Executive Summary

On November 4, 1997 the people of Washington overwhelmingly passed Referendum 47 to limit annual property tax increases in certain jurisdictions to the rate of inflation, which is just 1.9% in 1998.

Since its passage, however, no complete assessment has been made to determine whether the reform is working. Is Referendum 47 reining in property tax hikes? Have most jurisdictions used the "escape clause" to avoid the new tax limits? What actual property tax increases have been imposed by the state's counties and major cities?

To answer these questions, the Washington Institute Foundation conducted a major study of all 39 counties and the 12 largest cities in the state. The results are revealing. Less than half the jurisdictions surveyed are following the tax limits of the new law.

Our study found that only 17 of Washington's counties held their property tax increases at or below the inflation limit. Elected officials in 22 counties claimed a "substantial need" to raise taxes higher. One county raised taxes by over 36%! A majority of the largest cities also raised taxes above the inflation limit.

Does the Referendum 47 reform mean lower taxes? Over time, the answer lies with local officials and the voters who elect them. By publishing an annual "Scorecard," the Washington Institute Foundation will continue to monitor progress and report the results.

Introduction

by Metropolitan King County Councilmember Chris Vance

Since I become a member of the state legislature in 1990 and then a local government elected official in 1993, the citizens I have represented have consistently told me of their concern - even fear - of ever increasing property taxes: Young families have difficulties moving into their first homes, seniors are challenged to keep the homes they have, and all of us have less income for daily expenses. Nevertheless, to this day many local governments and taxing districts have consistently raised property taxes 6% over the preceding year - the highest level allowed by law.

In November, 1997, the voters of Washington State approved the tax relief measure Referendum 47 by a wide margin. This measure, placed on the ballot by the state legislature, would, among other provisions, limit local governments' ability to raise property taxes above the rate of inflation unless a supermajority of that government's council voted to override the limit due to some "substantial need."

Many of us in local government believe the message from the voters in November of 1997 was clear - do not increase taxes above inflation unless there is some extraordinary situation. In other words, do not increase the size of government bureaucracy without good reason. This is contrary to the culture of many local governments, including my own King County which, until last year, imposed a 6% increase every year it had the authority to do so.

This Washington Institute Foundation study and scorecard provides important information to busy lawmakers and citizens alike about the taxing practices of local government, and will allow readers to decide for themselves if their local elected leaders are complying with the intent of the legislature and the citizens who voted for Referendum 47. In a time when voters have limited the growth of state government through a similar restriction, this study is a fundamental tool to help us answer the question of how we view the role of local government, and addresses a critical need for accountability not provided for in the language of Referendum 47. I want to express my sincere thanks to the Washington Institute Foundation for this important contribution to the most vital debate taking place in America today, the proper size and role of government.

I. Purpose of Study

On November 4, 1997, Washington State voters passed Referendum 47, a measure to enact a permanent cut in the state property tax, smooth out sharp, one-year increases in individual tax bills, and limit local property tax increases to the lesser of 6% or the rate of inflation.

Referendum 47 promised major property tax relief for the citizens of Washington State. Since its passage, however, no complete assessment has been made to determine whether the reform is fulfilling its purpose. How has the measure fared? Is Referendum 47 reining in property tax hikes? Have most jurisdictions used the "escape clause" to avoid the constraints of the new law? What actual property tax increases have been imposed this year by the state's counties and major cities?

The purpose of this study is to answer these questions. The study will summarize the passage of Referendum 47 and briefly review our state's property tax system and how it has been changed by the new law. It will also examine the real impact Referendum 47 has had on property tax rates across Washington State, and assess how local elected officials have responded to the wishes of their constituents in collecting property taxes. Finally, drawing on actual practice, the study will present five specific ways the effectiveness of the Referendum 47 law can be improved.

II. The Push for Tax Relief: Passed, Vetoed, and Passed Again

Prior to passage of Referendum 47, the idea of property tax relief had been regularly debated in the state legislature over a number of years. No single proposal, however, garnered enough support for passage until the 1997 session. In January of that year, Senator Dan Swecker (R-20th) introduced SB 5212, "An act relating to limiting property taxes." A companion bill, HB 1268, was introduced in the House by Representative Michael Carrell (R-28th), titled "Limiting growth in property tax levies for all districts to the lesser of inflation or six percent."

The Senate version emerged as the consensus bill. SB 5212 passed both houses with overwhelming majorities: 63 to 34 in the House and 33 to 16 in the Senate. Governor Locke opposed the proposal, however, and shortly after the bill reached his desk he vetoed it.

Supporters quickly introduced the measure again. The number assigned to the new bill was SB 5835. In swift "second time around" fashion, the proposal moved smoothly through the legislature. It emerged in identical form as its predecessor, but this time a referendum clause directed the matter to the voters for their decision in November. Votes for passage closely reflected those of the earlier attempt: 60-38 in the House and 30-17 in the Senate. Due to the referendum clause, the Governor's signature was not required. The House and Senate votes on final passage of SB 5835 are shown in Figures 1 and 2.

Figure 1.

Source: Washington State Legislature, Senate Roll Calls on SB 5835, Third Reading, Final Passage, Item #2, February 24, 1997. See Appendix B for list of individual votes.

Figure 2.

                                          Source: Washington State Legislature, House Roll Calls on SB 5835, Third Reading, Final Passage, Item #3, February 26, 1997. See Appendix C for list of individual votes.

III. Debating the Pros and Cons

Referendum 47's referral to the November ballot sparked a vigorous campaign debate on the goal of property tax relief and how it should be achieved.

Supporters argued the measure would "provide tax relief to all property owners, not just a few." (1) They urged citizens to vote for Referendum 47 because it was about just one thing: "limiting the growth of your property taxes." (2)

In light of the state's ample budget surplus (a cumulative $820 million through the 1997-1999 biennium [3]), the time was right to cut taxes, supporters said. A tax cut was not only reasonable and responsible, it was a "vital step in returning part of the state revenue surplus to taxpayers." (4) The point is illustrated by a recent state-by-state study showing Washington State citizens as the eighth-most-heavily taxed in the country, paying an average 36.4% of their total earnings in taxes at all levels of government. The study shows that members of a median two-income family pay more in total taxes than they do for food, clothing, housing and transportation combined.(5)

On average, property owners routinely saw tax bills increase as much as 6% or more every year.(6) But with annual inflation rates running well below 3%, few homeowners received annual pay raises of 6% or more to help them keep pace with their higher tax bills. Even wage contracts with automatic cost-of-living adjustments provide working men and women no protection against tax liabilities that rise twice as fast as inflation. The increasingly heavy tax burden fueled a growing popular reaction against state and local levy increases. Referendum backers argued that property taxes were doubling every nine years, and that property tax relief was widely supported and urgently needed.(7)

Opponents faulted the measure as inadequate. They labeled Referendum 47 "not a real tax cut" because it was not "targeted to homeowners" and "is not the best the Legislature can do."(8) Opponents focused on other aspects of the measure as well. They called attention to the one-time reduction in the state portion of property taxes, which they argued should be targeted to homeowners rather than applied to all properties. And they opposed provisions which would spread sharp revaluation changes over several years.

Calling the measure "phony reform," opponents claimed the cuts did not go far enough. "At best," they maintained, "Referendum 47 means slower growth in taxes, but no real cut in your tax bill."(9)

Governor Locke employed the same reasoning in explaining his rejection of the property tax relief proposal sent to him by the Legislature. In his veto message he called the proposed tax cut a "short-sighted, piecemeal approach."(10) In a public statement the same day, he further criticized the bill, saying it "would do nothing to correct the imbalance in tax relief between businesses and homeowners."(11) The Governor proposed instead a "major property tax cut for homeowners" based on an "annual credit that [would] be equivalent to exempting the first $29,000 in assessed value of their home from state taxes."(12)

In sum, opponents asserted that they, too, supported property tax cuts, but they demurred from backing Referendum 47, insisting it wasn't targeted in the right way. Supporters' views can be summed up as agreeing property tax relief was sorely needed, but should be adopted in a way that helps the largest number of taxpayers, without discriminating between citizens based on economic class.

Interestingly, supporters and opponents agreed on the central point: Washington property owners deserved serious tax relief. Therefore, it is important to measure how effective Referendum 47 has been in practice.

IV. The Voters Decide: Referendum 47 Passes by Wide Margin

At the end of the campaign, Washington State voters had their say. Over one million people voted for the measure, approving it by an overwhelming 64% to 36% margin.(13)

The ballot measure enjoyed wide geographic support, garnering a majority in every county in the state and passing in eleven counties by a two-to-one margin or better. The biggest victory was recorded in Chelan County, where voters approved it by 73%. The narrowest winning margin, 51%, occurred in Columbia County, which registered 873 votes in favor and 828 against. On average, more than 63% of voters in the five largest counties, Clark, King, Pierce, Snohomish and Spokane, where almost two-thirds of Washington residents live, approved Referendum 47. In fact, the proposal was so popular, only four counties registered less than 55% support.(14)

V. Washington's Property Tax System

Washington State's property tax system is complex. To help in understanding the changes made to it by Referendum 47, this section briefly discusses the tax system's major features.

All real and personal property in Washington State, unless specifically exempted by law, is subject to property tax. County Assessors are responsible for setting official assessments that reflect 100% of the "true and fair" value each January 1st.(15)

Most counties revalue land every four years to adjust tax assessments for changes in market value. Property owners must pay one half of their annual tax by April 30th each year, and the remaining half by October 31st. For many homeowners, tax payments are collected by their mortgage company every month, held in escrow, and paid out on the proper dates.

Tax assessors are required to mail a notice to each property owner within 30 days of appraisal stating the true and fair market value of the property. To promote accuracy, each property must be physically inspected and valued directly by the tax assessor at least once every six years.(16)

Once a property's valuation is established by the assessment process, the actual tax bill is determined by applying a "levy rate" to the assessed value. The maximum allowable levy (excluding voter-approved special levies and bond issues) is 1% of true and fair value.(17) If a taxpayer disagrees with the way a property has been assessed, the law provides for a process of appeal.(18)

The counties collect the property tax and distribute it to support government at several levels. The state receives a portion (which totaled 39.5% in 1997 [19] ) of the regular property tax revenue. The rest is allocated to the county itself and to smaller tax districts - such as cities, public schools, ports, fire, water and hospital districts - where the taxed property is located. Each taxing district decides how much in property taxes it will collect, up to the amount of its share. Thus, individual tax bills are determined by the decisions of many separate boards and councils. All these tax districts over 10,000 in population are now governed by Referendum 47.

A 1971 state law limits annual increases in local property tax revenues to 6% above the highest level levied in the three most recent years, excluding the value of new construction.(20) This level of annual increase seemed reasonable during the 1960s and 1970s when annual inflation rates ran high.

The 6% limit does not apply, though, to special levies expressly approved by the people, such as additional funding for schools, fire stations or emergency medical services. Voter-approved "levy lid lifts" give elected leaders flexibility in providing additional community services without depleting their regular operating budgets.

In addition to the possible 6% increase, the counties also collect tax on the value of any new construction which has occurred in the previous year. In 1996, for example, the counties collected on average an additional 3.04% from property taxes on new construction, ranging from a low of .71% in Garfield County to a high of 5.11% in Stevens County.(21)

Further, the law allows local governments to "hold over" tax-increase authority from past years if they do not use their full 6% increase every year. The idea is to relieve governing officials of facing a "use it or lose it" situation when it comes to raising taxes. But the policy also means taxpayers can face a sudden jump in their tax burden if local officials decide to use past taxing authority, combined with the current year's full 6% increase, all in one year. As we will see, several counties took advantage of the hold over authority in setting property tax rates for 1998.

VI. Changes Under the New Law

On the state level, passage of Referendum 47, now law under title 84 of the Revised Code of Washington, assured immediate tax relief to all property owners. Under a section titled "Permanent State Levy Reduction," Referendum 47 supporters enacted a fixed 4.7% reduction in the state's portion of the property tax collection for 1998.(22) As a permanent reduction, this provision will continue to benefit Washington taxpayers in the years ahead, since future tax increases will be applied to a lower base than otherwise would have been in place.

The passage of Referendum 47 also changed the way the traditional 6% limit works. The 6% limit remains part of state law as an overall cap on property tax increases, but a new, lower limit is also in place. Now local governments may only increase property tax collections each year by the rate of inflation. An "escape clause" permits a higher increase when county or city officials find a "substantial need" for more money. If council members wish to raise taxes more than inflation, they must pass a special, stand-alone ordinance which can raise property tax revenues up to the limit of 6%.

To make imposing sharp tax increases more difficult, Referendum 47 requires a supermajority before a local legislative body can breach the inflation tax limit.(23) This procedural hedge against high taxes, however, has limited effect in a great majority (35) of Washington's counties because they are governed by three-member commissions where a simple majority of two is also counted as a supermajority vote. The only special protection Referendum 47 adds to these counties is the requirement for a separate ordinance and a finding of a "substantial need" for higher tax collections.

The four remaining counties have lawmaking bodies of more than three members. They are: King (13), Pierce (7), Snohomish (5), and Whatcom (7). The supermajority requirement means a higher-than-inflation tax increase must receive one vote more than a simple majority, or eight votes in King, five in Pierce, four in Snohomish and five in Whatcom.(24) The supermajority provision also increases the votes required in cities and other local taxing districts with a five-member or larger governing board.

Therefore, while the old 6% tax-increase authority remains in place, it can only be used if the city or county governing body holds a special vote. The exemption for direct, voter-approved "lid lift" levies remains unchanged.

Another important provision of Referendum 47 would allow owners whose property value rises by more than 15% in one year to phase in these sharp increases over four years. This smoothing feature is designed to protect property owners in fast-rising markets from being hit with higher taxes all at once, and instead permit them to stretch out the increased payments. Owners whose property increased by less than 15% in assessed value in one year would be unaffected, and would pay tax on the full market value of their holdings. Known as value averaging, this provision is currently facing a legal challenge in court on the grounds it violates the state constitution's "uniformity clause" by not treating similar taxpayers equally. If upheld, it will go into affect in 1999.

[NOTE: In late July 1998, the Washington State Supreme Court ruled against the value averaging provision of the Referendum 47 law. The court's decision does not affect the other provisions of Referendum 47, which is the subject of this study.]

Significantly, Referendum 47 also changes the generous tax "hold over" authority local governments have enjoyed for the last 27 years. In the future, local officials can only accumulate unused tax authority up to the amount of inflation, not up to 6%.(25) Our survey indicates some counties took advantage of the opportunity to add their pre-inflation-limit taxing authority to the current year's rate, thus "locking in" an even higher base for increases in future years. Ironically, counties which showed tax restraint in past years were in some cases able to post the steepest increases this year.

The difference between the old and new tax ceilings amounts to 4.1% for the year 1998, or $41 in tax savings on each $1000 of a property tax bill. In addition to any savings the first year, its cumulative effect over time can be enormous. At the standard 6% annual increase, property taxes double every twelve years. A $1,000 tax bill in 1998 can mushroom to $2,000 by 2010. At 1.9% in annual increases, though, the same bill in twelve years would increase to only $1,253. It would take 37 years, more than three times as long, to double.

VII. How It Works

To set tax rates for the following year, each county and other covered taxing district must now "adopt a separate ordinance or resolution" which "specifically authorizes the increase in terms of both dollars and percentage."(26) The state Department of Revenue provided each county assessor with a model resolution to use in meeting the public disclosure requirements of Referendum 47.

An example of how the new rule works in practice is illustrated by the typical "Referendum 47 Ordinance" passed by Jefferson County shown in Figure 3 on the opposite page.

Referendum 47 also requires each county and other taxing district to hold a public hearing before setting rates,(27) and states that, "The clerk of the board shall keep an accurate journal or record of the proceedings and orders of said board showing the facts and evidence upon which their action is based, and the said record shall be published." The law also states that, "Each county assessor shall provide copies of the explanation [of the property tax system] to taxpayers on request, free of charge."(28)

Figure 3.

Typical Referendum 47 Ordinance

The purpose of these sunshine requirements is to ensure people are informed of the decisions their elected representatives make on their behalf - decisions which directly determine how much of their income will be paid out in local taxes.

Taken together, the sums involved in this process are significant. The state's 1,720 taxing jurisdictions extracted about $6.2 billion in property taxes from the people of Washington in the 1995-97 biennium.(29)

VIII. Scope of the Study

To accurately assess the impact of Referendum 47 in its first year of operation, we studied all 39 Washington counties. To this we added a further study group consisting of the 12 largest cities in the state: those with populations over 50,000. These 12 cities are: Bellevue, Bellingham, Everett, Federal Way, Kent, Lakewood, Seattle, Shoreline, Spokane, Tacoma, Vancouver and Yakima.

Referendum 47 specifically exempts taxing jurisdictions with populations of 10,000 or less. Although we surveyed all Washington state counties, six of them - Columbia, Ferry, Garfield, Lincoln, Skamania and Wahkiakum - have populations under 10,000.(30)

This study addresses only the changes Referendum 47 made in limits on property tax rate increases. It does not discuss the value averaging provision intended to smooth out tax assessments that rise by more than 15% in one year, because this part of the law is not in effect in 1998.

The "implicit price deflator," as announced each year by the U.S. Department of Commerce, is to be used as the inflation rate for determining the property tax limit required under Referendum 47.(31) On October 7, 1997, the Commerce Department announced the implicit price deflator for 1998 as 1.9%.(32) This is the inflation rate that is used for Referendum 47 tax limitation in 1998.

IX. Study Results

Our study examines how many, and by how much, counties and the 12 largest cities raised their property taxes. The results for counties are shown in Figure 4 on the opposite page. (These results, along with county populations and county votes on Referendum 47, are also listed in Appendix D.)

Figure 4

X. Analysis

Less than half of Washington counties (17, or about 44%) held property tax increases at or below the limit approved by the voters. Of these, county commissioners in five - Columbia, Ferry, Garfield, Pend Oreille and Whatcom - did not impose any property tax increases at all.(33) Two counties, Cowlitz and Lincoln, passed increases well below the inflation limit. The remaining 10 complying counties approved tax increases of 1.9%, right at the inflation limit for 1998. Except where statutory limits have already been reached, property owners in these counties are receiving the direct and immediate tax relief promised by passage of Referendum 47.

Elected officials in most Washington counties, however, did not hold to the Referendum 47 limit in setting new property tax rates. Twenty-two (56%) exceeded the inflation cap. The governing bodies of 20 of these counties passed special resolutions citing a "substantial need" to raise taxes higher. Skamania and Wahkiakum counties had populations too small to require them to follow Referendum 47 procedures.

Seven of these counties passed tax increase limits at various levels between 1.9% and 6%. Nine counties chose a 6% increase, the level most common under the law before the passage of Referendum 47.

Six counties - Adams, Benton, Chelan, Jefferson, Douglas and Franklin - placed even heavier burdens on their taxpayers, with tax increases exceeding even the traditional 6% limit. Franklin passed a 7.75% levy increase; Benton a 9% hike; and the Commissioners in Adams County imposed a whopping 36.27% tax hike on their property-owning constituents. In each case, these six counties "locked in" higher taxes for the future by drawing on unused taxing authority from the past. This will allow them to add tax increases they adopt in following years to a higher tax base. While some suggest that the mere desire to "lock in" a higher base for future tax increases does not meet the statutory requirements for "substantial need," we are unaware of any court challenge to these decisions.

The number of counties raising taxes in each category is shown in Figure 5.

Figure 5.

In some cases actual tax collections will differ from the authorized level because of separate levies approved at the polls. For example, King County raised its regular property tax levy by more than twice the inflation rate, but actual tax collections will decline slightly in 1998 because the special levy "lid lift" passed by the voters six years ago for the Regional Justice Center has expired. The rate increase passed by the Council will therefore be offset by the expiration of the Regional Justice Center levy.

In at least one case, a county chose not to collect the full amount of tax it had authorized for the year. San Juan county passed a resolution on December 1, 1997 (number 102-1997) which set the highest allowable property tax rate for 1998 at a 6% increase. The County Commissioners the same day passed a second resolution (number 105-1997) authorizing actual tax collections below that level. Taken together, these actions allow San Juan County to preserve its highest allowable tax rate under the law as a basis for 1999 increases, while collecting less than that amount in actual tax.

In further examining the data on 1998 county tax increases, we looked at five additional factors for significant patterns. We considered distribution of state population, voter support for the Referendum, size of counties, county geographical distribution and finally, party control of county government.

Most Washington citizens live in the 22 counties that brushed aside the Referendum 47 inflation limit. Almost 3.5 million people (61.5%) of the state's 5.6 million population live in these high-tax counties. The bulk of them live in the 16 counties that raised their taxes in the range of 3.8% to 6%. The six counties with tax increases over 6% are home to 313,100 people, or 5.6% of the population. About one third of the state's population live in counties that held tax increases to the 1.9% inflation limit. Only 181,000 Washingtonians, or just 3.2% of the population, live in counties that did not raise their property tax rates at all this year.

The election results showed that, ironically, voters who pulled the lever for Referendum 47 by the largest margins were hit with some of the highest property tax increases shortly thereafter. Referendum 47 passed in Chelan County by 73%, where the county commission only six weeks later passed an 8% tax hike. Voters in Jefferson County saw a 7.97% levy boost after their nearly two-thirds support for property tax limitation. After 55% of Adams County voters supported the measure, their Commission passed the largest property tax increase in the state - 36.27%. Members of the Douglas County Commissioners answered voters' 70% backing for Referendum 47 with a 7.9% property tax increase.

We also examined whether the size of a county was significant in the size of its tax increase. We considered whether the demand for public services in the biggest counties simply made restraining large tax increases too difficult. In fact, as Figure 6 shows, three of the state's five largest counties held to the Referendum 47 increase of 1.9%. Only King and Snohomish counties exceeded the limit.

Figure 6.

We looked at the location of the counties that raised tax rates over the Referendum 47 limit. No significant geographic pattern emerged. As shown in Figure 7, about half of the high-tax counties, ten, are situated east of the Cascade range, the other twelve are west of the mountains. Within both regions, counties with higher taxes are distributed about evenly throughout the area. The same generally even geographic distribution occurs with low-tax counties.

Figure 7.

Washington State Counties
Geographical Distribution by 1998 Regular Property Tax Increase
(Shading indicates counties that imposed increases greater than 1.9%)

Finally, we considered party control of county government. Party control of the 22 high-tax counties is closely split between Democrats and Republicans. A little more than half (12) of these county governments have Republican majorities, while Democrats are in charge in the remaining ten. Among the 17 low-tax counties, the party division is more lopsided. Republicans govern in 13, or 76%, of these counties while Democrats predominate in just three. (Whatcom county is non-partisan.)

We looked at the average tax increase in the counties controlled by each of the two parties. We also examined the median tax increase, since an average can be distorted by a single example. The average tax increase in Democrat-controlled counties was 4.66%. The average increase in Republican-controlled counties was 4.98%. The median county under Democrat control increased property taxes by 6%. The median county under Republican control increased taxes by 1.9%. These results are shown in Figure 8.

Figure 8.

XI. Adams County

At a 36.27% increase, Adams County stands out in our study as adopting by far the highest one-year tax increase in the state, and Foundation staff made extra efforts to confirm our data on Adams County and to understand the basis for the increase.

On December 29, 1997, the Adams County Board of Commissioners passed two resolutions relating to the requirements of the new Referendum 47 law. The first, Resolution No. R-122-97, "In the Matter of Setting the Limit Factor for the Regular Levy for the Calendar Year 1998," states that, "due to failure to levy the maximum in prior years, and due to the need to continue as many services as possible at the 1997 level" the Board finds a "substantial need to increase the regular property tax levy rate above the rate of inflation." The resolution then sets the "limit factor for the regular levy" at 6% over the highest amount previously levied in the county since 1985.

The second resolution, however, went farther. Resolution No. R-123-97, "In the Matter of Increasing the Taxing District's Regular Levy From What Was Levied the Previous Year," authorized "an increase in the regular property tax levy," excluding new construction, improvements to property and any increases from state-assessed property, "in the amount of $2,283,985, which is a percentage increase of 136.27 percent from the previous year."

With the first resolution, Adams County imposed the highest property tax increase allowed by law in one year. The second resolution drew on past, unused taxing authority, which, combined with the 6% increase, brings the total levy increases for the year to up 36.27%. The Adams County Commission thus used accumulated taxing authority to "lock in" higher tax rates for future years. In telephone interviews with a representative of the County Assessor's office, and with County Commissioner William Schlagel, we have confirmed these conclusions.(34)

XII. King County

While many counties referred to generic findings of "substantial need," some, like King County, gave specific reasons for raising their property taxes above the 1.9% inflation limit. King County's ordinance raised the regular property tax levy by 5.5%. When the amount for new construction is subtracted (because it is excluded under the Referendum 47 limit) the rate is 5.08%.

In its ordinance the Council cited a "substantial need" for increased tax revenue to pay for Medic One services after voters rejected an earlier funding levy. The ordinance states, "essential emergency medical services presently provided throughout King County are threatened by the unavailability in 1998 of the existing source of funding due to the recent failure of the proposed EMS [Emergency Medical Services] levy."(35) By basing its action on a specific reasons, King County councilmembers made their actions transparent and understandable to citizens.

XIII. Property Tax Increases in Major Cities

Slightly more than half (seven) of the state's 12 largest cities claimed they faced a "substantial need" to raise their property taxes above the Referendum 47 limit. Of these, four passed tax increases at the 6% level. Two cities, Tacoma (5%) and Federal Way (3.7%) imposed tax increases somewhat below this level.

Seattle, which levied a hefty 7.81% tax hike, stands out not only as imposing the largest tax increase among major cities, but as the only one to exceed even the traditional 6% increase. By passing a large increase, Seattle's elected leaders have "locked in" higher rates on property-owning citizens for the years ahead.

Three cities, Kent, Lakewood and Vancouver, held to the 1.9% tax-increase limit, while citizens in two large cities, Bellevue and Bellingham, saw no increase at all in their 1998 property tax rate. These results are shown in Figure 9.

Figure 9.

Regular Property Tax Increases in Major Cities:
Percentage Increase in 1998 over 1997

XIV. Recommendations

Referendum 47 establishes a clear mandate from the voters of Washington State that, except in unusual circumstances, tax districts should show restraint and limit yearly property tax increases to the annual rate of inflation. But, as our report shows, the "unusual" may be on the way to becoming routine. Following are five specific areas in which the effectiveness of the law can be improved.

1. Full Disclosure. Each taxing district with over 10,000 people must enact a special ordinance to increase taxes above inflation. There are, however, several hundred such districts in the state. This study covers all 39 counties and the 12 largest cities, but it is impractical to gather public tax information on all jurisdictions in a comprehensive way. A requirement that a copy of each taxing district's most recent Referendum 47 ordinance be sent to the Office of the State Auditor in Olympia would allow citizens easy access to these public documents. As a service to the public, a summary of the information should be compiled in a standard format and posted on the state's internet site. The central location would allow private citizens, as well as professionals in business, journalism or research, to easily determine and compare local taxing actions.

2. Clear Definition. At present there is no definition of "substantial need" in the law. As a result, there is no reason to expect each taxing district to interpret the meaning of the phrase in the same way. A clear legal definition of "substantial need" would guide local officials in making tax decisions and would insure fairer application of the law across the state.

3. Tax Increase Explanation. In order to raise taxes above the inflation rate, each taxing district must determine that it has a "substantial need" for more money. Current law requires county governing board keep a record of "the facts and evidence upon which their action is based..." There is, however, no requirement that the commissioners provide their reasons in the ordinance that sets new property tax rates. Some of the ordinances we examined, such as King County's, gave reasons for high tax increases. Most ordinances, though, cited no justification beyond a broad statement such as, "in order to discharge the expected expenses and obligations of the county and in its best interest." A better practice would be for all counties to follow the example of King County and provide "the facts and evidence" used to justify a tax increase in the ordinance that sets new rates. This would help people judge for themselves whether local officials are acting in their best interest, and it would provide a clearer basis for judicial review.

4. Equal Protection. As mentioned, there are 1,720 separate taxing districts in Washington State. Many of the single-purpose districts, especially in rural areas, have fewer than 10,000 people and are, therefore, not covered by Referendum 47. But tax increases hit the pocketbooks of property owners in small districts just as hard as those of residents in the large cities and counties. As we have seen, complying with Referendum 47 by passing a simple resolution is not difficult, even for small governments. Removing the 10,000 population minimum in the Referendum 47 law would extend equal protection from big tax hikes to all property owners in the state.

5. Full Accountability. Citizens' groups and the media will need to continually monitor the taxing districts in their communities to determine whether local boards are following Referendum 47's tax limits in good faith. As part of this effort, the Washington Institute Foundation's Property Tax Accountability Project will produce an annual scorecard of how well the state's counties and major cities comply with Referendum 47. Ultimately, however, only the voters can determine whether their elected representatives are respecting their wishes when new tax rates are imposed.

XV. Conclusion

Our study asks, "Is Referendum 47 working?" The answer is, "partially." Referendum 47 has delivered real benefits to the 17 counties and five major cities that held their property tax increases to 1.9% or below. The property-owning citizens living in these areas are receiving the direct and immediate property tax relief the reform's authors intended. Our research supports the reasonable conclusion that property tax increases would have been higher in most of these jurisdictions had Referendum 47 not passed. Elected officials in these areas heard the voice of the voters and restrained tax rates accordingly.

In seven counties and two major cities the results of the Referendum 47 reform are mixed. These jurisdictions exceeded the 1.9% inflation limit in raising taxes, but did not push them as high as 6%. Passage of Referendum 47 probably exerted a restraining influence on how much property tax rates were increased in these areas, but local elected officials did not implement the full reform.

In nine counties and six major cities, however, Referendum 47 seems to have had little or no impact. In these jurisdictions property taxes in 1998 were increased exactly 6%, the highest one-year increase authorized under the law. These areas seem to have followed the tax increase system that has been in place since 1971. Except for passage of the required separate ordinance, elected officials in these areas set local tax policy as if the sweeping vote in favor of Referendum 47 vote had never taken place.

Moreover, elected officials in six counties and in Seattle responded to passage of Referendum 47 by raising property tax rates by more than 6%. As a result, the governments of these areas will reap a double benefit: a windfall of tax revenue in 1998 as the higher rate goes into effect, and a higher base on which to build rate increases in the future. Their property-owning citizens, of course, will bear the cost.

Whether Referendum 47 will be a lasting reform that succeeds, or one that fails, remains an open question, one that will be decided as each county, city and taxing district adopts its budget in the years ahead.

Click here to read more about the author Paul Guppy.

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.

The research methods we used are simple and straightforward. 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 1998 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.

We then sent letters by fax, with originals sent by mail, to each of the jurisdictions in the study confirming in detail the information we had received from that jurisdiction. 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.

Appendix B:

Senate Roll Call Vote on SB 5835
On Approval of Referendum 47 Property Tax Relief

Vote on Final Passage - February 24, 1997

Appendix C:

House Roll Call Vote on SB 5835
On Approval of Referendum 47 Property Tax Relief

Vote on Final Passage - February 26, 1997

Appendix D:

Washington State Counties 1997 "Yes" Vote on Referendum 47 and 1998 Property Tax Increase
(Counties with equal levy increases are listed alphabetically)

* Counties exempt from Referendum 47 because population is less than 10,000.

____________

1. "Statement for Referendum Bill 47," prepared by Brian Thomas, State Representative; James E. West, State Senator; and Della Newman, former Ambassador to New Zealand and businesswoman; and printed in Official Ballot Title and Explanatory Statement, Office of the Secretary of State, July 9, 1997.

2. Ibid.

3. Dr. Chang Mook Sohn, Executive Director, Washington State Economic and Revenue Forecast Council, Olympia, WA, June Revenue Forecast, June 18, 1998.

4. "Statement for Referendum Bill 47,"....

5. The Tax Foundation, Washington, D.C., Special Report #78, April 1998, p. 6.

6. Individual tax bills can vary greatly from year to year depending on market trends, the assessment cycle, special levies, and other factors. Some property owners saw their tax bill increase in some years by an amount much greater than 6%.

7. "Statement for Referendum Bill 47,"....

8. "Statement Against Referendum Bill 47," prepared by Valoria Loveland, State Senator and Hans Dunshee, State Representative; and printed in Official Ballot Title and Explanatory Statement, Office of the Secretary of State, July 9, 1997.

9. Ibid.

10. Governor Gary Locke, Text of Veto Message for ESSB 5212, February 19, 1997.

11. Governor Gary Locke, press release, "Governor Locke Proposes Major Property Tax Cut for Homeowners," February 19, 1997.

12. Ibid.

13. Office of the Secretary of State, Official Results of the 1997 General Election, returns for November 4, 1997.

14. Ibid. See Appendix D for individual county results.

15. Revised Code of Washington, 84.40.020.

16. Revised Code of Washington, 84.41.041.

17. Constitution of the State of Washington, Article 7, Section 2.

18. Revised Code of Washington, 84.48.065.

19. "Local Property Tax Statistics," Revenue Research Reports, Washington State Department of Revenue, 1997, p. 32.

20. Revised Code of Washington, 84.55.010 and 84.55.020.

21. Washington State Legislature, House Finance Committee report, January 3, 1997, p.1.

22. Revised Code of Washington, 84.55.301.

23. Revised Code of Washington, 84.55.0101.

24. 1998 Washington State Yearbook, A Guide to Government in the Evergreen State, Public Sector Information, Inc., Richard Yates and Charity Yates, editors, pp. 111-150.

25. Revised Code of Washington, 84.55.092.

26. Revised Code of Washington, 84.55.120.

27. Ibid.

28. Revised Code of Washington, 84.08.115.

29. Washington State Property Tax Manual, Senate Ways and Means Committee, Olympia, WA, December 10, 1996, p. 1.

30. 1998 Washington State Yearbook,....

31. Revised Code of Washington, 84.55.005.

32. Municipal Research and Service Center, A Resource for Washington Local Governments, "Referendum 47 Update," p. 1.

33. RCW 84.52.043. State law limits counties to collecting a maximum of $1.80 per $1,000 of assessed value for their regular property tax levy each year. A county which does not reassess property values annually and which is already at the statutory maximum, has no room to increase taxes for 1998. Such counties can "catch up," however, the next time they revalue property. One of these five counties - Ferry - is currently at the statutory limit.

34. These phone interviews took place on May 19, 1998 and June 8, 1998.

35. King County Ordinance number 12957, "County Levy Limit Factor," approved December 19, 1997.