COVID-19 has forced companies to reevaluate office structure and has changed the way many people work. With stay at home orders continuing into their fourth month, organizations like Twitter, Facebook and Nationwide have opted to make working from home the new normal as they shift to a permanent remote workforce. These changes in corporate structures will have long term effects on the way state and local governments look to close budget gaps.
Now, several state and local governments are looking to create new revenue through “head taxes” on the payroll of large companies with employees in cities like San Francisco and Seattle. States like Illinois and Colorado are investigating amending their constitutions to establish a progressive income tax aimed at high earners. But as these states and localities look for ways to raise revenue, they need to consider this workforce shift.
Seattle’s City Council passed a head tax in 2018 only to repeal it a month later after opposition from the city’s tech giants. Now amid significant revenue shortfalls because of the economic downturn, Seattle passed an updated “JumpStart Tax” that imposes a payroll tax of 0.7% or higher on businesses with annual payrolls over $7 million. While initial revenue will be directed towards recovery from the COVID-19 pandemic, future earnings will be directed to homelessness and green initiatives.
San Francisco and Oakland are proposing similar taxes, including a head tax on executives and a headquarters tax. In the short term, these taxes may boost the revenue needed to move past the current fiscal crisis. However, the evolving landscape of how companies operate and where employees physically work might result in a loss of revenue as employees move to more affordable areas or because of incentives through flexible remote work policies tested by months of stay at home orders. And let’s not forget the attractiveness of shorter commutes. Cities like Tulsa, Oklahoma and Savannah, Georgia are actively pursuing remote workers to relocate through grants while promoting their lower cost of living and better quality of life.
Many of these revenue generating, technology companies that are targets of payroll and headquarter taxes may begin to encourage employees to relocate to such areas. Some companies may step up recruiting outside of the Bay Area and Seattle tech hubs that have served as an ecosphere to grow hundreds of other businesses throughout the last decade. Or they might just ask their employees to work more frequently at home and do away with large campuses and high overhead.
States and localities with high combined individual and corporate tax burdens— like Illinois and New York have already seen negative migration over the years as high earners and corporations relocate to states that boast lower taxes and a lower cost of living. The move to increased remote offices will only accelerate this trend. While the current budget crisis needs immediate action, state and local governments need to be strategic when looking to corporations to fill the budget holes.
Steve Arthur directs Stateside’s Attorneys General practice, helping clients build relationships with state Attorneys General and educating AGs on client business interests. Steve also leads Stateside’s retail industry practice and advises retailers on working with state government officials and trade associations. With over 20 years of public and private sector policy experience, Steve provides Stateside clients with a unique industry perspective and a wealth of relationships. Complete bio here.
Stephanie Reich provides our clients with advocacy consulting, strategic planning and State and Local Groups engagement support. As vice president of state and local issues, she manages Stateside’s Local Government Monitoring practice. With nearly 20 years of corporate government relations and public service experience Stephanie brings Stateside clients unique expertise and an extraordinary network. Complete bio here.