In an attempt to compete with California for the political jurisdiction with the most economically destructive policies, Seattle’s city council recently approved head taxes on large businesses in the city.
The reasoning? Seattle is experiencing rising levels of homelessness and politicians believe that they can legislate poverty away and create affordable housing with these funds.
Little do these politicians know that the laws of economics have a stubborn way of bringing political fantasies back down to reality.
An anti-business measure that singles out corporations like Amazon and Starbucks, this tax will hurt more than just the fat cats politicians love targeting. Workers for these companies and consumers alike will also bear the brunt of the tax through lower wage growth and higher prices at the checkout line.
In their myopic efforts “to do something” for the public good, politicians often ignore the underlying causes of the problems they aim to solve.
Seattle’s Housing Problem
It’s no secret that Seattle is one of the most expensive housing markets in the nation, with median house prices approaching $820,000. Politicians and social activists will blame free markets and greedy capitalists for high housing costs, but these accusations are off the mark.
As early as 2008, University of Washington economics professor Theo Eicher illustrated how government regulations contributed to Seattle’s home prices at the time.
Eicher contends that Seattle median home prices doubled from 1989 to 2006 due to the following factors:
- the state’s Growth Management Act which restricts available land and creates artificial density;
- long building-permit approval times;
- building and permit fees;
- and municipal land-use restrictions
These same restrictions have stayed in place and every time developers have tried to offer up affordable housing alternatives, politicians are quick to hamstring these efforts. This was put on display when planning bureaucrats put the clamps on cost-effective alternatives like “micro-housing ” through their alphabet soup of zoning restrictions.
Politicians and the voting public largely continue to overlook zoning’s impact on housing prices. Instead, they look to top-down measures like head taxes and housing subsidies as quick fixes to problems such as housing affordability.
Seattle’s Penchant for Anti-Growth Policies
Restrictive zoning is just one of Seattle’s problems. The city of Seattle has established itself as a bastion of anti-growth policies lately.
In 2015, Seattle gained notoriety for forcing every business with over 500 employees in Seattle to pay a $15 minimum wage. And the results have not looked promising so far.
A study from the University of Washington sheds light on the $15 minimum wage’s negative impact:
The UW researchers found a 9.4 percent drop in hours worked by low-wage workers both in and out of the restaurant industry — resulting in the equivalent of a whopping 6,317 full-time jobs eliminated. Even with a higher wage floor, the average low-wage worker’s monthly pay dropped by $124 — a 6.6 percent pay cut — because of lost hours.
Try as they might, politicians cannot break the laws of economics.
Like any other part of the market, labor markets function on a supply and demand basis. When a minimum wage is implemented the supply of labor increases, but the business demand for labor will decrease as a consequence.
To cope with minimum wage increases, employers will take either of the following actions:
- Turn to automation.
- Favor skilled workers over low-skilled workers.
- Cut hours.
- Lay-off workers altogether.
In a city that already has housing costs on the rise, the last thing it needs is policies that increase unemployment and lessen opportunities labor advancement.
Seattle Must Embrace Free Market Policies
Given the Seattle political class’s penchant for using government to solve every social problem that comes up, a new approach is needed. Policymakers should reassess Seattle’s restrictive zoning ordinances and minimum wage policy before even entertaining more government interventionism.
Striking at the root of the problem is crucial in these discussions, because drawing up more laws and regulations will just create a never-ending cycle of interventionism. Seattle already has enough government interference with its supply-restricting zoning ordinances, minimum wage laws, and their new head taxes.
What Seattle needs is a genuine free market housing environment where developers respond to market incentives, not bureaucratic ordinances. These market forces will determine the supply and types of housing arrangements they’ll bring on the market.
Seattle’s head tax makes for good populist politics but is a major inhibitor of economic growth. Due the increasing degree of jurisdictional competition between political entities, companies like Amazon and Starbucks can find more business-friendly states and municipalities to conduct business in.
Time will tell if coolers heads will prevail in Seattle.
But in the era of interventionist policymaking, old habits die hard.
