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The February Surprise

by Mark Hugh, CPA | Nov 08, 2017
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It may be known in the future as the Valentine’s Day Massacre 2018.

On approximately February 10, 2018, the King County Assessor’s office will mail bills for property taxes due in 2018. And, in a single lump sum, homeowners and business property owners in the county will suddenly understand the impact of the Washington State Legislature’s new property tax levy for basic education.

Since January 2012, the Legislature, at the mandate of the court, has struggled to raise additional funds for basic education, kindergarten through grade 12. The Washington State constitution considers basic education the “paramount duty” of the state. In January 2012, the unanimous Washington State Supreme Court ruling in McCleary v. State held that the state underfunded basic education and the Legislature had until 2019 to fully fund basic education, at a cost of $4-5 billion.

One holding of McCleary was the state relied too heavily on local property tax levies for salaries and operations. Both the state and 205 local school districts are separate taxing districts and assess property taxes dedicated to funding public schools. “Property rich” school districts, containing the high value property generally surrounding Lake Washington, are able to raise local funds while “property poor” districts cannot, even with higher tax rates. A shift of levies from local districts to the state raises taxes in property rich districts and lowers taxes in property poor districts.

For example, a property rich district has $500 million of taxable property, aggregate property taxes of $4 million, and an average home price of $500,000. A property poor district has $250 million of taxable property, aggregate property taxes of $3 million, and an average home price of $250,000. Before any levy swap, property taxes on an average home are $4,000 in the property rich district and $3,000 in the property poor district. The levy swap shifts more of the property tax burden to the property rich district. After a revenue neutral levy swap combination of taxing districts, property taxes would be $4,650 on the average home in property rich district and $2,250 on the average home in the property poor district.

Since 2012, the math on the levy swap has been simple, but the politics have been complex, especially with Washington’s divided legislature. The Legislature passed the two-year budget on June 30, 2017 and adopted the Senate’s plan for funding education. A new state property tax was assessed to fund basic education starting in 2018 and the levy swap was passed starting in 2019. The levy swap maintains, but lowers and caps, local property tax levies.

Impact on Taxpayers

Therefore, everyone’s property taxes increase in 2018, and in 2019 the levy swap will reallocate taxes statewide, resulting in property tax increases for some and decreases for others. Some examples for the average homeowner:

  • Bellevue, in 2018 a $640 increase over 2017 and in 2019, a $710 increase over 2017.
  • Issaquah, in 2018 a $610 increase over 2017 and in 2019, an $890 increase over 2017.
  • Seattle, in 2018 a $500 over 2017 and in 2019, a $470 increase over 2017.
  • Spokane, in 2018 a $130 increase over 2017 and in 2019, a $70 decrease over 2017.
  • Kent, in 2018 a $280 increase over 2017 and in 2019, a $50 decrease over 2017.
  • Tacoma, in 2018 a $190 increase over 2017 and in 2019, a $190 decrease over 2017.

You can view the two-year impact of the property tax increase and subsequent levy swap in your school district by following this link to the Office of Superintendent of Public Instructions’ website.

It’s not only residential property that will be affected; commercial property will be affected too. In Washington, commercial property is assessed at the same rate as residential property. A commercial property with 10 times the value as an average homeowner will have 10 times the increase in a district adversely affected by the tax increase. And a commercial property with 10 times the value as an average homeowner will have 10 times the benefit in a district positively affected by the tax increase.

King County, which contains most of the districts adversely impacted by the tax increase and levy swap, mails 2018 property tax bills on approximately February 10, 2018, which means they arrive on Valentine’s Day. And, because the increase will come in a single lump sum, everyone is going to notice.

The 2018 Legislature will be in session next February, and it’s already been suggested that the property tax increase and levy swap be unwound and instead the Legislature look to other sources of revenue, such as a capital gains tax, a carbon tax, higher B&O tax rates, and other revenue sources to fund basic education.

Either way, there won’t be much love in the room in February 2018 when property tax bills start arriving.

Mark Hugh headshotMark Hugh, CPA, is the principal of Mark Hugh PLLC. He is a frequent trainer and speaker regarding state and local tax issues. You can contact him at mark@markhugh.com.

Catch Mark Hugh at a number of CPE programs this fall, including Washington State Tax Update, Washington B&O Tax and New Developments, and Washington CPA Ethics and New Developments. Visit www.wscpa.org/markhugh for details.

This article appeared in the fall 2017 issue of the WashingtonCPA Magazine. Read more here.

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