Mayor Harrell’s New Budget and Windfall Revenue Provoke Big Questions

Earlier this week, Mayor Bruce Harrell performed the annual, legally-required ritual of delivering a proposed budget to the City Council for its consideration. The City Councilmembers officially write the budget; the Mayor just gives them a starting place and has a veto (which the Council can override) at the end of the Council’s process. But in practice, the vast majority of the Mayor’s budget proposal is a straightforward continuation of past years, and our elected officials’ contributions are usually restricted to nibbling around the edges.

This year was setting up to bit a bit more involved, as the city was facing down a $250 million deficit (I wrote about the reasons for the deficit earlier this year). The city is required to pass a balanced budget – and while the Mayor is not required to propose a balanced budget to the Council, the optics of not doing so are very bad. Then-Mayor Durkan tried that a couple of years ago, and it further soured an already deteriorating relationship between her and the Council and practically guaranteed that the Council would de-fund some of her pet projects. Harrell has now run that gantlet, and delivered a proposal that does, in fact, balance the city budget for next year. And there are three things that you need to know to understand Harrell’s proposal and what the Council is likely to do with it.

1. This is mainly about the Payroll Tax

Mayor Harrell (and in turn the Council) has benefited from a miracle: the city’s Payroll Expense Tax (PET), often called the “Jumpstart Tax,” has been a windfall beyond the imaginations of city leaders. The original revenue estimates from 2020, when the tax was passed, predicted that it would bring in $227 million this year. By the city’s current estimate, the real number will be over $400 million. The city’s budget experts (understandably) failed to predict the extent to which local tech companies were paying employees with stock options and grants, and particularly how much those stock prices would increase in the ensuing years. When those employees cashed in, Seattle’s bank account reaped the benefits.

But since the earliest days of the PET, elected officials have fought over how the money should be spent. Born in the days of the COVID pandemic, some (including Durkan) thought that the money should largely go into the General Fund; Durkan’s critics on the Council, however, expressed zero trust in her willingness to respect the Council’s wishes for how the money should be spent and instead legislated a strict Mayor-proof spending plan accounting for all of the revenues. Part of that plan was a short-term accommodation for the city’s pandemic-based financial woes, allowing a slice to be used to bolster the city’s General Fund, but that provision expires at the end of 2024. So under the current legislative structure, none of the PET funds can be used to fix the city’s budget deficit.

Harrell, however, has proposed that the PET revenues are the lion’s share of the solution to the deficit. This week he proposed – with accompanying legislation for the Council to pass – that after dedicating enough revenues from the tax to cover what was originally expected in the Council’s spending plan ($233 million in 2025), $287 million would be transferred to the General Fund. If you’re wondering about the math there, keep in mind that the PET tax also brought in more this year than budgeted, so there is expected to be an extra $138 million of unspent funds at the end of 2024.

In a nod to the expected volatility of PET revenues – if they can skyrocket when stock prices go up, they can crash when the opposite happens – Harrell has also proposed leaving 10% of each year’s revenues unspent as a carry-over buffer for the following year. In 2025, that would be $43 million.

Harrell is trying to split the difference here: continue to fund the original spending priorities for the PET, while siphoning off enough money to fix the enormous hole in the budget. And to fix it permanently, rather than just kick the can down the road by using one-time funds. His critics will argue that all of the PET revenues should be distributed according to the original percentages in the Council’s spending plan, rather than just what is left over after covering the deficit and setting aside the buffer for next year. In fact, Harrell is quietly spending even more: he also proposes allocating about $19 million of PET revenues for a series of “youth wellness” investments, and THEN distributing the remainder according to the original spending plan percentages.

In truth, since its inception the payroll tax has always been a slush fund for elected officials’ pet projects; they were negotiated and written into the original spending plan by Councilmembers, and each year in the budget process there are proposed amendments to use PET revenues to fund other items. But now the City Council that fought so hard with Harrell’s predecessor and locked down the spending plan is largely gone, and Harrell has a new majority on the Council that seems much more willing to go along with him – especially since there are few other viable options for balancing the budget, and none as virtually painless as re-allocating the payroll tax.

2. Harrell wrote a politically savvy budget

In his budget Harrell threw bones to both his allies and his detractors, in an attempt to de-fang critiques. He funded the Equitable Development Initiative (EDI) and the Green New Deal. He threaded the needle on public safety, increasing the budget for police and fire while also adding money for the CARE department to grow civilian alternatives to policing. He protected funding for both sides of the homelessness response, keeping at-risk shelter beds open but also expanding the Unified Care Team that responds to problematic encampments. He maintained hours at the Seattle Public Library, while also investing more in substance abuse treatment programs.

That sounds like an amazing trick in a year where there was a looming $250 million budget deficit. The truth is less amazing. In all of these cases, Harrell is pulling a classic politician’s trick: instead of solving a problem, increase funding just enough to be able to say that you’re doing something about it. Homelessness is a multi-billion-dollar problem; the few million that he added is a drop in the bucket. Similarly, the lack of substance abuse treatment resources in Seattle won’t be solved by Harrell’s meager offering. The CARE team doesn’t have enough new funding to spin up a civilian response to public safety issues where we would see a measurable reduction in armed police response. In City Hall, they don’t propose what it would take to solve the city’s problems; they just make incremental increases to show that they are doing something.

Harrell did one other smart thing: he left some money lying around for the Council to spend on its own priorities. In the General Fund, he proposes a 2025 budget that leaves about $52 million unspent. There is also that new $43 million of payroll tax funds carried over to 2026 as a buffer against volatility: there’s no hard-and-fast rule that it should be 10%, and the Council is free to change that number if it wants to spend more this year. The more opportunities that the Council has to make their own independent spending decisions, the less they will want to take money away from Harrell’s pet projects to fund their own.

3. The 2026 numbers are fiction

In even-numbered years, the city is required to pass a two-year budget, the second year of which is advisory and speculative, though it puts a stake in the ground as to where revenues and spending are likely headed.

At the beginning of the year, the city’s budget projections showed that the $250 million deficit was an ongoing issue that would compound over time: without a fix, it would be accumulate to almost $500 million in 2026. The Harrell administration claims that they have patched that hole permanently, using the payroll tax as an ongoing additional revenue source.

In the budget process no one really takes the second-year budget that seriously other than as a “baseline,” knowing that the Mayor and Council will rewrite it before it is officially enacted. But this 2026 budget includes some worrisome sleight-of-hand that should make us question whether the budget deficit is truly and permanently fixed.

There are five outsized revenue sources for the city: property tax, sales tax, B&O tax, utility tax, and now the payroll tax. The city’s economic forecasters and budgeters use federal and state forecasts to predict what future city revenues will be; they do so for all of the city’s revenue sources, but the “big five” are obviously more important since a small change translates into tens of millions of dollars.

The city’s economic forecast office presents to the Council three times a year updated economic and revenue forecasts. The most recent one, last month, included dire warnings about the local economy and the potential impact on city revenues. Nevertheless, it recommended using a middle-of-the-road “baseline” forecast rather than a “pessimistic” one. Doing so means that two of the “big five” are expected to meaningfully grow in 2026: the B&O tax and the payroll tax. By the city’s own data on the local business climate, there is little to support those growth estimates.

The city has recently received a few pieces of good news: inflation has dropped, the Fed has reduced interest rates, and Amazon just announced that it is requiring all of its employees to be back in the office 5 days a week starting in January. That might help the local economy a bit, though both inflation and unemployment are still higher in Seattle than nationally.

Harrell’s budget also hides a few more details deep in the numbers of the 2026 budget. Two local levies are due to expire at the end of 2025: the Families, Education, Preschool and Promise Levy (FEPP), and the King County Medic-One Levy. The proposed budget seems to assume that the Medic-One levy will be renewed by voters. But the FEPP levy funds disappear in 2026, and the Department of Education and Early Learning’s budget drops by $50 million accordingly. The chances of the city dramatically downsizing its K-12 and preschool programs that much if a levy renewal fails is essentially zero – the Mayor and Council would scramble to find other sources to maintain the program it its current funding level – so this is essentially a bet that a new levy passes.

There are some other places where the numbers are quietly massaged. For example, the Mayor’s proposed new rule to set aside 10% of the payroll tax annual revenues as a buffer isn’t followed in 2026, allowing the Mayor to spend an additional $12 million.

The bottom line is that the Mayor’s budget is working extra hard to make the numbers look good in 2026, whereas in reality there are a lot of big risks and unknowns that may leave our elected officials scrambling to patch a new budget hole next year.

Something else to consider…

As the City Council begins to ruminate on the Mayor’s proposed budget and especially its radical re-working of the payroll tax spending plan, it’s worth reflecting on the path that the tax itself has taken.

The payroll tax emerged from the political carnage after Amazon unwisely dropped a large amount of cash into a local PAC to try to influence the outcome of the 2019 elections. While then-Councilmember Mosqueda took a more moderate approach to enacting a tax on “big business” than her colleague Councilmember Sawant wanted, there were reportedly plenty of back-room negotiation sessions to find a middle ground that the Seattle business community wouldn’t actively campaign or litigate against (even Amazon, despite the fact that the tax as enacted has a separate, punitive higher bracket that only Amazon pays). The argument at the time was that big business wasn’t paying their “fair share” despite benefiting from the city’s infrastructure and services.

Fast forward to today, and the payroll tax is bringing in almost twice as much in revenues than originally forecast. That raises two questions. First, is this the deal that Seattle companies signed up for? The payroll tax isn’t deducted from employees’ paychecks; it’s an additional cost that employers pay on top of their payroll. So when their employees get a windfall from their stock options, the employer’s payroll tax bill goes up as well – a lot, apparently, from looking at the amount the city is raking in. On the other hand, it implies that the company’s stock has risen appreciably, and perhaps that is enough of a benefit to make it a bill worth paying.

Second, are companies now paying their “fair share?”  Of the “big five” revenue sources, two are entirely paid by businesses: the B&O tax, and the payroll tax. Businesses also pay a big chunk of the other three: property taxes, sales taxes, and utilities taxes.

Let’s do some quick math here. In 2025, Seattle businesses will pay into the General Fund $380 million in B&O tax and $297 million in payroll tax. According to the city’s annual financial report (page 227), last year ten large businesses alone paid $25 million in property taxes (there are more than 22,000 businesses in Seattle, though many don’t own taxable property).  If we assume – based on published financial reports – that businesses make up 30% of Seattle City Light and Seattle Public Utilities revenues, and thus their utility tax payments, then that’s about $65 million of utility tax paid by businesses.  There are no detailed statistics for city sales tax, but if we conservatively assume that 10% of sales tax is paid by businesses, that is about $35 million.  In total: at least $800 million of the city’s $1.87 billion general fund revenues next year will come from Seattle businesses. And this doesn’t include any of the non-General Fund taxes and fees, such as the Real Estate Excise Tax, that companies pay.

Is that a fair share? That’s impossible to answer, because no one has, or ever will, define “fair share.” If you’re looking to increase revenues for the city, then it simply means “more than they are paying now.” On the other hand, if you’re looking to lower the burden on companies setting up shop here, then you want taxes to be as low as possible and any amount is too much. Businesses will argue that their primary civic contribution is as “job creators,” which has a grain of truth but is also self-serving since they do consume local resources and need to be monitored and regulated.

Mayor Harrell’s budget doesn’t try to answer the question either, other than by leaving tax rates unchanged and happily spending the payroll tax revenues. And it’s hard to imagine that this City Council will open up that Pandora’s box instead of taking the easy path: patching the budget hole with the existing payroll tax windfall and moving on.