Seattle’s highly concentrated payroll expense tax shaping up to be a volatile revenue source

Jun 29, 2023
Written by WR Communications

By: Washington Research Council

The City of Seattle adopted the payroll expense tax (PET) in July 2020. The rate of the tax varies from 0.7%–2.4% depending on the total payroll expense of a business and the amount of an employee’s compensation.

The PET is the city’s fourth-largest tax source, behind property, business and occupation, and retail sales taxes. In 2021, the first year of collections, PET revenues totaled $295.4 million (about the same amount as the retail sales tax). PET revenues declined to $253.1 million in 2022, which is a 14.3% reduction from 2021 and 9.5% below what was assumed for 2022 in the city’s current budget. The city’s April 2023 revenue forecast estimates that PET revenues will be $263.3 million in 2023 and $279.7 million in 2024. Although revenues are expected to grow in 2023 and 2024, the current estimates for those years are lower than what was assumed in the adopted budget.

City data show that a small number of taxpayers with the highest payroll expense pay the vast majority of the tax. In 2021, the 48 taxpayers with $100 million or more in payroll expense (9.9% of all taxpayers) were responsible for $245.0 million in revenues (83.4% of all PET revenues). Further, according to the city’s Office of Economic and Revenue Forecasts (OERF), “The largest 10 taxpayers account for 70% of total revenue, and essentially all the revenue decline in 2022 is accounted for by these top 10 taxpayers.”

Additionally, the largest taxpayers are concentrated in a few economic sectors. Together, the information, trade, and professional and business services sectors account for 55% of taxpayers and 85% of taxes paid. The information sector accounts for the largest share of taxes paid (38.6% in 2021 and 38.3% in 2022).

With a deep revenue decline in 2022, the PET is shaping up to be a volatile tax source. This should concern the city, as revenue volatility compromises budget sustainability. The OERF notes, “Revenues are generated from relatively few firms and depend on their individual financial performance.” As they go, so go the PET revenues. Consequently, it would behoove the city to foster a business climate that—despite the PET—encourages businesses to grow in the city.

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