Property Tax Relief in Washington: Referendum 47 s Increasing Effectiveness

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1 POLICY BRIEF Property Tax Relief in Washington: Referendum 47 s Increasing Effectiveness By Paul Guppy Vice President for Research 2000 P.O. Box 3643, Seattle, WA WPC

2 Property Tax Relief in Washington: Referendum 47 s Increasing Effectiveness by Paul Guppy Vice President for Research I. Background Three years ago the people of Washington passed Referendum 47, a law to limit state and local property tax increases to the rate of inflation (which is 1.42% this year), unless elected officials identify a substantial need to raise taxes higher. Frustrated with the pressure of ever-rising property taxes and yearning for relief, voters passed the measure by a landslide 64% margin. It gained a majority in every county in the state, and in eleven counties it passed by a two-to-one margin or better. The message to Washington s elected leaders was clear: the people wanted property tax relief. Once the excitement of the campaign and ensuing election were over, however, it was less clear just how effective Referendum 47 would be. The existence of an escape clause allows counties and cities to ignore the Referendum 47 limit. That means two older property tax laws remain in place: 1) local officials are still allowed to raise tax collections by 6% a year and; 2) officials can raise taxes even higher by drawing on unused taxing authority that they have banked in previous years. For these reasons many observers assumed Referendum 47 s call to hold annual property tax increases to inflation would be quickly forgotten by county and city governments. To assure a measure of public accountability, the Washington Institute Foundation conducted an exhaustive study in each of Referendum 47 s first two years of Washington Institute Foundation 1

3 operation to measure its effectiveness. The results were mixed, as shown in our two earlier reports. 1 Now that Referendum 47 has built up a three-year track record, many wonder how it has fared. Are local officials still aware of the people s call for property tax limitation? Has Referendum 47 worked in holding down higher-than-inflation increases in the years since it was enacted? Or, as the voters mandate recedes in time, are officials more likely to just rubber stamp routine yearly tax increases? This year s study addresses these questions and arrives at some hopeful conclusions. The methodology we used to conduct the study is presented in Appendix B. The third year of Referendum 47 comes at a time of special financial challenge to our state s counties and cities. Initiative 695 repealed the Motor Vehicle Excise Tax and immediately cut the revenue going to local governments by some $362 million. 2 While some of these revenue reductions were later made up by the legislature in its 2000 session, only the Initiative 695-related cuts were known in December 1999 when counties and cities were adopting their budgets. Many governments must have been tempted to declare a substantial need based on revenue losses from Initiative 695 and to increase their property taxes accordingly. We expected that for most counties and cities that would be the result. In fact, as this study demonstrates, most governments resisted the temptation. For the first time most counties and major cities honored the Referendum 47 mandate to hold down property tax increases. II. How Referendum 47 Works It is no understatement to say that Washington s property tax system is complex. It consists of tax assessments (establishing the value of each parcel of land), tax levies (the amount of money each taxing district chooses to collect each year) and spreading the tax among landowners. The system has been described in detail in our earlier reports. 3 In summary, under a 1971 law each taxing district may increase the dollar amount it collects in property taxes by 6% over the previous year, plus an amount equal to the tax on new construction. Unused taxing authority may be carried forward from year to year. 4 Referendum 47 established a lower benchmark for the annual tax increase: inflation as measured by the implicit price deflator (IPD). In 1998 the IPD was 1.9%, in 1999 it was 1 See Washington Institute Policy Briefs Property Tax Relief in Washington: Is Referendum 47 Working (July 1998) and Property Tax Relief in Washington: Referendum 47 s Second Year (June 1999), both available at our website at 2 City and County Impacts Vary Widely, Washington Research Council Policy Brief on Initiative 695, October 28,1999, 3 See Property Tax Relief in Washington: Is Referendum 47 Working? pp. 5-9; and Property Tax in Washington: Referendum 47 s Second Year, pp Revised Code of Washington and Memorandum on Levy Capacity of Taxing Districts by Sandra G. Guilfoil, Assistant Director, Property Tax Division, Department of Revenue, Olympia, Washington, October 9, Washington Institute Foundation 2

4 .85% and in 2000 it is 1.42%. The rate may only be exceeded if a supermajority of the county council or city council votes to declare a substantial need to levy a tax increase greater than inflation. 5 Referendum 47, then, does not prohibit local governments from increasing property taxes by the older statutory limit of 6% per year. What it does do is establish a sunshine requirement by requiring a public hearing be held and a special, stand-alone resolution or ordinance be passed. An example of a Referendum 47 resolution is shown in Figure 1 on the next page. When imposing higher-than-inflation tax increases local officials must now explain their reasons, thus allowing their constituents to be informed of the changes in tax policy that effect their lives and to hold their representatives accountable for these decisions. III. The Growing Tax Burden An incremental increase in property taxes each year at first appears small and easily trivialized. Tax-increase proponents often say that for most people the rise in their yearly tax payments only equals the cost of a Big Mac a week. But the cumulative effect of decisions made by each taxing district -- county, city, port, school, water and many others -- add up fast for the typical wage-earning family. The power of compound interest turns small annual increments into a budgetbusting burden for many taxpayers. It is a simple mathematical calculation that an annual 6% increase causes a regular property tax bill to double every twelve years. But at this year s 1.42% inflation rate it would take more than 50 years for property tax collections to double. Sharply rising property taxes can mean all the difference to low-income families that are working and saving to buy their first home. Not surprisingly the growing burden of property taxes continues to be a major concern for the people of Washington. Property taxes were more than four times higher in 1998 than in Measured over the same period, personal incomes have not risen nearly as fast, meaning property taxes today consume a much higher proportion of personal income than in the past. Even after adjusting for inflation and population growth, per capita property tax collections in the state have increased by 85% since For the 35 counties governed by 3-person boards, a simple majority vote meets the law s requirement, so the supermajority rule has no impact on them. In the remaining four counties the number needed for a supermajority vote are as follows: eight votes in King, five in Pierce, four in Snohomish and five in Whatcom. 6 See Property Taxes Continue to Soar, by Jeff Hanson, Washington Institute Foundation Policy Brief, March 2000, available at Washington Institute Foundation 3

5 Figure 1. Typical Referendum 47 Resolution RESOLUTION NO. 99/155 GRAYS HARBOR COUNTY PROPERTY TAX INCREASE RESOLUTION GENERAL FUND AND VETERAN S FUND COMBINED 1999 TAX LEVY FOR 2000 COLLECTION WHEREAS, the Board of County Commissioners, Grays Harbor County, Washington, has properly given notice of the public hearing held December 6, 1999 to consider Grays Harbor County s general fund and veteran s fund budget for the 2000 calendar year, pursuant to RCW ; and WHEREAS, the Board of County Commissioners, after hearing, and after duly considering all relevant evidence and testimony presented, has determined that Grays Harbor County requires an increase in property tax revenue (general fund) from the previous year, in addition to the increase resulting from the addition of new construction and improvements to property and any increase in the value of state-assessed property, in order to discharge the expected expenses and obligations of the County and in its best interest; and WHEREAS, the Board of County Commissioners has determined that it is in the best interest of and necessary to meet the expenses and obligations of Grays Harbor County for the property tax revenue (general fund) to be increased in the next calendar year; and WHEREAS, the County Commissioners shall certify to the County Assessor taxes levied for county purposes in accordance with RCW ; and WHEREAS, the assessed valuation of Grays Harbor County is estimated to be $3,443,943,420 for regular levy purposes; NOW, THEREFORE, BE IT RESOLVED, by the Board of County Commissioners of Grays Harbor County that an increase in the regular property tax levy total for general fund and veteran s fund, in addition to any amount resulting from the addition of new construction and improvements to property and any increase in the value of state-assessed property, is hereby authorized for the 2000 levy in the amount of $6,168,201. This is increased at 1.42 percent from the previous year at the Washington State established rate of inflation (IPD). ADOPTED this 6th day of December, (signed) BOARD OF COUNTY COMMISSIONERS FOR GRAYS HARBOR COUNTY Washington Institute Foundation 4

6 IV. Summary of 1998 and 1999 Studies 1998 Survey Results Our first study on the effectiveness of Referendum 47 found that just 17 of the 39 counties (about 44%) held their property tax increase at or below the inflation limit. Five of these counties, Columbia, Ferry, Garfield, Pend Oreille and Whatcom, did not increase their property tax collections at all. 7 Two counties, Cowlitz and Lincoln, approved tax collection increases well below inflation, while ten counties approved increases of 1.9%, right at the inflation limit for As intended by the voters, the people of these counties received the direct and immediate benefit of the new Referendum 47 law. In contrast, 22 counties (56%) approved property tax increases exceeding the inflation limit in the first year of Referendum 47. Six of these counties, Adams, Benton, Chelan, Jefferson, Douglas and Franklin, approved tax increases that surpassed even the normal 6% limit. In each case officials in these six counties locked in higher taxes by drawing on unused taxing authority from the past. This action has allowed them to add even modest tax increases since then to a higher base, thus boosting their overall property tax collections in 1999, in 2000 and into the future. Our Referendum 47 study also looked at major cities across the state. Seven of the twelve cities we surveyed that year increased their property tax collections above the inflation limit. One city, Seattle, tapped past taxing authority to increase tax collections by 7.81% over the previous year. Three cities held to the inflation limit of 1.9%, while two cities, Bellevue and Bellingham, did not increase their regular property tax collections at all Survey Results Our second annual study of Referendum 47 s effectiveness found that compliance with the inflation limit had declined significantly. In 1999 twenty-five, or 64%, of the counties exceeded the limit, representing a 14% increase in counties taking this course compared to the previous year. About half of these counties imposed a 6% increase in property tax collections, while the rest chose increases between.85% (the inflation level) and 6%. Unlike 1998, no county in 1999 increased property tax collections by more than 6% over the previous year. Of the 14 counties that did follow the Referendum 47 limit, eight chose increases right at the inflation limit (.85%), while the rest did not increase property tax collections 7 In this and all subsequent references to property tax collections, the reader should understand that this study deals only with regular property tax collections by counties and cities. Taxes on new construction are not included in the discussion here. So total property tax collections even in these five counties increased to the extent that the value of new construction was added to the tax rolls. 8 See Property Tax Relief in Washington: Is Referendum 47 Working. Washington Institute Foundation 5

7 at all. Adams County, reversing its performance in 1998, actually cut slightly the amount of property tax it collected. These results parallel those of the expanded group of major cities we studied. More than half (12, or 57%) of the 21 major cities in our 1999 survey increased property tax collections above the inflation limit. The remaining nine cities (43% of the total) followed the Referendum 47 reform and limited their increases in property tax collections to.85% or less. Five of these, Bellevue, Bellingham, Ellensburg, Kirkland and Renton, went further and avoided any tax increase. Like the counties, no city increased its property tax collection in 1999 by more than 6% over the previous year. 9 V. Results of the 2000 Study Having measured Referendum 47 s tax-limiting performance in its first two years, we were curious to see how the pattern may have shifted in the third year. The news was surprising. In a significant reversal from previous years, a majority of the counties are for the first time fully implementing Referendum 47 s inflation limit on property tax increases (see Figure 2 on the next page). In all, 21 of the 39 counties held their increases in property tax collections at or below this year s inflation rate of 1.42% or less. This represents a remarkable 50% increase in the number of counties fully implementing the Referendum 47 law compared to Eleven of these, or more than a quarter of all counties, adopted property tax increases of exactly 1.42%. Three counties, Adams, Cowlitz and Ferry, chose small increases below the inflation level, and an unprecedented seven counties did not implement any property tax increase at all compared to Of the 18 counties that exceeded the Referendum 47 limit, eight chose increases between inflation and 6%, showing at least modest restraint by not taxing their citizens by the maximum amount permitted by law. A further eight counties imposed increases right at the 6% and two counties, San Juan and Columbia, exceeded even the 6% limit. The fact that most counties are now complying with Referendum 47 s inflation limit places an added obligation on those counties that are still imposing maximum tax increases each year. Local elected officials have a responsibility to explain to citizens why the additional taxes they are taking are truly required by public need. In previous years we have been critical of counties that adopted vague substantial need declarations without specifically explaining the kind of unusual circumstances contemplated in Referendum 47. We have praised counties like Okanogan which raised taxes by more than inflation, but which also identified a specific public need that called for additional revenue. 9 See Property Tax Relief in Washington: Referendum 47 s Second Year. Washington Institute Foundation 6

8 While fewer counties declared a substantial need in 2000 than in years past, many of those that did failed to provide specific justification for doing so. Of the 18 counties that took advantage of the substantial need exception, only seven gave the public specific reasons for their action. King County spelled out six reasons for its tax increase; Kitsap County listed 15. But most counties only mentioned the increased cost of mandated services or inadequate revenues from the state as justification for raising taxes. Such imprecise statements fail to give people the information they need to judge accurately the urgency used by local officials to justify extraordinary tax increases. VI. Analysis of Counties by Geography, Size and Governing Party As we have in previous surveys, we looked at the results of the 2000 survey for any significant patterns revealed by the geographical distribution, size and party control of counties. Geographically, high-tax and low-tax counties are distributed about evenly across the state. Ten, or slightly more than half, of the 18 counties that exceeded Referendum 47 s inflation limit are located east of the Cascade mountains, while the remainder are in the west. Similarly, the counties that limited their increase in property tax collections to inflation or less fall about evenly in both major regions of the state; eleven in the west and ten in the east. These results are consistent with our findings in past property tax studies. We also assessed whether the size of a county seemed to influence local leaders desire or ability to limit annual increases in property tax collections. Of the five largest counties, where 65% of the people in the state live, three held their property tax increases to inflation, while two exceeded it. Among the largest counties, only Pierce increased taxes up to the 6% limit. King County continued its downward path in the amount of increase it takes each year (discussed further below), but still increased taxes nearly twoand-a-half times the rate of inflation. Snohomish County showed the most dramatic improvement in tax limitation compared to the previous year. In 1999 the Snohomish County Council imposed a full 6% increase. In 2000, however, Council members decided to follow the Referendum 47 limit and held their tax increase to inflation (1.42%). The results for the five largest counties are shown in Figure 3. Washington Institute Foundation 8

9 Figure Regular Property Tax Increases in Washington s Five Largest Counties Pierce 6% King 3.53% Snohomish Clark 1.42% 1.42% Spokane 0.00% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% As in past years we also examined increases in property tax collections in the counties in relation to party control. We found a similar distribution for counties controlled by each party across tax increase categories. About half of the counties governed by each party fell into the lowtax category, that is those that raised tax collections by 1.42% or less. Each party was represented in equal proportions in the higher-tax categories as well. Whether a county is governed by Democrats or Republicans, therefore, does not seem to determine whether or not that county will follow the Referendum 47 inflation limit. Republican-controlled counties had a slightly higher average tax increase, 3.35%, than those of Democrat-controlled counties, which averaged 3.17%. Likewise, the Republican median was higher. These results show a significant change in the pattern from our previous surveys. In 1998 the median Democrat-controlled county raised taxes 6%, while the median Republican-controlled county raised taxes by the inflation rate of 1.9%. In 1999 Democrat-controlled counties were still higher than Republican ones, but the margin had narrowed to 4% to 2.83%. The convergence between Democrat and Republican performance is encouraging evidence that Referendum 47 compliance is becoming part of the culture of government in most counties, regardless of party control. These results are shown in Figure 4. Washington Institute Foundation 9

10 Figure 4. Average and Median County Property Tax Increases by Governing Party Governing Party Number of Counties Number at 1.42% or less Number at 1.42% to 6% Number at 6% Number over 6% Average tax increase Median tax increase Republican % 2.21% Democrat % 1.42% Non-Partisan % 0% VII. San Juan and Columbia Counties San Juan and Columbia are the only two counties that increased their property tax collections in 2000 by more than 6% limit. In its tax increase resolution San Juan County commissioners say they are imposing a one-time increase in the amount of $281,000 (12%) to pay for the development of parks on Orcas Island. 10 It is to the commissioners credit that they give taxpayers a specific reason for taking a higher-than-inflation tax increase, something many counties do not do. Further information provided by the San Juan County Auditor shows that the commissioners balanced the increase in the regular property tax levy by reducing the road levy by $281,000. As the Auditor puts it,...the effect on taxpayers was zero. 11 He further states that the Board of Commissioners anticipates reversing this levy shift in Our survey does not measure increases to the dedicated road fund, which is a separate component of the property tax, so our figure for San Juan County gives only the increase in the regular property tax. As such it may appear to overstate the total property tax burden imposed on San Juan County residents, since the 12% increase has been offset by a reduction in a tax that is outside the scope of this study. Columbia is the only other county to impose a higher-than-inflation property tax increase in Although not identified in its tax-increase resolution, information from 10 Resolution , Resolution Setting the Property Tax Levy for Current Expense for 2000, Board of County Commissioners, San Juan County, Washington, passed December 6, communication with Si Stephens, Auditor, San Juan County, Friday Harbor, Washington, June 20, Ibid. Washington Institute Foundation 10

11 the Columbia County Assessor indicates that revenue lost from passage of Initiative 695, and representing about a quarter of the budget, is the reason elected leaders sought more revenue. To adjust to Initiative 695 s requirements the County eliminated six full-time positions, froze wages, eliminated travel and trimmed back on capital outlays. Once these cuts were in place, the County Assessor reports that in order to keep the doors open, County Commissioners reluctantly tapped past taxing authority to increase property tax revenues by more than 12% over the previous year. 13 Columbia County presents a good example of Referendum 47 s substantial need requirement in action. The law allows increases in property tax collections to grow by more than inflation, but it requires local officials to present their reasons for doing so, so that voters can judge whether such increases are really justified by extraordinary circumstances. VIII. King County As Washington s largest county and home to well over a quarter of the state s 5.7 million inhabitants, King County s revenue decisions have the single greatest impact on taxes collected at the county level. When Referendum 47 was enacted, King County leaders demurred from applying the inflation limit to property tax increases in the first year. The County Council instead announced its intention to gradually reduce annual property tax increases over five years so as to responsibly reach the inflation limit. 14 So far the County is on track with its stated policy. It imposed a 6% increase in regular property tax collections in 1997 (before Referendum 47 passed), then reduced the increase to 5.08% in 1998 and to 4.5% in For 2000 the Council adopted a financial plan which directed County Executive Ron Sims to submit a budget with a property tax levy of no more than 4% over the previous year. Executive Sims did the Council one better. He fashioned a budget proposal which trimmed the annual increase in property tax collections to just over 3.5% in The lively competition between the Council and the Executive in cutting annual tax increases is a powerful spur to boosting efficiency in delivering government services, and can only benefit County taxpayers. Slowly, with strong bipartisan commitment, King County is moving toward full compliance with Referendum 47. IX. Three-Year Results for Counties One advantage of conducting a study each year of Referendum 47 s effectiveness is that we now have a three-year record of increases in property tax collections by all of 13 Letter from Robert H. Carlton, Columbia County Assessor, Dayton, Washington, June 27, King County Ordinance 13670, An ordinance relating to the county regular property tax levy for tax collection in , Seattle, Washington, passed October 18, Washington Institute Foundation 11

12 Washington s counties and major cities. It is possible to begin to measure long-term trends. And because annual tax increases are cumulative -- each year s percentage increase is applied to the higher base of the previous year -- residents in counties that have consistently limited property tax increases to inflation since 1997 are receiving significantly greater benefit than their neighbors who live in consistently high-tax counties. The three-year compounded results for all counties is shown in Figure 6 on the next page. In all, ten counties, or about a quarter of the total, have always respected voters wishes by complying with Referendum 47 s recommended inflation limit. Five of these counties, Clallam, Clark, Klickitat, Lewis and Thurston, have held to exactly the inflation-level increase each year. Residents in these counties have seen the total amount of property tax collected from them rise by only 4.23% over the last three years. Three counties, Cowlitz, Kittitas and Spokane, have overall increases well below the inflation level, and two counties, Pend Oreille and Whatcom, did not increase their regular property collections at all over the period studied. The counties that have always met or exceeded Referendum 47 s inflation limit are listed in Figure 5. Figure 5. Washington Counties That Have Fully Implemented Referendum 47 in 1998, 1999 and Clallam 6. Lewis 2. Clark 7. Pend Oreille 3. Cowlitz 8. Spokane 4. Kittitas 9. Thurston 5. Klickitat 10. Whatcom Eleven counties did not adopt Referendum 47 s inflation limit on property tax increases in either 1998 or 1999, but have done so in 2000, bringing the total number of counties complying with the inflation limit in 2000 to 21. For example, elected leaders in Asotin County imposed 6% increases in each of the first two years, then limited their increase to 1.42% in Adams and Benton counties deserve recognition as most improved in holding back the rising tax burden for their citizens. Adams County topped the charts in 1998 by imposing an increase in property tax collections of 36.27%, more than four times that of the next nearest county. The following year, however, Adams leaders chose a slight decrease, and have taken a very modest.58% increase in 2000, still well below the inflation limit. Benton County started with a 9% increase in 1998, the second highest in the state, then dropped to 2.65% in 1999 and finally to no increase in Washington Institute Foundation 12

13 Six counties, Chelan, Douglas, King, Kitsap, Skamania and Yakima, have never implemented the inflation limit, but have moved closer to it each year since Referendum 47 passed. While residents in these counties are not receiving the full benefit of limiting tax increases to inflation, the Referendum 47 law appears to be having an influence in driving annual property tax increases lower each year. It is likely that at least some of the counties in this group will reach the inflation limit in Other counties adopted the Referendum 47 inflation limit at first, then imposed higher-than-inflation tax increases in later years. Pierce County, one of the state s largest, held to 1.9% in 1998 but has imposed 6% increases in each of the two subsequent years, leaving residents with a three-year increase of more than 14%. Garfield County held to no increase in each of 1998 and 1999, then jumped to 6% in Some counties have passed 6% increases in property tax collections each year, meaning their residents have seen property tax collections rise by more than 19% in just three years, a rate about five times that of inflation. These high-tax counties are listed in Figure 7. Even higher, though, are the cumulative increase in Adams, Douglas and San Juan counties. Figure 7. Washington Counties That Have Imposed 6% Property Tax Increases in Each of 1998, 1999 and Mason 3. Stevens 2. Pacific 4. Whitman X. Summary of Three-Year Results for Counties The table in Figure 8 shows the trends in compliance among Washington Counties over the time that the Referendum 47 law has been in effect. A glance at the table reveals two modest but significant trends. First, as noted, the number of counties implementing Referendum 47 s inflation limit in 2000 (21) is the highest ever. Of these the number of counties taking no increase in property tax collections (7) is also the highest ever. Second, the number of counties taking a 6% or greater tax increase (10), is the lowest since Referendum 47 passed. That means Referendum 47 is having an overall impact in holding down annual increases in property tax collections, even in counties that have not yet fully implemented the inflation limit. Washington Institute Foundation 14

14 Figure 8. Number of Washington Counties in Each Tax-Increase Category for 1998, 1999 and 2000 Year 0% IPD or less Between IPD and 6% 6% Greater than 6% XI. Results of the 2000 Study for Cities As with the counties, this year s survey discovered a much higher rate of compliance with the Referendum 47 inflation limit among the state s 21 major cities. In 2000 almost two-thirds (13) of major cities held to the limit, representing close to a 50% increase in compliance over the previous year, when only nine cities held to the limit. In addition, seven cities imposed no increase at all in property tax collections in 2000 compared to five in Of the cities that increased taxes above the inflation limit, four, Renton, Seattle, Tacoma and Yakima, adopted a 6% rise in property tax collections, and Kent was close with a 5.95% increase. The remaining three cities, Spokane, Federal Way and Wenatchee, also went above the inflation limit but held their increases to below 6%. As in 1999, no city increased property tax collections by more then 6%. The overall results for cities are shown in Figure 9 on the next page. XII. City of Kent A growing tendency among some jurisdictions to be disingenuous with the voters is illustrated by the ordinance adopted by Kent for property taxes in In its ordinance setting the amount of property tax to be collected in 2000 the Kent city council says they have decided to reduce the City s property tax levy rate approximately 1.1% by establishing no property tax rate increase for inflation... The same ordinance says Kent has determined...a zero percent increase for inflation. 15 For overburdened taxpayers these statements sound pretty good. But a more careful reading shows that the choice of words obscures their actual meaning. 15 Both quotes are from Ordinance No. 3493, City of Kent, Washington, November, Washington Institute Foundation 15

15 In fact, Kent is increasing its property tax collection this year by more than a million dollars (5.95%) over its 1999 property tax revenues of $17,175,994. Kent officials call this a zero percent increase only by measuring it against the taxes they could have levied in 1999 if they had ignored Referendum 47 and increased taxes the full 6%, not against the taxes they actually levied that year. The claim that the levy rate has been reduced is equally disingenuous. Even when cities increase property taxes by much more than inflation, levy rates will decline if the assessed value of property goes up even faster. To the average taxpayer, the reduction in the levy rate is meaningless when his actual tax bill is increasing. A major purpose of the Referendum 47 reform is to create more openness in the property tax process in a bid to foster greater trust between ordinary citizens and their elected representatives. In the case of Kent, the city council s ordinance obfuscates rather than reveals what it is doing, which only serves to fuel the distrust of government and serves Washington poorly. XIII. Summary of Three-Year Results for Cities The three-year pattern of compliance among major cities with the Referendum 47 limit is similar to the one we have seen with counties. As with the counties cities show a higher level of compliance with the inflation limit the longer it is in effect. In 1998 eight cities imposed property tax increases of 6% or more; in 1999 seven did so, and in 2000 only four cities were at the 6% level. The three-year compounded property tax increases for Washington cities are shown in Figure 11 on the next page. In the first two years of our survey we found that fewer than half (8) of major cities implemented the inflation limit. But in 2000, 13 of the major cities -- the most ever -- adopted Referendum 47 s limit or less. Significantly, only two cities, Seattle and Yakima, have ignored the Referendum 47 limit completely and continued taxation as usual. The number of cities that fall into each tax increase category over the three years is shown in Figure 10. Figure 10. Number of Major Washington Cities in Each Tax-Increase Category for 1998, 1999 and 2000 Year 0% IPD or less Between IPD and 6% 6% Greater than 6% Washington Institute Foundation 17

16 XIV. Conclusion Far from fading in influence, Referendum 47 is proving to be more effective and enduring than even many of its supporters expected. The number of counties and major cities limiting property tax increases to inflation is higher today than ever before. The power of compounding percentage increases, both for rising taxes and for tax limitation, is being felt also. For the residents of counties and cities holding to the inflation limit or less, the Referendum 47 law is reaping ever-greater benefits as each year goes by. The same mathematical effect is having an impact on citizens in high-tax counties and cities as well, but in a far different way. As noted in this study, compounded 6% property tax increases year after year have resulted in a hefty tax bite for some citizens. Perhaps for this reason interest among ordinary people for additional property tax limitation continues to be strong. Signatures have been filed for Initiative 722, which would cap property tax increases at 2% per year, and signatures are being gathered for Initiative 717, which would phase out the state portion of the property tax. As this report goes to press, it is unclear whether either initiative will appear on the ballot this fall. If they do not, the legislature is almost certain to consider further property tax relief in its 2001 session. But whether more property tax legislation is ultimately enacted or not, the results of our annual survey confirm that Referendum 47 will continue to have a major impact in holding down tax increases in many of Washington s counties and major cities. Washington Institute Foundation 19

17 Appendix A A County Commissioner s Perspective: Property Taxes and Unfunded Mandates by James M. Lewis, Commissioner Yakima County, Washington The Washington Institute Foundation has provided a public service by its annual reports monitoring county and city tax increases subsequent to the enactment of Referendum 47. Accountable government must always be based on an informed electorate. However, by focusing only on tax increases, and not spending pressures, and by studying only counties and cities, the Washington Institute tells only part of the story. I d like to begin by stating that I do not agree that Referendum 47 is a sunshine measure. I believe my good friends in the Republican legislature used questionable tactics with the taxpayers when they called Referendum 47 a reform of property taxes. Here s why their tactics were questionable: What Referendum 47 really does is draw attention to something that all local taxing jurisdictions have done for years, which is capping tax rates at 106 percent, as required by state law. This was always done in a public meeting with a vote. Referendum 47 did not change that process, except for requiring a declaration of substantial need As we ll see, substantial need is a given under current circumstances. Meanwhile, what most property taxpayers don t realize is that only 12.6 cents of each property tax dollar they pay is returned to the county general fund. 16 The biggest portion of the property tax bill consists of local school levies and the state s share of the property tax. Together these account for over 50 percent of each property tax dollar paid. 17 This means that every year county government gets criticized for increasing property taxes, while our friends in the Legislature and the School Districts continue to enjoy their majority share of the tax dollar with no adverse voter reaction. However, that pales in comparison to the next real crisis facing local government: unfunded mandates. 16 An additional 5.5 cents, on average, is dedicated to the county road fund. Washington State Department of Revenue, Property Tax Statistics 1999, Table 10, available at protax99/table10.htm 17 See the Washington Institute s March 2000 study: Property Taxes Continue to Soar. Including all voter-approved levies, local schools receive 31.6% of property taxes and the state of Washington receives 25.2%. Counties and cities together receive 31.3% Washington Institute Foundation 20

18 Since 1989, counties and cities have been working with Olympia to obtain relief from the growing burden of unfunded mandates, first in the criminal justice system and now in the environmental arena. These visits finally resulted in very limited relief -- through a dedicated amount of money for criminal justice and money to help distressed counties, of which Yakima is one. Yakima County received approximately $4 million for both these areas through the Motor Vehicle Excise Tax (MVET). However, MVET has vaporized through passage of Initiative 695 and the budget recently adopted by the legislature gave only limited relief to the plight of local government, especially those in the other Washington, east of the Cascades. Although MVET funding is gone, our criminal justice system continues to devour nearly 78% of our $45 million general fund budget. And that amount continues to grow, in part because of state expenses we must absorb. For example, the state does not pay for the prisoners it houses in our local correctional facilities (annual cost to Yakima County: $3 million). If the state were to pay for its prisoners and fund indigent defense costs, Yakima County would save nearly $5 million per year. Additionally, if the state paid for some of its mandated costs for juvenile incarceration, it would save Yakima County $2 million annually. If soaring costs for criminal justice weren t enough, we now face unfunded mandates in the environmental arena. The Department of Ecology s recent storm water management regulations, which exceed EPA rules, are expected to cost local governments in Central Washington over $300 million to implement. The so-called salmon recovery efforts are also unfunded by millions of dollars, and promise to put local government at odds with private property owners. At the national level we have the draconian proposals by the National Marine Fisheries Service (NMFS) over the Endangered Species Act. Salmon recovery and NMFS actions are expensive and unfunded, controversial and highly contested. These regulations put us at odds with our local property owners, the agricultural industry and developers. If you combine high crime rates, actions by environmental agencies, the loss of revenue due to I-695, and the freeze on property tax rates, the future looks bleak indeed for local governments, especially those in eastern Washington. The message is plain: We cannot survive without legislative relief. The relief must come in the form of stable revenue and a change in the relationship between Olympia and local governments. We can no longer be expected to absorb ever-increasing mandates and agency requirements without a way to pay for them. And taxpayers must also change their expectations of government. During the Initiative 695 campaign we all heard comparisons to the Boston Tea Party, the popular cry being, It s time government was returned to the people. We couldn t agree more. And for those interested in really cutting their tax burden above and beyond Initiative 695, I have a suggestion: Washington Institute Foundation 21

19 That on January 1, 2001, all 212,000 residents in Yakima County make the following vows: Citizen Vow Taxpayer Saving I will not vandalize or steal road signs $100,000 I will not throw trash or litter my roads 75,000 I will not allow my dogs to disturb others 245,000 I will not allow my kids to get in trouble 4,000,000 If charged with a crime, I will pay for my legal defense 2,000,000 Total Yakima County Taxpayer Savings: Over $6.4 million Per Year Compare those savings to the total Yakima County property tax collections of $15,572,000 for And if taxpayers really wanted to save money, they wouldn t have kids unless they could afford them, love them, and take responsibility for them. While that would never happen, it clearly shows the ability -- and responsibility -- of citizens to control their tax burdens. It also illustrates how government spends their money. Yakima County government is responding to the spirit of Initiative 695. It was the first county to put its fee increases on the ballot in 2000, opting last November to eschew year-end fee increases and instead place proposed increases on the February ballot. We are also forging new partnerships with the business community to streamline operations and ensure we are operating at peak efficiency. We have developed task forces with other community members to study how we, working as a team, may be able to save programs that will be lost under Initiative 695. But despite these efforts, the multimillion dollar impact of unfunded mandates WILL undermine the efforts of local government and the taxpayer without state and national reform. The Initiative 695 battle was at the local government front. The next battle must be at state and federal levels. That is where the WAR must be won! 18 For the general fund. An additional $9,111,000 is dedicated to the county road fund. Washington State Department of Revenue, Property Tax Statistics 1999, Table 10, available at reports/protax99/table10.htm. Washington Institute Foundation 22

20 Reply to Commissioner Lewis by Richard A. Derham, President Washington Institute Foundation In his commentary from a county perspective, Commissioner Lewis makes several valuable points that need to be part of any analysis of future tax policy. In our annual reports analyzing Referendum 47 compliance, we have always acknowledged that the substantial need exception in Referendum 47 is there for a purpose: counties and cities may well need to increase taxes at a rate above inflation in order to pay for the costs of government. The voters established inflation as a benchmark, not as a ceiling. By so doing, and by requiring the separate substantial need declaration in order to exceed the benchmark, the voters have imposed a measure of accountability on local governments. It is the burden of any local government to justify to its constituents why a tax increase in excess of inflation is required. We believe that is a fair burden to impose, and Commissioner Lewis exposition of the funding problems facing Yakima County is the kind of dialogue we believe Referendum 47 suppoerters contemplated would occur. Commissioner Lewis is also correct in noting that property tax collections by counties and cities are only a part of the total property tax burden on Washington citizens. Excluding bond issues, levies and other voter-approved measures, cities collect 18.8% of the property tax, counties, including the county road tax, take 26.9% of the property tax, the state receives 38.9% dedicated to schools, with other districts making up the remainder. 19 As Commissioner Lewis notes, when voter-approved measures are included (nearly 90% of which go to the schools), the state-plus-school portion exceeds 56%. 20 Voters concerned with property tax relief should be engaging in a dialogue with all their local officials. To assist in promoting accountability, the Washington Institute may examine the record of selected Port Districts and School Districts in the months ahead. Commissioner Lewis is also correct in pointing to the challenge local governments face by unfunded mandates. State-level tax restraint measures such as Initiative 601 tempt legislators to ease their own budget by imposing requirements on local governments. To the taxpayer, of course, the burden is the same. Finally, Yakima County is to be commended for its efforts to respond to the voter mandate of Initiative 695. By eschewing the (perfectly legal) tactic of increasing fees in December 1999 and placing the choice before the voters, Yakima County Commissioners have shown that they understand themselves to be the servants of the people. And by working to restructure services delivered, they understand that Initiative 695 mandated more than a tax cut, but a change in the culture of government. 19 Calculations based on data from the Washington State Department of Revenue, Property Tax Statistics 1999, Table 8, available at 20 Ibid. Washington Institute Foundation 23

21 Appendix B: Study Methodology The conclusions of this study are based on original research obtained directly from county and city officials. All information included is a matter of public record. To conduct the study we used the following research method. The Referendum 47 law requires each taxing jurisdiction over 10,000 people to pass a stand-alone ordinance which states: 1) the percentage tax increase over the previous year and; 2) the dollar amount of that increase. Whenever possible, the research staff at the Washington Institute Foundation obtained a copy of the ordinance setting local property tax rates for 2000 from each of the jurisdictions we studied. In cases where no copy was available, the tax information was gathered in writing or by phone directly from the county or city assessor s office. A copy of any ordinance we received is available at no charge to our readers upon request. In some cases information was further confirmed by phone. The responses were then used as needed to correct our data. All conclusions and analysis in this study are solely the work of the Washington Institute Foundation and do not necessarily reflect the views of any public agency or government official. Washington Institute Foundation 24

22 Appendix C: Washington Counties Increase in Regular Property Taxes Over the Previous Year and Three-Year Cumulative Total County Cumulative Adams 36.27% 0.00% 0.58% 37.06% Asotin 6.00% 6.00% 1.42% 13.96% Benton 9.00% 2.65% 0.00% 11.89% Chelan 8.00% 4.00% 3.80% 16.59% Clallam 1.90% 0.85% 1.42% 4.23% Clark 1.90% 0.85% 1.42% 4.23% Columbia 0.00% 1.28% 12.12% 13.55% Cowlitz 0.15% 0.00% 0.39% 0.54% Douglas 7.90% 6.00% 5.24% 20.37% Ferry 0.00% 6.00% 1.00% 7.06% Franklin 7.75% 2.62% 4.03% 15.03% Garfield 0.00% 0.00% 6.00% 6.00% Grant 3.80% 0.85% 1.42% 6.17% Grays Harbor 4.00% 4.00% 1.42% 9.70% Island 4.50% 6.00% 1.42% 12.34% Jefferson 7.97% 4.00% 6.00% 19.03% King 5.08% 4.50% 3.53% 13.68% Kitsap 5.00% 6.00% 4.98% 16.84% Kittitas 1.90% 0.85% 0.00% 2.77% Klickitat 1.90% 0.85% 1.42% 4.23% Lewis 1.90% 0.85% 1.42% 4.23% Lincoln 1.60% 2.51% 3.00% 7.27% Mason 6.00% 6.00% 6.00% 19.10% Okanogan 1.90% 6.00% 6.00% 14.49% Pacific 6.00% 6.00% 6.00% 19.10% Pend Oreille 0.00% 0.00% 0.00% 0.00% Pierce 1.90% 6.00% 6.00% 14.49% San Juan 6.00% 6.00% 12.00% 25.84% Skagit 5.50% 4.00% 0.00% 9.72% Skamania 6.00% 3.00% 3.00% 12.46% Snohomish 5.60% 6.00% 1.42% 13.53% Spokane 1.90% 0.85% 0.00% 2.77% Stevens 6.00% 6.00% 6.00% 19.10% Thurston 1.90% 0.85% 1.42% 4.23% Wahkiakum 6.00% 0.00% 0.00% 6.00% Walla Walla 1.90% 3.00% 1.42% 6.45% Whatcom 0.00% 0.00% 0.00% 0.00% Whitman 6.00% 6.00% 6.00% 19.10% Yakima 6.00% 5.00% 5.00% 16.87% Washington Institute Foundation 25

23 Appendix D: Washington Major Cities Increase in Regular Property Taxes Over the Previous Year and Three-Year Cumulative Total City Cumulative Bellevue 0.00% 0.00% 0.00% 0.00% Bellingham 0.00% 0.00% 1.42% 1.42% Ellensburg 0.00% 0.00% 0.00% 0.00% Everett 6.00% 6.00% 0.00% 12.36% Federal Way 3.70% 2.50% 3.20% 9.69% Kent 1.90% 0.85% 5.95% 8.88% Kirkland 0.00% 0.00% 1.40% 1.40% Kennewick 0.00% 6.00% 0.00% 6.00% Lakewood 1.90% 0.85% 0.00% 2.77% Olympia 6.00% 0.85% 1.00% 7.97% Port Angeles 4.00% 0.85% 1.40% 6.35% Redmond 3.00% 2.00% 0.00% 5.06% Renton 4.30% 0.00% 6.00% 10.56% Seattle 7.81% 6.00% 6.00% 21.14% Shoreline 6.00% 6.00% 0.00% 12.36% Spokane 6.00% 6.00% 4.00% 16.85% Tacoma 5.00% 0.88% 5.99% 12.27% Vancouver 1.90% 3.00% 1.42% 6.45% Walla Walla 6.00% 6.00% 1.42% 13.96% Wenatchee 6.00% 4.00% 2.00% 12.44% Yakima 6.00% 6.00% 6.00% 19.10% Washington Institute Foundation 26

24 About the Author Paul Guppy is a graduate of Seattle University and holds a Master of Arts degree in government and public policy from Claremont Graduate University and a Master of Science degree in political science from the London School of Economics. He served for 12 years in Washington D.C., mostly as a Legislative Director in the United States Congress, before joining the Foundation in 1998 as Vice President for Research. He is the author of previous Washington Institute studies on civil rights, labor policy, insurance regulation and property taxes. Published by the Washington Institute Foundation Chairman President Acting Operations Manager Hon. Emilio Cantu Richard Derham Dan Zarelli Krista Colson served as the primary research assistant for this study as part of the Washington Institute s Internship Program. Her professional work and overall contribution is greatly appreciated. If you have any comments or questions about this study, please contact us at: Washington Institute Foundation, 4025 Delridge Way SW, Suite 210, Seattle, WA Visit our website at wif@wips.org Phone: (206) Toll Free: (888) WIF-9797 Fax: (206) Washington Institute Foundation 27