Auburn studies first draft of proposed B&O tax

Berk Consulting Agency of Seattle studied the city of Auburn’s general fund finances in 2020 and forecast that over the next decade, a gap would open between the revenue Auburn takes in and what it spends.

And like a patient with an illness that seems insignificant at first but becomes more dire over time, the gap would widen year by year, until by the end of that decade, it reached a crippling $10 million.

Sobering news — because the general fund pays for most city operations.

To city leaders, then, their task become to scout out ways to help fill the gap, a job the current pandemic has made much tougher.

On Monday (Feb. 22), Auburn City Council members listened as the city’s Financial Director, Jamie Thomas, guided them through the complexities of the first draft of what could become the first Business and Occupation tax the city has ever imposed.

Thomas said the goal is to generate $6 million in new taxes to help plug the $10 million gap, and then use other revenue sources or cost-recovery model amendments to make up the difference.

The new rates would not go into effect until January 2022.

City officials say they met with business people one on one to hear their concerns, or in larger meetings that the Auburn Area Chamber of Commerce arranged for educational purposes, that is, to inform members o business community of what the city was proposing to do and its implications.

Deputy Mayor Claude DaCorsi noted that many people in the business community are arguing that with a pandemic raging and businesses struggling just to hold on, now is not the right time for a B&O tax.

“We’ve heard from a lot of businesses, and I can tell you on a personal note from my children who have their own businesses, that it could take many, many years for businesses to recover from the downturn in revenues related to this pandemic.

“It’s hard to think about recovery occurring even now when restaurants are only open at 25 percent capacity,” DaCorsi said, noting that even that barely pays the bills.

Thomas told the council that the principle that has guided the city in formulating the proposed B&O tax has been to keep it as low as possible to help get to that $6 million.

“We don’t see this as a money grab,” Thomas said. “We’re not trying to fix all of our problems on the backs of the business community and trying to generate all of the money we possibly can with maximum rates every year. We want to keep them as low as possible.”

Cities considering a B&O tax have to follow the state’s model B&O ordinance in broad outline, but cities may add their own ideas to certain portions of the code, including options for additional exemptions and deductions.

The Revised Code of Washington likewise specifies that any B&O tax code a city devises has to identify “retail, wholesale, services, manufacturing and other” categories and the proposed rates for each.

So, to come up with the estimated tax that each of the categories would generate, the draft ordinance takes the base revenues from those businesses and the activity they are actually generating in Auburn.

The code also has to identify the most equitable tax rates and the most unpalatable tax rate for each business sector, Thomas said.

The fact is that by their very nature, Thomas said, some businesses have smaller profit margins, so it exempts from the B&O tax any businesses that don’t generate more than $500,000 a year.

The draft also takes into consideration that the revenues the service and wholesale categories generate in Auburn do not belong 100 percent to Auburn, so the draft subtracts 50 percent of the revenues those businesses generate each year to form the adjusted base, Thomas said.

It also removes another 50 percent of the revenues from all categories, recognizing that some of that revenue is deductible or exempt from being taxable.

The draft estimates that the proposed tax rates by category will generate about $3.94 million a year in revenue.

The city compared the tax rates of similar cities across each business category and took the actual revenue generated in Auburn and applied the other cities’ tax rates to Auburn’s revenue.

So, Thomas said, if Auburn applied Bellevue’s tax rate to itself, it would generate a little more than $8 million each year, and if they applied the city of Kent’s projected 2022 tax rates, Auburn would generate $6.2 million.

“The biggest thing that’s making our total tax dollars being generated seem so low is retailing activity, and in an effort to protect that retailing business at half a percent, it also means much less revenue. Just a slight adjustment in the retail rate actually bumps up the total estimated tax that we would receive quite a bit,” Thomas said.

Thomas illustrated the impact of the proposed rates on actual businesses at .05 percent, .1 percent,.15 percent and .18 percent,representing retail and all other categories, services and wholesale, respectively.

So, for a business generating $750,000 a year, its annual tax burden at .05 percent would be $375. A large retail establishment generating $20 million of taxable revenue in the city annually at .05 percent would sum to a $10,000 B&O tax bill for the year.

For a wholesaler in Auburn generating $750,00o a year, at .18 percent its total tax burden apportioned to Auburn would be $1,350. If its taxable revenue in Auburn were $20 million annually, its annual tax burden would be $36,000.

Thomas said another possibility is tax caps, which other cities have set up to protect the biggest businesses within them. For instance, the city of Renton has a $5 billion revenue tax for its manufacturing sector, so that any revenue generated by that $5 billion is non taxable.

The city of Kent has a tax cap for its retail businesses that protects any retailers that generate $20 million in taxable revenue a year. Thomas said, however, such tax caps in Auburn would not square with the goal of protecting small businesses.

If the city’s goal is to generate about $6 million annually in new tax revenue, and the rates the ordinance proposes would generate only about $3.94 million, clearly there needs to be something else — and that something a square footage tax on the warehousing and wholesale sector.

The idea, Thomas said, is to make the overall tax burden more fairly capture the services and infrastructure of warehousing and wholesaling activities in the city of Auburn.

“Wholesaling accounts for 30 percent of the total gross revenue generated in Auburn, but with the tax structure as recommended, only 20 percent of the tax actually being generated comes from the wholesaling sector,” Thomas said.

“So even at .1 percent rate, which is much higher than all of those other categories, their tax burden still isn’t equal, or on the same level as the total amount of revenue and the total amount of activity that is being generated in Auburn,” Thomas said.

So, even if the city were to lower its.18 percent tax rate to .1 percent, as with all of the other industries, as the city is proposing,, Thomas continued, they would only be paying 17 percent of the total tax.

The city’s proposal then is 10 cents per square foot per quarter for any warehouse space greater than 4,000 square feet.

That means that the owner of a 4,000-square-foot warehouse would pay $2,000 a year on top of the B&O tax. The owner of a 500,000 square foot facility — the Safeway Distribution Center is 524,000 square feet — would pay $200,000 a year.

In total, Auburn has 3.3 million square feet of warehouse space inside city limits.

The city is also proposing a new business tax credit to promote new business and economic growth, and any new employer coming into Auburn that hasn’t operated in the city in the last 10 years would qualify. for the first three years. If they were to employ at least 20 full-time employees or more, they would qualify for a $1,000 credit for each of those employees.

The second credit the city is proposing is the Business Improvement Area assessment credit, tailored specifically to businesses in the downtown core that are paying an annual BIA assessment. The idea is to mitigate the impact of the assessment fee they now pay when the proposed B&O tax is added on, Thomas said.