Seattle’s Proposed Business and Occupation Tax Changes on Small Businesses

By Mark Harmsworth

Seattle’s small business community faces a new threat from a proposed change to the city’s Business and Occupation (B&O) tax structure. Seattle Mayor Bruce Harrell’s plan, which seeks to shift from a flat-rate B&O tax to a tiered system based on gross receipts, could place an undue burden on small businesses already struggling to navigate a challenging economic landscape. On the surface it appears to help businesses with lower gross receipts but in reality, it’s going to cost those businesses more. (B&O taxes are paid on gross income regardless of whether a business turns a profit or not.)

This proposal, detailed in a recent article by The Center Square, risks stifling growth, discouraging entrepreneurship, and further eroding the competitiveness of Seattle’s small business sector.

Under the current system, Seattle’s B&O tax applies a flat rate to businesses’ gross receipts, regardless of size. While not perfect, this structure provides predictability, allowing small businesses to plan their finances with relative certainty. The proposed tiered system, however, would impose higher tax rates on businesses with greater gross receipts, even if their profit margins remain slim. For small businesses operating on tight budgets, this change could mean the difference between staying afloat and closing their doors.

Small businesses, unlike large corporations, often lack the resources to absorb sudden tax increases. Many operate with narrow profit margins, particularly in industries like retail, hospitality, and food service, which dominate Seattle’s small business scene. A tiered B&O tax could disproportionately affect businesses that have high gross receipts but low net profits, such as restaurants or specialty retail. For example, a small restaurant generating significant revenue from high sales volume may face a higher tax rate, despite reinvesting most of that revenue into wages, supplies, or rent. This punitive approach fails to account for the economic realities of running a small business in a high-cost city like Seattle. A small restaurant can easily exceed $2 million in gross revenue while only making a 3% profit.

The proposed change comes at a time when small businesses are still recovering from the impacts of inflation, rising labor costs, and supply chain disruptions. Seattle’s minimum wage, one of the highest in the nation, already places significant pressure on small employers. Coupled with other local regulations, such as mandatory paid sick leave and scheduling requirements, the added burden of a tiered B&O tax could push many businesses to the breaking point. The Washington Policy Center’s research consistently shows that excessive taxation and regulation deter business investment and job creation, particularly for small enterprises that lack the financial cushion of larger firms.

Another concern is the potential for reduced economic dynamism. Small businesses are often the incubators of innovation and job growth, yet a tiered tax system could discourage entrepreneurs from scaling their operations. A business owner considering expansion might hesitate if it means crossing into a higher tax bracket, effectively penalizing success. This disincentive could stifle entrepreneurial spirit, driving ambitious startups to relocate to more business-friendly jurisdictions outside of Seattle.

Should the proposal go into effect, Seattle will be at a disadvantage to local cities like Bellevue which have a more stable and favorable tax structure.

Seattle’s city leaders argue that the tiered system aims to make taxation more progressive, ensuring larger businesses pay a fairer share. However, this overlooks collateral damage to small and mid-sized firms that may fall into higher tax tiers despite modest profits. Seattle’s policymakers must consider a more balanced approach, such as offering exemptions or lower rates for businesses below a certain profit threshold or B&O tax deferment to protect the small business ecosystem.

Seattle’s proposed B&O tax overhaul threatens to undermine the city’s small businesses, which are vital to its economic and cultural fabric. Higher taxes, increased complexity, and disincentives for growth could drive entrepreneurs away, reduce job opportunities, and weaken the local economy. City leaders should prioritize policies that support, rather than hinder, the small businesses that make Seattle thrive.

About the Author

MARK HARMSWORTH

Director, Small Business Center

PHONE (425) 418-6134

From washingtonpolicy.org