Tacoma City Council approves B&O tax break for small-business owners

Tacoma City Council took action Tuesday to modify a nearly-60-year-old law that has governed how City Hall collects revenue through...

Tacoma City Council took action Tuesday to modify a nearly-60-year-old law that has governed how City Hall collects revenue through its Business and Occupation (B&O) tax.

“It totally makes sense,” said Tacoma Mayor Marilyn Strickland before City Council voted unanimously to approve an ordinance that raises the annual taxable gross income threshold for small-business owners from $75,000 to $250,000 beginning in 2011. According to city staff, the move will benefit approximately 4,900 business owners who fall below that threshold. “It demonstrates Tacoma is a great place to do business and a great place to start a business,” added Mayor Strickland. “As we talk about our strengths as a city and as a place where we want to say Tacoma has what it takes to be successful, this shows that we’re really ready to support people.”

The new ordinance was co-sponsored by Mayor Strickland, Deputy Mayor Jake Fey, Councilmember Ryan Mello and Councilmember Marty Campbell. It’s good news for small-business owners, but it left the city scrambling to make up for what is projected to be approximately $1.4 million in lost revenue next year as a result of the change (and $2.8 million in lost revenue during the 2011-2012 biennium). The revenue reduction has been factored into the proposed 2011-2012 biennial budget, scheduled to be adopted Dec. 7. Notices advising business owners of the change will be mailed Dec. 15, and the change will be implemented Jan. 1, 2011.

The move also makes Tacoma’s B&O tax threshold more appealing than thresholds in Everett ($20,000), Olympia ($20,000), Bellingham ($20,000), Bremerton ($60,000), Seattle ($80,000), and Bellevue ($125,000).

— A LONG DISCUSSION AT CITY HALL —

The idea to change the B&O tax law has worked its way through City Hall for a long time.

During an interview with the Tacoma Daily Index in September, Mayor Strickland said the issue has been on her radar since she ran for City Council in 2007. “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?'” she said. “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?'”

When she began her term as mayor on Jan. 5, 2010, Mayor Strickland began to lobby for changing the law at city council’s government and performance finance committee, on which she serves as chair. The committee directed staff to look at what impact raising the threshold would have on the city’s budget. According to the city’s tax and license division, revenue collected from the B&O tax comprises almost 20 per cent of the city’s general fund budget. The city collected approximately $42 million in revenue through B&O taxes in 2007; approximately $44 million in 2008; and approximately $40 million in 2009. The money is used to pay for a variety of services such as street repairs, libraries, and emergency services such as police departments and fire departments. In addition to the $250,000 threshold, the committee examined the possibility of gross income thresholds of $500,000 and $750,000. According to a July 1 memo from Tacoma’s tax and license manager to the committee, raising the threshold to $500,000 would benefit 5,800 businesses, but result in approximately $2.8 million in lost revenue in 2011; raising the threshold to $750,000 would benefit 6,250 businesses, but result in approximately $3.8 million in lost revenue in 2011.

“One of the things that has come out of this is this idea that I am going to eliminate the B&O tax,” Mayor Strickland explained. “The B&O tax contributes $80 million into our biennium, our general fund. So we can’t just, with the wave of a hand, eliminate $80 million of our revenue to our general fund. There have been different efforts to categorize the 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.”

Instead, city staff looked for ways to make the change as revenue-neutral as possible by streamlining services and identifying other potential sources of revenue. Mayor Strickland also argued the city could see some revenue gains if small businesses decide to open in Tacoma because of the smaller B&O tax burden. Still, for businesses that were once below the $250,000 threshold but go on to exceed it, the legislation eases them back into the B&O tax system: businesses earning $260,000 to $269,000 would pay 20 per cent; $270,000 to $279,000 would pay 30 per cent; $280,000 to $289,000 would pay 55 per cent; $290,000 to $299,000 would pay 75 per cent; and businesses earning $300,000 or more would pay 100 per cent.

— AN IMPEDIMENT TO ECONOMIC DEVELOPMENT —

For years, many people in the business community have complained Tacoma has been dogged by the B&O tax. Nearby cities such as Fircrest, Lakewood, and Fife, which don’t have B&O tax ordinances, have benefited from Tacoma’s extra fee on business owners. Why locate your business in Tacoma and pay the B&O tax when you can duck the fee by locating a mile or two outside the city limits?

During an interview with the Tacoma Daily Index in September, Councilmember Campbell said he supported the tax change. He was aware of some businesses that have located outside Tacoma because of the B&O tax. He pointed to a large construction firm that he claims recently re-located to Fife for that very reason. Their B&O tax was typically $400,000 per year, according to Councilmember Campbell. “That’s a pretty big number,” he said. “I can see why they would make a decision to re-locate outside Tacoma when they can save $400,000 a year. To a large construction company, being located off one I-5 exit versus another exit doesn’t make a difference.”

Another factor for the construction company, said Councilmember Campbell, is passing along the B&O tax to its customers. “When that construction company figures a bid, they figure the B&O tax right into the bid,” he explained. “If they weren’t paying a B&O tax, what you would see is the bid would be slightly lower, which would make them a little more competitive. We want our businesses to be competitive.”

The construction company isn’t a perfect example; after all, it makes more than $250,000 in gross sales and therefore would still pay B&O taxes even if the city raised its threshold. But it does illustrate how any business, large or small, weighs its decision to set up shop in Tacoma in light of the tax.

On a more personal level, Councilmember Campbell said he was well aware of the tax long before he was elected to City Council last year. As the long-time owner of two Tacoma businesses — Buzzard’s Discs and Stadium Video — Councilmember Campbell, like every business owner in Tacoma, was required by the City of Tacoma and the State of Washington to report his quarterly earnings and pay his share of the B&O tax. Last year, according to Councilmember Campbell, he wrote checks totaling $1,200 to cover B&O taxes for both businesses. It wasn’t his biggest business expense, but “particularly for small businesses, little amounts like that matter,” he said. “That’s $1,200 I could have put into more product, a few more hours for employees, or a little more advertising.” (note: Couoncilmember Campbell said his two businesses already earn more than $250,000 in gross sales, so raising the threshold would not exempt him from paying B&O tax)

— NEW LEGISLATION MOVES FORWARD —

In early-September, council’s government and performance finance committee approved a ‘do pass’ recommendation to forward the revised ordinance to the full city council. On Sept. 14, the issue was discussed at length during council’s study session. “This supports small businesses and is a long-term strategy to make Tacoma a desirable place to do business,” said Mayor Strickland during the meeting. “It sends a positive message about Tacoma’s business climate and encourages entrepreneurs in Tacoma.”

On Nov. 23, the ordinance received its first reading in front of the full city council. A week later, the new ordinance was approved by council. During the city council meeting this week, and shortly before taking a vote to approve a change to the ordinance, several councilmembers spoke in support of the new law. Here are their comments on the issue.

COUNCILMEMBER JOE LONERGAN
This is something that we’ve been talking about for some time. Before we got into the budget deeply — last week when we were asking the city manager to look for $3 million in our budget, and then that evening, [during] the first reading [of the ordinance], that’s $2.8 million that could be used to fill that gap — I had a little moment of, well, there it is. At the end of the day, what I had hoped we would see out of this is a little more measured methodology of getting to an increased threshold for our businesses. I think this is going to be a great thing, a long-term win for the City of Tacoma. I will support this tonight. I had just hoped that we might be able to do it in a little slower fashion as we both try to help our businesses come out of this economic slump and also help the city and our citizens, because certainly, making sure that we have the money to fulfill our obligations to our businesses is every bit as important from my perspective as making sure that we have a climate that’s going to be good for them. At the end of the day, I think this is a win for both the business community and for the city. I know it’s caused us some issues as we’ve looked at the budget, but I think we’ve tackled those and conquered those.

COUNCILMEMBER MARTY CAMPBELL
I think you very eloquently put forth what is the other side of the B&O tax, which in these tough times, any municipality stepping up and saying we’re going to cut taxes for those small businesses that really need it is a rare thing. And so, I really hope the council’s supporting passing this because it’s something we need to say, ‘Tacoma is open for business and we value our small businesses.’ This is important. We had some great conversations in committee about how big of a step can we take. And I understand what you mean by [wanting] to go a little bit slower. To me, this is going a little bit slower, and I would have liked to have been more aggressive. But I think when we look at the number we’re at, we got it just right for this time. And I would hope that over the next few years we can continue to chip away at it. I’m just happy to be making the biggest change that we’ve made in the B&O tax in 60 years. I think that’s impressive.

COUNCILMEMBER DAVID BOE
I, too, am in full support of this. I want to really thank members of the government performance and finance committee, specifically Mayor Strickland, Deputy Mayor Fey, and Councilmembers Campbell and Mello for bringing this forward. Tacoma is a great place to start a business. You know, there’s lots of hand-wringing when large companies start and grow up and then leave, as a parent of two heading off to college next year. Of course, I’m rejoicing that they’re leaving. And in some ways, Tacoma, I think, needs to take that attitude, as well, that this is a great place to start a business and grow one. And just like a parent of young adults, at some point they leave the nest to see the big-city lights. So I think this is a great way to reinforce Tacoma [as an] incubator, making the City of Tacoma the city of your own destiny. It’s the first step of hopefully many more to come as we gain back from the great recession.

COUNCILMEMBER RYAN MELLO
I think this is really worth dwelling on. In these really tough economic times, I think as Councilmember Campbell indicated, you don’t hear anyone decreasing taxes. You see people asking for more revenue and rate increases and such. That we’re able to do this is a really bold step, a really courageous step. I really want to acknowledge the committee for their hard work and hanging in there, working tough with staff, figuring out a lot of issues to make this happen. I especially want to thank Mayor Strickland. She brought a formal presentation to study session several months ago, and I think made a compelling case, very eloquent, very clear, and made the case. And I really want to thank the Mayor for her leadership in shepherding this through council. I really appreciate that. The other comment I want to make is, as much as the savings that is for small businesses, as we heard, it’s also a paperwork savings, which was, I think, the point that the Mayor made — Mayor, I hope I’m not stepping on your toes, she’ll reinforce the message. But that was, I think, a really compelling point, as well. So we have these micro-businesses who can’t afford to pay this, but have to go through all of the hoops of filling out paperwork, and our staff has to deal with the paperwork. So we’re gaining efficiencies on the small business end, and our staff’s time won’t have to process literally thousands of pieces of paper every month, and they can spend their time doing other, more important matters and gaining efficiencies internally. So there’s savings all around, and it makes good sense.

MAYOR MARILYN STRICKLAND
Of all the cities in the Puget Sound that do have a B&O tax, and that’s multiple larger cities, we now have the highest threshold. And I think I’m very happy to say we were able to get together as a council. I’m also glad to hear that my fellow councilmembers are parroting my talking points, which means we’ve really advocated and discussed this thoroughly. When we talked about this at the committee level first, I went into it knowing good and well we were in the midst of a recession, knowing there would be a financial hit. But as a long-term strategy, it totally makes sense. It demonstrates Tacoma is a great place to do business, and as Councilmember Boe stated, a great place to start a business. As we talk about our strengths as a city and as a place where we want to say Tacoma has what it takes to be successful, this shows that we’re really ready to support people. So I thank my Council Members for spending months talking about, discussing, and debating. And I think this is really, really a smart move for Tacoma.

– – – – – – – – – – – – – – – – – –

For earlier Tacoma Daily Index coverage, click on the following links:

Tacoma City Council votes today on B&O tax revision (11/30/10) — http://www.tacomadailyindex.com/portals-code/list.cgi?paper=88&cat=23&id=1883578&more=0

Change to B&O tax policy reaches City Council Nov. 23 (11/15/10) — http://www.tacomadailyindex.com/portals-code/list.cgi?paper=88&cat=23&id=1874756&more=0

City considers B&O tax break for small business owners (09/14/10) — http://www.tacomadailyindex.com/portals-code/list.cgi?paper=88&cat=23&id=1838481&more=0

Mayor Strickland discusses Tacoma’s B&O tax (09/15/10) — http://www.tacomadailyindex.com/portals-code/list.cgi?paper=88&cat=23&id=1839304&more=0

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