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.

Tobacco excise tax now applies to roll-your-own cigarettes

If you don’t smoke, you might not be aware of the taxes placed on cigarettes sold in this state. And if you don’t smoke, you’ve probably been out of the loop on recent discussions pertaining to taxing loose/pipe tobacco. Pipe tobacco is sold by tobacco shops for tobacco pipe users, but it is also sold in shops that offer roll-you-own packs and cartons of cigarettes. The roll-your-own cigarettes are taxed at an extremely discounted rate, thus gaining appeal with the consumer that wants to spend less on their tobacco.

A pack of 20 cigarettes is taxed $3.025 in Washington State. The tax rate previously was $2.025 but went up a dollar in 2010. We rank 5^th in the country for the amount we tax cigarettes. In addition to the state tax, cigarettes are taxed an additional $1/pack by the federal government. New York taxes the most at $4.35/pack while the least taxed cigarettes can be found in Missouri at only 17¢/pack.

This tax is paid as soon as the cigarettes are brought into Washington State. The cigarette tax is not paid directly by the consumer; rather the seller of the cigarettes has to pay the tax on each pack of cigarettes before they are sold to the consumer. That being said, the increase in cigarette taxes certainly increases the price the consumer pays for cigarettes. 

The monies collected from the state’s cigarette tax go into the state’s general fund, except for 14% that is deposited into the Education Legacy Trust Account. This account is created in the State Treasury and goes towards expanding access to higher education.

Cigarettes aren’t just subject to the state cigarette tax; they also charged sales tax (for more information check out the Department of Revenue). Depending on where you are located, the sales tax differs. If you make a purchase in Olympia, you’re going to be paying .087¢ for every dollar. See how your county compares with others.

In 2009, Congress raised taxes on roll-you-own tobacco, but some companies were able to skirt this tax by changing the way they labeled their tobacco calling it pipe tobacco instead of roll-you-own tobacco. This loophole made it so that the roll-you-own stores could continue to sell the cheaper cigarettes without having to pay the new tax. Even in 1933, state legislators contemplated a large increase in tobacco tax as a way to raise revenue. Just like present day, store owners in 1933 didn’t think this was the best way to go about raising revenue.

During the 2012 Legislative Session, Representative Kirby from Lakewood sponsored House Bill 2565, Concerning persons who operate roll-your-own cigarette machines at retail establishments. The bill would make roll-you-own cigarettes taxable at the cigarette tax rate. Those testifying to legislative committees in opposition to the bill stated it would cost the state jobs and small businesses operating roll-you-own machines would have to shut down. Proponents on the other hand felt that competition should be fair and both manufactured cigarettes and roll-your-own cigarettes should be taxed the same.

House Bill 2565 passed the legislature, and Governor Gregoire is scheduled to sign the bill into law on May 2, 2012. We’ll just have to stay tuned to see if any part of it gets vetoed!   

The services you enjoy come from the taxes you pay.

I’m going to go out on a limb here and say that most Washingtonians take their government for granted. It’s so easy, especially now in the middle of “the great recession,” to talk about how burdened we are by the government and how they always want more, more, more. But is this really the case? Is the government really asking us for more without giving us our money’s worth? When you stop and think about it, the state (and the city and the county) turns your taxes into services. Have you ever thought about what an average day in your life or your family’s life would look like without the services your taxes provide? 

Next time you get a notice that your property taxes are due, or your driver’s license or car tabs are about to expire, consider what you’re paying for. Having to interact with bureaucracy can be enough to frustrate even the most patient of customers but at the same time, you’re interacting with a system that has been put into place that serves every citizen in the state and in turn, there’s a tacit agreement that for the taxes/fees that you pay, the state will provide infrastructure and services that you will benefit from. This assistance may come in the form of educating your child, providing HOV lanes during rush hour, or having police available when you need them most.

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Here is a rundown of just some of the things that you get from the state for what you give:

Public Schools—Receive over 22% of the entire state’s budget! There’s so much that goes into making public education possible, everything from: feeding breakfast/lunch; bussing children to and from school; paying teachers; providing opportunities for children to learn to play music, sing, and be expressive; supporting special education; making sure our schools’ roofs don’t leak and the fields are mown so our children can participate in afterschool sports—the list goes on-and-on. Washington State is responsible for educating over 1 million children in the public school system.

Human Services—Prisons, medical and public assistance. One-in-five citizens in Washington State benefits or receives care from the state under this category.

Higher Education—Revenue collected from taxes help support our six public universities in the state as well as thirty-four community and technical colleges. Your taxes help create competitive state schools and make it possible for some 75,000 students to receive financial aid.

Government Operations—Supports all judicial, administration, and legislative functions of the state.

Natural Resources—Your taxes go to maintaining our state parks and protecting the environment within Washington State.

For a helpful resource on your state’s taxes, check out the Senate’s Citizen’s Guide to the Budget.