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Washington is one of only seven states without a state income tax.

Seattle Hedges Its Bets with City Tax

The Seattle, Washington, City Council has imposed a 2.25% tax on residents earning $250,000 or more, or $500,000 for couples. Why here? Why now?

In a campaign launched by the group Trump-Proof Seattle, city leadership claims this is a proactive measure to mitigate a federal budget looking to cut federal aid to states for housing, education, transit and other social service programs.

Seattle is one of the fastest growing cities in the U.S., thanks to the growth of technology companies such as Amazon. This has led to a decreased availability of affordable housing. According to The Seattle Times, Seattle has one of highest tax burdens for families in U.S. cities earning $25K per year and one of the lowest for families over $150K.

Business leaders are divided on the tax. Former Microsoft CEO Steve Ballmer is worried companies will flee the city, while software developer Carissa Knipe says that the city should serve everyone, not just the rich. 

Some cities – such as New York, Philadelphia and San Francisco – have city taxes. However, they are flat, not progressive, taxes. In addition, Washington is one of only seven states without a state income tax. Many opponents of the Seattle city tax feel this could be a trial balloon for a new, state-wide tax.

The Seattle city tax should only impact approximately 20,000 of the city’s 660,000 residents, but hopes to raise $140 million annually. With no city tax collection infrastructure currently in place, it will cost $13 million to initiate one and $5 million annually to administer.

The tax is not scheduled to begin until 2019, unless it is repealed by challenges in court. The question is will this, in the face of decreased resources from the federal government, become the taxation policy du jour of U.S. cities?

With 20 years of experience, Gary Bingel's expertise focuses on state and local income taxation, and also includes sales and use tax consulting. Gary is Partner-in-Charge of EisnerAmper's State & Local Tax Group.

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