Executive Summary

Two years ago Washington voters passed Referendum 47, a measure to enact a permanent cut in the state property tax and to limit local property tax increases to the the rate of inflation, which is just .85% in 1999.

To gauge how well the will of the voters has been carried out, the Washington Institute conducted a study last year titled "Property Tax Relief in Washington: Is Reform Referendum 47 Working?" (see our Policy Brief for July 1998).

This year the Washington Institute Foundation again conducted a study of Referendum 47’s effectiveness. We surveyed all 39 counties, and expanded the survey group of cities from 12 to 21, to obtain a broader geographic sample from around the state. This paper presents the results of the 1999 survey.

At the state level, Referendum 47 has been an unqualified success. The permanent 4.7% reduction in state property tax collections and the annual inflation limit have provided $297.9 million in tax relief so far, and will save taxpayers a further $2.3 billion over the next six years

For Washington’s counties and major cities the results continue to be mixed. Our 1999 survey finds that 25 (64%) of counties did not implement Referendum 47’s inflation limitation, representing a 13% increase in the number of counties not applying this limit compared to last year.

More than half (12 or 57%) of the 21 cities in our survey increased their property taxes above the rate of inflation. Seven of these increased collections by the maximum- allowed 6% over the previous year. Eleven counties and six cities, however, held their increase in property tax collections to the rate of inflation or below in 1998 and in 1999, thus providing two consecutive years of maximum tax restraint for their citizens.

Introduction by King County Councilmember Rob McKenna

From 1977 to 1997 the property tax burden of the average homeowner in our state grew much faster than the rate of inflation. Worse yet, many city and county elected officials were imposing dramatic property tax increases every single year without ever taking a vote in public session on the proposed property tax increase. In a justifiable act of self-defense, voters two years ago overwhelmingly approved a simple, commonsense reform called Referendum 47.

Of the many good things about Referendum 47, the best one is that it brought the decisions elected officials make about property tax increases out of the backrooms and into the light of day. Now they must take a vote on the record if they choose to increase property taxes from one year to the next. That's why this report is so important: to let citizens know what kind of a job their city and county officials are doing with property taxes, and how they shape up against the rest of the state.

Since my election to the King County Council in 1995, I have continually heard from constituents about the burden they feel from property taxes, particularly if they are seniors on fixed incomes or young families trying to buy their first home. Many families who have lived in the same home for more than 20 years tell me that they pay more in property taxes now than they ever paid on their mortgage. That's why elected officials should be sensitive to property tax increases, because they disproportionately strike at the most vulnerable homeowners.

Despite the efforts of the measure’s opponents to belittle the benefits of Referendum 47 to the average taxpayer, the effect is quite substantial, especially over time. Research conducted at the time of Referendum 47’s passage indicated that the owner of a very modest home would see savings of $12,000 over 20 years if every jurisdiction agreed to live within the Referendum 47 inflationary limit for property tax increases. Does that sound like an insignificant sum? And these gains multiply when you consider that many taxpayers would invest those savings every year and accumulate even larger returns in the long run.

Unfortunately, many jurisdictions can't seem to change their ways. Every year they increase property taxes as much as current law allows, and then they direct staff to find an excuse that will seemingly justify such a large increase. As long as that kind of behavior continues there will be a need for this report, and I commend the Washington Institute Foundation for all of their efforts to bring this important information out in the open for all to see.

I. Background

Two years ago voters passed Referendum 47, a measure to enact a permanent cut in the state property tax, use "value averaging" to limit steep increases in individual tax bills, and limit local property tax increases to the lesser of 6% or the rate of inflation.

The movement to pass Referendum 47 was a response to sharply rising property taxes, which often increased many times faster than the annual rate of inflation. It also grew out of an effort to control the burgeoning size of government at the state and local level by establishing a policy that the cost of government should not expand faster than the growth of the general economy. On November 4, 1997, Referendum 47 passed by a popular vote of 64% to 36%, garnering a majority in every county in the state.

The measure’s state property tax cut went into effect in the first year of the reform, making permanent a temporary 4.7% reduction in state property tax collections that had been in place since 1996.

While the value averaging provision later fell to a court challenge and was never put into effect, the heart of the reform, setting the goal of holding local property tax increases to inflation, remains the main influence of the Referendum 47 law on our property tax system.

To gauge how well the will of the voters has been carried out, the Washington Institute conducted a study last year titled "Property Tax Relief in Washington: Is Reform Referendum 47 Working?" (see Washington Institute Foundation Policy Brief for July 1998). The study surveyed all 39 counties and the 12 largest cities in the state to assess whether Referendum 47 tax limitation was actually being implemented. The results of that study are summarized briefly in a later section.

This year the Washington Institute Foundation again conducted a study of Referendum 47’s effectiveness. We surveyed all 39 counties, and expanded the survey group of cities to 21, to obtain a broader geographic sample from around the state. This paper presents the results of the 1999 survey, along with background information on our local property tax system and an assessment of Referendum 47 tax savings at the state level.

II. 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, the subsections below briefly discusses the tax system’s major features.

State law designates the real and personal property that is subject to the property tax. County Assessors are responsible for setting official assessments that reflect 100% of the "true and fair" value for taxable property each January 1st.

The Assessed Valuation. An individual taxpayer’s bill is the result of multiplying the property’s "assessed valuation" by the levy rate set for that year. Each parcel of land is required to be taxed at its "highest and best use," and must be revalued by the County Assessor at least every four years. To assure accuracy, each property must be physically inspected by the assessor at least every six years. Typically these visual inspections are simply "drive-by" or external views only.

Tax assessors are required to mail a notice to each property owner within thirty days of appraisal stating the true and fair value of the property. If a taxpayer disagrees with the way a property has been assessed, the law provides for a process of appeal.

Washington counties operate on different appraisal cycles. Some reassess property on a rolling cycle, with one quarter of all properties reassessed each year. Some of the smaller counties reassess all the taxable property in the county in the fourth year of the cycle. Other counties operate on a two-year cycle. As we will see, the cycle has some implication for the statistics developed.

The Levy Rate. The levy rate applicable to a parcel of property is the result of actions taken by a number of taxing jurisdictions as well as by the voters themselves. Constitutionally, the maximum allowable levy (excluding voter-approved special levies and bond issues) is 1% of a property’s true and fair value, but that overall 1% is allocated among a number of taxing jurisdictions.

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) of the regular property tax revenue. The remainder of the 1% maximum allowable levy is allocated to the county itself and to the smaller taxing districts in which the particular property is located.

Each taxing district decides how much in property taxes it will collect, up to the amount of its share. Typically, a single property is located in several tax districts. In Seattle for example, a single-family home is a tax revenue source for as many as ten separate tax districts. These are listed on the property tax bill as: State, Local School Support, County, City, Port, Fire, Sewer and Water, Library, Emergency Medical Services, and "Other." Thus, individual tax bills are determined by the decisions of many boards and councils. All tax districts over 10,000 in population are now affected by the Referendum 47 reform.

The Tax Bill. After each taxing district has determined the amount of tax it will collect from the property located within its jurisdiction, the assessor applies the total amount to be collected to the property in the district. He then determines a composite rate from which he calculates each property owner’s actual tax. The result becomes the tax bill the county assessor mails to each property owner every year in February.

Property owners must pay one half of their annual tax by April 30th, 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.

Under this system, an increase in the assessed valuation of a piece of property does not by itself affect that property’s tax. This is because the governing board of a tax district decides how much it wants to spend in the coming year first, then instructs the local assessor to collect that amount.

To put it another way, if a county simply doubles the assessment of each property in the county, individual tax bills would not change. It is the decision of each taxing district to increase the tax it is levying that determines whether property tax collections will go up, not the value of the property to be taxed. For that reason, as we will see, Referendum 47 attempted to restrain the actual decisions by elected officials to increase the total amount local governments levy against property.

III. Limits on Annual Property Tax Increases

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. This level of annual increase seemed reasonable during the late 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 that 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.

IV. Reduction in State Property Tax

With the passage of Referendum 47, voters enacted a permanent 4.7% reduction in the state’s portion of property tax collections. Unlike the tax limitation procedure for counties, cities and other taxing districts, this provision did not require additional action by the state’s legislative body to be put into force. The provision went into effect immediately and saved property owners across the state $63.6 million in 1998.

In addition, the state is applying Referendum 47’s inflation limitation to its yearly increases in property tax collections. That means the 1.9% inflation limitation saved taxpayers a further $48.7 million in 1998, for combined tax savings that year of $112.3 million. In 1999, the savings from holding the increase in state property tax collection to inflation (.85%) total an additional $116.9 million.

Because the 4.7% tax cut is permanent and the state is holding property tax increases to inflation, these two reforms will continue to benefit taxpayers this year and in the years ahead. Thus Referendum 47 provides a $185.6 million state property tax cut in 1999, and a further $251.6 million in savings to taxpayers in 2000. Altogether, Referendum 47’s state property tax cuts will result in almost $2.6 billion in savings to taxpayers over its first eight years. The estimated year-by-year savings are shown in Figure 1.

Figure 1.

Estimated Savings to Taxpayers from Referendum 47

State Property Tax Cut, 1998 - 2005 (figures in millions)

Source: Washington State Department of Revenue, Research Division

V. Changes in Property Tax Law

Referendum 47 made important changes in the way Washington’s property tax system operates for local governments. The 6% limit remains part of the law as an overall cap on local 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 identify a "substantial need" for more money. If council members wish to raise taxes by more than the annual inflation rate, they must pass a special, stand-alone ordinance that allows them to raise property tax revenues up to the overall limit of 6%.

The "implicit price deflator," as announced each year by the U.S. Department of Commerce, is used as the inflation rate for determining the property tax limit required under Referendum 47. The inflation rate used for Referendum 47 tax limitation in 1998 was 1.9%; the same rate for 1999 is .85%.

To make it more difficult to impose sharp tax increases, Referendum 47 requires a supermajority vote before a local legislative body can breach the inflation tax limit. This procedural hedge against high taxes has limited effect in a great majority 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.

Thirty-five of Washington’s counties are governed by three-member commissions. The only additional duty Referendum 47 imposes on these counties is the requirement for a separate ordinance and a finding of a "substantial need" if they choose to authorize above-inflation increases in property tax collections in any given year.

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.

The supermajority provision has a greater impact on cities, school districts, port commissions and many other local taxing districts, because many of them are governed by boards with more than three members.

Though the old 6% tax-increase authority remains in place, it can only be used if a taxing district’s governing body holds a special vote. The exemption for direct, voter-approved "lid lift" levies, often used to provide extra funding for parks, libraries or schools, remains unchanged.

Referendum 47 also requires each county and other taxing district to hold a public hearing before setting rates, and further states, "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."

VI. Value Averaging Provision Struck Down

Another major provision of Referendum 47 would have allowed owners whose property value rose by more than 15% in one year to phase in these sharp increases over four years. This "value averaging" feature was 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 tax payments over four years. 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 each year.

For this reason the provision was challenged by ten county assessors in state court. The assessors argued that value averaging created unequal treatment of citizens under state tax law. On July 30, 1998, the State Supreme Court agreed and struck down the provision, ruling in Carol Belas et al v. Frederick C. Kiga that value averaging violated the state constitution’s uniformity clause, which requires that tax laws be applied equally to all citizens. To date, the "value averaging" clause is the only part of Referendum 47 that has been successfully challenged in the courts.

In the most recent session of the legislature a number of bills were introduced to alter various other aspects of the Referendum 47 law. These sought to eliminate tax hold-over authority (discussed below), allow voters to increase the regular property tax collections by more than inflation, eliminate the exemption for small tax districts (those under 10,000 in population), and require local officials to provide a clear and public explanation when they invoke a "substantial need" for increased tax collections. These proposals were referred to the House Committee on Finance and the Senate Committee on Ways and Means. None of them had become law, however, by the time the legislature adjourned it’s regular session for the year.

VII. Tax Hold-Over Authority

For the past 28 years state law has allowed local governments to "hold over" tax-increase authority from past years if they do not use their full 6% increase every year. The law’s intent 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.

Referendum 47 changed the way this hold-over authority works. Now the only amount that is automatically held over for possible use in future years is the difference between the inflation rate for that year and the amount a county actually levies. For example, when the inflation rate is .85%, as it is for 1999, and a county chooses to increase property tax collections by only .5% over the previous year, it automatically holds over .35% in taxing authority for possible use in future years.

In 1998, six counties and one city, Adams, Benton, Chelan, Jefferson, Douglas, Franklin and Seattle, took advantage of the final year to use the old rules governing hold-over authority. They set their property tax rates at more than 6% above the collections for the previous year, then collected that amount in actual taxes. This action permitted them to "lock-in" a higher tax base for future years.

In our 1999 survey, we found that no county or city set its property tax increase higher than the common 6% mark, possibly because no county or city had any past taxing authority left to use. Five counties, however, did pass ordinances reserving up to 6% in hold-over taxing authority for use in future years, even though in two cases the actual tax increase they are levying this year is considerably lower. These five counties are discussed further in section XIII.

VIII. Cumulative Benefits of Tax Limitation

In the second year of Referendum 47 tax limitation, the difference between the old tax ceiling of 6% and the new one for 1999 of .85% amounts to 5.15%, or $51.50 in tax savings on each $1,000 of a property tax bill. For most property owners, this results in only a modest tax savings at first.

But the cumulative effect over time can be enormous. At the standard 6% annual increase, property tax collections double every twelve years. A $1,000 tax bill in 1999 can mushroom to $2,000 by 2011. But at the much lower rate of .85% in annual increases the same tax bill would increase to only $1,106.90 in twelve years. It would take 82 years, almost seven times as long, to double. The aggregate effect is that a policy of limiting property tax increases to inflation each year will in time shave hundreds of dollars from the average homeowner’s annual property tax bill.

Opponents of tax cuts argue that tax limitation proposals add up to only "the price of a couple of lattes" for most taxpayers. As the previous calculation shows, however, these savings add up quickly. Even a modest easing in the rise of tax collections rapidly grows to a significant reduction in the overall tax burden government imposes on ordinary citizens.

IX. How Referendum 47 Works

To set tax rates for the following year, each county and other covered taxing district must now "adopt a separate ordinance or resolution" that "specifically authorizes the increase in terms of both dollars and percentage."

The purpose of this sunshine requirement is to ensure people are informed of the decisions their elected representatives make on their behalf -- decisions that 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 total number of Washington’s taxing districts has been gradually growing over time. Today they number 1,742 and are devoted to providing such diverse public services as sewers, cemeteries, mosquito control, irrigation, roads, schools, public utilities, flood protection, airports and hospitals. For a complete list of Washington’s taxing districts, see Appendix D. These taxing districts, including the state itself, collected $3.1 billion in regular property taxes from the people of Washington in the 1998, 39% of which (about $1.2 billion) was collected to support state government.

X. Results of the 1998 Study

Our initial study on the effectiveness of Referendum 47 property tax reform found that 17 of the 39 counties (about 44%) held their property tax increases at or below the limit approved by the voters. Five of these counties (Columbia, Ferry, Garfield, Pend Oreille and Whatcom) did not increase their levy rate at all. Two counties (Cowlitz and Lincoln) approved levy increases well below the inflation limit. The remaining 10 counties approved tax levy increases of 1.9%, right at the inflation limit for 1998. Property owners in these counties received the direct and immediate benefit of the new Referendum 47 law.

Twenty-two counties (56%) approved property tax levy increases exceeding the inflation limit. Seven of these counties passed increases in tax collections at various levels between the 1.9% inflation limit and the traditional 6% limit. Nine other counties enacted a 6% increase. The remaining six counties (Adams, Benton, Chelan, Jefferson, Douglas and Franklin) approved tax increases that surpassed even the traditional 6% limit. In each case these counties "locked in" higher taxes by drawing on unused taxing authority from the past. This action allows them to add even modest future tax increases to a higher base, thus boosting their overall property tax collections.

In addition, seven of the twelve cities surveyed increased their property tax collections above the Referendum 47 limit. One city, Seattle, used past taxing authority to increase tax collections by 7.81% over the previous year. Three cities held to the inflation limit of 1.9%, while two cities (Bellevue and Bellingham) did not increase their regular property tax collections at all.

The overall results of the first year of Referendum 47 property tax reform in the counties are shown in Figure 2.

Figure 2.

XI. Results of the 1999 Study

For our 1999 study, we again assessed whether Washington’s 39 counties implemented the Referendum 47 reform by limiting their increases in property tax collections to inflation (.85%), to the traditional 6% increase, or to some level in between. In addition, we expanded the survey to include 21 cities across the state.

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

Our 1999 survey found that 25 (64%) of counties did not implement Referendum 47’s inflation limitation, representing a 13% increase in the number of counties not applying this limit compared to last year. The overall results for counties are shown in Appendix B.

This group is almost evenly divided between the 13 counties that increased property tax collections by 6% and the 12 that increased collections by a percentage amount falling between .85% and 6%. Unlike last year, no county or city surveyed exceeded the 6% increase.

The remaining 14 counties (36%) did implement Referendum 47’s inflation limit in setting their increase in property tax collections over the previous year. This represents an 18% decline in the number of counties fully implementing Referendum 47 compared to last year.

Eight of these counties adopted the inflation level of .85%, a slight decline from the 10 that adopted the inflation limit last year. The six remaining counties adopted a 0% increase, one more than the five that adopted zero increases last year.

The results of the 1999 survey are shown in Figure 4, which shows the number of counties that fall into each tax increase category.

Figure 4.

The figures for Adams County present the largest movement of any single county in the survey, moving from the 36.27% property tax increased reported last year, to a minus .043% increase this year. The dollar amounts the County collected in regular property taxes in each year illustrate how this occurred. In 1998, Adams County collected $2,336,462 through the regular property tax levy, not counting increases from new construction and state assessed property. In 1999, the county is collecting $2,326,372, a .43% decrease from the previous year.

Yet both these figures are well above the $1,714,828 Adams County collected in 1997, the last year before Referendum 47 went into effect. While essentially holding property tax collections flat, the 1999 figure maintains a much higher tax base from which to calculate future property tax increases, due to the large property tax collection the county "locked-in" last year.

King County continued a downward trend in the level of increased property taxes it has adopted over the last three years, dropping from a 6% increase in 1997 (before Referendum 47 passed), to 5.08% in 1998, then to 4.5% in 1999. During budget deliberations, some King County Councilmembers pressed for full compliance with Referendum 47’s 1999 inflation limit of .85%. A supermajority of eight members, however, was sufficient to pass an ordinance citing the required "substantial need" to increase tax collections to the higher level.

Only two counties (Grant and Adams) that did not implement the inflation limit reform in 1998, did so in 1999. Four other counties, however (Okanogan, Pierce, Walla Walla and Lincoln) moved in the other direction. They adopted the inflation limit on property tax increases in 1998, but did not do so in 1999.

Two of these (Okanogan and Pierce) moved in one year from the inflation limit to taking the full 6% increase. Walla Walla and Lincoln counties adopted property tax increases of 3% and 2.51% respectively, roughly double the levels of increase they had imposed the year before.

Wahkiakum County showed the most movement in the direction of property tax limitation. In 1998 the county adopted the full 6% increase allowed by state law. In 1999, however, it adopted a 0% increase in property tax collections.

Eleven counties consistently implemented the inflation limitation on property tax increases in 1998 and in 1999. In each of the two years the reform has been in place the citizens of these counties have received the full benefit of Referendum 47 property tax limitation. These counties are listed in Figure 5.

Figure 5.

Washington Counties That Held Their Increases in PropertyTax Collections to the Rate of Inflation or Less in 1998 and in 1999:

    Clallam

    Clark

    Cowlitz

    Garfield

    Kittitas

    Klickitat

    Lewis

    Pend Oreille

    Spokane

    Thurston

    Whatcom

XII. Findings of Substantial Need

As noted above, the Referendum 47 law requires taxing districts to limit increases in property tax collections to the rate of inflation unless the governing board cites a substantial need to set collections at a higher level. Our previous report recommended that taxing jurisdictions give the public the specific reasons they were increasing property tax collections above the rate of inflation. For this reason we examined the 1999 ordinances to determine the number of counties that had taken this step.

Of the 25 counties that increased property tax collections above the rate of inflation in 1999, only 16 followed the requirement to identify a substantial need to do so. The remaining nine counties passed ordinances setting above-inflation tax collections, but failed to note a substantial need to help explain their reasons for the increase. In fact, these nine, contrary to the requirements of the law, did not mention "substantial need" in their tax ordinances at all.

All 16 counties that imposed greater-than-inflation tax increases on property gave specific reasons for doing so. These range in detail from no more than a general statement like, "due to the increased cost of criminal justice," as in the case of Franklin County, to the enumerated list of 17 cost-items Kitsap County printed with its tax-increase resolution.

The most common reason given for increasing property tax collections above inflation was the added cost of unfunded state and federal mandates, especially those that set tougher criminal justice requirements. Other common reasons given were: complying with the state Growth Management Act, meeting the costs of the salmon listing under the Endangered Species Act, and paying for enforcing the state’s stricter DUI laws. The language of the ordinances makes it clear that county commissioners consistently feel they have no control over these costs, yet are required by law to raise the money to pay for them.

Some reasons given do not make it clear whether the substantial need being cited is an unexpected additional expense to the budget, or simply the cost of funding the normal functions of government. Island County lists its substantial need for higher tax collections as, "due to increasing costs of governmental operations."

Other counties give reasons such as, "to fund critical public safety and justice systems programs" (Pierce), to meet the "increase in the county’s cost of doing business" (Snohomish), or to pay for the "continued need for construction, maintenance and repair of county roads" (Whitman). All of these activities are long-term government expenses that should be part of the regular budget planning process.

As these examples show, the absence of a definition of "substantial need" and a clear requirement for establishing it creates the temptation for local officials to take any single item in a county’s budget which they wish to increase and declare it as a "substantial need." That of course defeats the reason for having a substantial need requirement in the first place.

A budget item which is part of normal, on-going county expenses, and which has not suffered from any unusual, unplanned contingency, is simply a "normal" need, not a substantial one. In light of the requirement that clerks maintain a journal "showing the facts and evidence upon which [the] action is based," courts may require more than the bare assertions of the county council to uphold tax increases against any legal challenges brought by property owners.

Okanogan County cites a tax-increase reason that might not be considered a special cost in a large county, but which can create a serious substantial need for a small one. Its ordinance cites a substantial need "due to the cost associated with a Capital murder trial." The trial of a man accused of killing a local police officer is expected to cost the county $600,000 to $1 million, while the usual total budget for the county prosecutor’s office is only about $800,000.

The wide range of reasons given to justify higher-than-inflation tax increases grows out of the fact that the words "substantial need" are not defined in the law, so in practice each taxing district is free to interpret the phrase however it likes.

XIII. Reserving Future Taxing Authority

As noted above, counties can hold-over unused taxing authority for use in future years if they do not raise tax collections up to the inflation limit. There has been considerable confusion, however, over whether counties and other taxing districts can reserve future taxing authority at a level above the inflation limit.

In October 1998, the State Department of Revenue issued a memorandum saying that taxing districts may hold over up to 6% in unused taxing authority if the governing board passes, by a supermajority vote, a separate resolution or ordinance specifically reserving this taxing capacity for future years.

Our survey found that five counties (Benton, Ferry, Mason, San Juan and Skagit) passed ordinances citing the need to preserve hold-over taxing capacity as a justification for the level of their property tax increase. Two counties (Benton and Skagit) increased property tax collections by 2.65% and 4% respectively, but established 6% as the limit factor to be used in calculating their taxing capacity in the future. The other three counties increased their 1999 property tax collections by the full 6% over the previous year.

Four of the counties took this action by adding a clause to the same ordinance that authorized an above-inflation property tax increase. For example, Benton County’s ordinance imposes the 2.65% increase in property tax collections, and then goes on to state, "Be it further resolved that the levy limit is being established at 6% in the event that this levy is needed in future years."

Skagit County took a different approach to preserving hold-over taxing authority. The Board of Commissioners passed two ordinances, one setting the increase in tax collections at 4% for 1999, and another setting the limit factor at 6% for 1999. The result is the county will increase property tax collections by 4% over the previous year, while at the same time it has "banked" 2% in hold-over taxing authority for possible use in the future.

Two counties (Mason and San Juan) cited their desire to "bank" future taxing authority as one reason for maintaining a high level of property taxation. Both counties imposed 6% property tax-collection increases this year. San Juan’s ordinance cites the need to "preserve the future right to increase property taxes beyond the rate of inflation," while Mason County lists the "protection of future property tax revenues" as part of the basis for its tax increase.

The action to reserve future taxing authority, but not take the full 6% increase, could expose a taxing district to a possible legal challenge from taxpayers, because the governing board is citing a "substantial need" for increased property tax collections of 6%, while actually collecting taxes at a lower level. The district’s actual tax collections would appear to discredit the initial justification for a substantial need at the 6% level. Taxpayers could argue they are potentially harmed because the "banked" hold-over taxing authority could be levied on their property in some future year, when their property is likely to be assessed at a much higher value.

Since the phrase "substantial need" is not defined, a court would probably defer to a declaration of substantial need by the local legislative authority. However, where counties (or other tax districts) enact contradictory measures, courts may conclude that the determination of substantial need is refuted by the governing board’s own actions and may refuse to recognize it as a basis for future tax increases.

XIV. Analysis of Counties by Geography, Size and Governing Party

As in last year’s survey, we examined the data for the 1999 survey for any additional significant patterns. We considered the geographical distribution of counties, their size, and party control of county government.

We first looked at the location of counties that raised tax rates over the Referendum 47 limit. We found no significant geographical pattern. About half of the counties that raised their tax collections by 6% are located east of the Cascade mountains, while the remaining half are west of the mountains.

The same incidence occurs among the low-tax counties. Half of the 14 counties that held their property tax increases to the inflation limit or below are in the eastern part of the state, while the remainder are in the west. Similar to our 1998 study, we found a fairly even distribution of high- and low-tax counties across the state.

Next we assessed whether the size of a county influenced a governing council’s ability to limit annual increases in property tax collections. In 1998, two of the state’s largest counties (King and Snohomish) raised tax collections above the Referendum 47 inflation limit, while three other large counties (Clark, Pierce and Spokane) held tax collection increases to the inflation limit.

In this year’s survey we found a similar pattern, with only one large county, (Piece) moving from full tax limitation to an increase above the inflation level. The other four large counties remained in the categories they held last year. The mix, however, continues to show that size by itself does not determine whether a county government is able to hold down property tax increases or not. These results are show in Figure 6.

Figure 6.

1999 Regular Property Tax Increases

in Washington’s Five Largest Counties

We also examined the increases in property tax collections in the counties controlled by each party.

We found a relatively even distribution of counties in two of the three tax increase categories. Seven of the state’s 22 counties with a majority of Republicans on their governing board fell into each of the highest and lowest tax-increase categories, while six Democrat-controlled counties fell into each category. The only significant difference occurred among counties that raised property tax collections in the middle range, from between .85% and 6%. Eight Republican counties fell into this range, while only four Democratic ones did. (Whatcom County is non-partisan.)

We also looked at average and median property tax increases for the two groups. The average increase in property tax collections in Democrat-controlled counties was 3.35%, while the average for Republican-controlled counties was 3.26%. A look at the median tax increase reveals a wider disparity. The median increase for Democrat-controlled counties was 4%; while that for Republican-controlled counties was 2.83%. These conclusions are summarized in Figure 7.

Figure 7.

The average tax collection increase for both Republican- and Democrat-controlled counties is down slightly from last year, from 4.98% and 4.66% respectively to 3.26% and 3.35%. The change in the median tax increase, though, reveals a different pattern. In 1998, the median tax increase for Republican-controlled counties was 1.9%, while that for Democrat-controlled counties was 6%. In 1999, that range has narrowed. The median tax increase for Republican-controlled counties rose to 2.83%, while the median tax increase for Democrat-controlled counties dropped to 4%.

XV. Results of the 1999 Study for Cities

More than half (12 or 57%) of the 21 cities in our 1999 survey increased their property taxes above the rate of inflation. Seven of these increased collections by the full 6% over the previous year. Nine cities followed the Referendum 47 reform and limited their increase in property tax collections to .85% or less. The overall results for cities are shown in Appendix C.

Five cities (Bellevue, Bellingham, Ellensburg, Kirkland and Renton) provided the most tax relief to their citizens by enacting a 0% increase. All of these cities except Renton had chosen a 0% increase for 1998 as well, thus providing two consecutive years of maximum tax restraint for their citizens.

Some cities showed significant movement in their 1999 property tax increases compared to the previous year. Tacoma, which increased its 1999 property tax collection by .8775%, barely missed fully implementing Referendum 47’s inflation level, coming within three-hundredths of a percent of the inflation limit. But this level shows a marked improvement in tax limitation over the 5% increase the city enacted for 1998.

Renton is a similar example of movement in the direction of greater tax limitation. For 1998, Renton increased its property tax collection by 4.3% over the previous year. For 1999, the city choose a 0% increase, holding property tax collections flat compared to the previous year.

In these examples, both cities were exercising some tax restraint to begin with, holding even their 1998 increase in property tax collections below the maximum-allowed 6% level. Our 1999 survey found, however, that none of the six cities that took the full 6% increase in 1998, or Seattle, which enacted a 7.8% increase, moved toward greater tax limitation in 1999. All of them enacted the maximum increase of 6% in 1999.

Our survey found Vancouver to be the only city that had adopted the Referendum 47 limitation in 1998, but failed to do so again in 1999. Vancouver’s property tax collection increase shifted from 1.9% in 1998 to 3% this year.

The overall pattern shows that only cities that were exercising tax limitation in the first year of the reform continued to do so in 1999, while those that had increased their property tax collection by the maximum amount allowed in 1998 did so again in 1999. Only a handful of cities moved in the direction of implementing greater property tax restraint in 1999 than they had the year before.

XVI. Conclusion

Last year in addressing our research question, "Is Referendum 47 Working?", we concluded that the answer is "partially." A comprehensive study of the reform in its second year shows the results of property tax reform in Washington continue to be mixed.

At the state level, Referendum 47 has been an unqualified success. The permanent 4.7% reduction in state property tax collections brought immediate relief to all Washington property owners, and this one-time reduction continues to hold the state property tax at a lower level than it would have been otherwise.

Referendum 47’s annual inflation limitation is working at the state level too. In the two years the reform has been in place, the state has held the increase in its part of property tax collections to the level of inflation for each year. This is all the more remarkable because the inflation limitation in the second year, .85%, only allowed the state to increase its property tax collections at almost half the rate of the previous year, which was an already-low 1.9%.

Taken together, these two elements of Referendum 47 have delivered at the state level just what the original measure promised: millions of dollars in direct relief to taxpayers. Proposals have now been offered in the state legislature to phase out the state portion of the property tax altogether.

As we have seen, however, the tax limitation results for Washington’s counties and major cities vary. The majority of counties imposed property tax collection increases at well above the inflation rate called for by Referendum 47. But only one-third of the counties imposed increases at the full 6% level. This means that in two-thirds of the counties the measure has exercised at least a modest restraining effect on increases in property tax collections, and more than half of these actually implemented the full reform.

For the cities the results are equally mixed. Again, the majority of the cities did not hold their property tax collection increases to inflation, but only seven, one-third, imposed a full 6% increase. Like the counties, that means two-thirds of the cities surveyed are implementing some level of tax restraint, and again, more than half of these adopted the full reform.

Disappointingly for Referendum 47 supporters, the inflation limitation is not being implemented at the county and city level as widely as they had hoped. Some county and city officials, as noted here, continue to operate as if the people’s vote in November 1997 had not occurred at all. But the reform has created a major change in the way property taxes are levied in Washington.

Whether Referendum 47 tax limitation grows in effectiveness, or gradually fades, is a decision that will be made as each county, city and taxing district sets its spending and tax-increase policies in the years ahead.

About the Author

Paul Guppy is a graduate of Seattle University and holds graduate degrees in government and political science from Claremont Graduate School and the London School of Economics. He completed 12 years as a legislative aide in Washington, D.C., seven as a Legislative Director in the United States Congress, before joining the Foundation this year as Vice President for Research. He is the author of "Property Tax Relief in Washington: Is Referendum 47 Working?" and "A Citizen's Guide to Initiative 200," both published by the Foundation.

Andrew Primis, Shanna Follansbee and Brian Amsbary served as research assistants for this study as part of the Foundation’s Internship Program. They gathered and confirmed detailed information on property tax increases from around the state. Their work and overall contributions are greatly appreciated.

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 Institute Foundation obtained a copy of the ordinance setting local property tax rates for 1999 from each of the jurisdictions we studied. In cases where no copy was available, the tax information was gathered in writing or by phone directly from the county or city assessor’s office. A copy of any ordinance we received is available at no charge to our readers upon request.

In some cases information was further confirmed by phone. The responses were then used as needed to correct our data.

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

Appendix B:

Washington State Counties Increase in Regular Property Tax Collections in 1999 Compared with Increase in 1998 

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

Appendix C:

Washington State Major Cities Increase in Regular Property Tax Collections in 1999 Compared with Increase in 1998 

Appendix D:

Number of Taxing Districts in Washington State, by Type 1993 - 1997  

Source: "Tax Statistics 1997," Table 24, Washington State Department of Revenue, Olympia, Washington.