If you own a business in Tacoma, you are familiar with the city’s Business and Occupation (B&O) tax. Enacted by ordinance on Jan. 1, 1951, the tax code directs a portion of the revenue generated by businesses to the city’s general fund to pay for a variety of services such as street repairs, libraries, and emergency services such as police officers and fire fighters. The tax comprises nearly 20 per cent of the city’s general fund budget, but many business owners have complained it is an obstacle to businesses and economic development.
That could change in 2011. Tacoma City Council is expected to vote in October to modify its B&O tax ordinance. According to the city’s tax and license division, if you are a business owner who earns $75,000 or more in gross revenue this year, you are required to pay the tax. Under a new plan spearheaded by Mayor Marilyn Strickland and supported by most city councilmembers, that so-called “threshold” could be raised to impact only business owners who earn more than $250,000 in gross revenue. If Council changes the ordinance, approximately 4,900 business owners who fall below that threshold would essentially receive a break on their B&O tax bill. It might be great news for small business owners, but it would leave the city looking for how to make up for what is projected to be approximately $1.4 million in lost revenue next year as a result of the change.
The issue received much discussion Tuesday during council’s noon study session.
On Sept. 2, the Tacoma Daily Index met with Mayor Strickland in her office at City Hall to discuss the B&O tax and the proposed changes. Here are some of her comments from our interview.
ON LEARNING ABOUT THE B&O TAX POLICY IN TACOMA
The first time I really heard about the B&O tax was when I was running for City Council. You visit a lot of different constituent groups and the business community was saying, ‘What are you going to do about the B&O tax?’ The range of questions went from people pounding their fists on the table saying ‘The B&O tax is killing business!’ to people saying ‘Is there something you can do to relieve it?’
ON THE NOTION OF ELIMINATING THE B&O TAX
One of the things that has come out of this is this idea that I am going to eliminate the B&O tax. The B&O tax contributes $80 million into our biennium, our general fund, which is about 20 per cent of it. So we can’t just, with the wave of a hand, eliminate $80 million of our revenue to our general fund because we’re talking about essential services such as public safety, libraries, street repairs, public works — those things people depend on. Our job here is to really find a way to ease the B&O tax burden, but make it as revenue-neutral as possible. By revenue-neutral, it means if we’re going to provide relief to the B&O tax, it’s going to have to come from somewhere else, and what does that mean? Does it mean that we streamline some of our services? Where can we look for other potential sources of revenue? That’s not an easy fix because if you think about it, this has been in place since the 1950s. We’ve had several different city councils and mayors come through this building since then. There have been different efforts to categorize B&O tax, reduce some things, provide some incentives, but it’s never been completely done away with. Even when you had a council that had three or four members who were definitely very strong pro-business, they still didn’t take steps to eliminate it. That tells me obviously there is some value there and the whole idea of giving it up completely is very daunting.
ON THE FINANCIAL IMPACT OF CHANGING THE B&O TAX POLICY
It would be about $1.4 million per year [in lost revenue]. I think that we try to look at it holistically. We’ll make it up in other ways. It will be a hit. But I think in the long-term it will be beneficial because maybe we’ll be able to attract more businesses to open in Tacoma by having that threshold a lot higher. What we have to do is make this policy decision, which I’m confident we’ll do, and starting January 2011 we’ll really look at the B&O tax and compare it to sales tax given the current economy and see if we see balances happening and more businesses opening in Tacoma. I don’t know if the hole will be that big. There may be other ways where we’re making it up in sales tax revenue if more businesses open here or we’re getting more utility tax [revenue] or more property tax [revenue]. Again, it’s trying to look at it holistically and not just presume that raising the threshold means it totally gets erased because I think there will some increase in other areas. But how to measure it will be tricky. Again, if there are more businesses open and locating in Tacoma, there will be increases in sales tax [revenue] and utility tax [revenue]. If someone decided to open a business in Tacoma and move here, there would be property tax. We need to assume there will be incremental increases in other areas. We are looking at how we make this up in other areas.
ON THE ARGUMENT THAT BUSINESSES LOCATE OUTSIDE TACOMA BECAUSE OF THE B&O TAX
I’ve heard that expressed a lot. I’m looking for a list of businesses that have chosen to do that. I don’t have that list. Because a lot of them are private companies, they don’t have to reveal that. One of the things I would like to know is, really, if we’re going to analyze this, let’s deal with facts and not rumor. Can we have a list of businesses that we can speak with that said, ‘I chose not to locate in Tacoma because of the B&O tax’? Who are they and what were the factors that went into that? I think that the B&O tax is one component in Tacoma’s overall competitiveness. It could be what the lease rates are for real estate. It could be the utility tax rate. It could be a myriad of things that contribute to the overall cost of doing business. One example I use is Russell Investments didn’t leave Tacoma because of the B&O tax, and they didn’t stay because we were willing to eliminate it for them. That’s one example in the context of a large company. So perhaps it’s the smaller businesses that really feel the impact of the B&O tax. Obviously, they all feel it.
ON SUPPORT FOR THE B&O TAX CHANGE
Overall, I think most of the councilmembers are onboard with this. I think it’s something people can get behind. This is something we have been working on since I took office as mayor. We’ve talked about having a big stakeholders group but I don’t think there’s going to be much of an argument against a tax break in the business community. I think it sends a strong message to the business community that we can support small businesses, especially our really small mom-and-pop stores or micro-businesses where people are putting in their life savings and making purchases with their personal credit cards and putting in a lot of sweat equity. So I think this is one way we can show support to our smallest businesses but still capture the revenue we need.