California Considers Business Head Tax Plan that Seattle Repealed

May 28, 2020

With California’s unemployment rate approaching 25 percent, it is somewhat surprising to find policymakers contemplating a literal tax on jobs. That is, however, precisely what some California lawmakers have proposed under the COVID-19 Local Government and School Recovery and Relief Act, which would impose a $275 per employee tax on all businesses with at least 500 employees. If adopted, it would be the only statewide business head tax in the country, and the largest imposed at any level of government.

Two years ago, Seattle’s city council briefly adopted a $275 business head tax—then repealed it before it could ever go into effect, responding to widespread, and bipartisan, public opposition. Former Gov. Christine Gregoire, a Democrat, called it “a tax on jobs” and said that having such a tax “undermines our international and national reputation.” The Republican Senate Minority Leader drafted legislation restricting localities from imposing such taxes, while Sen. Mark Mullet, a Democrat representing a district just southeast of Seattle, warned that the city was “sending a message to the rest of the country that we’re going to penalize you for creating jobs here.”

The Seattle Times not only editorialized against the tax but called for a citizen ballot initiative to overturn it. And polling showed that 54 percent of Seattleites disapproved of the tax, compared to only 38 percent who supported it. Little surprise, then, that the city council reconsidered.

Almost a decade ago, Chicago scrapped a much smaller tax, with then-Mayor Rahm Emanuel (D) labeling it a job killer. Cupertino, California postponed consideration of its own head tax proposal in 2018, though a similar tax in Mountain View, California—largely targeting Alphabet (the parent company of Google)—went into effect earlier this year. The mayor of Mountain View, arguing in support of the measure, said that the community had “too many good jobs” but not enough transit.

This much is certain: with as much as a quarter of California’s workforce unemployed, the problem now is most assuredly not too many good jobs.

It is tempting to think that companies with 500 or more employees will barely notice an additional $275 per employee, but many of the state’s largest employers are low-margin businesses like supermarkets. The increased cost of employment is more pronounced for lower-wage and lower-skill workers, potentially nudging employers further in the direction of automation, or into hiring a smaller number of higher-compensated employees to do work that might otherwise have been distributed among lower-skill (and lower-wage) employees.

Governments usually shy from taxes which expressly penalize employment, and for good reason. (Many, in fact, offer incentives for creating jobs, though these are typically highly inefficient in their own right.) Payroll taxes fund unemployment insurance, but beyond that, taxes on jobs are rare—and for good reason.

As California grapples with a yawning budget gap, policymakers are increasingly getting creative, advancing this proposal shortly after Gov. Gavin Newsom (D) suggested a change to allow the state to tax more than 100 percent of businesses’ net income for the next three years by postponing their ability to carry over losses. The state’s revenue needs are real, but proposals like these threaten to slow the recovery and drive additional businesses and jobs out of state, which will only make the situation more dire.

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