Seattle Biz Tax Could Be Referendum-Proof, City Official Says

By James Nani
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Law360 (April 20, 2020, 6:19 PM EDT) -- A proposed Seattle payroll tax on large businesses could be referendum-proof if passed with the city council's emergency powers, a city official has said, adding a wrinkle to a proposal aimed at raising $500 million annually.

If the three bills that make up the corporate tax proposal were enacted as part of the Seattle City Council's emergency powers and contained an emergency clause, they wouldn't be subject to a public referendum, Kirstan Arestad, director of the council's central staff team of policy analysts, told Law360 on Friday.

The proposal comprises one bill that imposes the tax, a spending plan and a measure that would allow borrowing cash from other city funds to pay for the measure and then pay off those funds with the tax revenue. If a bill is passed as an exercise of the council's emergency powers with an emergency clause, Arestad said, the city charter limits public referendums on such measures. If there's no emergency clause, even if the bills are passed during a declared emergency, the measure would be subject to a referendum, she said.

The tax proposal, introduced to the city Select Budget Committee in early April, is sponsored by council members Kshama Sawant, a Socialist Alternative Party member, and Tammy Morales, a Democrat. The measure would impose a 1.3% excise tax on all nonexempt businesses with more than $7 million in annual payroll and with nexus in Seattle.

To generate funds to help the city deal with the novel coronavirus pandemic, the sponsors have said, the tax would go into effect on June 1. The tax is estimated to generate $500 million annually. The first payments for June through December 2020 are estimated to generate $286.4 million, though they wouldn't be due until Feb. 1, 2022. 

All three bills in the package include emergency clauses. Seattle Democratic Mayor Jenny Durkan, extended the city's emergency order to at least May 4, according to her office.

Limiting the ability of the public to hold a public referendum on the tax could be significant. In 2018, a so-called head tax measure, also sponsored by Sawant, was set to raise $45 million to $49 million annually. But with the prospect of a ballot measure to repeal the tax, state lawmakers threatening to kill the measure and growing fury from a corporate-backed campaign, the council voted to repeal the annual $275-per-employee tax on companies making more than $20 million a year, despite having passed the measure just a month earlier.

Sawant and Morales originally proposed the payroll tax in March with a start date of Jan. 1, 2021. But the pandemic prompted them to seek a June 1 effective date to provide payments to low-income households affected by the virus, which causes the respiratory disease COVID-19.

The taxes first would be used to repay a loan to support emergency cash payments in 2020. Four months of cash payments of $500 would be distributed to up to 100,000 low-income households, Sawant has said. Beginning in 2021, tax revenue would help pay for affordable housing and other housing investments related to a local Green New Deal, according to a fiscal note. Exempted from the tax would be grocery stores, federal and state governments, nonprofits and those preempted from taxation by city, state or federal law, according to the fiscal note.

When introducing the measure this month, Sawant and Morales put forward a petition demanding the tax, which they said had been signed by more than 5,400 people. But support among other city leaders remains unclear.

Ernesto Apreza, a spokesman for Durkan, told Law360 via email Monday that the mayor hopes to work with council members on the "significant budget shortfalls" the city will face this year and into the next biennium. Durkan's priority during the pandemic has been getting as much funding from the federal stimulus package and from Washington state, he said.

Apreza said that any new tax takes one to two years to enact and begin collecting. While the city has used interfund loans to manage the city's finances before, it has never done so at the scale suggested by the council members.

"The city only issues interfund loans when we have strong confidence in the source that will be used to repay the loan," Apreza said. "In addition to potential legal challenges or ballot measures, the city anticipates declines in all of our economically dependent revenues, including sales tax, business and occupation tax (which is applied to commercial gross receipts) and utility taxes (which are essentially a sales tax on utility services)."

Without further details about what specifically is being proposed, it is "impossible to assess these risks and uncertainties," Apreza said.

Sejal Parikh, chief of staff for Council Member Teresa Mosqueda, told Law360 on Monday that the legislation was being reviewed, but said it was his understanding that if the legislation was enacted with an emergency clause it wouldn't be subject to referendum.

In a statement, Mosqueda, a Labor Democrat, said that the need for revenue and resources to address the COVID-19 pandemic was great and that the virus has aggravated inequities many Seattle residents face.

"I support any conversation that begins to address our community's needs during the coronavirus emergency and beyond, while ensuring that any conversation surrounding new revenue must take into account the current economic climate," Mosqueda said. "I look forward to fully understanding Sawant and Morales' legislation."

Katie Wilson, general secretary of the Transit Riders Union, which helped spearhead the employee hours tax campaign in Seattle, told Law360 on Monday that while the measure would be insulated from a referendum, the city charter requires emergency measures to have at least three-fourths of all council members and the mayor approve the measure. That means seven out of nine members would need to vote yes and the council couldn't override a mayor veto, she said. 

"It seems to me highly unlikely that the ordinances in their current form will pass," Wilson said. "I don't think seven council members and the mayor are on board. It's possible, however, that council members could make amendments and turn these ordinances into something that has the support to pass." 

The Select Budget Committee is expected to receive an outline of the measures by council central staff Wednesday, along with a preliminary economic forecast update for the city by the Seattle Budget Office.

The committee will consider amendments and possibly vote on the measures on May 13.

--Editing by Neil Cohen.

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