I. Introduction

Initiative 747 is the latest property tax limitation law enacted by the people of Washington.  The measure passed in November 2001, receiving 57.5% of the popular vote, gaining a majority in every county except King and Whitman.[1]  Initiative 747 requires the state and local governments to limit increases in their regular property tax collections to 1% a year, unless the voters approve a larger increase.  Under certain conditions, local officials may also tap other taxing authority to impose larger tax increases.

Passage of Initiative 747 follows Referendum 47, a measure passed by voters in 1997 to limit increases in annual regular property tax collections to inflation, unless local officials identified a “substantial need” to raise taxes higher.  Each year since Washington Policy Center has conducted an annual survey of all 39 counties and 22 major cities to assess the impact of Referendum 47.  The results appear in our past Policy Briefs.[2] 

Now that Initiative 747’s 1% limit has replaced the Referendum 47 inflation limit, our survey this year assesses whether and to what extent Initiative 747 has changed property tax trends.  Specifically, this study shows which cities and counties limited their increase in regular property tax collections to 1% or less, as voters desire, whether they put any proposed tax increases to a vote of the people, or whether they drew on other taxing authority to impose higher-than-1% tax increases.  This study also looks at how long-term trends in property tax increases have changed over the years we have conducted this survey.

II. How Initiative 747 Changed Property Tax Law

Until passage of Initiative 747, state law provided that elected officials could not increase regular property tax collections by more than inflation (1.89% in 2002) unless they identified a “substantial need” to raise taxes higher.  The “substantial need” clause allowed elected officials to increase collections by as much as 6%.[3]  They were also allowed to draw on “banked” taxing authority to enact greater-then-6% increases.  Banked taxing authority is the amount of tax increase local officials could have used in past years but did not use.  In order to relieve the financial pressure on local officials to “use it or lose it,” state law permits them to save such taxing authority for possible future use.[4]

Initiative 747 enacted a single change in the law by lowering the limit factor on annual property tax increases from 6% to 1%.  The ability of elected officials to tap banked taxing authority remains unchanged, so higher increases are possible.  Also, the initiative left unchanged current law which allows voters at an election to enact tax increases greater than 1%.

The “substantial need” clause is still in effect, but now it only allows local officials to raise collections above inflation up to 1%.  Since annual inflation is seldom less than 1%, the “substantial need” clause will have little effect in the future.  In 2002, a few counties and cities cited a “substantial need” in their property tax ordinances, but since inflation this year is well above 1%, their use of the phrase was not necessary.

The lower limit factor will also restrict how much unused tax authority taxing districts are able to bank in the future.  Under Initiative 747, the maximum amount a district can bank is now 1% per year, rather than 6%.[5]

The new limit factor, like the old one, 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 1%.  The general effect, 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 property tax they owe, as more of the limited tax burden is shifted to owners of properties with fast-rising values.

The annual 1% limit applies only to regular property tax collections.  Alternative sources of property tax revenue remain unaffected.  Examples of these additional property tax sources are:  New construction, improvements to property, increases in the value of state-assessed property, any tax increase approved by voters, and the Real Estate Excise Tax (REET).[6]  Each of these 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 1% increase in their regular property tax collection.

III. Tax Savings at the State Level

The text of Initiative 747 provided that the 1% limit take immediate effect at the state level.  Unlike Washington’s cities and counties, policymakers in state government did not face a choice about whether to fully implement Initiative 747.  Like the Referendum 47 inflation limit before it, Initiative 747’s 1% limit has resulted in prompt and substantial tax savings for Washington property owners.

The state collected $5.71 billion in property taxes in 2001.  A 1% increase will raise collections by $57.1 million in the current year.  If Initiative 747 were not in place, the state would be increasing its property tax collection by 1.89%, the inflation limit required under Referendum 47.  By that measure the state property tax would have increased by $107.9 million in 2002.  Initiative 747 is thus saving Washington taxpayers $50.8 million compared to an inflation-level increase, and it is saving them $285.5 million compared to the traditional 6% increase.  These tax savings will grow dramatically in future years, as annual tax increases level off compared to what they would have been under previous law.

The leveling trend is already appearing in the growth rate of the state’s yearly property tax collections.  Figure 1 shows annual state collections since 1980.  Historically, revenues from the state property taxes rose steeply each year, often outpacing the annual rate of inflation.  The three bars for 2000, 2001 and 2002, however, show the restraining effect Referendum 47, and now Initiative 747, have had in slowing the rate of property tax increase.  Under current law, the state property tax burden on citizens will grow much more slowly in the future than it did in past years.

Figure 1.[7]

IV. Summary Results of Past Studies

The first of the recent series of property tax limitation measures was Referendum 47.  Passed in 1997, the measure took effect the following year.  Our follow-up survey found that elected officials in most counties at first ignored voters’ desire to limit annual increases in the property tax burden.  Our 1998 study found that officials in only 17 out of 39 counties, or just 44%, limited that year’s increase in regular property tax collections to inflation or less. 

Of the 22 counties that exceeded the inflation limit, six drew on banked taxing authority from past years to impose increases that surpassed even the 6% limit.  The result was to lock-in permanently higher taxes for the future, since each year’s increase is based on the amount collected the previous year.  Banked taxing authority can only be used once, however, so a large increase in one year reduced the ability of these counties to enact large tax increases in later years.

Our 1999 survey found even lower compliance with voter-approved tax limitation among counties.  Policymakers in only 14 counties complied with the inflation limit.  Twenty-five counties exceeded the limit and about half of those imposed increases of 6%.  No county exceeded the 6% level.  Six counties imposed no increase, holding collections flat from one year to next.

In 2000, we found that for the first time a majority of counties, 21, adhered to the inflation limit or less when setting tax levels.  Of these, seven chose not to implement any property tax increase at all.  Of the 18 counties exceeding the inflation limit, eight imposed increases of 6%, while two others, Columbia and San Juan, imposed even higher increases.

The trend toward greater tax limitation continued in 2001, when 34 counties, the most ever, held property tax increases to inflation or less.  Of the five counties that exceeded the limit, three imposed increases of 6%.  Eight counties adopted zero increases in their property tax collections.  The tax decisions of local officials were influenced by strong voter approval of Initiative 722 the previous November.  That measure called for limiting annual increases in regular property tax collections to 2%.  Although the courts later invalidated Initiative 722, 13 counties limited their property tax increases to 2%.

Over the same four-year period, our survey revealed a similar trend among major cities.  At first, compliance with voter-approved tax limitation was low, only a handful of cities limited their property tax increase to inflation or less in 1998.  By 2001, a strong majority, 17 of 22 cities surveyed, held their yearly increases in property tax collections to the rate of inflation or less.  Six cities opted for no increase at all, and only one city, Renton, imposed a 6% increase.  Even Seattle, which routinely enacted 6% property tax, increases year after year, trimmed back to a 4.1% rise in 2001.

V. 2002 Survey Results for Counties

Past survey results show an increasing number of counties were implementing the existing property tax limit when voters went to the polls last November.  Had the Referendum 47 law remained unchanged, it is likely that in 2002 a large majority of counties would have adopted property tax increases at or below this year’s inflation rate of 1.89%.  As it was, voter approval of Initiative 747 set an even stricter limit for property taxes to be collected in 2002.

Even with the new, lower limit, our new survey finds continued high compliance with the latest voter-approved property tax limitation.  Thirty-four counties, or 87%, adopted increases of 1% or less in their regular property tax collections for 2002.  Twelve of these counties adopted zero increases, holding the tax burden imposed on citizens constant from 2001 to 2002.  This is the highest number of counties to adopt a zero increase since we began conducting statewide surveys.  Two counties adopted very modest increases of less than 1%.  Holding tax collections flat or nearly so results in a tax cut for many property owners, as the valuation process redistributes a limited tax burden among a growing tax base.

Twenty counties adopted increases of exactly 1% in 2002.  Officials in these counties may have chosen this limit in response to the will of the voters or because they had no banked taxing authority upon which to draw, leaving them no other choice under the law.

Five counties exceeded the 1% limit.  Officials in Clallam and King counties chose increases of 1.59% and 1.47% respectively, higher than the Initiative 747 limit but below the inflation rate for this year.[8] 

Adams and Mason counties adopted increases of 3.34% and 5% respectively.[9]  While these tax increases are well above the 1% and inflation levels, they are low by traditional standards.  They indicate how much the budget culture in county government has changed over the last five years.

San Juan County stands out in adopting a 17% increase, the highest of any county, by drawing on banked taxing authority.[10]  This level of increase indicates the county was fiscally conservative in past years, since it was able to build up this amount of unused taxing authority.  2002 survey results for all counties are shown in Figure 2.

Officials in three of the counties that held increases in their regular property tax collections to zero softened the budget impact of their decision by transferring money from their 2002 County Road Fund into the general or Current Expense Fund.   These counties and the funds they transferred were Chelan ($470,000), Stevens ($341,307), and Whatcom ($706,530).  These amounts are significant.  In the case of Chelan, the transfer resulted in a 7.1% increase in the general fund, far more than would have been possible under the Initiative 747 limit.  Council members in a fourth county, San Juan, enacted a similar levy shift, moving $350,000 from the road fund into the general fund, in addition to the 17% increase they chose for the regular property tax.  Initiative 747 does not bar officials from shifting funds among budget categories.

Figure 2.

VI. The Long-Term Trend

Figure 3 shows the long-term trend in property tax limitation over the last five years.  This table retains the same tax-increase categories used in our past property tax studies, so there is a consistent standard of comparison over the five-year period.  The counties that held to the 1% limit in 2002 are placed in the “Inflation Level or Less” category.

The table shows the remarkable shift that has occurred in the rate of increase in regular tax collections in counties across the state.  The number of counties enacting annual property tax increases of greater than inflation, once common across the state, is now very low, just three in 2002.  At the same time, almost one-third of counties are now imposing no regular property tax increase at all on their citizens.

Figure 3.
Number of Washington Counties in Each
Tax-Increase Category, 1998 – 2002

VII. Five-Year Results for Counties

A modest one-year increase in property taxes may go largely unnoticed by taxpayers, but successive tax boosts, compounded year after year, can sharply increase the overall property tax burden on citizens.  A tax burden subjected to annual 6% increases, for example, will double in twelve years, while it would take 70 years to double if annual increases are limited to 1%.  For that reason, the greatest impact of voter-approved tax limitation is seen over time. 

The five-year tax increases imposed by 25 counties exceeded the rate of inflation for the same period, mostly because of large annual increases they enacted in past years.  For example, beginning in 1998, Pacific, Stevens and Whitman counties each imposed a 6% increase every year for three years, but by 2002 they had reduced the rate of increase to 1% or zero.  Due to past increases, however, the five-year tax boost in these counties is well over 20%.  Inflation over the same period was just under 9%.

Other counties locked-in a high tax base by first raising taxes sharply, then limiting the rate of increase in subsequent years.  Officials in Wahkiakum and Benton counties passed large tax increases of 6% and 9% respectively in 1998, but by 2002 had reduced their rate of increase to zero.

Officials in Adams County increased the regular property tax burden by more than 36% in 1998, and then adopted zero or modest increases in later years.  Despite more recent restraint, Adams tops our chart with a five-year increase of almost 42%.

In contrast, counties that consistently limited their annual property tax increases to inflation or less over the five-year period secured a significant level of tax relief for their citizens.  Officials in Kittias and Spokane counties chose zero or very low increases over the years, giving them each a five-year tax increase level of only 2.77%.  Pend Oreille County adopted no increases at all until this year, when officials enacted a 1% rise in collections.  Officials in Whatcom County have not increased regular property tax collections at all in five years.  In all, 14 counties have limited their annual tax increases to inflation or less over five years, and all but one of these counties, Clallam, chose a 1% or lower increase for 2002.

The five-year increases for all counties are shown in Figure 4, and in the table in Appendix B.

Figure 4.

VIII. 2002 Survey Results for Cities

The 2002 survey results for cities are similar to those of the counties.  Nineteen, or 86%, of the 22 cities surveyed limited their increase in regular property tax collections to 1% or less.  Six cities, Bellevue, Everett, Kirkland, Lakewood, Port Townsend and Redmond, did not increase collections at all, while the remaining 13 cities adopted increases of exactly 1%.  The survey results for all cities are shown in Figure 5.

Three cities, Federal Way, Seattle and Renton, drew on banked taxing authority to enact higher increases. 

Officials in Federal Way adopted a 4.8% increase, by combining the 1% allowed under Initiative 747 with 3.8% in taxing authority the city banked in previous years.  This amount represents the city’s total amount of banked capacity, so it will have no ability to exceed the 1% limit next year.[11]

Renton’s elected leaders drew on banked taxing authority to approve a property tax increase of 4.9%, almost five times higher than the Initiative 747 limit and the highest of any city in our survey.  Renton elected officials increased their regular property tax collection by almost 23% over the last five years.  Inflation over the same period has been just under 9%.

In their 2002 property tax resolution, city council members noted that the levy rate of $3.27 per $1,000 of assessed value would not increase compared to the previous year.[12]  Rising property values allow the city to increase regular property taxes by 4.9% while keeping the levy rate flat.  Had the city held to the Initiative 747 limit of 1%, the increase in property taxes would have been some $634,000 lower, and the levy rate would have decreased accordingly.  Many Renton property owners would have seen a significant reduction in their tax obligation, as owners of properties with fast-rising values assumed a larger share of the limited tax burden.

Seattle’s city council routinely adopted annual property tax increases of 6% or higher, until 2001, when the council chose a 4.1% increase.  This action allowed the city to bank 1.9% in unused taxing capacity.  In 2002, the city combined all of its banked taxing authority with the 1% increase allowed under Initiative 747, for a total one-year increase of 2.8%.[13]  While this level of increase is almost three times higher than that called for by Initiative 747, it is well below the usual 6% increase the city habitually adopted.  The result is significant tax savings to the owners of homes and businesses in the city compared to past increases.  Also, the city has used all its banked taxing capacity and will be limited to a 1% increase in 2003.

Figure 5.

Like the counties, leaders in Washington’s major cities have reduced the level of property tax increase they enact each year.  In the past, city officials routinely opted for the maximum tax increase allowed by law, 6%, or more if they had banked taxing authority upon which to draw.  Today the number of cities imposing property tax increases of 6% or greater has fallen to zero.  Our annual surveys show that the great majority of cities have now shifted to a strong tax-limitation policy.

These results are summarized in the table in Figure 6.  The five-year tax increase results for cities are shown in Figure 7 and in Appendix C.

Figure 6.
Number of Major Washington Cities in Each
Tax-Increase Category, 1998 – 2002

Figure 7.

IX. Conclusion

Initiative 747 is clearly working as voters intended.  As the research shows, compliance with the law’s 1% limit is high among Washington’s counties and major cities. 

The reasons for its success are two-fold.  First, the measure itself does not provide much maneuvering room for local officials.  Tax jurisdictions, which have little or no banked taxing authority, have no other choice than to comply with the 1% limit.  The restrictive nature of Initiative 747 reflects a pervasive distrust among citizens that elected officials will act on their own to curb an ever-increasing tax burden.

Second, Initiative 747 is only the latest in a series of consistent messages voters have sent through he ballot box over the last five years.  Each time a measure to reduce taxes or to limit their growth appeared on the ballot it passed.  Referendum 47, Initiative 695 ($30 car tabs) and Initiative 722 are examples.  Even when judges struck down Initiative 695 and 722, elected officials quickly made it clear they heard the tax-limit message.

This is the first year Initiative 747’s 1% has been in operation.  Future years will show how the limit fares in the face of changes in the operations of government and in the general economy.  The 1% limit will likely encourage changes in the way local government functions, prompting officials to seek greater efficiency in the way they provide public services.  It could also lead them to search for other sources of revenue, ones that are not yet subject to voter-imposed limits.  If carried too far, however, officials’ efforts to maximize revenue could spark renewed calls for further tax limitation initiatives.  If that occurs, citizens now have a clear five-year record of tax limitation experience to consider as they debate whether additional measures would be effective or desirable.

Appendix A

Study Methodology

The conclusions of this study are based on original research obtained directly from county and city officials.  All information sources are a matter of public record.

Whenever possible, the research staff at Washington Policy Center obtained a copy of the resolution or ordinance setting local property tax amounts for 2002 from each of the jurisdictions 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 resolution or ordinance we received is available upon request.

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

Washington Counties
Increase in Regular Property Tax Collections Over the
Previous Year, and Five-Year Compounded Total

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