Model behavior

Vancouver looks at Kirkland business fee structure; Redmond has similar surcharge

Puget Sound-area cities Kirkland and Redmond, Wash., serve as examples in the search for a business surcharge that is palatable to Vancouver and its business community.

At a public hearing earlier this month, city council received feedback on its most recent proposal from about two dozen people. The ordinance included a $275 business license surcharge and a $15 per-employee fee. It would have been capped at $10,000 and exemptions included businesses with revenue of less than $12,000 annually and non-profit and governmental agencies. The surcharge would have raised about $3 million annually dedicated to new-capacity transportation projects.

Though the proposal was unanimously denied by city council, council members were optimistic they are closer to finding a solution.

The business license surcharge has taken several forms since it was first suggested more than a year ago. The surcharges have been adjusted, capped and exempted at varying levels and employee fees have been grouped, tiered and applied differently throughout. Nearly all sectors of the business community have felt unfairly burdened by one or more of the proposals. Vancouver clearly is not the only city in the state looking to shore up its budget, and it won’t be the only one to have a business license surcharge if it is ever successfully passed.

Successful solutions

City staff has looked to the city of Kirkland’s business license surcharge, as it has identified a mechanism to boost revenues from business.

Kirkland implemented a business license surcharge in 2003 because of a budget shortfall due to declining sales tax revenue. And, like Vancouver, Kirkland realized its tax burden had shifted to residents, who contributed 64 percent of city revenues.

"We felt the business sector was not paying their share," said Gwen Chapman, Kirkland interim director of finance and administration.

And, also like Vancouver, business did not embrace the proposal with open arms.

Kirkland’s surcharge is based on the number of employees with additional levels of fees based on revenue. Sole proprietorships would pay a surcharge of $125 if it had revenue of $100,000 or more and $75 if revenue were between $50,000 and $99,999; two to five employees, $250 or $225; six to 20 employees $750 or $550; 21 to 100 employees, $1,500 or $1,000; and 100 or more employees, $2,500 or $2,000. Business that make less than $50,000 annually are exempt from the surcharge and would only pay the $100 business license fee charged to all businesses. Exemptions also include governmental agencies and non profits.

Kirkland’s ordinance also was shaped from a different proposal before it was finalized with the help of the Kirkland Chamber of Commerce.

"There still were groups that were not happy," said Chapman.

Under Kirkland’s structure, businesses with the most employees do not pay proportionately. For example, a business with 200 employees and revenues of more than $100,000 would pay $12.50 per employee or a $1250 surcharge, while a three-employee business in the same revenue bracket would pay $112.50 per employee – only $337.50.

"There were dire predictions that businesses would run away," said Chapman. "That has not happened."

The surcharge raised $899,709 in 2004 and $929,345 in 2005 from the city’s approximately 4,000 businesses. The money is not legally committed to fund specific programs or projects, but the city has made a commitment to enhance economic development.

"(The surcharge) increased our ability to spend more on economic development," said Chapman

Additionally, the city has promised business it would review the necessity of the surcharge. The city is currently taking its first look at the surcharge since it was implemented. Chapman said recovery from the sales tax decline is key to repealing the surcharge.

Kirkland’s neighbor Redmond also has a surcharge that looks much like an early proposal from Vancouver city staff. Redmond implemented in 1997 a $65 per-employee fee. Since then, the surcharge has been extended several times and is now $83.25 per employee.

Redmond enacted its surcharge to boost transportation funding for the rapidly growing city. Just as when it was first implemented, $55 of the surcharge is exclusively dedicated to transportation improvements while the rest is applied to the city’s general fund.

The surcharge includes standard exemptions for non-profits and government agencies, and businesses with annual revenue below $1,500 are not required to pay the surcharge. Additionally, there is no cap to amounts paid by businesses under the surcharge.

Redmond’s ordinance was passed with a four-year sunset clause. It has since been extended twice and expires at the end of this year. The surcharge raised $3.6 million in 2005 from about 4,800 businesses.

Still debating at home

While some business owners who spoke at a public hearing on Vancouver’s latest proposal were outright opposed to a surcharge of any kind, many supported the city’s efforts but had reservations about the proposal as it stood. The main sticking points tended to be the exemption and cap levels and the absence of a sunset clause.

John Caton, a partner with accounting firm Caton Day and Co., said his business serves about 1,000 clients, mostly small business. The extra $290 a sole proprietor business would have paid under the most recent proposal would feel like a lot of money if they were grossing $20,000 to $30,000 per year.

"The effect on a smaller company is far greater than on a larger company," said Caton. "Although excluding business that gross $12,000 is good, it is not enough."

Celinda Rupert, president of Vancouver’s Downtown Association, noted the city will face critics no matter what it decides, but "it is time to make the tough decisions for the betterment of our community."

One suggestion made by the VDA to improve the ordinance was to make big businesses pay more.

"(The proposal) puts an inappropriate burden on small businesses," she said. "Look to adjust the cap on larger employers."

Vancouver Pizza Co. owner Cliff McMillan said he understands the need to fund transportation, but has a concern regarding a sunset clause.

"I don’t want this to be a long term solution," he said. "We would just like to know for how long."