How startups and small businesses could be hit twice under Seattle’s new income tax?

by Richa Sharma Finance Expert

Income tax refers to the tax imposed on the income earned by the person. The money collected through the income tax is used by the government for various purpose such as infrastructural development, welfare program for under-privileged, healthcare facilities for all, educational programs for the lower start, etc. Thus income tax is a way to help the government to generate the funds needed for various constructive purposes. But in case such a taxation system is appearing as a burden on the people due to its unsound basis, it is protested by all. Same thing is happening with the new income tax plan levied by Seattle, yes, the Seattle’s new income tax. Everywhere there is hues and cries against it as it seems to be extremely harsh for the small business owners and startups.

Washington is one of the seven states of the USA which doesn’t impose any personal income tax. But on 10^th July 2007, it was proposed by the City Council approved to levy a 2.25% income tax on any income higher than $250,000 for individual filers and $500,000 for the joint filers (i.e. married couples). This means that in case a Seattleite has earned $300,000 in a year, the city would get 2.25% of $50,000, which will be amounting to $1,125 as a tax.

How much Seattle’s new tax will affect small businesses?

The tax is considered to “Regressive” as it takes a large portion from low-income grade in comparison to that from the high-income grade. Hence, there is great discomfort among the masses, especially the lower strata. Most of the business owners are considering it as the second burden on startups as a small business.

Under some circumstances, Seattle’s new will be levied even on the small business and startups. In that case, the city’s new income tax is cleared by the court, some small businesses and tech start ups will be levied almost twice the tax. Hence, people are in a state of uncertainty and dismay and are ready to protest against income tax for startups .

Business men of Seattle who are running “pass-through” entities such as LLCs, S Corporations, and the business alliances where the income goes to the company owner, he/she is liable to pay the tax in case the business is generating net income of more than $250,000 for every owner, after deducting the losses and operating expenses. Moreover, Business & Occupation (B&O) tax is also levied on gross receipts by the city of Seattle.

Under some circumstances, both income tax and the B&O tax will be levied on some business revenue. This clearly means double trouble for the small businessmen. This harsh reality can have very serious implications for the startup of Seattle including many businesses. Although an amendment has been added by two City Councilmembers which promises to lower the regressive element of the B&O tax, in the absence of concrete evidence, the situation of some business owners as well as legal experts is uncertain.

Will the income tax help in relieving the burden of the B&O?

Some people believe that in case of income tax is implemented; it will bring the B&O tax. The fact is that as Washington State doesn’t presently have an income tax. It has been assumed that if the Seattle City Council constantly levies the income tax, it will approximately bring in extra annual revenue of $140 million per annum. This revenue will be utilized in welfare efforts like the city’s housing affordability program for the underprivileged section, attaining the carbon reduction goal, and supersede federal funds in case they are deducted. The collected revenue is also supposed to lower the burden of unanimously approved property tax and sales tax of Washington, which are considered to be the most regressive tax in the country.

It has been reported that the tax structure of Washington is facing a crisis, indicating that the effective state and local tax rate fell from 11.4% to 9.4% between the years 1995 and 2014. It is falling further simultaneously with the growing population rate, boosted job prospects in tech and other sectors. Such a decline has not been reported to be experienced by any country over the given period.

Cries against the new income tax of Seattle:

The tax on high-income earners would be applicable on income earned after 1^st January 2018, and the collection of the taxes for 2018 would have started from 15^th April 2019. However, since a ruling given by the judge John Ruhl, the tax will not come into effect until the ruling is overturned, which is quite doubtful. Ruhl claimed that the new income tax is against Washington’s State Law.

The supporters of the income tax argued that it is necessary for handling the affordability crisis of the city, its transportation needs, and for addressing its various other problems. On the other hand, the critics maintained that it would be too expensive for the city to establish a new infrastructure, instead of continuing with the present state systems just like other cities are doing. Some other people opine that such income taxes can give rise to various bureaucratic issues.

According to some people, it will give rise to a series of several after effects including the rise in property taxes need for minimum wages and various other burdens on the Seattle businesses.

Paul Lawrence, an attorney for the Seattle city, remarked during the hearing that all those who don’t like the new income tax could move to Bellevue. Some legal challenges against this income tax are expected in the next few weeks which may be consolidated as one legal suit. It will ask the court to infer Washington state law and find if local jurisdictions allow the state to levy income tax for fulfilling its basic needs. Anyhow if the new income tax law is imposed, it will prove to be a big disaster for the small businesses. There is a lot of uncertainty against the new income tax, rest the time will tell.