Kent City Council committee advances B&O tax hike despite business leaders objections

Despite pleas by business leaders to look at alternatives to balance the 2019-2020 budget, the Kent City Council won’t back down from its plan to raise business and occupation (B&O) taxes.

The feud between city and business leaders heated up when the council’s Operations Committee voted 3-0 Tuesday afternoon to recommend that the full council approve the budget and higher B&O taxes on Nov. 20.

“It’s extremely disappointing to me that there was absolutely no discussion about whether or not the ordinance should go forward,” said April Sta. Rosa, owner of Valley Floor Company and Kent Chamber of Commerce president-elect, during an interview after the committee meeting. “Leaving it up to a future council to change it is to me completely unacceptable – the damage has already been done.

“We are going to see businesses leave and costs rise before the next council can do anything about it. We are talking about approving a two-year budget and 10 years of increases, and it’s just very unfortunate they did not take more time to discuss that in the committee meeting.”

Council President Bill Boyce and Mayor Dana Ralph turned the heat up further about the tax when they took an unprecedented step to issue a four-page special report (see full report below) during Tuesday evening’s council meeting to explain the B&O tax jumps, mainly in response to criticism of the increase by business leaders at the Oct. 16 council meeting and a Nov. 2 Kent Reporter opinion piece by Chamber CEO Andrea Keikkala.

“You may have heard some inaccurate information about our proposed B&O tax increase,” Ralph and Boyce said in the report. “That misinformation has created the impression that we do not support businesses in Kent, because we made the hard decision to raise B&O tax rates incrementally over the next 10 years. The mayor and council do support local businesses and we want them to be successful.”

A proposed increase on the B&O square footage tax in 2020 will bring in an additional $3.4 million to the general fund. The council already approved in 2017 an increase in the square footage tax that will bring in $2.6 million in 2019 to help fund parks projects. The council first approved a B&O tax in 2013 to help pay for street repairs. The tax is expected to produce about $11.5 million in 2019 and $14.9 million in 2020.

The hike in 2020 is the first of four planned increases over the next 10 years. Ralph said the B&O rate structure is based on the city’s long-term economic development plan and includes different rates depending on the business type. The proposal maintains a threshold of $250,000 on gross receipts for businesses before the tax kicks in and institutes a cap of $20 million on gross receipts from retail sales.

City leaders say they need the additional revenue because Kent will lose about $5 million a year (starting in late 2019) from the state in streamlined sales tax mitigation and lose about $4.7 million per year from its annexation sales tax credit that ends in June 2020 for the 2010 Panther Lake annexation.

Sta. Rosa supports an annual vehicle tab fee of $20 to bring in revenue of about $1.5 million per year and replacement of city recreation programs with the new YMCA opening next year that could save the city about $457,000.

“Nobody wants to talk about the car tab,” Sta. Rosa said. “You are talking about 20 bucks which is less than half a tank of gas. If someone has to relocate their job or find new job because their Kent job went somewhere else, what does 20 bucks get you?”

•• Editor’s Note: Below is the special report read by Mayor Dana Ralph and Council President Bill Boyce at the Nov. 6 City Council meeting:

Special Report by Mayor Dana Ralph and City Council President Bill Boyce

Tonight, the Operations Committee recommended the Mayor’s proposed 2019-2020 budget to Kent City Council for approval. We are really proud of this budget and the collaboration among the Mayor, City Council and the community that started in February at our first Council retreat. Since then, there have been many retreats, workshops, hearings and public meetings where we reached out to residents, businesses and the Kent Chamber of Commerce to get feedback.

We also attended Chamber board meetings, committee meetings and held three budget roadshows to educate residents and businesses about the fiscal cliff. We set up a budget FAQs page on our website and asked residents to share feedback and to sign up for an email list to be kept informed of the budget process.

You may have heard some inaccurate information about our proposed Business & Occupation (B&O) tax increase. That misinformation has created the impression that we do not support businesses in Kent, because we made the hard decision to raise B&O tax rates incrementally over the next 10 years. The Mayor and Council do support local businesses, and we want them to be successful.

We did not make the decision to raise B&O lightly. B&O is a poorly constructed tax, yet one of the few options the legislature gives cities to fund operations. Faced with a significant budget shortfall due to factors beyond our control, we had to find a way to remain financially sustainable. Before reallocating revenues, cutting more than $2 million in costs, reducing staff, and generating new revenue through B&O, we explored many cost-cutting measures and revenue-generating options.

We want to take this opportunity to provide facts to counter some of the myths you may have heard.

Myth: There wasn’t any collaboration between the City and the business community on the budget, and the Mayor and Council President rejected the Chamber’s request for conversations about the budget.

Fact: The Mayor’s first budget roadshow this spring was at the Chamber office. Either the Mayor or our CAO attended every Chamber board meeting and most Government Affairs Committee meetings. We responded to the incoming Chamber president’s spreadsheet with miscellaneous budget suggestions and answered her specific questions. The Mayor and representatives from our Economic and Community Development and Finance departments met with individual B&O taxpayers in September and shared information with stakeholders and answered questions. However, we cannot and did not delegate the Mayor’s statutory role to draft the budget. That authority is hers and hers alone.

Myth: The City is not open to the Chamber’s input.

Fact: We’re open to proposals of the magnitude necessary to replace our lost revenue. Many of the suggestions we received have been done, are not legal, or do not address the general fund. It is hard to imagine alternatives to the Mayor’s proposed budget that don’t raise residents’ taxes or cut services to residents, which residents have told us repeatedly that they oppose.

Myth: All small businesses pay B&O tax.

Fact: The threshold of revenue at which small businesses owe B&O tax to the City is $250,000 per year. If a Kent business does not generate that much in sales annually, they do not pay any B&O tax. Approximately 55 percent of Kent’s 4,610 registered businesses owe B&O tax; 45 percent owe nothing.

Myth: B&O tax increases on small businesses are large.

Fact: This is simply not true. For example, for a retail business with gross receipts of $251,000, the annual B&O tax due is currently $0.46. Under the proposed rate increase for this category, which would go into effect in 2022, the tax due would be $1, an increase of $0.54.

The annual B&O tax for a professional service business with gross receipts of $500,000 is currently $380. Under the proposed rate increase for this category, which would go into effect in 2022, the tax due would be $500, an increase of $120.

For a business engaging in wholesale with gross receipts of $1,000,000, the annual B&O tax due is currently $1,140. Under the proposed rate increase for this category, which would go into effect in 2020, the tax due would be $1,500, an increase of $360.

Myth: The purpose of B&O tax is restricted to pay for streets.

Fact: B&O revenue is general revenue under state law. Most cities use B&O for general fund operations. There are no laws restricting B&O revenue to streets or any other service area. The original B&O revenue amount allocated in 2012 is still dedicated to streets. That has never changed.

Myth: There are no efficiencies in City government.

Fact: The City of Kent has a low level of service and staffing for a city its size. Our number of employees per 1,000 residents has actually declined since 2011. We have continued to make cuts, have not added new programs, and we seek grant funding whenever possible.

Myth: Businesses are going to leave Kent due to B&O tax increases.

Fact: This is a subjective assumption. Each business is unique, and businesses make location decisions based on a number of factors of which taxes are only one. Kent’s proposed B&O tax rates remain below those of other cities and Kent remains a strategic location for businesses in the greater Puget Sound region. Our Economic and Community Development Department works with businesses looking to locate to Kent every day.

Myth: The City waited until the last minute to address the fiscal cliff.

Fact: As the Mayor stated in her September 25 letter to Council, we are proud of the steps taken previously to mitigate these impacts. While this loss is certainly significant, the fiscal cliff would have been a much larger challenge had the City not taken proactive steps. These steps included talking to our residents about the fiscal cliff as early as 2014, making strategic transfers, eliminating negative fund balances, refunding existing debt to reduce interest costs, and updating our fiscal policies to address fund balance levels.

The City utilizes a conservative budgeting approach, and we use realistic revenue forecasting to inform expenditure levels. The City also made the extremely difficult decision to begin levying the full property tax rate allowable under state law beginning in 2018. Additionally, the City has taken a lead role in working with the State as well as other cities negatively affected by the state’s decision to eliminate Streamlined Sales Tax mitigation monies beginning in 2019. Since we won’t know the outcome of our efforts until after the City’s budget must be adopted, we have planned for the worst-case scenario but are hopeful for a successful outcome from this endeavor.

The budget provides a sustainable solution and allows the City to continue to move forward. Our budget shortfall is a serious situation that we have worked hard to address creatively. We have crunched the numbers, examined our revenue and expenses, and explored many options and possibilities. The bottom line is that a single solution will not resolve the fiscal cliff, and we’ve made some difficult decisions that some will disagree with, but they were well thought out and we took all feedback from residents and businesses into consideration. At the same time, we appreciate the Chamber’s involvement in and their passion for the business community. We welcome continued dialogue on budget issues and are open to viable solutions.