Exactly how do you close tax exemptions in Washington State?

There has been increased discussion in the halls of our capitol about the impact tax exemptions have on our state.  Previously, I talked in detail about just how much exemptions are costing our state and how many we have on the books.  Many have argued that it’s time to close some of those exemptions, or at least bring them under review.  Unfortunately, closing an exemption is more complicated that you might think.

The authority to levy a tax is clearly given in Article VII of Washington’s Constitution, which is aptly named Revenue and Taxation.  The complexities of this article and the authority given have been the subject of numerous debates and countless courts cases.  The debates have played out in the legislature, the Supreme Court, and the ballot.  To say that it is complicated is, well, an understatement.  However, its relevance is paramount in trying to understand just how to address the issue of exemptions.

To put it plainly, the Federal Government and the Washington State Legislature have the authority to manage our tax system, including modifying any existing exemptions.

However, a recent ballot initiative has impacted the legislature’s ability to manage Washington’s revenue system.  Initiative 1053 (led by initiative activist Tim Eyman) passed in November 2010 with over 63% voter approval.  This initiative re-instated a 2/3rds vote requirement in both houses of the Washington State Legislature to make any changes to our tax code.  This requirement was first introduced by I-601 in 1993 and was later reinstated by I-695 in 1999 and again by I-960 in 2007.  The 2/3rds requirement INCLUDES the closure of tax exemptions because it would require legislative action that would amend our tax code resulting in a net increase in revenue. 

The super-majority requirement has plagued reform advocates since it was first introduced.  There have been a number of attempts to mitigate the impact of these initiatives, including the introduction of a temporary increase in sales tax on certain retail items to a full legal challenge of I-1053 which is currently being reviewed by King County Superior Court.  The outcome of the legal challenge will have a big impact on the legislature’s ability to address or modify existing exemptions.  Until then, it’s going to take a supermajority in the legislature to close any of the 452 revenue generating tax exemptions.

BUT, there is another way.  The ballot.  Both I-960 and its predecessor I-1053 reinforce the power of the ballot by reinforcing the people’s right to petition their government.  An existing exemption could be closed by a simple majority vote of the people.  However, it’s important to realize just how difficult it can be to pass an initiative in Washington State.  To date, nearly 1,200 initiatives have been introduced and only 69 have successfully passed into law.

Bearing in mind the complications associated with the closure of tax exemptions, reform advocates should remain diligent in their efforts to bolster fairness in our tax code through the elimination of some outmoded exemptions.  However, the road to closure for tax exemptions is wrought with pitfalls and speed bumps.  When trying to address the fiscal crisis other more short term measures should be explored as well.  Those might include the introduction of mandatory reviews and sunsets of existing exemptions or greater scrutiny of any newly proposed or existing exemptions.  These are two options that are being explored which I will discuss in another post.

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: 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.

Understanding the effects of tax cuts in the initiative process

Last time we looked at issues around passing expensive initiatives without outlining how to pay for them (click here in case you missed it). This entry will focus on the opposite occurrence, that of the public limiting the state’s ability to raise taxes or reducing certain revenue sources. Before going further, I want to say that I’m not trying to demean our initiative process or take away from its significance. Ballot initiatives have made many positive changes in Washington State including: the Public Records Act (I-276), the Clean Indoor Air Act (I-901), Mandatory Performance Audits (I-900), and many others.  There are plenty of examples depending on your political cup of tea that you could find to your liking.  My goal is to simply show the power of this process and the importance of understanding the fiscal consequences of using it.

When talking about limiting government through the initiative process, one has to mention Tim Eyman who, love him or hate him, has become quite adept at using Washington’s direct democracy to pass laws that circumvent the Legislature and the Governor.  Some recent reductions in state funding are a result of his efforts including: I-695 - Cut the state motor vehicle excise tax and required voter approval for all tax, I-747-Cut state and local property taxes, and I-1053 - Concerns Tax and Fee Increases by State Government.

In brief I-695 was commonly known as the law that capped car tabs at $30 and I-747 limited increases in total property-tax collections by a taxing district to 1% a year. If there’s anything consistent in our state’s history, it’s our disdain for property taxes (click here for Justin’s piece on I-64). Both of these laws have a similar story.  The initiatives that passed were declared unconstitutional by the State Supreme Court but were resurrected by the Legislature shortly afterwards due to their popularity with the voters.  Lastly, I-1053 (and it’s predecessor I-960) requires the Legislature to have a two-thirds majority in both chambers before raising any taxes.

So what happens when reductions like this occur? In 2009, the Kitsap Sun wrote an article that looked at the effects of I-695 ten years after it passed.  “[Washington State Ferries] drive-on customers are clearly worse off for I-695. Frequent-user books for drivers jumped from $104 to $189.60 for 10 round trips. That equates to a $2,225.60 increase for this year alone.” The story goes on to talk about other modes of transit since this tax reduction targeted transportation services and projects.

Lastly, the voting requirement on taxes outlined in I-1053 has severely limited the Legislature’s options for dealing with the current recession. Over $12 billion has been cut in the last 4 years and taxes haven’t been able to help address this shortfall. The only time the state came close was with the candy and soda tax, which was overturned by I-1107 (click here for Catherine’s post on this issue).

After saying all of this I have to ask, do citizens fully understand how tax cuts affect them? Would the public have vetoed the soda tax if it were commonly known that it could have saved a service or health care program? Or would I-695 have passed if everyone had a full understanding of its impact on local transportation?  While I can’t answer these questions with accuracy, I can say that it’s important for both the public and government to be more engaged with each other in this discussion. If citizens can look beyond the appeal of tax cuts or large ideas and know where the money goes, and if government can work harder to explain clearly where specific tax dollars are going then that’s a start. I know it’s a tall order, but anything less leaves Washington at risk to ballot initiatives that aren’t fully understood by the electorate.