Property Tax Limitation in Washington State

Transcription

1 POLICY BRIEF Property Tax Limitation in Washington State By Paul Guppy Vice President for Research August 2003 P.O. Box 3643, Seattle, WA WPC

2 Property Tax Limitation in Washington State by Paul Guppy Vice President for Research Contents I. Introduction. 2 II. Summary of the Property Tax System. 3 III. Property Tax Tends at the State Level. 4 IV. Survey Results for Counties. 5 V. Survey Results for Major Cities. 8 VI. Long-Term Property Tax Trends. 10 VII. Conclusion. 14 Appendix A. 15 Appendix B. 16 Washington Policy Center 1

3 Property Tax Limitation in Washington State by Paul Guppy Vice President for Research I. Introduction In recent years Washington voters have approved three popular measures to ease the growth of the property tax burden government places on citizens. 1 Each measure set progressively more stringent limitations on how much state and local elected officials could increase the basic property tax each year. The relatively easy passage of these measures indicates public support for limiting property taxes increases has remained stable over time. The latest of these measures to become law was Initiative 747, passed in It provides that a taxing district may not increase the total amount it collects in regular property taxes by more than from one year to the next. Initiative 747 s limit replaces the earlier Referendum 47 limit, which held annual property tax increases to the lower of the rate of inflation or 6%. 2 Under Initiative 747, local officials have three options when considering whether and how much to increase yearly property tax collections: 1) they can increase the amount collected by up to ; 2) they can increase the amount collected by more than by drawing on unused taxing authority they banked in previous years; or 3) they can ask voters to approve a higher increase. There are no statutory limits on tax increase proposals sent to the voters. Such proposals need only a simple majority to pass. This study follows up on the passage of Initiative 747 and assesses its effectiveness. The study examines the extent to which elected leaders in Washington s 39 counties and 22 major cities limited the increases in regular property taxes collected in 2003 to or less, or whether they chose to enact higher increases. The study also summarizes tax savings at the state level, and looks at the long-term trend in state property tax collections. Finally, the study reviews the course of property tax limitation over the last six years, and looks at how voter-approved efforts to limit the rise in the property tax burden have affected the average rate of yearly tax increases. 1 The three measures are: Referendum 47, passed November 1997 by 64% to 36%; Initiative 722, passed November 2000 by 56% to 44% (this initiative was later invalidated by the courts); and Initiative 747, passed November 2001 by 58% to 42%. 2 The Implicit Price Deflator, the inflation measure used when Referendum 47 was in force, is 1.16% in Washington Policy Center 2

4 II. Summary of the Property Tax System Many people believe their property value alone determines how much property tax they must pay, and when the county assessor updates home values to reflect market trends, their taxes automatically go up. This is not the case. County assessors do not levy property taxes. Elected state legislators and the local board and council members of the Washington s 39 counties, 268 cities and 1,436 other taxing districts do. Once elected officials in each taxing district decide the total dollar amount they feel they need to fund public operations for the following year, the assessor apportions that amount among the district s property owners, based on each land parcel s assessed value. It is a budget-based tax system, and that is the source of most of the confusion over who is responsible for rising property taxes. Most people are familiar with rate-based tax systems, like the state sales tax or the federal income tax. Under a rate-based system elected officials first set a percentage rate which determines the fraction of each dollar of a given tax base that must be paid to the government. The revenue the government will receive from such a tax cannot be known in advance; it can only be estimated. A budget-based system like the property tax begins at the other end. Elected officials first decide how much money they feel is needed for the budget, then divide this among the tax base to determine what rate is needed to raise that amount of revenue. The rate is expressed as so many dollars per $1,000 of assessed value. Under this system, the amount of revenue the government will collect is known from the beginning. It is the tax rate that is unknown until the assessor calculates it. The difference between the two systems can be expressed this way: Rate-based system: rate x tax base = revenue Budget-based system: revenue tax base = rate Once the rate is determined, the county assessor applies it to the value of each owner s property. One piece of land may fall under the jurisdiction of as many as ten separate taxing districts. 3 The assessor adds the budget demands of the different districts together, calculates the tax rate, and then mails the final bill to each property owner. Tax payments are due twice a year. Initiative 747 s limit applies to the total amount of money a taxing district may collect through the regular property tax in any given year. Increases in individual property tax bills will vary according to assessed valuations and in many cases will rise by more than. The general effect over time, however, will be to ease the rate of property tax increase for all property owners, because the state and local governments will be taking less overall. Many property owners will see a decrease in the amount of 3 Examples of taxing districts include, the state, county, city, road, school, public utility, library, port, water, fire, sewer, parks, flood zone, hospital, airport, ferry, cemetery, mosquito control, park-recreation, emergency medical, irrigation, cultural-arts, agricultural pest and urban apportionment. In all there are 1,744 taxing districts in Washington. Washington Policy Center 3

5 property tax they owe, as more of the limited tax burden is shifted to owners of properties with fast-rising values. The limit applies to regular property tax collections. Other sources of property tax revenue remain unaffected. These additional property tax sources are: 1. New construction 2. Improvements to property 3. Increases in the value of state-assessed property 4. Levy increases approved by voters (such as school levies) 5. Banked taxing authority 4 6. The Real Estate Excise Tax (REET) charged on the value of property when it is sold. These additional property tax sources can raise substantial amounts of money for local government. For many counties and cities, the increased revenue coming from taxes on newly constructed buildings alone is more than they receive from a increase in their regular property tax collection. Officials in Jefferson County, for example, increased the amount they collect through the regular property tax by $73,225 in 2003 (i.e. over 2002 collections), but the county will collect more than as twice much, $194,169, from taxes on new construction. Also, the property tax on new construction provides more than a one-year revenue increase, since the value of newly constructed homes and commercial buildings becomes a permanent part of the tax base in future years. III. Property Tax Trends at the State Level Historically, revenues from the state property tax increased sharply each year, usually exceeding the annual rate of inflation. The restraining effect of voter-passed tax limitation, however, is beginning to gradually slow the rate of annual increase. This moderating trend is illustrated in Figure 1. The law does not permit the legislature to exceed the Initiative 747 limit, unless specifically approved by voters, so the state portion of the regular property tax will grow at no more than a year in the future. About one quarter of property taxes paid in Washington go to the state government. 4 The law allows local officials to set aside, or bank, taxing authority they could have used in past years but did not use. The intent is to prevent a use it or lose it mentality when setting public budgets by allowing officials to preserve the ability to increase public revenues for years when it is truly needed. Washington Policy Center 4

6 Figure 1. State Property Tax Collections, $1,600 $1,400 IV. Amount in Millions of Dollars $1,200 $1,000 $800 $600 $400 $200 $ Survey Results for Counties 1992 Year In 2002, our property tax survey results showed that 34 of Washington s 39 counties, or 87%, adopted increases of or less in their regular property tax collections. Twelve of these counties adopted zero increases, thus holding the regular property tax burden placed on their citizens constant from 2001 to Officials in five counties exceeded the limit by drawing on taxing authority they had banked in previous years. 5 In 2003, we found that 36 counties (92%) limited their annual increase in regular property tax collections to or less. Five of these counties adopted zero increases. This is the highest level of property tax limitation since we began assessing statewide property tax trends six year ago. Survey results for all counties are shown in Figure 2. Three counties, Island, Benton and Garfield, raised their property tax burden more than by drawing on banked taxing authority. Benton County officials explained the level of tax increase as being due to the expected completion of a new jail/court facility and the loss of state criminal justice funding. 6 Garfield County officials presented no explanation in their resolution for the level of increase they approved for See Assessing the Effectiveness of Initiative 747 Property Tax Limitation, by Paul Guppy, Washington Policy Center Policy Brief, August Resolution No , Benton County, passed November 18, Resolution file no , Garfield County, passed December 30, Washington Policy Center 5

7 Island County commissioners explained their level of tax increase by stating additional funding was needed, to meet the expected expenses and obligations of the County by partially offsetting the long-term impact of the loss of MVET, Sales Tax Equalization, and certain Criminal Justice funds from the State of Washington. 8 Island s total increase in regular property tax collections for 2003 was $318,372, comprised of $57,514 (), plus an additional $260,858 (4.8%), which the county reported, represents the use of previously banked excess tax capacity. 9 Island County tops our 2003 survey with a tax increase of 5.8%. No county increased taxes by more than the once-common 6% level, indicating the broad effect the Initiative 747 law has had in reducing the rate of annual property tax increases among counties. Some counties increased their current expense budget, which funds most county programs, by shifting money from their road levy. Chelan County increased the regular property tax levy by $75,039 (), added $108,153 in additional tax revenue from new construction (which is not limited by Initiative 747), then shifted $510,000 that will not be collected this year for County Roads. 10 The total increase in property tax collections from these sources totaled $693,192, resulting in an overall 10.83% increase in collections compared to the previous year. San Juan County restored a funding shift from the county road levy it had made last year. The County Council increased the 2003 regular property tax collection by $31,070 (), and then reduced the amount to be collected by $318,929 (9%), to reverse the one-time tax levy shift for 2002 from San Juan County Road Property Tax Ordinance No. C-88-02, Island County, passed November 4, ibid. 10 Resolution No , Chelan County, passed December 16, Resolution No , San Juan County, passed December 2, Washington Policy Center 6

8 Figure 2. Property Tax Scorecard Regular Property Tax Collections by County Percentage Increase in 2003 over 2002 Island Benton Garfield INFLATION Adams Asotin Chelan Clallam Clark Douglas Ferry Franklin Grant Grays Harbor Jefferson King Kitsap Klickitat Lewis Lincoln Mason Okanogan Pacific Pend Oreille Pierce San Juan Skagit Skamania Snohomish Thurston Walla Walla Yakima Cowlitz Columbia Stevens Kittitas 0% Spokane 0% Wahkiakum 0% Whatcom 0% Whitman 0% 0.35% 0.49% 1.16% % 2% 5.8% 0% 2% 3% 4% 5% 6% Annual Rate of Property Tax Increase Washington Policy Center 7

9 V Survey Results for Major Cities In 2002, we found that 19 of 22, or 86%, of the major cities we surveyed limited their annual property tax increase to or less. Six cities adopted zero increases, and three cities increased tax collections by more than. In 2003, a slightly higher number of major cities, 20 of 22 surveyed, or 9, passed regular property tax increases of or less. Four of these cities, Bellevue, Bellingham, Redmond and Spokane, imposed no tax increase at all in regular property taxes. This restraint will result in a tax reduction for many residents in these cities, as the assessment process shifts a limited burden among property owners. Two cities, Lakewood and Kirkland, passed increases greater than. Survey results for all cities are shown in Figure 3. Seattle used all its banked taxing authority to impose a combined tax increase of 2.8% in 2002, so the city council was automatically limited to an increase of or less this year. Council members chose to adopt the full increase. There is little serious debate between Seattle elected officials about how much the annual property tax burden should be increased each year. With one exception (in 2001), the city council merely imposes the maximum increase allowed by law. In past years that level was 6%. In discussing the yearly budget city officials routinely stated, we took the 6%, treating the state s legal ceiling on local property tax increases as a floor. Voters later revised the limit to the annual inflation rate. Since passage of Initiative 747 the limit is. The result is a significant level of tax relief for Seattle residents compared to what the tax burden would have been otherwise, and a considerable change in the way the city finances public services. Renton s ordinance setting property tax collections for 2003 is confusing. It first states, Whereas, the City of Renton does not want to increase the tax burden of the City s property owners, and goes on to say, the City of Renton intends to fully comply with the one percent () limitation of property tax increase imposed by state law. 12 Since the Initiative 747 law does not require local governments to increase the property tax burden, these two clauses seem to indicate city officials intended to approve a zero tax increase in Instead the Renton city council voted to increase the regular property tax by. While still an increase, the rise is considerably lower than the 4.9% boost the city approved in 2002, possibly because, like Seattle, the city has already used up all of its banked taxing authority. 12 Ordinance No. 4989, City of Renton, passed December 9, Washington Policy Center 8

10 Figure 3. Property Tax Scorecard Regular Property Tax Collection by City Percentage Increase in 2003 over 2002 Lakewood 5.6% Kirkland 3% INFLATION Ellensburg Everett Federal Way Kennewick Kent Olympia Port Angeles Port Townsend Renton Seattle Shoreline Tacoma Vancouver Walla Walla Wenatchee Yakima 1.16% Bellevue Spokane Redmond Bellingham 0% 0% 0% 0% Annual Rate of Property Tax Increase (%) Washington Policy Center 9

11 VI. Long-Term Property Tax Trends for Counties and Major Cities As yearly increases accumulate over time, a high rate of growth in the property tax burden has a significant financial impact on citizens. Figure 4 shows the cumulative effect of annual property tax increases adopted by county governments over the last six years. Thirteen, or one-third, of the counties held the rise in the basic property burden below the level of inflation. Inflation rose 10.23% over the six-year period. Two counties, Kittitas and Spokane, have not raised their basic property tax burden since One county, Whatcom, has kept its regular property tax burden flat over the entire period. The remaining 26 counties increased property tax collections faster than inflation over the long term. Twelve of these counties increased the property tax at more than twice the rate of inflation, with Adams County leading the list with an increase of more than 43% over six years, because of a large one-year increase it adopted in Officials in these counties will benefit from the large tax increases approved in the past. Their annual tax revenue will be less affected by the Initiative 747 limit, because yearly increases will be calculated according to the permanently higher tax base they locked in before the limit took effect. The six-year trend for all the counties is shown in Figure 4 and in Appendix A. A similar long-term pattern occurs with major cities. Six cities have held their cumulative increase in regular property tax collections to less than inflation. Three cities, Kennewick, Port Angeles and Vancouver, adopted cumulative tax increases only slightly higher than the inflation rate, while Bellevue has not increased its basic property tax burden at all since Fifteen cities have six-year tax increases greater than inflation, with Seattle, Renton, Yakima and Spokane each imposing increases at more than twice the rate of inflation. While Seattle s one-year property tax increase was limited to in 2003, the cumulative financial burden the city places on its citizens increased 3 over the past six years, due to the continuing effect of the large tax increases city officials adopted in past years. The long-term tax trends for all the cities in our survey are shown in Figure 5 and in Appendix B. Washington Policy Center 10

12 Figure 4. Property Tax Scorecard Regular Property Tax Collections by County Total Compound Increase % 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Adams San Juan Mason Pacific Stevens Whitman Jefferson Pierce Douglas Island Kitsap Yakima Okanogan Asotin King Snohomish Chelan Franklin Skamania Ferry Benton Columbia Skagit Grays Harbor Walla Walla INFLATION Lincoln Garfield Grant Lewis Clallam Klickitat Thurston Clark Wahkiakum Kittitas Spokane Cowlitz Pend Oreille Whatcom 0.00% 29.60% 28.79% 26.69% 23.33% 23.35% 23.22% 23.06% 22.45% 22.30% 21.60% 19.13% 18.57% 18.26% 18.12% 17.75% % % 14.16% 14.14% 10.32% 10.23% 9.47% 10.28% % 9.08% 8.45% 8.45% 8.45% 6.00% 2.77% 2.77% 3.44% % Washington Policy Center 11

13 Figure 5. Property Tax Scorecard, Regular Property Tax Collections by City Total Compound Increase % 5% 10% 15% 20% 25% 30% Seattle Renton Yakima 24.16% 23.93% 31.06% Spokane Shoreline Walla Walla Federal Way Tacoma Wenatchee 20.38% 19.09% 18.57% 18.43% 18.36% 16.67% Olympia Everett P. Townsend Kent 13.87% 13.48% 13.48% 13.29% Vancouver Port Angeles Kennewick INFLATION Lakewood 10.76% 10.66% 10.29% 10.23% 8.52% Bellingham Redmond Kirkland Ellensburg % 4.44% 4.05% Bellevue 0.00% Washington Policy Center 12

14 To get a clearer sense of how voter-passed initiatives have altered the pattern of taxation in our state, we looked at changes in yearly average and median property tax increases at the county and city level. It is likely the average annual property tax increase prior to passage of Referendum 47 in 1997 was around 6%. In the first year of our survey, in 1998, the statewide average increase among counties was 4.7%. Among major cities it was 3.5%. Since then the level of average property tax increase at the county and city level has declined steadily across the state, falling to in Average tax increase results for 1998 through 2003 for counties are shown in Figure 6, and for cities in Figure 7. Figure 6. Average and Median Increases in Regular Property Tax Collections by County, Year Average Increase Median Increase % 4.5% % 3% % % 2% % 2003 Calculating averages can be misleading when a single sample sharply skews an entire group of figures. For example, in 1998 Adams County increased its property tax by 36%, four times more than the next highest county, and in 2001 Renton raised its property tax collections by 6%, half again as high as the next highest city. For this reason it is useful to look at the median increase for each year studied, in which half the results occur above the median point and half fall below it. In 1998, the median property tax increase among counties was 4.5%, while among cities it was 5%. By 2003 median levels had fallen to and 1. respectively. Figures 6 and 7 show median annual tax increases for counties and major cities. Figure 7. Average and Median Increases in Regular Property Tax Collections in Major Cities, Year Average Increase Median Increase % 4.4% % 2% % 1.4% % 2% % Washington Policy Center 13

15 VII. Conclusion Initiative 747 was not a tax cut; it did not reduce or even freeze the total amount of property taxes Washington citizens pay, especially since many categories of property tax are not subject to the limit. Still, the initiative has been successful in achieving the policy goal of restricting how much the regular property tax burden can grow each year. In our latest survey, well over 90% of Washington counties and major cities limited their annual increase in regular property tax collections to or less. This is a considerable change from 1998, when only six counties and two cities held property tax increases to or less. Initiative 747 has markedly eased the yearly increase in the tax burden imposed by counties and major cities. Property taxes are much lower today than they would have been under previous law, resulting in significant tax savings to Washington citizens. Washington Policy Center 14

16 Appendix A Washington Counties Increase in Regular Property Tax Collections Over the Previous Year, and Five-Year Compounded Total County Compounded Adams 36.27% 0.00% 0.58% % 43.35% San Juan 6.00% 6.00% 12.00% -8% 17% 36.8 Mason 6.00% 6.00% 6.00% 2.6 5% 29.60% Pacific 6.00% 6.00% 6.00% 6% 28.79% Stevens 6.00% 6.00% 6.00% 6% 0%.35% 26.69% Jefferson 7.97% 4.00% 6.00% 2.6 0% 23.35% Whitman 6.00% 6.00% 6.00% 3.55% 0% 0% 23.33% Pierce 1.90% 6.00% 6.00% 5.50% 23.22% Douglas 7.90% 6.00% 5.24% 0.22% 23.06% Island 4.50% 6.00% 1.42% 2% 5.8% 22.45% Kitsap 5.00% 6.00% 4.98% % Yakima 6.00% 5.00% 5.00% 2% 21.60% Okanogan 1.90% 6.00% 6.00% 2% 19.13% Asotin 6.00% 6.00% 1.42% 2% 18.57% King 5.08% 4.50% 3.53% 1.50% 1.47% 18.26% Snohomish 5.60% 6.00% 1.42% 2% 18.12% Chelan 8.00% 4.00% 3.80% 0.00% 0.00% 17.75% Franklin 7.75% 2.62% 4.03% 1.06% 0% 17.4 Skamania 6.00% 3.00% 3.00% 2% 17.0 Benton 9.00% 2.65% 0.00% 2% 0% 2% 16.4 Ferry 0.00% 6.00% 1.00% 6.00% 15.76% Columbia 0.00% 1.28% 12.12% -0.62%.49% 14.54% Skagit 5.50% 4.00% 0.00% 2% 14.16% Grays Harbor 4.00% 4.00% 1.42% 2% 14.14% Garfield 0.00% 0.00% 6.00% 2.20% 0% 1.8% 10.28% Lincoln 1.60% % 0.60% 0.43% 9.47% Grant 3.80% 0.85% 1.42% 1.02% 9.4 Walla Walla 1.90% 3.00% 1.42% 2.6 0% 0% 9.23% Lewis 1.90% 0.85% 1.42% % Clallam 1.90% 0.85% 1.42% 2% 1.59% 9.08% Klickitat 1.90% 0.85% 1.42% 2% 8.45% Thurston 1.90% 0.85% 1.42% 2% 8.45% Clark 1.90% 0.85% 1.42% 2% 8.45% Wahkiakum 6.00% 0.00% 0.00% 0% 0% 0% 6.00% Cowlitz 0.15% 0.00% 0.39% 1.78% 0.18% 3.54% Kittitas 1.90% 0.85% 0.00% 0% 0% 0% 2.77% Spokane 1.90% 0.85% 0.00% 0% 0% 0% 2.77% Pend Oreille 0.00% 0.00% 0.00% 0% 2.0 Whatcom 0.00% 0.00% 0.00% 0% 0% 0% 0.00% Washington Policy Center 15

17 Appendix B Washington Major Cities Increase in Regular Property Tax Collections Over the Previous Year, and Five-Year Compounded Total City Compounded Seattle % 6.00% 4.10% 2.90% 31.06% Renton 4.30% 0.00% 6.00% 6.00% 4.90% 24.16% Yakima 6.00% 6.00% 6.00% 2% 23.93% Spokane 6.00% 6.00% 4.00% 2% 0% 20.38% Shoreline 6.00% 6.00% 0.00% 3.90% 19.09% Walla Walla 6.00% 6.00% 1.42% 2% 18.57% Federal Way 3.70% 2.50% 3.20% 2% 4.80% 18.43% Tacoma 5.00% 0.88% 6.00% 3.34% 1.00% 18.36% Wenatchee 6.00% 4.00% 2.00% % Olympia 6.00% 0.85% 1.00% 3.39% 13.87% Everett 6.00% 6.00% 0.00% 0.00% 0.00% 13.48% P. Townsend 6.00% 6.00% 0.00% 0.00% 0.00% 13.48% Kent 1.90% 0.85% 5.95% 2% 13.29% Vancouver 1.90% 3.00% 1.42% 2% 10.76% Port Angeles 4.00% 0.85% 1.40% 2% 10.66% Kennewick 0.00% 6.00% 0.00% 2.00% 10.29% INFLATION 1.90% 0.85% 1.42% % 1.16% 10.23% Lakewood 1.90% 0.85% 0.00% 0.00% 0.00% 5.6% 8.52% Bellingham 0.00% 0.00% 1.42% 2.6 0% 5.1 Redmond 3.00% 2.00% 0.00% 0.00% 0.00% 0% 5.06% Kirkland 0.00% 0.00% 1.40% 0.00% 0.00% 3% 4.44% Ellensburg 0.00% 0.00% 0.00% 2% 4.05% Bellevue 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Washington Policy Center 16

18 About the Author Paul Guppy is a graduate of Seattle University and holds Masters degrees in public policy and political science from Claremont Graduate University and The London School of Economics. He completed higher education programs at The Sorbonne, Paris and at Gonzaga University in Florence, Italy. He served for 12 years in Washington D.C., most of that time as a Legislative Director and Chief of Staff in the United States Congress, before joining Washington Policy Center in 1998 as Vice President for Research. He is the author of previous Policy Center studies on civil rights, labor policy, property taxes, insurance regulation and health care reform. He received the 2003 Award for Governmental News Reporting from the Municipal League of King County. Michael Brandt, Elizabeth Clawson and Nigel Stark provided valuable research assistance to this project as part of their work with Washington Policy Center s internship program. Their contribution is greatly appreciated. Published by Washington Policy Center Chairman President Vice President for Research Communications Director Janet True Daniel Mead Smith Paul Guppy Dan Zarelli If you have any comments or questions about this study, please contact us: Washington Policy Center P.O. Box 3643 Seattle, WA Visit our website at wpc@washingtonpolicy.org Phone: (888) WPC-9272 Fax: (888) Washington Policy Center 17