Seattle's Proposed Business Tax Overhaul: What It Means for Tech Startups

The Seattle skyline and Mount Rainier. (GeekWire Photo / Kurt Schlosser)

Seattle voters are set to decide this November on a major overhaul of the city's business-and-occupation (B&O) tax. Supporters argue it offers relief for small businesses and safeguards city services, while opponents warn it could drive companies away.

For tech startups, the impact is nuanced and varies 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. This means small- and medium-sized businesses with gross receipts of $2 million or less would temporarily pay no B&O taxes.

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.

Key Implications for Startups

• Smaller companies and early-stage startups would benefit significantly, potentially saving thousands of dollars annually. For example, a services company with $1 million in revenue currently pays $4,270 in B&O tax each year.
• However, tech companies with higher revenues, such as more mature startups or corporations like Amazon, would see their tax obligations increase. 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.

Jacob Vigdor, a professor of public policy and governance at the University of Washington, notes, "For early-stage startups not realizing much revenue yet, the proposal looks good. It's as a business is transitioning to the 8-figure revenue level where the proposed tax system starts to bite."

Broader Context and Concerns

This measure comes amid a wave of new business taxes in Washington state. Earlier this year, Seattle voters 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, appreciates the city's effort to reduce burdens for small businesses but points out a key issue: the B&O tax 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.

Vladimir Dashkeev, an assistant professor of economics at Seattle University, suggests companies might consider relocating to cities with friendlier tax climates. "The question is: Is the cost of this tax optimization for the business worth the benefit of saving on these tax payments?"

Vigdor adds that other factors, like state income taxes in California or higher office rents in Bellevue, also play a role in such decisions.

(City of Seattle chart)

The new tax changes are expected to raise about $81 million per year for human services and other city programs. The city, facing a substantial budget shortfall, claims that about 90% of small- and medium-sized businesses in Seattle will pay fewer B&O taxes if the proposal passes.

Support and Opposition

Mayor Bruce Harrell and Councilmember Alexis Mercedes Rinck unveiled the initiative in June, framing it as a way to protect small businesses and shield from potential federal funding cuts. The city council approved the proposal earlier this month with several amendments.

Rachel Smith, CEO of the Seattle Chamber, supports the exemption but believes it should be funded from the payroll tax fund or through the normal budgeting process, not by larger companies, citing concerns over employment and economic uncertainty.

In contrast, Jon Scholes, president and CEO of the Downtown Seattle Association, called it "a boneheaded proposal of epic proportions" on LinkedIn. He supports exempting small businesses but warns that raising taxes on larger companies "will ultimately result in Seattle defunding its tax base" and shifting the burden to residents.

Harrell has pushed back, stating, "We're not trying to run businesses out of Seattle. We are open for businesses."