FIN 2018-08-21 Item 2A - Discussion - Business and Occupation (B&O) Tax Revenue

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INFORMATIONAL MEMO Page 2 by government. The rate can be set at 0.2% or lower. For example, a business with gross revenue of $1 million would pay $2,000 per year. At the July 17, 2018 Finance Committee meeting, staff was asked to return to Committee with information on the outreach efforts, draft legislation and the following: 1. Can more business sectors be used in addition to the standard four — retail, wholesale, service and manufacturing? Per a telephone conversation with the Department of Revenue on 8/9/18, multiple sectors can be used each with a unique rate. A list of the State's B&O classifications is attached to this memorandum. 2. What is the logic used by other Cities in setting B&O tax rates? In the City of Kent, rates were set to encourage retail and manufacturing, not services and warehouses. In Renton, all rates are the same except retail which is lower to encourage retail development and activity. 3. What are the service impacts from different sectors? Of the four standard B&O sectors — retail, wholesale, services and manufacturing-- the retail sector receives the highest calls for service by both the Fire Department and the Police Department. However, it should be noted that the retail sector also generates the highest tax amount for the City and also has high foot traffic when compared to the other standard B&O sectors. 4. Why are we considering a B&O tax and how would the money fund City services? As mentioned above, sales tax revenue has not grown in the past two years at the rate anticipated or budgeted. Additionally, the State's sales tax mitigation payments of approximately $1.1 million annually will cease in 2019 based on a decision by the state legislature. These two revenue shortfalls have the potential to create a more than $2 million annual budget gap. While the Administration is proposing reductions, without additional revenues the City would need to reduce services. The additional revenue from a B&O tax would allow the current level of service to be maintained, including several police officers added over the past seven years. Additionally, the revenue would allow for continued investment in infrastructure including street overlay and bridge inspections. DISCUSSION Outreach The City has had some preliminary meetings with Westfield Southcenter and the Seattle Southside Chamber of Commerce to discuss a potential B&O tax and to discuss the overall budget situation of the City. These meetings were intended to help in the creation of an overall 2 W:12018 Info Memos\BO tax.docx