News Roundup: Streetcar

Oct 28, 2023

I agree Glenn that Bellevue should be concerned. Personally I think Bellevue got ahead of its skis with its development plans and expected revenue in its race to replace Seattle as the regional center. Just like the vaunted Bellevue School Dist. is closing elementary schools due to budget deficits due to a loss of students, I think Bellevue City will need to scale backs its expenditures that are based on future construction that is unlikely right now.

The differences are Bellevue has a very vibrant retail area from big box stores to Bellevue Mall, most with free parking, Bellevue's expenditures are much lower per capita than Seattle, and Bellevue's loss will not so much be in existing office towers but planned future towers. Planned developments at East Main, Wilburton and The Spring Dist. always seemed optimistic to me, but now I think they are postponed mostly, and many will have to be rethought, and I imagine the investors are doing that right now.

It was a shame they built East Link where the people ain't hoping to manufacture that ridership with new development, although at the time everyone including the city of Bellevue thought Bellevue would be the next NYC and everyone would get rich.

I agree that you may have gotten the tax revenue consequences for Seattle a little off. It is true the downtown core generated around 2/3 of Seattle's tax revenue pre-pandemic, but WFH will have different revenue impacts:

1. B&O tax. The business and occupation tax is a tax on gross receipts for businesses. This is the largest source of tax revenue, and is expected to decline the most, or be reallocated to other cities.

2. Sales tax. This comes from business purchases because the sales tax is allocated to the point of purchase, commuters shopping and dining (and the lunch trade is critical for most restaurants to provide enough hours for staff), and especially sales tax on new construction because a new office tower can cost a hundred million dollars. The problem for Seattle today is it doesn't have a backup retail tax source like Bellevue.

3. REET tax. This is the real estate excise tax that is applied to any sale of property. When large office towers are sold it generates a lot of REET tax.

4. Head taxes. Seattle has taxes that tax headcounts as well as highly compensated employees that brought in over $400 million/year.

5. Parking taxes. Pre-pandemic Seattle charged a 10% parking tax that it raised to I think 15% that brought in quite a bit of revenue that went toward SDOT.

6. Utility taxes. The cost of utilities themselves must match the cost to produce and must be spent on utilities, but taxes on top of the utilities is a very large source of revenue for cities, and has few restrictions on its use.

7. Property tax. Actually, this will have almost no impact on the city of Seattle except from the loss of new construction which is exempt from the levy cap. A city has a property tax levy, which is capped except for 1% annual increases unless the voters vote to increase the levy. The total levy, which does not go up or down on the basis the cost to run a city is the same whether property values go up or down, is then allocated among all the properties based on valuations. If some properties go up and others go down.

My guess is there will be many appeals by office tower owners and other downtown property owners to lower the value of their properties for tax purposes (Bellevue will not have as many appeals because much of the property is still not developed and so its value has not increased). However the total levy revenue for Seattle remains the same. The decline in valuations for downtown buildings is simply reallocated to other properties in Seattle until the levy — plus 1%/year — is realized because the cost to run a city does not decline because property values do, just like in 2008 when property owners wondered why their property tax stayed the same when their property value fell, or in 2020 when property values soared but the property tax stayed the same, except for voter approved levies.

Probably the biggest impact will be on renters because in order to maintain the levy those properties will see their property taxes increase to make up for the decline in downtown commercial values, which will be passed onto renters. I wouldn't look for my rent to decrease over the next five years no matter how much housing is built.

This is why I noted earlier that one of the big benefits of a vibrant commercial core is it generates so much tax revenue that allows a city like Seattle to spend more and lowers the residents’ tax burden, and commuters have such low social costs. For example, on Mercer Island we get very little tax revenue from our commercial core and so have much leaner budgets so the city has to tax property higher.

I also think it is unfair and unproductive for SLU’er to accuse me of hating Seattle, a city I have worked and lived in since 1959. I love the city, and have been through the ups and downs in the 1970's, 1980's, 1990's until the dot com bubble burst, the rebirth in the early 2000's until the crash in 2008, the resurgence (almost too fast) beginning in 2014 along with the tents, and today. I loved my office in The Smith Tower, except the city changed around me. It became dead retail wise so what was the point of commuting to Seattle, paying a much higher rent, plus $275/mo. for parking, when I can get anemic retail on MI.

The difference today is I think a lot of Seattle's problems were self-inflicted, and I think Seattle voters think that way too which is why they elected Harrell and most of the council is bailing. My post was mostly based on the columns by Westneat and Talton in Sunday's Times. One lives in SLU and the other in Belltown, and both are progressives. If SLU’er has a problem it is with Westneat and Talton. Walking around and seeing people (although Westneat stated SLU is dead) and claiming everything is fine is while Nike is pulling out is not a good policy. This is no time to put your head in the ground.

The Times estimates Seattle will have an operating budget deficit of $240–$250 million for 2023, which will increase each year thereafter, although if you include the loss of REET and sales tax on commercial development I think the figure is closer to $300 million. What this means is the next council is going to have to cut expenditures, or raise taxes, and the main place taxes will increase will be property taxes to offset the decline in valuations and property tax paid by downtown commercial buildings (and utility taxes depending on much room Seattle has under the cap, although utility taxes are some of the most regressive). Seattleites can still spend the same if they want, they just will have to pay more, and if it is property tax that hits renters the hardest.

There is no free lunch even if some like SLU’er want to think there is.