January 30, 2020
A bill has been introduced in the Legislature that would allow King County to impose a “payroll expense tax” when employees earn $150,000 or more.
Under HB 2907, a county with a population of at least 2 million (i.e., King) could impose a payroll expense tax on all compensation paid to employees at a rate of at least 0.1 percent but not more than 0.2 percent. If King County decides to impose such a tax, it would have to apply the same tax rate to all businesses subject to the tax. But, the county could impose tax rates that increase as compensation increases.
HB 2907 would allow taxpayers to deduct the compensation of employees who earn less than $150,000 a year and the compensation of grocery workers. The $150,000 threshold would be adjusted for inflation annually (using the CPI-U). The bill also includes a number of exemptions from the tax:
- Businesses that only sell, manufacture, or distribute motor vehicle fuel,
- Businesses that only sell, manufacture, or distribute liquor,
- Federal, state, and local government entities,
- Businesses a county may not tax under federal or state law,
- Small businesses (businesses with 50 employees or less, when 50 percent of their employees do not make more than $150,000), and
- Comprehensive cancer care centers.
The bill would specifically allow King County to impose the tax on insurers. The tax would expire 25 years after imposition, but it could be reauthorized by the county council.
Under the bill, “compensation” includes commissions, bonuses, net distributions, and incentive payments. “Employee” includes members of limited liabilities companies, partners, owners of pass-through entities, and sole proprietors.
HB 2907 specifies that any revenues could be used first to fund the administration of the tax. After that, revenues could only be used to:
- Acquire, rehabilitate, or construct affordable housing,
- Fund operations and maintenance costs of affordable or supportive housing,
- Provide rental assistance,
- Provide for housing, shelter, and evidence-based interventions that address and prevent homelessness,
- Acquire, construct, start up, or operate community-based behavioral health facilities, and
- Provide supportive services to people with behavioral health conditions who have frequent involvement in the criminal justice system.
The bill would allow King County to issue bonds (backed by the payroll tax revenue) to fund such spending.
For this payroll tax to go into effect, the state Legislature would have to pass the bill, then the King County Council would have to approve an ordinance. There is no fiscal note, but King County estimates that the tax could increase revenues by about $121 million a year.
Finally, the bill states, “The tax imposed by this chapter is levied on employers. The employer is responsible for paying the tax required under this chapter, and the employer may not make any deductions from the employees’ compensation to pay for this tax.” Note, however, that economists assume that payroll taxes are ultimately borne by employees, regardless of the statutory incidence of the tax.
This bill comes as the Seattle income tax case is still ongoing. As Opportunity Washington wrote last week, two bills have been introduced in the Legislature this session to reaffirm the state ban on local income taxes. HB 2479 simply states, “A county, city, or city-county shall not levy a tax on net income.” SB 6462 states, “A county, city, or city-county shall not levy a tax on net or gross income, except that this section does not prohibit the imposition of gross receipts taxes on businesses as otherwise allowed by state law.”Categories: Categories , Tax Policy.