Small businesses in Tacoma take heart: Starting next year, you’re getting a tax break. And you can thank the Tacoma City Council.
Amid dour economic times when the city is struggling to balance its budget, the council this week unanimously approved an ordinance that will eliminate and reduce the city’s Business and Occupation Tax for certain small businesses.
Specifically, the ordinance lifts the city’s taxable threshold that determines which small businesses are required to pay the city’s B&O tax. Starting Jan. 1, only businesses with gross annual revenues of $250,000 or more will be subject to the city tax under the new law. The previous threshold was $75,000.
The ordinance also establishes tax credits for other small businesses that are still subject to the tax, stipulating that firms with gross annual receipts of $250,001 to $300,000 will receive incremental tax credits ranging from 90 percent to 25 percent to help cover their city B&O taxes.
In all, about 4,000 “micro” and small businesses will be affected by the changes, with about 60 percent of those firms located within Tacoma, city officials say.
“Of all of the cities in the Puget Sound region that do have a B&O tax — and that’s most of the larger cities — we now have the highest threshold,” Mayor Marilyn Strickland said Tuesday, before the council passed the city law.
Strickland, the driving force behind the B&O tax changes, made the issue a priority as a way to attract and retain small businesses in Tacoma after she won the mayoral election in 2009.
“You often hear our B&O tax is killing business in Tacoma,” she said earlier this year. “My approach has been, let’s really look at our tax structure and how it compares to other cities.”
In January, Strickland began meeting with local business leaders to examine the issue, before putting together a proposal for the council. The council’s Government Performance and Finance Committee later took up the effort to help formulate the final measure.
The biggest hurdle: Approving a law that would eliminate part of a city revenue stream at time when city officials are grappling to balance a general fund budget plan that’s $45 million less than the one approved two years ago.
“This change is estimated (to have) a reduction of revenues of $1.4 million (per year),” Jodie Trueblood, manager of the city’s Tax, Finance and Licensing Division, told the council last month.
When factored into the city’s biennial 2011-12 budget, the lost B&O tax revenue amounts to $2.8 million.
That amount is almost as much as what the council recently asked City Manager Eric Anderson to trim from his budget plan, leading him to recently propose a menu of alternative cuts.
Councilman Joe Lonergan said Tuesday he almost rejected the B&O measure due to his budget concerns.
“Last week, when we asked the city manager to look for $3 million in our budget … and then seeing this (proposal) is $2.8 million that could be used to fill that gap,” he said, “I had a little moment of – well, there it is, (the money is) right there in front of us.”
Lonergan added that while he had hoped the B&O tax changes would be implemented in a “slower fashion” that those approved Tuesday, he ultimately supported the proposal for its long-term benefits.
“At the end of the day, I think it’s both a win for the city and the business community,” he said.
Strickland said she knew concerns over lost city revenues would be a challenge.
“I went into it good and well knowing that we were in the midst of a recession and that there would be a financial hit,” she said. “But I think as a long-term strategy it totally makes sense.”
Strickland has said that as local businesses impacted by the measure grow and thrive, the city will ultimately benefit from them in other ways, including through increased revenues from sales taxes.
Other council members agree.
“In these really tough economic times … you don’t hear anyone decreasing taxes, you see people asking for more revenue and rate increases,” Councilman Ryan Mello said. “So, that we’re able to do this is a really bold step.”
As a side benefit, the new tax thresholds will reduce the amount of paperwork processing and costs for both small businesses and the city, Mello added.
“There’s savings all around and it makes good sense,” he said.
Councilman David Boe added: “I think this is a great way to reinforce Tacoma as an incubator for small businesses and micro businesses, and making Tacoma the city of your own destiny.”
The council on Tuesday also unanimously approved a measure sponsored by Councilman Marty Campbell to exempt certain businesses from the city’s cabaret tax.