Seattle economic forecast offers little relief for City Hall

The Seattle City Council’s most recent economic forecast does little to assuage any budget anxiety facing City Hall, as the near-term outlook for sales and business taxes in the metropolitan area continues to look sluggish.

Seattle’s slowing construction industry and underperforming employment growth continue to underpin the budget headache facing the city’s decision-makers. Combined with growing labor costs and ongoing programs funded in recent years, city politicians face a difficult math equation to balance the budget, as they’re required to do.

The city’s budget is approaching a roughly $240 million deficit for 2025. That number could grow depending on how the finances of the city’s most recent labor agreement with the Seattle Police Officers Guild shake out. Though not a surprise, a presentation Monday from officials with the city’s new Office of Economic and Revenue Forecasts concluded lawmakers in City Hall aren’t likely to have the burden of closing that gap lifted from their shoulders.

The city’s coffers depend highly on three streams of revenue: sales tax, business and occupation tax and a payroll tax on the city’s largest companies. All three are similarly sized.

More than half of the city’s sales tax comes from construction and retail trades. Compared with the frenzied pace of building over the last decade, Seattle is now looking at a drop-off in permitting. At the same time, office vacancies are predicted to grow in 2024 and beyond before beginning to decline.

The slowdown can be seen in the 4.8% drop in construction employment in the metropolitan area.

At the same time, taxes from the sale of goods slowed more precipitously in the final months of 2023 than city officials expected.

Employment in Seattle grew 1.3% last year — slower than the roughly 2.3% national growth. That pace was dragged down by the tech industry, which saw layoffs and slower hiring not typical of other industries.

The one revenue source surpassing expectations is the payroll tax, which took effect in 2021. The fortunes of that tax, dubbed JumpStart by its backers, are tied closely to the stock prices of a select few companies with workforces in Seattle, including Amazon, Microsoft, Expedia, Apple and Facebook. As those have gone up, the tax is expected to bring in about $400 million in the coming years, exceeding early estimates of $250 million.

When it was passed in 2020, its purpose was to fund housing and environmental priorities in the city. But it’s already been used once to backfill the general fund and the new City Council may eye it as a means to help plug the growing budget hole.

Because the payroll tax affects so few companies, it’s also volatile. Unlike projections for sales and business and occupation taxes, the range of forecasts for JumpStart is much broader.

While running for office, many of the new members of the City Council said they would “audit” the budget to find savings to close the hole. Several have since acknowledged a true, full-scale audit would take more time and money than they have.

With the exception of Councilmember Tammy Morales, most of the rest have been hesitant to discuss new revenue, which would mean finding cuts from the city’s general fund.

Mayor Bruce Harrell has issued a hiring freeze this year, with exceptions for police, fire and a few other areas. He’s also asked to departments to game out varying degrees of cuts, but has not said how he intends to shore up the city’s accounts.