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

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INFORMATIONAL MEMO Page 3 outreach strategy (see "DRAFT Potential B&O Implementation Communication Plan, attached to this memo). The proposed communications plan is comprehensive. If the City decides to implement a B&O beginning January 1, 2019, the communications plan would need to be streamlined. Some businesses may see a January 1, 2019 implementation date as a burden as many businesses develop budgets in advance of the beginning of the year. Finding the right balance of an implementation date that meets the City's needs and allows for adequate outreach will be important. Preliminary Draft Ordinances The draft ordinance to implement a B&O is based on the model ordinance produced by the Association of Washington Cities (AWC). When reviewing the ordinance, keep in mind there are elements that are mandatory. Notes are included on the draft as comments. They highlight Council decision points. The Administrative draft code is provided as a separate chapter and is not included in the B&O ordinance. This code can remain as a separate chapter or be incorporated into the B&O tax chapter. By establishing the Administrative code separately for the B&O, the groundwork would be laid for the City to include administrative code for all taxes in one administrative code chapter making it easy to reference filing requirements, payment methods, and penalty rates, and promotes cohesive practices. Other Revenue Options Adoption of a B&O tax, along with the previously discussed reductions in expenditures being proposed for the 2019/2020 budget, could close the budget gap created by the flattening sales tax and the discontinuation of the sales tax mitigation revenue and allow the City to provide its current level of service. Further, and importantly, adoption of this tax would better diversify and stabilize revenues, which would benefit the City long term. Additional revenue could reach $3 million or more. However, implementing a new tax is time consuming and requires significant education and outreach to the business community. Should the Council choose to consider other options, raising the Business License fee, in coordination with increases in other fees and taxes, could generate the goal of $2 million additional revenue. For example, the 2018 budget for business license revenue is $2.4 million and the City is on track to collect that and more in 2018. The current business license fee is $70 per full time employee or $35 per part time employee. If the fee were raised to $112 per full time employee and $56 per part time employee, an additional $1.5 million could be generated. In comparison, the business license fee for the City of Kirkland is $105 per FTE and $112 for Redmond — neither city has a B&O tax. Raising the City's fee would bring it in line with these rates. Another option that has been discussed is raising the gambling tax. If it were raised by 1 % to 11% - the same rate charged by the City of Kent and in King County's unincorporated areas - almost $400,000 could be generated in additional revenue. Revised Proposed Timeline If the best option is a B&O tax, the schedule below more realistically estimates the implementation timeframe. The City of Renton used one year to implement. The City of Shoreline hired a tax accountant effective January 1, 2018 for a January 1, 2019 B&O tax implementation date — thus W:12018 Info Memos\BO tax.docx 3