Tax Reform

Seattle Learned There’s No Brain Behind a Head Tax

In May, Seattle, Washington, enacted an employment head tax on large firms but then abruptly repealed the tax just weeks later after an alliance of businesses and labor unions voiced strong opposition to a tax on employment. Unfortunately for taxpayers, other municipalities are picking up where Seattle left off. Exploring how employment head taxes work will likely convince other communities that such taxes are bad economics and unfair to workers. A “head tax” levies an identical tax on each individual regardless of circumstances. Such taxes were common from the Middle Ages until the 19th century.

The Seattle city council intended to combat homelessness by taxing large firms that drive housing prices up. Stylized as the “Employee Hours Tax,” the EHT would have taxed firms with gross revenue of more than $20 million, $500 for every employee. Nearly 600 businesses would have been forced to pay the city for each person on their payroll. The EHT is a tax on work, similar to a payroll tax, where every employee is taxed at a percentage of their wage. The EHT deviated from a payroll tax by taxing each employee the same amount regardless of how much they earned. However, both forms of employment taxes harm job creation and depress wages.

The city council failed to anticipate the predictable response from employers when the price of labor is substantially increased. Of course, absent the repeal of the tax, there was a real threat that employers would have exited Seattle and relocated to locales with more favorable tax codes. For instance, Amazon halted construction on a new skyscraper and backed off of a leasing deal, freezing an estimated 7,000 new jobs. Following these rumbles of economic peril, Seattle nearly halved the proposed tax to $275 per employee and then passed the EHT unanimously before repealing the tax by a 7-2 vote four weeks later. Amazon ultimately resumed their expansion plans in Seattle.

Basic economics dictates that employment head taxes cost jobs. Employers make hiring decisions based on margins. In other words, a company must analyze whether the value added by an additional employee exceeds the related employment costs. Increasing the marginal cost of employment resulted in a number of employees becoming less than profitable to hire—or potentially more profitable to a firm if hired elsewhere. For a city with a growing homelessness crisis, pricing job seekers out of the market is highly imprudent. Also, the Seattle head tax proposal violated the key tax policy principle of transparency by hiding the true cost of taxes.  After all, the company may legally be required to pay the tax, but the economic costs are passed along to workers in the form of suppressed wages and other foregone opportunities. Fortunately, under immense pressure from an unusual alliance of large companies and labor unions, Seattle’s city council repealed the tax. Without this turnabout, the job market in Seattle would have been decimated and homelessness would have grown. Despite the clear economic peril of this form of taxation, other municipalities are considering similar employment head taxes this November, including the California cities of Mountain View and San Francisco. Time remains for residents of these communities to realize that employment head taxes violate the principles of sound tax policy, are anti-worker and are counter-intuitive to solving homelessness. There is simply no brain behind a head tax.

In Depth: Tax Reform

Mainstream economists, small business owners and taxpayers across the country understand that growth-oriented reforms mean increased opportunity for all. As demonstrated by the annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, sound tax and fiscal policies are critical to economic health, allowing businesses and households to flourish. A…

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