I. Introduction

Rising property taxes continue to be a major concern for the people of Washington state.  In recent years each time a statewide ballot measure has come before voters to cut taxes or curtail their rate of growth, it has passed.  Yet another tax limitation measure, Initiative 747, is slated to appear on the ballot this fall.

As voters consider pending proposals for future tax limitation, it is important to know how past reforms have fared.  Voters naturally expect their elected leaders to carry out their will faithfully.  Yet once the excitement of a political campaign is over, it is easy for elected officials to forget or ignore the message sent by voters.  Institutional pressures from public agencies and persistent lobbying by groups that benefit from public spending combine to promote ever-growing government revenues.  Consistent follow-up is needed to give voters a clear picture of whether their wishes are being respected, so they can hold elected officials accountable.

To assess the effectiveness of one major tax reform, the Washington Policy Center has conducted an in-depth review of Referendum 47 each year that law has been in force.  This study presents the results of our fourth and most recent survey.

Passed by voters in 1997, Referendum 47 made permanent an existing 4.7% cut in state property taxes and now limits annual state and local property tax increases to the rate of inflation (2.61% this year), unless elected officials identify a “substantial need” to raise taxes higher. 

At the state level Referendum 47 has been an unqualified success.  The measure’s 4.7% cut saved taxpayers $206.6 million over the first three years compared to what the state would have collected if the reform had not been enacted.  In addition, Referendum 47’s inflation limit has been fully implemented by the state, reducing the growth of the tax burden even more.  Altogether, the measure will result in almost $2.6 billion in savings to taxpayers over its first eight years.[1] 

Among counties and cities, however, implementation of Referendum 47 has been mixed.  The existence of the “substantial need” clause allows local governments to ignore the inflation 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 they have “banked” in previous years.

This study assesses the impact of Referendum 47 in 2001 and presents a broader picture of how the reform has performed over four years.  Our survey covers all 39 counties and 22 major cities across the state.  This year we added Port Townsend to the group of cities studied, and included the annual tax increase information for that city for the last four years.  We include an analysis of how annual tax increases have compounded each year since Referendum 47 passed, in order to assess how year-by-year increases add up to impact property owners.  The study also looks at the effect recent passage of Initiative 722 had on this year’s property tax increases.

II. How Referendum 47 Works

Washington’s property tax system is complex.  It includes tax assessments (determining property values), tax levies and “spreading” the tax among landowners. 

Each of the state’s 1,720 taxing districts is authorized to levy an annual tax under certain legal limits.  In addition, voters periodically approve further taxes to pay for schools, parks, libraries or other public services.  The workings of the property tax system are described in detail in our earlier reports.[2]  Here we will present a short summary to help the reader understand the findings of our survey.

Under a 1971 law each taxing district may increase the total dollar amount it collects in property taxes by 6% over the previous year, plus an amount equal to the tax on new construction, improvements to property and increases in the value of property assessed by the state.  Unused taxing authority may be “banked,” carried forward from year to year.[3] 

Referendum 47 established a lower benchmark for the annual tax increase: inflation as measured by the implicit price deflator (IPD), reported each October by the U.S. Department of Commerce.  In 1998 the IPD was 1.9%, in 1999 it was .85%, in 2000 it was 1.42% and in 2001 it is 2.61%.  The inflation rate may only be exceeded if a supermajority of the governing county or city council votes to declare a “substantial need” to levy a tax increase greater than inflation.[4]

Referendum 47 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 provision by requiring a public hearing be held and a special, stand-alone resolution or ordinance be passed, usually in November or December, stating the amount and percentage increase in property tax to be collected the following year.  When imposing higher-than-inflation tax increases local officials are supposed to explain their reasons, thus allowing their constituents to hold their representatives accountable for tax decisions.

III. Determining Property Tax Bills

The process described above only deals with the total dollar amount of property tax a jurisdiction may collect in one year.  Many people believe their property value alone determines how much property tax they must pay as individuals, and that when the county assessor updates home values to reflect market trends, their tax automatically goes up.  This is not the case.

County assessors do not levy property taxes.  Elected board and council members do that.  Once the governing members of each taxing district decide the total dollar amount they believe is needed to fund public operations for the following year, the assessor apportions that amount among the district’s property owners, based on each parcel’s assessed value.  This is a budget-based tax system.

Under a rate-based system, like a sales tax or income tax, the elected governing body first sets a rate which determines the fraction of each dollar of a given tax base that must be paid to the government.  The total revenue which the government will receive from such a tax cannot be known in advance, it can only be estimated.

A budget-based system begins from the other end.  The governing body determines how much revenue it feels it needs first, then divides this among the tax base to determine what rate is needed to raise that amount of money.  When used to levy a tax on property the rate is expressed as so many dollars per $1,000 of assessed value.  Under this system the amount of revenue the government will raise is known from the beginning.  It is the tax rate that is unknown until it is calculated by the assessor.  The valuation process is separate, and is used to divide the tax among all taxpayers on a fair basis.  The difference between the two systems is illustrated in Figure 1.

Figure 1.
Two Types of Tax Systems       Rate-based system:       RATE  x  TAX BASE  =  REVENUE     
Budget-based system:   REVENUE  /  TAX BASE  =  RATE

Property tax limits, like the 6% limit or the Referendum 47 inflation limit, only restrict how fast each district’s total budget can grow from one year to the next.  These limits only apply to regular property tax collections, not to the yearly expansion of the tax base that results from natural growth as new buildings are constructed and existing ones are upgraded.  In addition, they do not apply to special voter-approved levies.  Many city and county councils take increases from all these sources; the maximum increase allowed for regular property taxes (currently a 6% boost), plus whatever new taxes come in from new construction and property improvements, plus whatever added revenues have been specifically approved by voters.

Because of property tax revenue they receive from other sources, many cities and counties take zero increases in their regular property tax collection, or enact increases well below the level of inflation.  By doing so they are passing the benefit of a naturally-growing tax base on to their citizens.  When elected officials show restraint in how much they increase property tax collections each year, or hold collections constant by taking a zero increase, the share paid by many property owners decreases as more of the tax burden is assumed by new construction and upgrades.

IV. Summary Results of Past Studies[5]

Our initial survey in 1998 found that the newly-passed reform was effective in only 44% of counties (17 out of 39) in holding property tax increases at or below that year’s inflation rate of 1.9%.  Five of these counties did not increase property tax collections at all.  Of the 22 counties that did take higher-than-inflation increases, six imposed hikes that surpassed even the 6% limit.  In these counties elected officials “locked-in” higher taxes by drawing on unused taxing authority from past years.  That action allowed them to impose future increases on a higher base, an effect that still serves to boost tax collections in these counties to this day.

Like the counties, survey results in 1998 for major cities found that more than half exceeded the inflation rate.  Two cities, Bellevue and Bellingham, held their tax increases to zero.

Our 1999 survey found that only 14 counties, or 36%, complied with the inflation limit.  Fully 25 counties (64%) exceeded the inflation limit and about half of these took maximum 6% tax increases.  Similarly, more than half of the 21 cities surveyed imposed increases greater than inflation, and of these, seven chose a 6% increase compared with the previous year.

In 2000, we found that for the first time a majority of counties, 21 or 54%, adhered to the Referendum 47 inflation limit that year of 1.42%, or enacted a lower increase.  Of these, one third chose not to implement any property tax increase at all.  Compliance increased among cities as well.  More than half of the cities surveyed held their increases in property tax collections to the inflation level or below.

V. Findings of 2001 Survey for Counties

The results of our past surveys show generally increasing compliance among counties and cities with Referendum 47 tax limitation.  Our 2001 survey finds that this trend has continued.

This year 34, or 87%, of Washington’s counties held their increases in property tax collections to inflation or less.  This is by far the highest rate of compliance since Referendum 47 passed.  Two counties, Columbia and San Juan, actually reduced the amount collected, thus lowering the burden of the regular property tax on their citizens.[6]

Six counties held their increases to zero, providing valuable relief to local taxpayers.  Six further counties passed increases of less than 2%, and twelve counties, almost a third of the total, passed increases of exactly 2%.  These twelve counties were clearly responding to voters’ wishes as expressed in Initiative 722, a newly-passed tax measure discussed in the next section.   Garfield County raised taxes by 2.2% and six counties raised taxes by the inflation limit, 2.61%.  Two counties, Adams and Lincoln, passed small increases of less than 1%.  The results for all counties are presented in Figure 2.

Figure 2.

Of the five counties that exceeded the inflation limit only three – Stevens, Pacific and Ferry – chose the maximum increase of 6%.[7]  This represents a sharp drop from our 1998 survey, when nine counties imposed the maximum.  The law requires taxing jurisdictions to cite a “substantial need” for raising taxes above the inflation level.  Of the five that exceeded the limit, only Ferry County did not comply with this requirement.[8]  In practice, there has been no legal consequence when counties fail to conform to the “substantial need” provision, but it does deprive citizens of an explanation for why their taxes were increased so sharply.

Among the “substantial need” reasons given by the four other counties were the rise in criminal justice costs, the cost of mandates imposed by the state and reduced revenue from public timber sales.  Pacific County specifically noted the costly burden of complying with the Endangered Species Act, the  Growth Management Act and the Shorelines Management Act.[9]

When Initiative 695 passed in November 1999, many local officials expressed concern about the negative impact this voter-approved tax cut would have on funding public services.[10]  Yet only two counties, Stevens and Whitman, cited Initiative 695 as one reason they had a “substantial need” to raise taxes by more than inflation.[11]  Douglas County mentioned that Initiative 695 created a challenge in funding government services, yet officials there clearly made the necessary budget adjustments.  The county council only increased regular property taxes by .22%.[12]

King County

King County continued its stated policy of moving toward meeting Referendum 47’s inflation limit in annual steps.  The county imposed a 6% increase in 1997 (before Referendum 47 passed), then enacted an increase of 5.08% in 1998, 4.5% in 1999 and 3.5% in 2000.  In 2001, the county surpassed its goal by passing an increase of just 1.5%, more than a full percentage point below the limit.[13]  The county’s restraint will save county property taxpayers more than $2.4 million this year compared to an inflation-level increase, and more than $9.8 million compared to the once-routine 6% increase.

San Juan County

San Juan lowered its regular property tax collection significantly in 2001 compared to the previous year.  The county’s tax resolution explains the reduction as a “one-time decrease in the amount of $281,000 to reverse a “one-time increase” in 2000 to pay for a new park on Orcas Island.[14]  The county commissioners’ action shows responsiveness to voters’ wishes for three reasons.  First, as required by Referendum 47, they explained why they imposed a higher-than-inflation increase on citizens in 2000.  Second, they kept their promise by promptly repealing the increase the following year.  For many governments, “temporary” tax increases have a way of becoming permanent, thus becoming part of the base for calculating future increases.[15]  Finally, San Juan commissioners showed restraint by not imposing a permanent property tax increase in 2001 larger than the temporary one they were repealing.

Referendum 47 is showing greater effectiveness the longer it is in place.  The dramatic rise in compliance is highlighted when the results of this year’s survey are compared with those of our past surveys.  The number of counties that fell into each tax-increase category in 1998, 1999, 2000 and 2001 is shown in Figure 3.

Figure 3.
Number of Washington Counties in Each
Tax-Increase Category for 1998, 1999, 2000 and 2001

The rising incidence of compliance is the result of a combination of factors.  This year’s inflation level is the highest since the measure passed, making it easier to meet the Referendum 47 standard.  Regular publication of our annual surveys means elected county and city officials are receiving greater scrutiny in how they respond to Referendum 47 than has occurred with past ballot measures.  And finally, repeated messages from voters, at the ballot box and otherwise, is making itself heard, although in many jurisdictions it seems the message is being acknowledged four years late.  A measure of how strongly voters continue to feel about tax limitation is demonstrated by recent passage of Initiative 722.

VI. Impact of Initiative 722

Initiative 722 was passed in November 2000 by a statewide vote of 56%.  Section Five of the measure sought to lower the maximum statutory limit on annual property tax increases from 6% to 2%.  For 2001, that meant the limit called for by Initiative 722 was lower than the inflation level of 2.61%.

Initiative 722, promoted by sponsors as “Son of 695,” was stuck down in February 2001 by Thurston County Superior Court Judge Christine Pomeroy.  She cited a number of grounds for her decision, specifically that the measure, 1) covered more than one subject by repealing local taxes passed in 1999 and creating a new limit on future property tax increases and; 2) violated the state constitution’s uniformity clause by limiting the rise in property tax assessments (not total tax collections) to 2% a year.[16]  The case is currently on appeal to the state supreme court.

Before Judge Pomeroy’s decision on February 23rd, Initiative 722 and the popular voice behind it had already exercised a powerful influence on the tax decisions of a number of jurisdictions.  City and county governing bodies met in November and December of 2000 to set the level of property tax for collection in 2001.  Their tax decisions were made after Initiative 722 passed but before the court ruled on its constitutionality.  In all, twelve counties and eight cities chose to increase property tax collections by exactly 2%. 

VII. Four-Year Results for Counties

Although Referendum 47 is intended to slow annual increases in the property tax burden, a greater measure of the reform’s impact is to look at its effect over time.  The mathematical effect of annual compounded increases over several years can be enormous.  A tax burden subjected to annual 6% increases, for example, will double in twelve years, while it would take 27 years to double at the present rate of inflation.

The results of our 2001 survey show most counties are moving toward greater limitation on annual tax hikes, yet the impact of compounded increases over four years reveals a pattern of increases that has grown much faster than inflation.  The compounded tax increases for all counties, 1998 through 2001 inclusive, are shown in Figure 4.

Residents in 28, or 71%, of the counties are today shouldering a tax burden that is rising significantly faster than called for by Referendum 47.  In seven counties tax collections have gone up more than three times faster than the compounded rate of inflation.  In Pierce County, for example, the burden increased 20.8% in four years, while inflation over the same period rose just under 7%.

Figure 4.

Two counties, Pacific and Stevens, have consistently levied 6% annual increases since 1998, imposing a property tax increase of 26.3% over the four year period, three-and-a-half times inflation.  Whitman County only this year imposed a tax boost of less than 6%, almost halving its traditional level of increase, yet its total amount of increase over four years exceeds 23%.

King County imposed a tax increase well below inflation this year, but when combined with past increases residents have experienced a total 15.4% rise over four years.  Adams County imposed a large increase immediately after Referendum 47 passed, and has more than complied with the limit each year since then.  Yet the county’s initial boost was so large that its four-year total, 37.4%, easily outstrips that of every other county.  Chelan steadily reduced its level of annual increase from 8% in 1998 to zero in 2001, yet with an overall 16.6% rise over four years, county residents are still living with the legacy of past tax increases.

It is interesting to note that Wahkiakum raised collections by 6% in 1998 but held increases to zero in each year thereafter.  The result is that the tax rate in Wahkiakum went down.[17]  This means regular taxes for many property owners will fall as updated assessments redistribute the burden among the current tax base.

Only 11 counties have consistently held increases to the rate of inflation or below.  Elected officials in these counties are allowing their citizens to receive the full intended benefit of the Referendum 47 reform.  These counties are listed in Figure 5.

Figure 5. Counties that have fully implemented
Referendum 47 in 1998, 1999, 2000 and 2001

As with the counties, we found the largest number of cities ever, 17 or 77%,  complied with the Referendum 47 inflation limit this year.  Six cities chose to impose no increase at all in regular property tax collections.  One city – Bellingham – imposed the inflation limit of 2.61%.   Five cities exceeded the inflation limit, but only one – Renton – increased property tax collections by the maximum 6%.  Complete results for cities are shown in Figure 6.

Many cities, like the counties, were influenced by the recent passage of Initiative 722.  Nine cities, 41% of those surveyed, passed increases of exactly 2%.  Yet only Kirkland mentioned Initiative 722 in its tax ordinance, and only then to note that even if the measure is determined to have no legal effect, the city is in compliance with it anyway.[18]

Seattle

As in past years, Seattle failed to follow the inflation limit in 2001, imposing a 4.1% increase in tax collections on its citizens.  While still well above the inflation level, this is the first time since Referendum 47 passed that Seattle has taken an increase of less than 6%.  Yet the impact of large compounded increases over time is striking.  Seattle has increased its regular property tax collections by 26.1% over four years, while inflation over the same period rose less than 7%.

In its ordinance for 2001 the city council states that it chose 4.1% because it is “in line with the local CPI plus health care costs.”[19]  Selecting its own measure of inflation, however, has no relation to complying with the limit called for by Referendum 47.  Nor does this reasoning satisfy the law’s requirement for Seattle to explain its reasons for raising tax collections by more than inflation.  Citing rising health care costs to the city meets the “substantial need” requirement in part, but by itself this does not account for all of the increase taken.  Failing to explain changes in tax policy makes it difficult for Seattle residents to hold the city’s elected leaders accountable for their decisions. 

Renton

Renton shows the highest increase of any city surveyed and is the only one that imposed the maximum 6% increase in collections.  The city council cites its desire to preserve future levy capacity as its “substantial need” for imposing a tax increase of this magnitude.[20]  Preserving the option of raising taxes in some future year does not justify increased public spending today, so in this sense the city failed to meet the law’s “substantial need” requirement.  The council was clearly driven by a sense of “use it or lose it” regarding taxing authority, and its action produced the opposite of what voters intended in passing Referendum 47.  Many residents of Renton would be surprised to learn that their vote for tax limitation prompted the city council to raise their taxes by the maximum allowed by law.

Figure 6.

Kent

Last year we criticized the city of Kent for claiming a zero percent increase over the amount of tax they could have levied as opposed to the amount they actually levied. 

Kent’s actual increase in property tax collections in 2000 was 5.95%, as we reported.  We also noted that far from respecting Referendum 47’s sunshine requirements, the wording of Kent’s ordinance tended to obscure, rather than explain, the action city council members were taking.

This year Kent’s tax increase ordinance is more clear.  It reports the city council’s decision to increase regular property tax collections by 2%.[21]  The result is a savings of $755,902 to the people of Kent compared to the maximum amount of increase the city council could have levied, i.e. 6%.  Although an overall increase, the city’s restraint in raising total tax collections resulted in a reduction in the levy rate, which should bring tax relief to some individual property owners, depending on how their assessed valuation has changed.  The case of Kent illustrates how elected officials that show tax restraint can lower the tax burden for at least some individual property owners while actually increasing total collections, because a limited tax burden becomes spread more widely.

IX. Four-Year Results for Cities

In 1998 eight cities imposed increases in property tax collections of 6% or more; in 1999 seven did so; in 2000 four did, and in 2001 only one did.  The four-year compounded property tax increases for Washington cities are shown in Figure 7.

Five cities – Bellingham, Bellevue, Ellensburg, Kirkland and Lakewood – have held their annual property tax increase to the inflation limit or less since Referendum 47 was enacted.  The highest level of tax relief of any city is enjoyed by the citizens of Bellevue, where elected leaders have held tax increases to zero each year. Redmond exceeded the inflation limit in 1998 and 1999, but by holding further increases to zero the city council limited the overall four-year increase to less than inflation, bringing citizens Referendum 47’s intended tax relief for the period as a whole. 

Everett and Port Townsend perhaps deserve recognition as “most improved.”  The councils of these cities imposed 6% tax increases in 1998 and 1999, then dropped to zero increases in the two following years.  Consequently, residents of these cities have seen their tax burden rise at less than half the rate of Seattle, which at 26.1% imposed the highest four-year increase.  Yakima adopted a 2% increase in 2001, but the legacy of 6% increase in each of three preceeding years means residents are still left with an overall tax increase of 21.4%, the second highest in the state.  Elected leaders in Spokane imposed 6% increases in 1998 and 1999, lowered their increase to 4% in 2000, then complied with Referendum 47 by adopting a 2% increase in 2001.  Even so, Spokane’s tax rise over four years is 19.1%, almost three times the rate of inflation.

Figure 7.

Some cities have moved away from compliance with Referendum 47. Olympia honored the inflation limit in 1999 and 2000, but imposed a 3.39% increase in 2001.  When combined with the 6% increase the city imposed in 1998, citizens of Olympia have seen their regular tax burden rise 11.6% in four years. Renton’s city council held to a

zero increase in regular property tax collections in 1999, but have imposed 6% increases each year since then. 

As we saw at the county level, Referendum 47 has been increasingly effective in limiting increases in city-imposed taxes the longer it is in place.  The number of cities that fall into each tax category in the last four years is shown in Figure 8.

Figure 8.
Number of Major Washington Cities in Each
Tax-Increase Category for 1998, 1999, 2000 and 2001

X. Conclusion

How much county and city officials might have raised property taxes in the absence of Referendum 47 will never be known, but there is no question the measure has been increasingly successful in holding property tax increases down.  Imposing yearly 6% increases in regular property tax collections was once a matter of routine for many elected officials, regardless of what else was happening in the economy.  Referendum 47 prompted an important change in local government culture.  It challenged the assumption that a 6% ceiling on increases should be treated as a floor, indicating the minimum increase the local government will take.

At the state level the measure has been a remarkable success.  Since passage, the state has held its portion of the property tax levy, which makes up between a quarter to a third of the typical property tax bill, to the level of inflation.  At the local level, as our annual survey’s have revealed, implementation of Referendum 47 has been sporadic.  People reasonably expected the level of compliance would be 100% from day one, but whether that level will ever be reached is unknown.  It is likely that as long as the “substantial need” exemption is on the books, at least some counties, cities and other taxing districts will use it to exceed the inflation limit. 

Our studies focus on the largest taxing jurisdicitons, the state, counties and major cities.  But there are hundreds of smaller districts whose combined tax decisions have a major financial impact on owners of homes, businesses and other property.  So far no research organization has attempted a systematic review of these so-called “junior” taxing districts.  To gain some insight into how these districts have responded to voters’ wishes, the Washington Policy Center is now completing a survey of Port Districts across the state.  The findings of that study will be published shortly.

It is understandable if voters prove impatient with the slow pace of compliance with the Referendum 47 law.  They may choose to pass Initiative 747 this November.  That initiative removes the “substantial need” exception and reduces the permitted increase in regular property collections to 1% or inflation, whichever is lower.  If this happens Referendum 47 will become moot, and elected officials in counties, cities and other taxing jurisdictions will lose much of their control over how much regular property tax revenues increase from year to year.  If voters approve Initiative 747, the Washington Policy Center will conduct follow-up research to assess its impact.

Should Referendum 47 pass from the scene it will leave a lasting legacy, both in its impact in slowing the rising cost of public sector spending, and in the changes it has brought to the way local government functions in our state.

Appendix A

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 Policy Center obtained a copy of the ordinance setting local property tax rates for 2001 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 upon request.

All conclusions and analysis in this study are solely the work of the Washington Policy Center and do not necessarily reflect the views of any public agency or government official.

Increase in Regular Property Taxes Over the Previous Year, and Four-Year Compounded Total

Washington Major Cities
Increase in Regular Property Tax Collections
Over the Previous Year, and Four-Year
Compounded Total

About the Author

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