Property Tax 101: Exemptions, Credits, & Deductions

Part 2

In Part 1 of our discussion on property tax exemptions, credits, and deductions we touched on a higher-lever overview.  Today, we dive into a few of the more popular programs in the state.

A majority of the exemptions mentioned in Part 1 are targeted at organizations or entities that serve the public and add to the public good.  There are also a few exemption and deferral programs aimed at relieving the tax burden on certain groups of people.

Senior citizens/disabled persons can apply for an exemption if they are 61 years old or retired due to a disability and whose household income is $35,000 or less.  This exemption program, which was passed as a constitutional amendment in 1966, is a large one in the state.  According to the Department of Revenue, in 2009 (the most recent data available) $176.1 million in property tax relief was given to homeowners, which equates to an average savings of $1,555 per household – that’s no nominal figure! 

A related program for senior citizens/disabled persons is not an exemption program but a deferral program.  Under this program, seniors 60 years or older in a household that has less than $40,000 of disposable income can defer property tax collections until the property ceases to be the permanent residence  of the homeowner or surviving spouse.  The deferral then becomes a lien on the residence and is repaid from the proceeds of the estate.  In the meantime, the state reimburses local jurisdictions for lost revenue.  This deferral program isn’t as widely utilized as the exemption program.  In 2007, only 950 households took part in the program, compared to the just under 114,000 households that took part in the exemption program.
In 2005, a similar program was established for widows/widowers of veterans who died in the line of active duty.  In 2007, the legislature created a new deferral program for low-income households.  Those households with a combined income of $57,000 or less can qualify for the deferral program which allows taxpayers to defer half of their yearly property taxes; payment on the second half is then postponed until the residence is sold.

It is clear to see what the legislature’s priorities have been by looking at the history of property tax exemptions and deferral programs.  Those most vulnerable to losing their homes – seniors, low-income, and widows/widowers – are considered entitled to state assistance.  Do you agree with the legislature’s view?  Should we be subsidizing those in need?  Around the same time these popular programs were put into place, a Tim Eyman initiative (I-747) was voted into law, which restricted property tax valuations to 1% per year.  Clearly, Washington State residents were struggling with the cost of their property taxes and the legislature made an effort to help those most in need.

Property Tax 101: Exemptions, Credits, & Deductions

Part 1

Washington State’s Constitution allows for the legislature to declare certain exemptions for property taxes.  And declare they have!  Over the years, the number of exemptions, credits, and deductions has grown.   There are a number of classifications, too.  For example, there are various entities and types of property that are exempt from property taxes.  It’s probably no surprise that federal, state and local government owned properties are among those exempt.  But did you know that most non-profit organizations and many privately owned properties are exempt, as well?  For a complete list, read the Tax Reference Manual produced by the State Department of Revenue.  In the meantime, here are some examples:

Non-Profit Organizations:

·         Churches, parsonages, convents, and administrative offices of religious organizations

·         Humane societies

·         Assembly halls and meeting places

·         Thrift stores that sell only donated merchandise

Privately Owned Property:

·         Cemeteries

·         Widows/widowers of veterans

·         Property used to produce biodiesel, wood biomass, or alcohol fuel or as an anaerobic digester

·         Senior citizen and disabled homeowners (see below for a more detailed discussion)

As discussed in previous posts, some personal property is also exempt from taxation.  Certain intangible assets such as cash, stocks, and bonds are not included in property taxation.  Also, motor vehicles, farm equipment, commercial vessels, and recreational boats are exempt. 

In the 2012 legislative session multiple bills were introduced to expand exemptions or credits.  Here is a roundup:

·         SHB 1042/SB 5017 – Providing a property tax exemption for property held under lease, sublease, or lease-purchase by a nonprofit organization that provides job training, placement, or pre-employment services.  Did not pass.

·         HB 1385/SB 5628 - Concerning a limited property tax exemption from the emergency medical services levy.  Did not pass.

·         HB 1457 – Encouraging businesses to locate in vacant buidlings through a business and occupation tax credit for property taxes paid. Did not pass.

·         HB 2772/SB 6583 – Creating a property tax exemption for the value of new construction of industrial/manufacturing facilities in target urban areas.  Did not pass.

·         SB 6600 – Extending property tax exemptions to property used exclusively by certain nonprofit organizations that is leased from an entity that acquired the property from a previously exempt nonprofit organization.  Passed – effective 6/7/2012.

For more information on property tax exemptions, read part 2, coming soon.

Washington State Property Tax 101 – Overview

State property taxes account for approximately 13% of all state general fund revenue, making it the third largest revenue stream in the state.  Think of Washington’s tax structure as a three-legged stool (a reference made by former State Forecaster, Arun Raha, during a revenue forecast in 2011); the three legs (taxes) hold up the entire stool (Washington’s revenue sources).  To put things in perspective, the following chart shows you what our property tax collections look like relative to all other sources of revenue.  No surprise that the “three legs” account for nearly 80% of state general fund revenues.

In 2011, $8.9 billion in property taxes was paid by Washingtonians to state and local governments and school districts.  Of that, just under 55% (approximately $5 billion) was collected to support K-12 education.  Local governments rely heavily on property tax collections as well.  In fact, property taxes make up the largest revenue stream in tax collections for the locals, generating approximately $4 billion in 2011.  Clearly in times of economic downturn (especially The Great Recession with the huge hit to home ownership levels), K-12 education funding is directly at risk.  For further discussion on this, see this article.

As I briefly mentioned in the property tax history  post, the definition of taxable property has changed over the years and will undoubtedly continue to change as our technology evolves.  At its most basic level, it is defined in Article 7, Section 1 of our state constitution as tangible and intangible goods that can be owned.  Real property – land, structures, etc - and tangible property – generally everything else - are the two major classifications the state uses to define property.  The legislature has granted some exemptions; for instance, motor vehicles and household goods are not included in property tax assessments.

The same uniformity clause in the state constitution that prevents Washington from implementing a state income tax applies to property tax too.  According to the Legislative Guide to Washington State Property Taxes, “many other states have differential tax rates or different value standards that depend upon the separate classification of property.”  This type of system would be deemed unconstitutional in Washington and has been multiple times throughout state history.

Stay tuned for more posts about property taxes including a discussion on exemptions and how your property is assessed.

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Washington State Property Tax 101:

The relationship between property taxes and public school funding

In Washington State, property taxes are the primary revenue source for public schools.  Of the state general fund, almost half goes to K-12 education – as shown in A Guide to K-12 Funding, $13.2 billion was dedicated to public schools in the 2009-11 biennium. The state property tax levy is commonly called the state school levy because the funds are dedicated to public schools.  The paid property tax, as well as all other tax revenue, is deposited into the general fund.  In 2000, voters approved Initiative 728, which transfers a portion of the state property tax from the general fund to the Student Achievement Fund (SAF).  This transfer of funds goes directly to school districts across the state to be used for class size reduction, extended learning opportunities for students, professional training for educators, and early childhood programs. 

In addition to the school levy, there are special levies.  Whereas the school levy is paid by all Washington property owners through the property tax, special levies are approved by voters for a specific school district.  Special levies are often called excess levies because the levy is in excess of the 1% limit on property taxes.  To read more about the 1% limit visit this post. 

Over the years, reliance on special levies to fund school operations has decreased, largely in part to the Seattle v. State of Washington State Supreme Court decision in which Judge Doran directed the legislature to define and fully fund basic education for all students in Washington State.  After that, in 1977, the legislature enacted the Basic Education Act, increasing state funding support to public schools and limiting the special levy limits.  Still, special levies remain an important part of funding for public schools.  In 2010, 281 of the state’s 295 school districts passed a special levy aimed at maintenance and operations for school districts.

Property Tax 101: The Limit Factor

In recent years, residents of Washington State would think little of Governor Gregoire calling a special session of the legislature simply because it has become a very common occurrence as of late.  However, in November of 2007, when the Governor called her first special session, it was unexpected. The special session was called for the purpose of reinstating a 1% limit, or cap, on property taxes. 

The first limit on property taxes was passed by the legislature in 1971 and only affected regular property taxes at the local level.  This limit required that any property tax levy not exceed 106% of the highest amount of revenue received from any levy in the preceding three years.  Eight years later, the legislature extended this same provision to state property taxes, as well.

 A couple decades later, Washington State voters passed Referendum 47, which required additional limits on top of the 106% limit.  Beginning in 1997, taxing districts with a population over 10,000 could only increase regular levies by the inflation rate or 6%, whichever was smaller.

Not long after, in 2000, Initiative 722 (I-722) was passed.  I-722 limited future property tax increases to 2% and rolled back certain property tax increases levied in the year 2000.  The State Supreme Court ruled I-722 unconstitutional because it was not limited to a single subject.

With the help of Tim Eyman, voters were back at it in 2001 with I-747, which restricted property tax increases to the lesser of inflation or 1%, sending legislators a clear message that property taxes were growing too quickly and they wanted that growth curbed.  Six years later, the State Supreme Court overturned I-747 stating that it didn't include proper disclosure to voters.  In other words, the court believed voters didn't fully know what they were voting on.

The legislature and Governor Gregoire disagreed and quickly called a special session in late 2007.  House Bill 2416 reinstated the 1% levy limit established by I-747 and remains intact today.

What are the costs of tax exemptions in Washington State?

According to a recent Department of Revenue report, there are 640 tax exemptions on the books in Washington State.  Of those, 452 would likely generate revenue if eliminated.  However, the bigger question is how much revenue is being lost through these exemptions?

Revenue advocates make the case that closing some exemptions would help to address the budget shortfalls that have plagued Washington since the start of the Great Recession.  Before getting into the weeds of that debate, we need to know just how much the 452 revenue-generating exemptions cost our state.

Exemptions are spread across our entire tax code and can be found in every type of tax applied by the state.  176 apply to the B&O tax, 151 are in sales tax collections, 63 are found in other business taxes, 35 apply to taxes in lieu of an excise tax, 21 in miscellaneous taxes, and 6 in property taxes.  In total, these 452 revenue-generating exemptions resulted in $29.3 billion in lost revenue in the 2011 – 2013 biennium.

To fully understand the $29.3 billion in lost revenue, we need to relate this amount to the big picture—the state’s full operating cost. According to the Washington Citizen’s Guide to the Budget, total expenditures for the 2009- 2011 biennium added up to $74.8 billion.  Of that amount, $26.7 billion was spent on human services, $17 billion on public schools, $10.5 billion on higher education, and $8 billion on transportation.  If viewed as an expenditure, exemptions outweighed any other categorical expenditure in the state.  Currently, exemptions represent approximately 39% of our state’s operating cost.       

Since the beginning of the Great Recession, the legislature has had to rip $10.5 billion from the state’s operating cost as a result of continued budget shortfalls.  These reductions have had a tremendous impact on how the state conducts its business and funds its core values.  Across the board reductions have resulted in increased tuition at our 2-year and 4-year colleges, decreased funding for k12 education (resulting in a legal challenge that was recently upheld by our state’s supreme court), the elimination of vital social service programs, and the delay of critical infrastructure improvements.

Viewed as a whole, exemptions add up to a huge bite out of our state’s operating budget.  Still, a knee-jerk decision to close loopholes could have larger unforeseen ripple effects in our economy.  Currently, these exemptions are not subject to regular and rigorous review, with some exemptions remaining on the books for over 50 years.  When entering into the debate over the closure of exemptions, it is important to not only know the impact that these exemptions have on our budget but to also conduct a full and careful review of proposed exemption eliminations. 

It is hard to argue that the closure of exemptions should not be considered in trying to address the current fiscal crisis in our state.  Even if only 10% of the exemptions were closed, it would result in $2.9 billion of additional funds that could be used to mitigate some of the recent devastating cuts experienced by critical public programs.    

Washington State Property Tax 101: History

This overview of Washington State property taxes is the first in a multi-part series focused on shedding some light on our state’s property tax system.  It is intended to condense and simplify the myriad of information already available.  If you are interested in more detailed information, head over to the Department of Revenue’s (DOR) webpage.

The Organic Act of 1853 not only established the territorial government of Washington but also required that taxes assessed on property be administered uniformly and provide exemptions for benevolent institutions, federal property, and churches.  Thus began the first tax in Washington’s history.  When Washington gained statehood in 1889, the property tax laws remained largely the same.  Property taxes were the principle revenue source for Washington from the Organic Act of 1853 to the early Depression years. 

In the 1920s and 1930s, property tax rates began to rise.  According to DOR, rates of 2.5% - nearly three times what they typically are today – were not uncommon during this time period.  During the Depression Era, efforts were made to reduce burdensome property taxes because they were no longer an accurate predictor of wealth.  As society moved from largely agrarian production to industrialization, property ownership changed.  Reliability on property tax revenue was at an all-time low in a time when demand for government resources and services was at an all-time high.

An effort made to help alleviate the tax burden (which you’ve read about multiple times on this blog) was an attempt to pass a graduated income tax.  Initiative 69 was passed by voters with 70% approval in 1932, but the state supreme court ruled the law unconstitutional because of the graduated rate structure.  Taxpayers did get some relief in 1933 and 1935 when the state sales and business & occupation taxes were passed. 

On the same ballot as Initiative 69, was an initiative to limit property tax rates, which passed.  During the following decade, voters approved multiple limitations on property tax rates which severely reduced the property tax revenue.  Additionally, a few exemptions were put into place: certain intangibles, household goods, and motor vehicles.  In the 1970s, even more exemptions were adopted: senior citizen and open space program being the most notable. 

In 2001, Initiative 747 (an Eyman initiative) was approved by voters.  This initiative placed further restrictions on taxing districts in regards to how much revenues may grow from year to year.  Before the initiative, growth rates were tied to inflation and not to exceed 6%.  Under the new initiative, growth could not exceed 1% annually.  Even though the law was deemed unconstitutional in 2007, the Legislature enacted a similar statutory limit of 1% and is currently still in place. 

In 2009, legislation requiring that all property be assessed for value annually by 2014, as opposed to every four years which had been the law since 1955, was enacted.

Overall, it’s clear to see that Washington’s property tax history is complex and ever-changing.  Stay tuned for a breakout of detailed property tax issues and a roundup of property tax stories in the news.  For a timeline of significant events go here.