Seattle Business Head Tax Proposal Threatens its Thriving Tech Sector

April 26, 2018

Most cities fortunate to have a thriving technology sector are proud of the distinction. Seattle, by contrast, often seems ashamed of the tech agglomeration within its borders—eager to drive those jobs away, even. That perplexing stance has come to the forefront now, as the City Council considers a tax on jobs—literally—with an emphasis on increasing taxes on the city’s thriving tech sector.

The tech sector is known for its embrace of business clusters, with firms locating near each other, building up a geographic agglomeration of intellectual capital. The Santa Clara Valley of California, known around the world as Silicon Valley, became synonymous with computing, home to Intel, Apple, Google, Hewlett-Packard, Cisco, Xerox, Adobe, and more. The nucleus was Stanford University, and the exchange of ideas and talent around the university and early corporate innovators located nearby quite literally changed the world.

Seattle had the good fortune to emerge as another large tech hub, kicked off by Bill Gates bringing Microsoft to nearby Redmond (near where he grew up), and given an enormous boost when Jeff Bezos chose to locate Amazon within the city limits. An entire tech ecosystem grew up around these two companies, not just of clients or vendors, but of other companies which saw an advantage in locating where technology was “in the air.”

Zillow, RealNetworks, Whitepages, Redfin, and Classmates are Seattle companies, and Expedia and T-Mobile are based nearby. Meanwhile, countless tech start-ups flock to Seattle because there’s a built-in talent pool and a thriving tech culture. It’s a major part of Seattle’s story, and a key component of the city’s economic appeal.

Which is why it’s so bewildering that the city would go out of its way to target the industry with which it is so closely associated.

Proponents of the proposed Seattle business head tax have gleefully presented it as a tax specifically targeting the city’s large tech companies. It’s destructive as an employee hours tax (over 26 cents per hour, or $500 per year for full-time employees) and it only becomes more onerous for tech sector employers once it transitions to a payroll tax, scheduled to happen in year three. The problem with that? Increasingly, tech companies don’t need to be in Seattle.

The degree to which technology companies rely on economies of conglomeration is declining, as ideas are more likely to be shared online than in cafes or technology parks. The diffusion of ideas celebrated in places like Silicon Valley and Seattle now happens in communities that aren’t defined by a physical location. Agglomeration still matters, but not as much as it used to, and in a field with far more competitors. The Research Triangle in North Carolina, the Dulles Technology Corridor in Northern Virginia, Silicon Hills in Austin, the Denver Tech Center, and Route 128 in Massachusetts, to name just a few of the competing tech centers in the United States alone—it’s a big world out there, and tech companies don’t have to be in Seattle, if the city no longer wants them. Particularly if some of the biggest players shift resources elsewhere.

Large employers like Amazon are big enough to create their own technology clusters. A constellation of other companies will form around the forthcoming Amazon HQ2 wherever it lands.

And Expedia and T-Mobile show that there’s nothing magical about the Seattle city limits. Tech jobs are fairly mobile; if Seattle’s tech companies are targeted too heavily, they can always relocate to Bellevue.

The Seattle business head tax is, in a literal sense, a tax on jobs. Moreover, it’s one that falls particularly heavily on one of the city’s most important industries. It comes on the heels of a long string of tax proposals considered in 2017, many of them quite arbitrary, which create substantial business uncertainty. Other cities have high tax burdens, but few have as many tax experiments in the pipeline as Seattle does. At some point, employers feel besieged.

Given that Chicago scrapped a business head tax less than one-tenth as large as “a job killer,” the latest in Seattle’s long line of proposed tax increases has the potential to be shockingly counterproductive.

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