As Colorado Springs wrestles with business tax questions, it should ask the simple question of what tax structure would most align business taxes with the demands a business places on local governments — i.e. be the most fair to businesses.

The traditional ways of taxing businesses are on their property and income. Neither arguably is much related to the services provided by local governments to the business. Businesses need police/fire/roadways/trained people etc. whether they are profitable or not, and whether they deploy lots of equipment per worker or not.

A business that spends more on equipment for its workers to be productive is not demanding more local services — which makes the business use tax, a sales tax on manufacturing equipment, an inappropriate way to tax businesses. The City and the Chamber are, from this perspective, on the right track to consider eliminating or reducing it. A further reason to eliminate it is the arbitrariness of it applying only to businesses in the city limits rather than the entire county or region, which penalizes businesses located within the city.

Having wrestled with this question in the 1990s as Economic Development Policy Manager for the City of Portland, with responsibility for business incentives, I concluded that the demands of a business on local governments will most closely track a very simple measure: number of employees in the area. An employee tax is, therefore, probably the fairest way to create alternative revenues to replace the business use tax.

Some greater accuracy relating taxation to business demands might come from refinements to a simple employee count, such as square footage of facilities (more real estate probably means a bit more cost by local governments to serve the business), or employee wage levels (lower paid employees will require more in public services from local governments, so employers with lower wage jobs should probably pay more in local taxes than employers with higher compensation levels).

Employee taxes are often called “head taxes” and they have been increasingly adopted by major cities. The City’s Sustainable Funding Committee concluded in 2009 that a head tax the same as Denver’s at $9.75/month/employee would raise about $12.7 million in 2010. The Committee voted 2-1 to recommend this option to City Council for consideration. Members were strongly in favor of the tax being regional if adopted (which was the case for any new taxes the committee considered.

Some cities have business income taxes. A business income tax has two fairness problems: (1) Businesses demand public services from local governments whether they are profitable or not — so why exempt from taxation businesses that for whatever reason (typically management decisions are a big factor) are not profitable; and (2) Business profits for taxation purposes are complicated calculations that can be manipulated downward via legal business tax strategies.

Both of these problems are solved by a low business revenue tax, such as deployed by the State of Washington sine the 1920s. Instead of a business income tax, businesses in Washington pay approximately one-half percent of their revenues. If an income tax is under consideration by the City, I recommend a revenue tax instead as much more fairly reflecting the demands of a business on local governments.

Christopher Juniper

Chariman, City of Colorado Springs Sustainable Funding Committee