Think about the sales tax for a moment and I suspect you'll agree with the following two statements:
- The sales tax is regressive, meaning that lower-income families devote the highest share of their income to paying the tax. The root cause being that low-income families spend almost all of what they earn on taxable goods and services, while higher-income families save quite a bit.
- When you buy something, you pay the tax.
These two statements imply a third. If you believe them, you also believe this:
- The person who "pays" a tax is not necessarily the person who hands the money directly to the government.
When you purchase an item at a store, there isn't a little government agent there in the checkout line asking you directly for the tax. It isn't handled as a separate transaction. Instead, you are giving a bit of extra cash to the store with the expectation that the owner will in turn deliver that money to the government on your mutual behalf. Which is generally what happens. There are exceptions.
We've had a curious episode here in Seattle recently, where the local government appointed a "Progressive Revenue Task Force" to identify ways to raise money to address the city's twin crises of homelessness and housing affordability. The PRTF's report recommends the city implement a so-called "employee hours tax," or in common parlance a "head tax," with the following justification, which appears at the top of page 4:
"An EHT is inherently progressive in the specific sense that, because it is levied on employers rather than individuals or households."
By this logic, the PRTF would deny points one and two above and call the sales tax "inherently progressive." The sales tax is not levied on individuals or households either.
Whether a tax is progressive or regressive depends on who pays it, and "who pays it" is a question of tax incidence, one of the fundamental bread-and-butter concepts in public finance economics. The key argument: "who pays" is not the same as "who writes the check." One entity might write the check but then pass the costs directly along to somebody else. That's the way the sales tax works, that's the very reason the regressivity of the sales tax is pretty much a consensus view among economists.
The employee hours tax is a tax levied on businesses as a function of the number of hours worked by their employees. Seattle's proposed tax amounts to 26 cents per hour worked, whether that hour is worked by a minimum-wage earner or Jeff Bezos. So the argument that this is in fact a "progressive" tax completely falls apart if businesses were to pass the tax along to workers, in the form of reduced wages or reduced employment.
So do they? Theory says that if we tax a transaction between two people, such as a business agreeing to pay a worker in exchange for their time, the person who is more dependent on that transaction (in jargon, the less elastic party to the transaction) will take the biggest hit. So who is more dependent on an employment contract in Seattle, the worker or the business?
Economists are typically inclined to say "that's an empirical question." Meaning, let's not argue about it abstractly, let's take it to the data. The data are pretty unequivocal: taxes on employment hit employees, not employers. A study of Philadelphia's wage tax, in effect since the 1930s, blames that tax for hundreds of thousands of lost jobs over decades. A study of payroll taxes in Washington state -- a particular payroll tax that is paid by the employer -- concludes that tax increases are "largely passed on to workers through lower earnings."
These results help explain why the non-partisan Tax Policy Center rates payroll taxes as regressive: they are passed on to workers, and low-income households end up bearing a larger burden because wealthy households earn less of their income from work. And that's just a payroll tax: a flat percent of wages paid that would hit a minimum-wage worker and Jeff Bezos at the same rate on their earned income. An employee hours tax is even more regressive, because it represents a bigger hit for the lowest earners.
Seattle hopes to soften the impact of the employee hours tax by exempting smaller businesses, defined as those with revenues below a certain threshold. From the standpoint of tax incidence analysis, this only negates the regressivity if high-grossing firms employ exclusively high-earning workers. Which isn't the case.
What is a city, particularly one prohibited by law from levying a progressive income tax, to do? The answer's pretty simple, actually. If you need to raise money, raise it from property taxes. Local politicians in Seattle like to call property taxes "regressive." They are a tax on housing, and the poor pay a higher percent of their income in housing. But this assumes that the incidence of the property tax falls on renters rather than landlords. There's a pretty strong argument that this is not the case: the landlord can't take the property elsewhere, it's literally nailed down. Whereas a prospective tenant can evade a property tax increase by renting an apartment in the next town over. There's an active and vigorous decades-long debate among economists regarding whether property taxes are, in the words of one recent summary, "regressive, progressive, or what?"
If your city is determined to extract income from businesses, then tax their income. The income of a business is equal to what's left over from their revenue after covering expenses -- their profits. Businesses can escape payroll taxation can by passing it to workers or employing fewer of them. Profit taxation is fundamentally different.
Bottom line, where Seattle's civic leadership would have you believe that the employee hours tax is a "progressive business tax," it's actually a regressive worker tax.
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