Seattle voters will decide this November on a major overhaul of the city’s business-and-occupation (B&O) tax. Supporters pitch it as relief for small businesses and a safeguard for city services; opponents warn it risks driving away companies.
For tech startups, the impact is more nuanced as companies scale.
The ballot measure, known as the Seattle Shield initiative, would raise the B&O tax threshold exemption from $100,000 to $2 million — temporarily wiping out B&O taxes for small- and medium-sized businesses with gross receipts of $2 million or less.
To offset the revenue loss, businesses above the $2 million threshold would face a rate increase — from 0.427% to 0.65% for service businesses — applied only to revenue above $2 million.
So what does it all mean for tech startups?
Smaller companies and those just getting off the ground would no longer pay B&O taxes, potentially saving them thousands of dollars per year. A services company with $1 million in revenue pays $4,270 in B&O tax annually at the current rate.
But for tech companies that have higher revenues — from more mature startups to corporations such as Amazon — their tax obligation will increase.
“So for your early stage startups that are not realizing much revenue yet, the proposal looks good,” said Jacob Vigdor, professor of public policy and governance at the University of Washington. “It’s as a business is transitioning to the 8-figure revenue level where the proposed tax system starts to bite.”
Under the proposal, a company with $100 million in annual revenue would owe an additional $213,920 in B&O tax — about 50% more than under the current rate.
The measure comes amid a wave of new business taxes in Washington state. Earlier this year, Seattle voters also approved a payroll tax on high earners to fund social housing, adding to the JumpStart payroll tax passed in 2020.
Kelly Fukai, CEO of the Washington Technology Industry Association, said she appreciates the city’s attempt at reducing the burden for small businesses. But she said the B&O tax proposal may not be as helpful to tech startups given that it is applied to gross receipts versus profit.
“Startups do not have net income for years as there is heavy investment made upfront in development,” she said.
Companies may weigh whether to reallocate resources — or even relocate to a different city with a friendlier tax climate, said Vladimir Dashkeev, an assistant professor of economics at Seattle University.
“The question is: Is the cost of this tax optimization for the business worth the benefit of saving on these tax payments?” Dashkeev said.
Vigdor said there are many other tax-related factors a tech company has to consider. For example, if a company wants to move to California, there’s a state income tax. And if they want to relocate to Bellevue, office rents may be higher relative to Seattle given vacancy rates, he said.
The new tax changes would raise about $81 million per year for human services and other city programs.
The city, which is trying to address a substantial budget shortfall over the next two years, says about 90% of small- and medium-sized businesses in Seattle will pay fewer B&O taxes if the proposal passes.
Mayor Bruce Harrell and Councilmember Alexis Mercedes Rinck unveiled the Seattle Shield initiative in June, framing it as a way to protect Seattle’s small businesses while shielding from potential federal funding cuts.
The city council approved the proposal earlier this month with several amendments.
Rachel Smith, CEO of the Seattle Chamber, voiced support for the proposed exemption but said it should be funded from the payroll tax fund or through the “normal budgeting process” instead of larger companies — pointing to broader trends on employment, office vacancies, and economic uncertainty.
Jon Scholes, president and CEO of the Downtown Seattle Association, called it “a boneheaded proposal of epic proportions” in a post on LinkedIn.
Scholes also supported exempting small businesses from the B&O tax. But he said raising taxes on larger companies “will ultimately result in Seattle defunding its tax base.”
“This is an unnecessary tax on downtown Seattle’s revitalization that comes with big risks to the fragile commercial tax base,” Scholes said. “As the commercial tax base withers, the tax burden will shift to Seattle residents.”
Harrell pushed back on the criticism from DSA.
“We’re not trying to run businesses out of Seattle. We are open for businesses,” he said in June.
