A Few Thoughts on the New Seattle Soda Tax

Soda Tax Seattle Drink Council City

Seattle Soda Tax

On Monday, June 5, 2017, the Seattle City Council passed a motion which will implement a tax on sugary soft drinks (soda). This new “soda tax” is designed to reduce statewide obesity rates, particularly among children, and to raise additional funds for public projects. Expectedly, the passage of the soda tax has been met with both surprise and opposition as it raises issues regarding personal freedom and the role of government in the marketplace. Let’s look at the basic provisions and purposes of the tax and then discuss some of the arguments both in favor and against it.

Basic Facts

The soda tax was passed by a margin of 7-1; Lisa Herbold was the sole councilmember to vote against the tax. The city will collect 1.75 cents for every ounce of “sugary” soda, such as regular Coca-Cola, Pepsi and so forth. The tax will not be collected on diet sodas and sodas made by smaller distributors.

The tax is set to take effect on January 1, 2018. This date could be pushed forward, however, in the event that a legal challenge or other type of motion takes place in the interim. Prior to the vote on the tax, councilmember Herbold proposed several amendments which she claimed would mitigate some of the potential negative consequences of the tax. All of Herbold’s amendments failed except for her proposal that some of the tax proceeds be used to fund local food banks.

Pros and Cons

The chief architect of the tax, councilmember Tim Burgess, argued that the tax will make a positive impact on state obesity levels. Though the tax may (indirectly) encourage healthier eating habits, many opponents could argue that this tax represents an undesirable incursion by the state on the free market. Regardless of the price, people have a choice to purchase sugary soft drinks, and the tax on soda could easily be interpreted as a financial penalty on personal freedom. The soda tax, therefore, brings up the recurring issue of what role the government should play in preventing certain behaviors in the interest of the wider public good.

When viewed in this fashion, the soda tax acquires a rather lengthy pedigree. Sin taxes, such as those imposed on tobacco and liquor, have been relatively common throughout American history. In the 1920s (and early 1930s), we used Prohibition to guard against the supposedly toxic influence of alcoholic beverages; today, historians almost all concur that Prohibition was a failed experiment, but the issue of what level of responsibility the state has for promoting public health remains hotly contested. Here at HTC, we think it prudent to avoid a definitive stance on the issue; after all, we are not dealing with a ban or severe financial burden, only a small incentive to avoid sugary drinks. HTC is certainly very curious about the impact of the tax and we look forward to seeing hard numbers on whether the tax lives up to its expectations.

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Hawaii Housing Authority v. Midkiff & the Function of Eminent Domain

Law Market Economics Eminent Domain Property

Eminent Domain

One of the most enduring myths about government in the United States is the idea that governmental behavior is more or less congruent with standards of individual morality. In other words, most Americans believe that government authority is shaped and ruled by the same moral standards which shape and rule the behavior of the average individual. Governmental behavior may have special leeway in a few instances, but for the most part it is constrained by the same principles which constrain the typical man on the street.

This idea, while not without foundation, falls well short of capturing the truth. What most people do not realize is that governmental morality is based on processes which are altogether different from those which form the basis for the morality of the individual. Individual morality is based on reciprocity, the classic notion of “give and take”: we refrain from damaging our neighbor’s property or stealing goods from our friends because we expect this same kind of treatment in return. Individual morality is an exchange, it stems from the basic idea that whatever action or inaction we take will be reciprocated by whoever is affected.

And because our government is nothing other than a massive collection of individuals, many people assume that governmental behavior must be based on this same principle. In reality, however, this is not the case, because our government does not take part in the sort of interactions in which the individual takes part. Instead of reciprocity, government behavior is based on reason, it derives from a wholly rational process involving the weighing of pros and cons and the careful analysis of possible outcomes. A good deal of the confusion about government would quickly disappear if this fact were realized.

There are various ways to show that this is an accurate statement; today, we will use the concept of eminent domain to prove our case. Relatively few property owners are aware that the government has the constitutionally conferred power to confiscate private property, and that the exercise of this power is not limited strictly to times of war. Denuded of its lofty name, eminent domain is simply a forcible acquisition of the sort which would be punishable if committed by an individual citizen. Of course, this does not speak to its propriety, but only illustrates the fact that governmental behavior operates according to different rules. Let’s take a peek at the case of Hawaii Housing Authority v. Midkiff (1984) to get a sense of the contours of eminent domain.

Facts

On the island of Oahu, 22 landowners held 72.5 percent of the land titles. This oligopoly led to a distorted market which involved inflated prices and general social discontent. One landowner (the Bishop Estates) held an unusually large portion of land. The Hawaii Legislature passed a measure designed to redistribute the lots held by the Bishop Estates to their corresponding lessees. The legislature reasoned that this transfer of ownership was in the best interests of the entire community. The measure was brought before the Supreme Court of the United States in order to determine its constitutionality.

Law

The doctrine of eminent domain arises from the Fifth Amendment to the U.S. Constitution. According to the so-called “public use doctrine,” the government has the ability to transfer title of ownership if such a transfer serves a legitimate public good.

Ruling

In an 8-0 (unanimous) decision, the Supreme Court of the United States ruled that the measure adopted by the Hawaii Legislature was constitutionally valid. The court’s decision of this case was significant because the legislature did not transfer the title of the land to the “public,” but to a larger share of private homeowners. However, though this was the case, the court determined that the legislature’s invocation of eminent domain was valid because the correction of the market conferred a substantial benefit to the general public. In other words, in order for eminent domain to be invoked, private land does not have to be put specifically to public use; it only has to confer a clear benefit to the wider populace.

Of course, circumstances will rarely compel the typical homeowner to master the finer points of eminent domain; but it is still important for virtually every homeowner – and nearly every citizen, for that matter – to have at least a basic understanding of this concept. As citizens, we have to be aware of all the functions of our government, not just those which are the most visible or common. Eminent domain may not dominate the headlines of our most popular media, but as we’ve seen it is still remarkably important.

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In addition to a knowledge of eminent domain, our readers who own property will also benefit from the following presentation about the tax advantages available to homeowners

The Defeat of Oregon’s Measure 97

Portland Oregon Corporate State Tax

Oregon Tax Issues

On November 8, the state of Oregon declined to pass through an initiative which would have severely impacted corporate tax rates. The initiative – known as Measure 97 – was targeted toward Oregon-based C corporations which brought in upwards of $25 million in gross sales in a single year. Corporations bringing in $25 million or less would have been unaffected by the measure.

Measure 97 would have compelled C corporations (with sufficient gross sales) to pay an additional tax of 2.5 percent on top of their original rate. However, businesses classified as “benefit companies” – meaning a business which has aims to either help the community or the environment – would have been exempt from the extra tax even if they brought in sufficient revenue.

Rationale

Oregon currently has no sales tax and also has one of the lowest state corporate tax rates in the union. Proponents argued that Measure 97 was a logical step to bring Oregon’s tax policy closer in line with other states. Supporters of the initiative also argued that the increase was needed to raise funds for a variety of public projects, including education and healthcare. If the measure had succeeded at the ballot box, Oregon would have likely received an extra $3 billion annually in tax revenue.

Defeat

Measure 97 was shot down by a clear majority of voters; the initiative received 1,141,677 votes for “no” and 792,094 votes for “yes” (or 59.04 percent vs. 40.96 percent). Opponents cited the fact that the new state corporate tax rate imposed by the measure would have been among the highest in the country.

Interestingly, the battle over Measure 97 was the most expensive ordeal in Oregon’s history. Supporters and opponents of the bill raised a combined total of approximately $42 million in preparation for the ballot.

Measure 97 certainly would have given the state pocketbook a large boost. However, too many people saw its flaws and so Oregonians will have to think of another way to address shortages for public needs.

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Vancouver’s Latest Tax May Impact Seattle Real Estate Market

Seattle Real Estate Market Prices

Seattle Real Estate Market

Though the Seattle real estate market is attractive on its own merits, a recent tax issued in Vancouver, Canada may create even more demand in the Seattle housing market. In recent years, foreign buyers have caused housing prices in the Vancouver market to rise substantially. In response, the city (of Vancouver) implemented a tax to help stabilize the market. Some observers speculate that new tax will push foreign home buyers south toward Seattle. Let’s take a look at the facts and develop an informed view of the matter.

Foreign Buyer Transfer Tax

The new tax – which is known as the Foreign Buyer Transfer Tax – applies specifically to foreign buyers in the Vancouver housing market. Whenever a foreigner purchases a piece of Vancouver real estate they must pay an additional 15 percent on top of the home price. The tax took effect on August 2nd of this year.

Because little time has passed since the implementation of the tax, predicting its long-term impact is not an easy task. However, it seems likely that foreign real estate buyers – who are predominantly Chinese – will look toward Seattle simply because of the large disparities in home prices between the two markets. In August, the benchmark home price in Vancouver rose to $1.57 million; in Seattle the median home price is $625,000. It seems reasonable to predict that the new Vancouver tax will create an additional incentive to migrate south on top of other incentives which already exist.

Since August, investment in the luxury real estate market of Vancouver has declined by approximately 20 percent. Whether this decline is attributable specifically to the new tax is not fully clear. Along with Seattle, foreign buyers will probably also look toward Toronto.

Possible Impact on Seattle Market

As of right now, there is relatively little hard evidence to support the idea that the Vancouver tax will lead to a stampede of foreign investment in the Seattle real estate market. In fact, there are some data which may suggest a decline in foreign investment. As a general matter, tracking foreign investment is a difficult task, but one way to obtain an imperfect sense of foreign investment trends is to look at cash sales. Cash sales may reflect foreign investment trends to a degree because many (though not all) foreign buyers pay in cash because they are unable to obtain financing in the U.S. But, as it turns out, cash sales have actually declined in Seattle in the past several years. Though this is not conclusive evidence, it tends to throw doubt on the migration hypothesis.

Even without a pile of solid evidence surrounding it, the Vancouver tax has still managed to catch the attention of the Seattle political establishment. Seattle officials are very concerned about keeping housing prices affordable and the potential impact of the Vancouver tax has already sparked discussion about policy considerations. However, it seems certain that no measures will be adopted until there is more firm data on the effect of the tax.

The new Vancouver tax is an interesting example of a city taking action to stabilize its housing market. But at this point it appears that the idea of this tax creating a veritable avalanche of foreign investment in Seattle is almost pure speculation.

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If you’re curious about various tax strategies which can help you save money as a property owner you should view the following presentation by our CPA Jessica Chisholm

Which Presidential Candidate Has the Best Tax Plan?

As it gets closer to election time, presidential candidates are voicing their tax plans for the American public to stew over. Tax plans on the democratic side seem to be raising taxes across the board. Most republican candidates are simply making adjustments to existing tax brackets.PresidentialRace2016

Individual Income Tax Plans

Ted Cruz seems to have a tax plan that will help more Americans with poverty-level income and those barely making ends meet. He has proposed a 10-percent flat tax on income. Donald Trump and Marco Rubio have established three tax brackets, taxing high earners the most.

Hillary Clinton plans no changes other than a 4-percent surtax for those earning $5 million or more. Bernie Sanders plans to raise taxes with the lowest bracket being 37-percent.

Republicans plan to eliminate estate taxes altogether and democrats plan large increases on estate taxes.

Business Income Taxes

On a corporate level, there is not much discussion regarding taxes. Many candidates have no specific proposal at all. The republican candidates are the only ones with some kind of corporate tax plan. Both Trump and Rubio have proposed lowering corporate taxes. Cruz plans to replace the income tax with a 16-percent business transfer tax.

It is not easy to know precisely which tax plan is best for the American people taken as a whole. Those who are barely making ends meet would not benefit from increased taxes. Lowered income taxes would mean that the economy could flourish because more Americans would have a few extra dollars in their pockets to spend on entertainment, travel and in local economies.

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Tax Changes Policy Makers Should Pursue in 2016

The tax system can be a confusing beast. That’s why we’ve put together some of the tax changes policy makers should be pursuing in 2016.TaxSystemCongress

Change the Inflation System

Only half of our states tag their income tax brackets to inflation. This is damaging for everyone, especially those on low incomes. Citizens are therefore paying higher taxes, even though their incomes aren’t increasing. All states should be indexed to inflation to ensure income tax reflects the wider economy.

Expand Earned Income Tax Credit

It’s not the perfect tax credit, but it’s effective at relieving the working poor. It helps to reduce the damage caused by certain states and their regressive tax systems. States without one should adopt it and those with the tax credit should expand on it.

Independent Tax Tribunals

Barely half of our states employ independent experts to chair tax disputes. All the other states have tribunals chaired by people from the revenue department. This state of affairs is borderline corrupt and there’s nothing fair about it. States should adopt a more equitable system.

Go Against Tax Incentives

Tax incentives are unnecessary and unfair. They often waste money and they are against the principles of the free market. Although this is a mammoth task, policy makers should not neglect it.

More Transparency

Finally, there should be a higher level of openness within the tax system. State governments should be more forthcoming with policy information. The opinions of tax experts should not be restricted. It should be released to the public.

What tax changes would you make in 2016?

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Huddleston Tax CPAs of Seattle & Bellevue
Certified Public Accountants Focused on Small Business

(800) 376-1785
40 Lake Bellevue Suite 100, Bellevue, WA 98005

Huddleston Tax CPAs & accountants provide tax preparation, tax planning, business coaching, Quickbooks consulting, bookkeeping, payroll and business valuation services for small business. We serve Seattle, Bellevue, Redmond, Tacoma, Everett, Kent, Kirkland, Bothell, Lynnwood, Mill Creek, Shoreline, Kenmore, Lake Forest Park, Mountlake Terrace, Renton, Tukwila, Federal Way, Burien, Seatac, Mercer Island, West Seattle, Auburn, Snohomish and Mukilteo. We have a few meeting locations. Call to meet John Huddleston, J.D., LL.M., CPA, Tawni Berg, CPA, Jennifer Zhou, CPA, Jessica Chisholm, CPA or Chuck McClure, CPA. Member WSCPA.