Seattle’s New B&O Tax: How Higher Rates Are Designed to Work

Seattle voters approved Proposition 2 on 4 November 2025, ushering in a major overhaul of the city’s business and occupation (B&O) tax. The measure, sometimes called the Seattle Shield Initiative, responds to a looming budget deficit and potential federal cuts by lowering taxes for most small businesses while raising rates for the city’s largest firms. Here’s a detailed look at how the new B&O tax structure will work and why it was adopted.

Why the City Changed Its B&O Tax

Seattle’s B&O tax is a local version of Washington State’s gross‑receipts tax. Unlike an income tax, the B&O tax is assessed on a business’s gross receipts, with no deductions for labor, materials or other costs. City leaders faced a $241 million projected revenue reduction for 2025–2026 and worried that cuts in federal programs—such as housing vouchers and food assistance—could dramatically shrink the city’s budget. Mayor Bruce Harrell and Councilmember Alexis Mercedes Rinck argued that, without new revenue, Seattle would have to reduce funding for emergency shelters, homelessness prevention, food access, gender‑based‑violence programs and other services.

The B&O tax was seen as one lever for raising revenue because it already applies to every business operating in the city. The existing system has long been criticized as regressive: businesses owe B&O tax even if they are not profitable. By raising the exemption threshold and creating a standard deduction, the initiative aims to reduce that burden for most small and medium‑sized businesses while asking large corporations to contribute more.

Core Elements of Proposition 2

The ballot description of Proposition 2 explains the central changes:

• Higher exemption threshold – The measure lifts the annual gross‑receipts threshold at which city B&O tax is owed from $100,000 to $2 million. Businesses whose revenue stays below that amount will no longer owe city B&O tax, though they must still file a return.
• Standard deduction – All businesses, even those earning more than $2 million, will get a standard $2 million deduction from taxable gross receipts. In practice, a company with $10 million in revenue will pay city B&O tax on $8 million.
• Temporary rate increases – For seven years (2026–2032), rates rise by roughly 50 percent: retail, wholesale, manufacturing, extracting, printing and publishing businesses will pay 0.342 % (34.2 cents per $100 of taxable revenue), and services, “other” and transport‑for‑hire businesses will pay 0.658 % (65.8 cents per $100). In 2033 the rates drop to 0.273 % for retail/wholesale/manufacturing and 0.526 % for services.
• Credits and exemptions – The proposal provides a credit that effectively exempts pediatric hospitals and comprehensive cancer centers from the increase. The ordinance also directs officials to create offsetting tax credits for eligible businesses.

These temporary rates and the standard deduction make the system progressive: the more a firm earns beyond $2 million, the more it pays. Businesses with gross receipts below roughly $5.7 million are expected to see their tax bills go down or stay the same; only those above that level will pay more. The $5.7 million “break‑even” point represents where the savings from the new deduction equal the cost of the higher rates.

New B&O Rates by Classification

The state B&O tax still applies separately, with rates varying by classification and no deductions for costs.

Who Pays Less and Who Pays More?

• Small and medium‑sized businesses – About 75–76 % of current B&O taxpayers, including most tech start‑ups and local shops, will owe no city B&O tax at all because their revenue falls below $2 million. Nearly 90 % of Seattle employers will pay less B&O tax under the new structure. A professional services firm with $1 million in annual revenue, for example, currently pays around $4,270 in B&O tax; under Proposition 2 it will owe nothing.
• Firms between $2 million and ~$5.7 million – Companies just above the new threshold will still benefit from the $2 million deduction. Because the deduction offsets the higher rate, their tax liability will often remain lower than under the previous 0.427 % rate. City officials estimate that businesses with gross receipts under $5.7 million will see their overall tax burden decrease.
• Large corporations and high‑revenue businesses – Only the portion of revenue above $2 million is taxed, but the increased rates mean that businesses with gross receipts well above $5.7 million will pay more than they do today. Retail, wholesale and manufacturing companies will pay 0.342 % on taxable revenue through 2032. Professional‑services companies (law firms, accountants, software developers, etc.) will see their rate rise to 0.658 %. The city anticipates that only about 5,000 businesses (down from roughly 21,000) will owe city B&O tax once the changes take effect.

How Revenue Will Be Used

Proposition 2 is expected to raise about $80–81 million per year. Up to $30 million annually may be used to backfill federal funding cuts, with the remainder supporting the city’s General Fund for social and human‑service programs. City documents and campaign materials identify several priority areas:

• Emergency shelters and homelessness prevention.
• Food assistance and food‑access programs.
• Gender‑based‑violence prevention and victim services.
• Small‑business support and worker protections.
• Arts, culture and community programs.

The measure also requires audits and includes a sunset date in 2033, after which the higher rates drop to lower levels and voters could choose whether to renew them.

Perspectives: Supporters and Critics

Supporters, including Mayor Harrell, Councilmember Rinck and the Yes on Prop 2 campaign, argue that the measure protects vital services while giving small businesses permanent relief. They emphasize that over 75 % of small businesses will pay no city B&O tax and that the largest firms—many of which earn millions or billions of dollars—can afford a modest increase. Community groups such as Tabor 100 note that the proposal “asks more from big corporations, but it’s lifting the burden off of the small and medium business”.

Critics, including the Seattle Metropolitan Chamber of Commerce, warn that higher B&O rates could make Seattle less competitive. The Chamber contends that raising taxes on large companies while the city is already dealing with economic headwinds may prompt businesses to reduce jobs or relocate. Jon Scholes of the Downtown Seattle Association called the proposal “boneheaded” and argued that coupling small‑business relief with big‑business increases is like “putting whip cream on a plate of dog food”. High‑volume, low‑margin businesses such as grocery stores worry they may have to raise prices.

When Will the Changes Take Effect?

Proposition 2 passed with roughly 67.7 % approval according to early returns. The ordinance stipulates that the new rates and deduction will take effect in 2026 following certification of the November 2025 election. Rates will remain elevated through 31 December 2032, then automatically fall on 1 January 2033. The City Council may refer a future measure to voters to reimpose higher rates if funding needs persist.

Example: Impact on a $20 Million Services Business

To illustrate how the new B&O rates work in practice, consider a services‑based business with $20 million in annual gross receipts. Under the current system, services and other business activities are taxed at 0.427 % once revenue surpasses the $100,000 threshold. That business would owe about $85,400 in city B&O tax (0.427 % of $20 million).

With Proposition 2, all businesses receive a $2 million standard deduction. For our $20 million example, the taxable revenue drops to $18 million. During the seven‑year period from 2026 through 2032, the services rate rises to 0.658 %, meaning the business would pay roughly $118,440 in city B&O tax (0.658 % of $18 million). That is about $33,040 more than under the old rate. Beginning in 2033, the rate declines to 0.526 %, so the tax liability would fall to $94,680 (0.526 % of $18 million), which is still higher than the current tax but lower than the 2026–2032 period. This example underscores how the standard deduction shields the first $2 million of revenue while the increased rates apply only to the amount above the threshold.

Final Thoughts

Seattle’s B&O tax overhaul represents a significant shift in how the city funds essential services. By raising the exemption threshold to $2 million and implementing a standard deduction, the measure eliminates the city B&O tax for most small businesses and offers meaningful savings to mid‑sized firms. At the same time, large corporations that earn well above $5.7 million will pay higher rates, generating roughly $80 million a year to support housing, food access, public safety and other human‑service programs. Though the policy has sparked debate, the overwhelming voter approval suggests a broad consensus that investment in social infrastructure and tax relief for small businesses outweighs concerns about higher taxes on the city’s largest employers. Businesses should stay informed about the 2026 implementation, the $2 million deduction, and any rate changes or credits. informed about the 2026 implementation, the