to families hit hard by the pandemic at first, then go on to address Seattle’s homelessness and affordable housing crisis. It targets the top salaries at big companies, like Amazon.
The legislation appears more likely to make it across the finish line in the current environment than previous attempts but it still faces some hurdles. The Seattle City Council voted 7-2 to adopt the new tax on Monday. It now awaits Mayor Jenny Durkan’s signature.
We looked into some FAQs about how the tax will work, who it will affect, and what it promises to accomplish if implemented. Continue reading for answers to questions from GeekWire readers and staff.
How will the tax work?
The ordinance establishes a tiered system of taxation on companies with annual payroll expenses exceeding $7 million. Employers in the first bracket will be taxed:
- 0.7% of annual salaries between $150,000-$399,999
- 1.7% of annual salaries exceeding $400,000
Employers with annual payroll expenses of more than $1 billion per year will be taxed:
- 1.4% of annual salaries between $150,000-$399,999
- 2.4% of annual salaries exceeding $400,000
Who gets taxed exactly?
Employers will be taxed a percentage of the highest salaries that they pay to Seattle-based employees. If more than 50% of an employee’s work occurs in Seattle — and that employee makes more than $150,000 per year — then that their salary would be subject to the tax.
What about remote workers?
Given the salary threshold, many of the employees subject to the tax will have jobs that can be done remotely. That’s even more likely now that the pandemic has many companies rethinking in-person office work. Remote employees whose work is not “assigned” to any one city will still be subject to the tax if they reside in Seattle.
Is stock included in salary thresholds?
Stock grants are included in when calculating taxable compensation but stock options are not, according to City Council staff.
How many companies will be subject to the tax?
We don’t know exactly how many companies will have to pay the tax or which bracket companies that are subject to it fall into. That’s because the state keeps payroll data confidential — even the Seattle City Council is working off of estimates. But the city estimates about 800 companies will be subject to the tax.
Who is exempt?
Grocery stores, non-profit hospitals, insurance businesses, motor fuel companies, and liquor stores do not have to pay the tax.
When does the tax take effect?
The tax takes effect Jan. 1 2021. It will remain in effect through Dec. 31 2040 unless a state or regional tax plan with similar objectives is adopted.
How much money will this generate?
The City Council estimates it will raise more than $214 million per year.
How will it be spent?
The city will borrow funds to immediately invest in rental assistance programs, affordable housing non-profits, homeless service providers, grocery vouchers, and to provide cash assistance to small businesses. The borrowed funds will be paid back using money raised through the tax in its first year. When the pandemic subsides, money raised through the tax will fund affordable housing and homeless services.
