Oak Harbor business owners may soon face an increase in their annual business license fees after city Finance Director David Goldman recommended the council approve a change to its local business license structure.

Increased revenue from any forthcoming change would be used to fund economic development programs that are expected to help small businesses grow, council members said during a workshop meeting July 26.

Beginning in March of last year, the city began charging a flat annual rate of $40 for business licenses in the city, bringing in nearly $59,000 in revenue to the city. This represents a 19% year over year increase in business license fee revenue from 2021, though Goldman said increased compliance at the onset of the new fee likely accounts for the increase.

In an analysis comparing Oak Harbor to 15 other Washington cities, Oak Harbor ranked last in business license revenue as a percentage of the city’s general fund and business license revenue per capita in 2021.

Goldman presented three options for rate structure changes that would generate more revenue for the city.

The first option would implement a tier system based on the number of employees a business has. Under this option, businesses with 10 employees or fewer would pay a maximum of $100, businesses with 11 to 50 employees would pay a maximum of $1,700 and businesses with 51 to 100 employees would pay a maximum of $4,200. Businesses with more than 100 employees would also be capped at a $4,200 annual license fee.

Most Oak Harbor businesses would fall into the first tier with 10 or fewer employees. The average annual business license fee under this system would cost $135, and the scheme would generate an expected $176,000 for the city to be put toward economic development.

The second option also uses a tier system, but based upon gross income rather than number of workers. Businesses with a gross income of less than $20,000 would pay a $50 fee, businesses with a gross income of $20,000 to $100,000 would pay $75, businesses with a gross income of $100,000 to $200,000 would pay $100, businesses with a gross income of $200,000 to $500,000 would pay $250 and businesses with a gross income over $500,000 would pay $500.

Under this system, the average license fee would be $137, and license fees would generate an additional $180,000 for the city.

The third option Goldman presented is to increase the flat rate. A $50 flat rate would generate another $18,500 in revenue, while a $125 flat rate would increase business license revenue by $157,500.

City council members overwhelmingly favored the second option. Councilmember Bryan Stucky said that a flat rate isn’t equitable, but an employee-based tier system would unfairly penalize businesses with lots of workers but a low profit margin.

A tier system based on gross income, however, could generate significant funds for the city without overburdening business owners. Stucky said that his own business generates over $500,000 in gross income and would therefore fall into the fifth tier of Goldman’s proposed system. Though the $500 fee would be more than a tenfold increase over the current rate, he said, it would still be a negligible amount for the business.

“For me, option two I would have no issues with as a business owner, and I think it’s a great decision as a council member,” he said.

Councilmember Shane Hoffmire said that revenue generated from fee increases could be put right back into helping businesses grow through economic development initiatives such as hiring an economic development coordinator. Councilmember Jim Woessner, who attended the meeting remotely, added that an income-based system would not disincentivize businesses from hiring people the way an employee-based system might.

The council did not take any action on business license fees at the meeting.