Seattle’s City Budget is Broken. Here’s Why

Earlier this week, Mayor Harrell unveiled his proposed budget for 2026. If you were looking for major changes and bold new initiatives, you were disappointed: it is very much a plan to do more of the same. This is not surprising, given that once again our city’s elected officials are required to patch a sizable fiscal deficit.

Back in April budget projections suggested that there would be a shortfall of about $215 million in General Fund revenues; last month the budget forecast office reduced that to $120 million – still a lot of money to find, and not the first year in a row where fiscal gymnastics were required to balance the budget as required by law.

Last year Harrell found a way to close the gap without imposing new taxes; this year he proposed a few new sources – not necessarily a great thing to do when you’re running for re-election. The mayor has put forth a proposal for restructuring the Business and Occupation (B&O) Tax, which would place more of the burden on large businesses and increase revenues by about $81 million in the first year.

That proposal is on the ballot in November for the voters to approve, yet Harrell has already built it into his budget; if it doesn’t pass, the City Council will need to clean up that mess. Harrell is also taking advantage of an option that the state legislature recently approved: imposing a Public Safety Sales Tax, which in Seattle would raise about $39 million. Together those two measures cover the $120 million shortfall.

In addition, the Mayor has tightened the belts of several departments, recovering about $37 million that he is redirecting to sustain and protect his priorities: police hiring (which is exceeding expectations), housing investments, homelessness response, and economic recovery.  David Kroman at the Seattle Times does a good job covering the nuts and bolts of Harrell’s proposed budget.

Here’s the bad news:

We’re going to do this again next year. The city budget office is already predicting another $140 million shortfall for 2027. Year after year after year of deficits: it wouldn’t be wrong to surmise that something is structurally wrong with the city’s financial situation.

On the expense side, some like to claim that the budget has become “bloated” and needs to be scoured of excess and frivolous spending, including elected officials’ pet projects. The city General Fund budget has certainly increased a lot over the last decade: from $1.11 billion in 2016 to a proposed $1.98 billion for next year, a 79% increase.

But we need to put that in the context of two other phenomena: inflation and population growth. In the same span of time, Seattle’s population has grown from 686,800 to 816,000, an 18.8% increase; and inflation has caused today’s prices to be 44% higher than in 2016. Population is important because it determines the number of people that the city government must provide services for; inflation is important because the city government’s expenses – particularly its largest expense, labor costs – track with local inflation.

We can recast the city budget numbers to factor in both population and inflation, by looking at inflation-adjusted budget per capita. And when we do that, we see that the city budget – both the General Fund and the total budget accounting for all operations – have been flat for ten years, with the exception of a hiccup in 2020 and 2021.

If we drill down and look at inflation-adjusted per capita spending in the largest city departments, we find that many of them have also stayed flat. There are a few exceptions, where policy decisions came into play:  housing and human services grew, while SDOT and SPD shrank a bit.

But the larger take-away is a bit of a surprise: there is little evidence for runaway spending in City Hall. And where changes were made, they largely align with the platforms that elected officials ran on. You can disagree with the policy choices, but it isn’t “bloat” when the total budget tracks with inflation and population growth.

The revenue side of the budget paints a very different picture, and it turns out that is where the problem lies: the city’s main revenue sources are not keeping pace with inflation, because they are not tied to inflation. Property tax revenues are kept artificially low under state law; the only way they can grow faster is by increasing the amount of property to tax by building more. And building construction is, of course, tied to economic expansion.

Similarly, B&O tax and sales tax both can be affected by inflationary prices, but they are equally if not more affected by economic expansion and contraction. Same for the utility tax. And our new payroll expense tax, by design, focuses only on high-compensation employees and has proven to have dramatic swings based upon stock options rather than base salary: in boom times, (mostly tech industry) employees cash in for big windfalls, and in bust times stock option compensation goes unexercised.

Here is what that has looked like over the past ten years for the largest revenue-generators for the city’s General Fund:

In inflation-adjusted dollars, most of these big sources have been losing ground; in fact, we can see that Mayor Harrell is proposing to restructure the B&O tax in order to prop it up in the face of its decline. The payroll tax numbers look erratic because only a portion of the tax’s revenues go into the General Fund, and our elected officials have changed that portion every year to balance the General Fund budget. But if we look at total payroll tax revenues (independent of where they end up), we see the same effect: in inflation-adjusted dollars, they have peaked and are now in decline.

Next year the city predicts that payroll tax revenues will increase only 1.3% and total General Fund revenues 2.2% — while local inflation (CPI-U) is forecast at 3.2%. The city budget will fall farther behind with every passing year – at least until the next economic boom grants a short-term reprieve.

Property taxes could be fixed by the state legislature, by tying the annual increase cap to inflation. The other taxes will be harder, if not impossible, to fix. Since the city’s expenses are tied to inflation and population growth, the inevitable conclusion is that Seattle – and many other cities that face the same problem – will need to replace its existing revenue sources with ones that better withstand inflationary pressures. Not just add new revenues, but replace the old ones. As long as the current revenue sources are still being used the problem will persist. Any new revenue sources will need to compensate for the weak growth in the old ones in order for the city to stay in the black.

There is one obvious source city leaders could turn to, if the state government would allow it: an income tax. Personal income here in Washington has kept pace with and often exceeded inflation for most of the past 35 years:

This shouldn’t really be a surprise, since many employers explicitly tie pay raises to inflation, aka “cost of living adjustments.” An income tax, as many people have argued, could also have the advantage of being a progressive tax, rather than the regressive property and sales taxes the city relies on today. However, the political resistance to allowing an income tax in Washington is substantial.

Swapping out taxes has another hurdle: the city would need to be able to assess and collect it. Seattle leverages existing state and county tax infrastructure wherever it can, including for property and sales taxes, which saves it the cost and logistical overhead of running its own separate process. The benefit of a revenue source is greatly diminished if there is a hefty cost to collect it.

At the moment, there are no proposals on the table for fixing the city’s budget problem; City Hall just keeps kicking the can down the road, hoping for an economic miracle that looks increasingly unlikely in the next few years. But it won’t be too long before city leaders hit the end of the road: they will run out of short-term patches for the annual shortfalls and finally be forced to reckon with the underlying problem.