Mayoral candidate Joe Mallahan, at a forum last week, is among those criticizing the head tax (Photo: Johnathan Fitzpatrick)

By Larry Lange

PostGlobe transportation reporter

       Three years ago, Seattle Mayor Greg Nickels and City Council members thought they should tax employers whose workers commuted to jobs in the city, creating wear and tear on city streets.

       Now, with the economy in the tank and employers laying off workers, City Hall is having second thoughts, and at least one candidate for mayor is picking up the cause.

       In short, the so-called “employee head tax,” part of the 2006 Bridging the Gap transportation levy, may be on the way out.

         The tax was imposed on city businesses in 2007 as a way to help fix up the city’s streets, sidewalks and bridges. Employers with more than $80,000 in annual gross income can calculate by using a 1.3-cent-per-employee-hour formula or by paying $25 per year for each worker putting in more than 1,920 hours per year.

        The tax raises close to $5 million a year and was strongly endorsed by council members and the mayor in 2006.  The rest of the nine-year, $545 million improvement program is being financed by property and parking taxes.

        Now some think the employee tax is a bad thing to do when people are losing jobs, and some question using Bridging the Gap money on the controversial Mercer Street project.

         Last week, Joe Mallahan, campaigning for mayor against Nickels, issued a news release criticizing the tax because it “penalizes Seattle businesses for creating new jobs.”

       “It makes absolutely no sense in bad economic times,” said Charla Neuman, a spokeswoman for Mallahan’s campaign.

        But others already had gotten the idea. City Councilman Tim Burgess criticized the tax from virtually the minute it went into effect in mid-2007, when he began campaigning for his council seat.

      “Even though this appears as a minor financial burden to an individual company, it sends a signal, and in that way is very symbolic about Seattle’s desire to create new jobs, to attract new industry,” Burgess said Monday.

       Burgess couldn’t point to examples of businesses leaving the city or laying off workers because of the tax, but he said other cities without the tax use that fact as a lure when competing with Seattle for new businesses. And the tax is producing less than expected, partly because council members allow exemptions for employees who commute to work by bus, car pool, bicycle or walking.

        Council members in early May approved a resolution calling for small-business relief by first limiting the employee tax later this year to whatever employers paid in 2008, then possibly repealing it in 2010.  Burgess said legislation for a change could be presented within two weeks.

       He said he’s not supporting Mallahan’s candidacy and is being “scrupulously neutral” in the mayor’s race in which Mallahan is pitted against Nickels and five other candidates.

      The resolution also said the council will consider several other economic-incentive measures, including exempting 1,800 small companies from the state business and occupation tax, exempting live-music locations from city admission taxes and extending the duration of some building permits to save developers the cost of reapplying.

         Nickels, who brought the transportation levy package to the council three years ago, is reconsidering the employee tax but not committed to scrapping it yet. Nickels spokesman Alex Fryer said the mayor has been discussing changes in the tax with Burgess. “We’re interested in a repeal but are considering the budget impacts,” Fryer said.  “The mayor will consider discussions, and we’re looking forward to next steps.”

         Part of Mallahan’s opposition to the tax is based on his opposition to the $200 million Mercer Street improvement project that would turn Mercer into a two-way boulevard and narrow the parallel Valley Street segment to the north, shifting some traffic away from new South Lake Union developments.

       Mallahan accused Nickels of penalizing business with the head tax in order to partly fund the Mercer project. He said the mayor is “hurting the city twice with this fee by taxing small businesses that want to grow and then using the funds to pay for the giant Mercer Street project we can’t afford.”

        But spokesmen for the city and for Nickels say Mallahan is wrong about Mercer financing and say the Bridging the Gap money is spent all across the city. Seattle Transportation Department spokesman Rick Sheridan said the Mercer project would be financed partly by $70.5 million in bond revenue that would be repaid from the parking tax, “not the employee hour (head) tax.”

       Sandeep Kaushik, spokesman for Nickels’ re-election campaign, said the “vast majority” of the cash raised by the head tax, property tax and parking taxes in the Bridging the Gap levy is used for projects “in neighborhoods across Seattle,” not just on Mercer or downtown. “If Joe Mallahan is unaware of that, it’s just another indication he’s not familiar with city issues. The idea that this is earmarked for a single project is just not true.”

      Kaushik said Nickels would support repealing the employment tax if needed street, sidewalk and bridge repairs can still be made. “Joe Mallahan’s talking about blowing another … hole in the money available for transportation fixes,” he said.

     Because of an expected revenue shortfall and expected cuts in the city’s budget, Councilman Richard McIver voted against the May resolution calling for limits and cuts to the tax. “We’re in the hole, and giving away our income just didn’t seem to be the vest way out of the hole,” McIver said.