Fair Tax Solutions for Cities Facing Covid-19 Budget Crises

The economic impact of the Covid-19 pandemic has strained municipal budgets, even as cities have been on the frontlines of the public health emergency and the rising eviction crisis. The federal government is balking at approving aid to states and municipalities, sparking calls for cutbacks in vital public services. Instead, local elected officials should explore options for generating new revenue in ways that help reduce the inequalities that have worsened the effects of the crisis.

This is also a critical moment for municipalities to help restore some fairness to the tax code after the 2017 Republican tax law slashed taxes on wealthy individuals and corporations. Below we highlight several revenue options, focusing on corporations and wealthy property owners. The feasibility of these proposals vary by jurisdiction, since states grant municipalities different levels of taxation power.

Corporate Payroll Taxes

The Seattle city council approved a new tax on July 6, 2020 that targets large businesses with highly paid employees to generate funds for initial use as crisis relief. The Jumpstart Seattle plan has three tiers. Businesses with annual payrolls of at least $7 million will be taxed 0.7 percent on pay to Seattle employees making $150,000-$399,999 per year and 1.7 percent on pay to employees making $400,000 or more. Middle-tier firms with payrolls of at least $100 million will owe a tax of 0.7 percent on pay to employees making $150,000-$399,999 and 1.9 percent on pay to employees earning $400,000 or more. At the top end, corporations with payrolls of at least $1 billion (e.g., Amazon) will be taxed at 1.4 percent on pay to employees making at least $150,000 and 2.4 percent on pay to employees make $400,000 or more. The tax plan is expected to generate more than $200 million per year.

Corporate Income Taxes

Municipalities with the authority to apply local corporate income taxes should consider introducing or increasing the rate on existing taxes or require firms to pay a certain percentage of their state/federal corporate income tax bill to the local government. Another well-established option is a local corporate minimum tax, which could be based on income, gross receipts, or the value of a firm’s local payroll or property. New York City adopted such a minimum tax in 2015. San Francisco is another example. After a 2018 ballot initiative, the city imposed an additional gross receipts tax on its biggest corporations in order to fund homelessness programs.

Taxes on Excessive CEO Pay  

Americans across the political spectrum are outraged about the vast gaps between CEO and worker pay. In 2016, Portland became the first city to tackle this problem through its tax code. Companies that operate in this Oregon city face a 10 percent surtax on the standard 2.2 percent local profits tax if their CEO pay is more than 100 times their median worker pay. For firms with pay ratios larger than 250 to 1, the surtax is 25 percent. Many of the 500 corporations subject to the tax regularly appear on highest-paid CEO lists, such as General Electric and Wells Fargo.

In San Francisco, residents will vote in November 2020 on a ballot measure to introduce a similar tax in that city. Under the proposal, large companies that pay their CEO more than 100 times the pay of their median worker in San Francisco will owe a tax of 0.1 percent of their annual gross receipts. The tax rises to 0.2 percent for companies with pay gaps of more than 200 to 1, and can go up to 1 percent of gross receipts if the top-paid exec makes 1,000 times the median. If approved, the tax is expected to generate as much as $140 million per year.

Lawmakers in eight U.S. states and in the U.S. Congress have introduced legislation similar to the Portland tax. These efforts build on the living wage movement by giving corporations an incentive to narrow their gaps by lifting up the bottom end of their wage scale and reining in CEO pay.

High-End Real Estate Taxes to Fund Affordable Housing And Other Priorities

In many U.S. cities, gentrification trends are exacerbated by a surge in international capital as wealthy investors seek safe havens to park their money. Cities should consider taxes on luxury real estate transfers and annual taxes targeting luxury second homes and unoccupied, vacant properties. Ordinances can be designed to target residential, commercial, and corporate-owned properties. Such legislation raises revenue while discouraging the disruptive impact of luxury development on local housing markets.

Some municipalities may require state enabling legislation to allow such local taxes. Jurisdictions should also consider requiring disclosure of the true owners of real estate (which is not always the name on the legal title) so they better understand who is buying up their communities.

In 2016, San Francisco voters approved a tax on high-end (over $5 million) commercial and residential real estate transactions, with funds used to make community college more affordable.

In 2019, the New York state legislature strengthened an existing “mansion tax,” with rates ranging from 1 percent on sales over million to 3.9 percent rate on transactions over $25 million. The new tax is expected to raise $365 million in FY2019-2020 to help finance mass transit.

At least 35 states have luxury real estate transfer taxes, and seven states levy a surcharge on the highest-value homes or have a progressive bracket structure through their real estate transfer tax system. Some of these laws enable municipalities to piggyback on the state transfer tax.

In 2019, Washington state implemented a progressive real estate transfer tax that also enables cities and towns to create a local add-on tax for affordable housing and homeless services. The statewide transfer tax ranges from 1.1 percent on the first $500,000 in real estate value to 3 percent on sales over $3 million. Cities and counties have great flexibility to add-on to the state transfer tax to fund capital projects. Seattle’s municipal add-on tax will generate an estimated $15 million-$20 million per year for affordable housing and homeless services.

In Massachusetts, state legislators are considering a bill to enable municipalities to implement luxury transfer taxes. In December 2019, Boston city councilors passed a “home rule petition” to the state legislature to enable them to levy a 2 percent real estate transfer tax on properties valued at over $2 million. The fees could raise over $160 million for the City of Boston and would be dedicated to affordable housing programs.

Vacancy Taxes

A growing number of cities are also exploring “vacancy taxes” to discourage wealthy investors from treating properties as “wealth storage units,” not homes. In Vancouver, Canada, for example, a new Empty Homes Tax aims to combat a recent housing crisis caused by property owners’ refusal to enter into rental agreements. Vacant residential properties are taxed at 1 percent of their value.

Such taxes build on state “split roll property taxes” that apply different rates to different types of property. The District of Columbia, for example, taxes vacant commercial and residential properties at a much higher rate.

Reduce Corporate Tax Subsidies

In addition to fair tax increases, municipalities should eliminate wasteful tax subsidies that do little to ensure businesses create good, sustainable jobs. New accounting rules require all state and local budgets to report revenues lost to such tax breaks, generating useful information for eliminating subsidies that drain resources from vital public services.

This article is drawn from a policy brief prepared by the Institute for Policy Studies for Local Progress, a movement of local elected officials advancing a racial and economic justice agenda through all levels of local government.