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JoiLA' N <br />City of Tukwila <br />Allan Ekberg, Mayor <br />INFORMATIONAL MEMORANDUM <br />TO: Finance Committee <br />FROM: Peggy McCarthy, Finance Director <br />CC: Mayor Ekberg <br />DATE: August 14, 2018 <br />SUBJECT: Business & Occupation (B&O) Tax Next Steps <br />ISSUE <br />Following Committee guidance at the July 17, 2018 Finance Committee meeting, staff has the <br />following goals for this agenda item: <br />• Continue discussion with the Committee of the desirability of, and timeline for, enacting a <br />Business and Occupation tax; <br />• Report on the first stages of business outreach <br />•Review preliminary draft legislation; and <br />• Discuss alternative options for closing the budget gap. <br />BACKGROUND <br />Sales tax revenue has not grown in the past two years at the rate anticipated or budgeted. <br />Additionally, the State's sales tax mitigation payments of approximately $1.1 million annually will <br />cease in 2019, based on a decision by the state legislature. These two revenue shortfalls have <br />the potential to create a more than $2 million annual budget gap. This budget gap was discussed <br />with the Finance Committee in February through May in connection with the Public Safety Plan <br />financing. <br />The Administration has directed departments to underspend by 3% in 2018 in order to meet the <br />revenue shortfall, as well as identify 3% reductions for the next biennium. While the budget will <br />continue to increase due to contractual obligations, it will not rise as quickly were these reductions <br />not implemented. In addition, the City is transitioning to Priority Based Budgeting (PBB), which <br />may help the Administration and Council identify other opportunities for expenditure reductions <br />as the budget process progresses. However, from what we know today, without adding new <br />revenue in 2019 the City will have to reduce service levels. <br />Additional opportunities to better align revenues and expenditures include: <br />• Establish a B&O tax, which could generate between $700K - $3 million <br />• Increase the gambling tax rate by 1% - 5%,generating between $380K - $1.9 million <br />• Transportation Benefit District car tabs, which would provide $200K to $500K annually to <br />transportation -related projects <br />• Increase other tax rates to the extent allowed without voter approval <br />• Reduce General Fund operational expenditures across-the-board at a higher percentage <br />than 3% <br />• Reduce the General Fund contribution to the CIP by $500,000 annually <br />The B&O tax provides the greatest potential additional revenue, better diversifying and stabilizing <br />the city's revenues. B&O Tax rates are calculated on gross receipts multiplied by the tax rate set <br />1 <br />