The Seattle, Washington City Council is undertaking an effort to enact an ordinance that would require that large Seattle employers pay a city income tax effective January 1, 2019.

The taxes would apply to businesses with employees working in the city, regardless of whether the place of business is located within or outside of Seattle. The new business tax is expected to generate between $25 million and $75 million, to be used to fund programs that would address homelessness and build new affordable housing. (Business tax overview, April 25, 2018.)

Enactment in 2017 of what was referred to as a "head tax" was stymied by a King County ruling that found the tax to be unconstitutional. The city, while appealing last year's court ruling, is this year proposing two separate business income taxes to be in effect consecutively.

Newly proposed taxes would be tax against employers

Under C.B. 119244, for January 1, 2019 through December 31, 2020, an "Employee Hours Tax" would be in effect that would impose a $500 per full-time equivalent (FTE) employer surcharge (plus an $0.26402 times the hours worked by part-time employees amount) or instead, at the employer's option, an $0.26402 per hour surcharge against the actual hours worked by all employees in Seattle.

Beginning January 1, 2021 and each year thereafter, an "Employer Payroll Tax" would replace the "Employee Hours Tax" that would be equal to 0.7% of the total payroll paid to all employees for work performed in Seattle.

The two new taxes would be imposed on Seattle businesses with $20 million or more in taxable gross income. These new taxes are seen as being imposed mostly against tech companies. New Seattle Mayor Jenny Durkan appears to support passage of the new ordinance.

Besides businesses with $20 million or less in taxable gross income, the ordinance would exempt: (1) all non-profit companies; (2) the federal and state government entities and their subsidiaries; (3) insurance businesses and their agents; (4) businesses that only sell, manufacture, or distribute motor vehicle fuel; and (5) businesses that only sell or distribute liquor.

2017 ordinance enacted, then struck down, would have imposed an individual income tax

As we reported previously, previous Mayor Ed Murray signed an ordinance passed by the Seattle City Council in mid-2017 to establish a city income tax on city residents who are high earners. This is despite the fact that Washington state is one of nine states that do not have a personal income tax.

Effective with income received on and after January 1, 2018, resident individuals earning over $250,000 and joint filers earning over $500,000 would have been required to pay an income tax of 2.25% on total income. These income levels would have been adjusted annually on and after January 1, 2019 by inflation.

The city income tax would have been due annually on April 15, accompanied by a return to be developed by the city's finance director. The ordinance did not provide for the withholding of city income tax by the individual's employer.

The ordinance was struck down in late 2017 by King County Superior Court Judge John Ruhl. Then Mayor Murray pledged that the ruling would be appealed.

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