On July 10th, the Seattle City Council unanimously passed an ordinance, sponsored by Council members Lisa Herbold and Kshama Sawant, purporting to “[impose] an income tax on high-income residents.” Really? According to the bill summary, “This ordinance would impose an income tax on high-income Seattle residents. In particular, the ordinance places a 2.25 percent tax on the income of joint tax filers with income over $500,000 and single tax filers . . . with over $250,000 in total annual income.”
I grew up in Idaho and, later, resided in Virginia. Both states rely, in part, on a state income tax to bolster state revenue. And, in both states, reasonable deductions are allowed. Unlike Idaho and Virginia, the Seattle City Council decided to tax Seattle residents based upon “total annual income.” A recent blog post by the Greater Seattle Business Association (GSBA) explains in detail the negative impact a gross income tax will have on small local businesses taxed as pass-through entities including LLCs, partnerships, S-corporations and sole proprietorships. As stated by the GSBA, “Most income taxes imposed by other states and cities around the country start with federal net taxable income. While the City Council’s stated goal is to tax the wealthiest Seattleites, you are inadvertently going after many of our city’s small business owners who are anything but wealthy. Income reported by a LLC, S-Corp, or sole proprietorship is not the same as wages. Wages are commonly understood as a measure of cash amount actually received by an individual.” (emphasis in original).
To provide an example, a small business owner operating a pizza restaurant via a pass through LLC might have numerous business expenses that will not be deductible pursuant to a tax on “total income” as defined by line 22 of the IRS Form 1040. That business owner may be considered by the Seattle City Council to be a “high-income Seattle resident,” and will be taxed as such, even though that same business owner would not be classified as “high-income” if his or her federal net taxable income was the applicable standard. Larger businesses organized as C-corporations do not face the same dilemma. That policy lacks common sense, and is fundamentally unfair to our small business community.
The heart of Seattle’s humming economy is entrepreneurship. Ordinances of this nature choke the life out of entrepreneurs, and make them feel unwelcome in our city. Do you agree? Then let our Seattle City Council know!