Planning and Finance Series: Tax Incentives at the Local Level

Published in 2014

by Patrick L. Dugan, Everett, Washington

Recently, the Weyerhaeuser Corporation announced that they were relocating their corporate headquarters from their spacious 430-acre suburban office park campus in the City of Federal Way to Pioneer Square, a dense historic area in downtown Seattle. To planners, this is a fascinating announcement that runs counter to decades of business migration out of central cities to suburban office parks.1 Forty-three years ago, Weyerhaeuser itself was part of the relocation of businesses out of urban centers when it moved out of downtown Tacoma to suburban Federal Way. This announcement not only raises interesting planning questions, but it also affects the way we might think of the role of taxes in business location.

Taxes and Economic Development

It is commonly argued that taxes need to be kept low if we are to attract new business and that we will drive out business with higher taxes. This argument is most pronounced at the state level, where states vie with each other to reduce taxes or provide tax incentives to attract or keep businesses. A recent example is the competition between Washington State and South Carolina to keep or attract various part of Boeing’s business. This competition culminated recently with Washington granting $8.7 billion in tax breaks to keep assembly work on Boeing’s new jumbo jet.
 
 
The debate over tax incentives is also common at the local level, arising whenever a local government considers raising taxes. The argument also comes up during economic development discussions where economic development proponents may argue that lowering taxes will attract new business. While many people accept the argument that taxes encourage or discourage business, I have always been skeptical of those arguments at the local level because the differences between the tax rates at the local level within a state are much smaller than the differences from state to state. Differences in taxes at the state level are often large enough to constitute a significant amount on a major corporation’s bottom line, enough to be a factor in locational decisions. The effect of higher taxes can be substantial, especially when combined with other costs, such as labor, which can vary greatly from state to state. However, any differences in local tax rates would have a much smaller impact and are not likely to outweigh other locational considerations.

The Role of Taxes and the Weyerhaeuser Decision

The Weyerhaeuser decision seems to be an example of the lack of significance of local taxes in a locational decision by a large corporation within a state. The local tax most businesses argue the strongest against in Washington is the business and occupation (B&O) tax (a tax on gross receipts or gross income of businesses). Because it is aggressively opposed by business, only a few cities in the state levy it. Seattle has the second2 highest B&O tax in the state (a rate of 0.00215 on gross receipts), while Federal Way has no B&O tax at all.3 On the other hand, Federal Way does have a higher overall property rate tax rate of about $15.75 per thousand (due to an exceptionally high property tax for schools) compared to a $10.29 rate on the Seattle property.4 Other tax rates in Seattle and Federal Way are the same or similar.
 
 
In describing the reasons for the move to Seattle, the Weyerhaeuser CEO cited the Seattle site has having better access to a larger talent pool to meet future recruiting needs, not just in the Seattle region but from across the country, and that the Seattle site is a great transit hub for employees. Although he alluded to the high costs of maintaining the Federal Way site (which would include property taxes), the non-tax advantages of the Seattle site seemed to be emphasized more.5 If taxes were the driver in Weyerhaeuser’s deliberations, there are plenty of other sites in the county that have both no B&O tax and lower property taxes than Federal Way.

Other Examples of the Role of Local Taxes in Business Location

While the Weyerhaeuser decision may be an outlier, I have encountered other examples in my career. For many years, the City of Everett had a lower sales tax rate than other areas of Snohomish County, but other areas of the county consistently attracted more retail sales business than Everett. Similarly, when I was Finance Director in the City of Lynnwood during the recession, the city considered, and ultimately adopted, a range of tax and fee increases that were vigorously criticized by the business community as driving out business. In spite of these criticisms, since then, business activity (as measured by sales taxes) has increased at the same rate as the state average, and the average for all other cities in the county (13 percent for all three between 2011 and 2013).
 
 
The locational decisions of new firms locating in the region indicate that Weyerhaeuser is one among many examples of companies that prefer urban sites over suburban. While Microsoft opted for a suburban office park when it began, other major corporations starting since then have opted for a Seattle location over suburban ones. This is in spite of Seattle having a significantly higher B&O tax than most competitive cities, such as Redmond, Kirkland, and Bellevue (these cities have property tax rates comparable to Seattle). These corporations include Starbucks, Amazon, Vulcan, and numerous high tech firms. Nonetheless, there are also numerous examples of firms locating in the suburbs as well, including some that moved out of Seattle, notably Costco and REI.

Conclusion

Very little in my experience indicates that local tax rates play a significant role in attracting or driving out business. Other advantages or disadvantages of different locations and sites usually play a much more significant role in the locational decisions of businesses within a state. The recent Weyerhaeuser announcement seems to be an example of this.
 
 
One of the most significant planning paradigms of my planning and finance career, that businesses flee downtowns in favor of suburban locations, may be eroding, at least in the Seattle area. One of the reasons it was thought that business fled the city was to take advantage of lower suburban tax rates. In King County, Washington, urban locations offer advantages that often appear to outweigh any tax advantage that suburbs may have.

Patrick L. Dugan has held various financial and planning positions in cities, counties, and regional agencies in three states over the last 30 years. Now a private consultant in Everett, Washington, he can be reached at consult.dugan@frontier.com.

Endnotes

1. See “The death of the suburban corporate campus” by Mark Hinshaw in Crosscut, http://crosscut.com/2014/09/02/architecture/121714/weyerhauser-end-era/ for an interesting discussion.
2. Exceeded only by the small town of Westport.
3. Association of Washington Cities, http://www.awcnet.org/Portals/0/Documents/Legislative/bandotax/botaxrates.pdf
4. King County Assessor, http://gismaps.kingcounty.gov/parcelviewer2/
5. Seattle Times, “Weyerhaeuser moving to Seattle’s Pioneer Square,” August 26 2014. http://seattletimes.com/html/businesstechnology/2024394215_pioneersquarexml.html