Seattle, Washington is the home of quite a number of high tech startups, some of which have grown into massive corporations that have changed the world, such as Microsoft and Amazon. The city also has a far left municipal government. The two facts are about to collide thanks to a soak the rich tax scheme that slaps a 2.25 percent levy on income over $250,000.

The problem with the income tax on the wealthy

As Geekwire explains, a lot of business owners in Seattle operate under various models such as LLCs, S Corporations, and partnerships that are treated as individual income.

Hence, if a small, start up business makes more than $250,000 per owner, they get hammered by the new Income Tax. Businesses already pay a Business and Occupational Tax on gross receipts to the city of Seattle. In effect, small businesses will be subject to double taxation. On top of other government imposed burdens, such as a $15 an hour minimum wage, starting and operating a business is increasingly becoming more difficult in Seattle. Housing and transportation costs have skyrocketed in the city, making a living in Seattle less and less affordable.

Supporters of the tax counter that it is needed to pay for Affordable Housing programs and carbon reduction. Some members of the Seattle City Council promise to look at the “regressive” nature of the Business and Occupational Tax.

Critics of the income tax are, mildly speaking, skeptical.

The tax is also likely illegal

The Seattle income tax on the wealthy is now being litigated in court. The legal action stems from an inconvenient provision in Washington State law that says, “a county, city, or city-county shall not levy a tax on net income.” How the Seattle City government imagines that the income tax on the wealthy law that it passed complies with state law is unclear.

The bottom line

The problem of affordable housing, thanks to the population growth brought on by the technology boom, is genuine. However, traditional solutions to that problem, ranging from affordable housing programs to rent control, have never worked and tends to make the problem worse. Measures that drive out Small Business may just push people and their attempts to create start-ups out of Seattle entirely to suburban communities.

The city would, in due course, become hollowed out like too many other urban centers before it.

One solution that Seattle might want to try, especially if the courts strike down its income tax scheme, is to examine how regulations and other taxes contribute to the lack of affordable housing in the city. A free market solution may be beyond the comprehension of government officials who are trapped inside the regulatory and taxation box, but it may be the only way out.