Let’s Bring Back the Employee Hours Tax, and Make it Good This Time

Seattle's transit infrastructure is years behind what it should be to accommodate current ridership, let alone the thousand or more human beings sinking roots in our city every month. The Move Seattle levy, assuming voters approve it in November, will be a good step forward - but we'll still be playing catch-up.

What if Seattle had another $20 or $30 million per year to accelerate the build-out of transit corridors and other BRT-related capital projects in the Transit Master Plan, and maybe add more service to boot?

Seattle can make it happen. With a little political will on the part of our City Council, Seattle can generate significant revenue from a progressive and comparatively stable source: a new-and-improved Employee Hours Tax (EHT). Let's glance over the recent history of this tax before considering how to refashion it for today.

History of the Employee Hours Tax

The Seattle City Council first approved an EHT in 2006, along with a Commercial Parking Tax. Both complemented the Bridging the Gap levy, and were also slated for transportation maintenance and improvements. The EHT required businesses to pay a modest $25 per full-time employee per year, exempting small business and employees who didn't drive alone to work. Over the 9-year lifespan of the $365 million property tax levy this would have brought in an extra $50 million or so.

In 2009, one year into the Great Recession, the city council repealed the Employee Hours Tax. Although $25 per employee wasn't enough to actually discourage hiring (Councilmember Tim Burgess call the repeal "somewhat symbolic"), business groups complained the tax was hurting the reputation of Seattle's business climate. Led by Burgess, then-Councilmember Richard Conlin and then-Mayor Greg Nickels, and despite resistance from sustainability advocates and groups such as Cascade Bicycle Club that saw no reason to forego millions in bike and pedestrian improvements for a symbolic gesture, the city council conceded.

Fast forward to spring 2014, when King County's Proposition 1 went down in flames. As Seattle prepared to take action to save bus service, Councilmembers Nick Licata and Kshama Sawant teamed up to revive the EHT. Rather than simply rerunning the county's ballot measure in Seattle, they proposed replacing the regressive sales tax hike with a 5% Commercial Parking Tax increase and an EHT set at a very modest $18 per worker per year, or less than a penny per hour. Interestingly, this EHT was projected to raise $7 million per year, significantly more than the repealed version, which in 2008 generated only $4.5 million. While the Licata-Sawant proposal also exempted small business (up to the current B&O threshold of $100,000), it dropped the exemption for employees who do not drive alone to work. This change wound not only increase revenue but also make the tax significantly easier to administer. In the end, to no one's surprise, the council rejected the Licata-Sawant proposal 2-6 and Seattle's Prop 1 went to the ballot in its original form.

The following year - that's this past spring, 2015 - when all eyes turned towards the Mayor's proposed Move Seattle levy, the stage was set for another try. Councilmember Licata raised concerns about how voters would respond to the $930m price tag, coming amidst a volley of property tax measures: parks and preschool, transportation, and later the Seattle Housing Levy, which the HALA committee recommended double in size on the 2016 ballot. And so Licata and Sawant proposed a diversified funding approach, bumping the median property tax bill down from $275 to $175 and making up the loss through $100 million in development impact fees and the same combination of a Commercial Parking Tax increase and an EHT.

This second revival effort also failed 2-7, but significantly, most of the council expressed support for an Employee Hours Tax in principle. Mike O'Brien and Tom Rasmussen stated that it's not a question of if we use the EHT, only when and what for. Bruce Harrell has expressed support. In a meeting with the Transit Riders Union, Burgess said he could support the tax if it is tied to congestion by requiring employers that bring commuters into high-traffic areas to pay more. The general refrain during council discussions was that the EHT shouldn't be used to displace other funding mechanisms, because Seattle's unmet transit needs are so deep we're eventually going to need all the options.

I believe it's time to start using this one now. Every year we wait to pass a robust Employee Hours Tax, we lose millions of dollars in progressive revenue that could be building the world-class transit system Seattle so desperately needs. So let's pass an EHT and, while we're at it, let's make it good. Here are some initial thoughts on what that means.

A Robust Employee Hours Tax

1. Congestion Zones: The Employee Hours Tax is a flexible tool, since it arises from Seattle's general business license authority (RCW 35.22.280 (32)). There is no cap, and nor is there any requirement that the EHT be uniform for all businesses. So as long as there are sound policy reasons for it, per-employee rates could vary by geographic area or even type of business. The idea of carving Seattle into several "congestion zones" - e.g. low, medium, high - as suggested by Councilmember Burgess makes a lot of sense. Businesses like Amazon, whose rapid growth in already congested areas is contributing to gridlock, will also be contributing more to transportation improvements to tackle this problem.
2. Exemptions: The big difference between the EHT that was in effect from 2006-2009 and Licata-Sawant proposal is that the former exempted employees who do not drive alone to work, whereas the latter would not. I believe the Licata-Sawant approach is superior, for three reasons. First, it will generate a lot more revenue. Second, this exemption made the first EHT complicated to calculate and difficult to enforce. Third, it did not effectively accomplish its main intent, which was to discourage single-occupancy commuting. This was partly because the tax was so low ($25 was not enough to act as a disincentive, as Conlin pointed out), but also because the incentive was indirect: driving alone is the employee's choice, not the employer's. If we want employers to make it easier for their employees to choose non-SOV commute options, we can accomplish this more directly by strengthening Seattle's Commute Trip Reduction Plan. In the case of the EHT, congestion relief will come in the form of the better transit system built with the revenue - and it makes sense for employers whose employees use this system to contribute too. On the other hand, for obvious reasons the EHT should exempt small businesses, and in the interest of administrative ease the threshold should be consistent with the B&O tax.
3. Revenue Target: A new EHT should not be so small as to be merely symbolic - it should raise significant revenue. I propose a minimum target of $20 million per year. An average tax rate of $50 per employee would generate nearly this much; an average of $80 would generate over $30 million. Yes, business groups will say this is too high. But to keep things in perspective, remember that $80 per FTE per year works out to just over 4 cents per hour. With Seattle's minimum wage climbing stepwise to $15 in two-dollar increments, it's hard to believe that a few extra pennies for transit is going to push things over the edge. Also remember that regular transit riders (including low-income youth, senior and disabled riders) have just been asked to pitch in an extra $108 per year, and Access riders an extra $204, due to fare increases.
4. Dedication: How to use the money? At the outset I suggested making strides toward Bus Rapid Transit - an emphasis on capital improvements, maybe coupled with some service hours. If the goal is to keep the whole package clearly tied to congestion, this is undoubtedly the best choice. But there are many other possibilities. Seattle's late-night service needs a serious boost, for instance. Or we could fund some of TRU's affordable transit goals, like a free pass program for low-income youth, seniors and people with disabilities. I wouldn't rule out bike and pedestrian improvements, either. I'm interested to hear more ideas.

A Political Path

So, how and when is this going to happen? I would love to see a robust Employee Hours Tax passed before the end of this year. Given that most if not all of the current council has expressed support for this funding option, I think we should push them to act.

If this year proves too short a timeframe, at the very least we can get a Statement of Legislative Intent in the budget so that consideration is assured for next year. The city is already in the process of studying transportation impact fees, and much of this analysis could be made relevant to an EHT. The impact fee study is funded through the end of this year, and the Mayor is expected to propose additional funding to extend it into 2016; the city council could condition these funds to ensure that the analysis also covers a congestion-zone approach to an EHT. A well-designed EHT could end up being a tool far superior to impact fees, which must be tied to current development and are far more restricted in use. If needed it could even be re-branded (how about an "Urban Impact Fee"?) to shift the emphasis away from employment and towards the impact of growth.

One way or another, the EHT is a progressive revenue source Seattle can't afford not to use. So let's bring it back, and let's make it good this time.

Katie Wilson is General Secretary of the Transit Riders Union.