From the Director: Initiative 747 Declared Unconstitutional

I-747 was passed in 2001, limiting annual property tax levy increases for each tax district to one percent. The court's opinion states that the initiative failed to accurately inform voters of the impact of the change, because the text of the law used in the initiative showed that the initiative reduced the general property tax levy from a limit of two percent to one percent.

However, in reality it reduced the limit from six percent (or IPD for cities and other districts over 10,000 population) to one percent. I-722 implementing the two percent limit had been declared unconstitutional by the Supreme Court earlier that same year. This court decision means that, unless a request for reconsideration is filed prior to November 28, the court will issue its mandate on that date and the law will be back to what it had been prior to the passage of I-747 in 2001 - a six percent cap. Again, the effective date of the decision will be November 28.

This issue has been the subject of debate and speculation over the last week and it is expected to continue during the next several weeks. A special session is under consideration and, if that does not occur, the Legislature is very likely to address this issue early in the 2008 legislative session.

Messages to Deliver to your Legislators

As we wait to hear whether this issue will be taken up in a special session later this month or during the 2008 session, please deliver these messages to your legislators:

• No special session: The Legislature should take the time to thoughtfully review this issue before taking action. Property taxes are some of the most complicated taxes to administer and understand. Don’t take action now that could have unintended consequences.
• The AWC Board adopted a policy position in 2007 of replacing the one percent cap with the implicit price deflator (IPD), which for 2008 would have been 2.084%. The Board will soon adopt the 2008 legislative priorities. The preliminary recommendation from the Fiscal Legislative Subcommittee is to retain the position of endorsing the IPD as an appropriate cap. The one percent limit does not keep up with inflation, and many city expenses are growing faster than inflation.
• Allow jurisdictions to retain the banked (held for possible use in the future) capacity created by the I-747 decision. The I-747 decision creates additional banked capacity by returning the law to the rules implemented by Referendum 47. This means that the highest legal levy for each jurisdiction would be recalculated. The difference between the one percent limit and IPD for jurisdictions would be banked for jurisdictions over 10,000 population, and the difference between one percent and six percent would be banked for jurisdictions under 10,000 population.
• Don’t punish fiscal prudence by jurisdictions that have banked capacity: Even under the one percent limit imposed by I-747, jurisdictions had the option of choosing to enact a levy lower than the one percent levy increase and "bank" the difference between their levy increase and one percent. This policy allows jurisdictions to take the minimum amount needed in any given year, while having a reserve amount "banked." Without this authority jurisdictions would have more incentive to take a full increase every year for fear that it may be needed in the future.

We realize many cities are in the process of adopting their budgets for 2008. Cities should strongly consider the political and legal ramifications and use extreme caution if considering property tax increases above one percent. Action taken this year for next year’s taxes could be impacted by legislation approved later this month or early next session.

Some in Olympia are asking for the inclusion of a retroactive clause in a bill next year that would impact 2008 levies set in 2007. The Governor has already called on local governments to refrain from increasing their property taxes as a result of this decision – see below for a complete copy of her statement.

Banked Capacity – Not Really 30% for Most Jurisdictions

While the news has reported that the limit for banked capacity is 30% for all taxing jurisdictions in the wake of the opinion, that is simply not the case. A complex set of factors limit the ability of a jurisdiction to use banked capacity including:

• Statutory maximum rates per $1000 assessed value – if a jurisdiction is at that limit, it may not be able to increase by one percent;
• Whether a jurisdiction has done a permanent levy lid lift, which resets the base;
• Whether the jurisdiction is under or over 10,000 population, which had a different limit – IPD; and
• The legislative authorities in many jurisdictions have simply declined to use banked capacity.

Tax districts over 10,000 population represent 85% of regular levy dollars statewide and are the least likely to have a big increase in the levy capacity from the recalculation under the I-747 decision. Those jurisdictions were limited to the difference between one percent and the IPD unless they made a finding of "substantial need" in each year following the passage of I-747. Since 2001, the IPD varied from a low of 1.16% in 2003 to a high of 3.42% in 2007.

For More Information

AWC is working to secure answers to a number of questions including: what happens if taxes are raised more than one percent for 2008 – can the Legislature rescind a local decision and, if so, must they do so by a certain date, is there a deadline for a jurisdiction to "bank" capacity for 2008 – must it be done by Nov 30 or the end of the year? These are just a few of the questions in play.

We continue to work with the Department of Revenue and private attorneys in an effort to provide you the best possible information. Everyone agrees our property tax statutes are very complicated and many answers will be provided without certainty – some actions by be challenged in court. AWC is an active participant in the daily discussions.

We hope to have additional information available with the next few days. Please watch for emails and future mailings as information becomes available. Please contact Jim Justin, Sheila Gall or Alicia Seegers-Martinelli at 1-800-562-8981 if you have any questions or comments.

• Supreme Court Opinion: www.courts.wa.gov/opinions/index.cfm?fa=opinions.showOpinion&filename=788448MAJ
• Dissent: www.courts.wa.gov/opinions/index.cfm?fa=opinions.showOpinion&filename=788448Di1
• Statement from Gov. Gregoire on Overturn of I-747: www.governor.wa.gov/news/news-view.asp?pressRelease=684&newsType=1

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