I695 -- WSACA Meeting Comments Memo (9/20/99)

September 20, 1999

TO: All County Assessors

FROM: Sandra G. Guilfoil, Assistant Director - Property Tax Division, Washington State Department of Revenue

SUBJECT: WSACA MEETING COMMENTS ON INITIATIVE 695

Introduction: The Department of Revenue has received a number of inquiries regarding what effects Initiative 695 would have on the administration of property tax in the event the Initiative passes in November. As with any other law, the courts may ultimately decide what the law means. This document, however, attempts to give some guidance to county assessors with respect to what the Department believes is the best interpretation of the Initiative at the current time. This information is also provided at this time so that assessors and taxing districts can take appropriate steps toward planning the implementation of the Initiative if it passes. In this regard, the Department has a continuing interest in any comments or questions that you may have with respect to this document or with respect to the implementation of the Initiative. To the extent that the Department is not sure about the legal effect of the Initiative, we will try to make that clear. The statements and opinions given are not, and should not be interpreted as, expressions for or against the Initiative. They are offered pursuant to the Department's statutory responsibility to exercise general supervision with respect to the administration of the property tax laws and to decide questions of interpretation with the advice of the attorney general.

Initiative 695 has three main parts. The first section of the Initiative imposes annual license tab fees of $30.00 on motor vehicles. The sEcond section requires voter approval of "any tax increase imposed by the state." The third section repeals a number of existing laws. For purposes of this memorandum, the important sections that are repealed are those found in the motor vehicle excise tax chapter, one of the provisions of which currently provides an exemption from property tax for motor vehicles. Another section that is repealed (along with chapter 82.50 RCW) currently provides an exemption from property tax for travel trailers and campers. The Initiative also provides that it is to be "liberally construed" to effectuate its policies and purposes. This document focuses primarily on the meaning and effects of section 2 of the Initiative as it relates specifically to property taxation, namely the requirement for voter approval of any tax increase imposed by the state.

The Initiative states in section 2 subsection (1), "Any tax increase imposed by the state shall require voter approval." The Initiative goes on to define both "tax" and "tax increase," and also defines "state." Because these definitions are so important to the interpretation of the Initiative, they are set out below in full.

"Tax" is defined as follows:

(2) For the purposes of this section, "tax" includes, but is not necessarily limited to, sales and use taxes, property taxes, business and occupation taxes, excise taxes, fuel taxes, impact fees, license fees, permit fees, and any monetary charge by government.

(3) For purposes of this section, "tax" does not include:

(a) Higher education tuition, and

(b) Civil and criminal fines and other charges collected in cases of restitution or violation of law or contract.

"Tax increase" is defined as follows:

(4) For the purposes of this section, "tax increase" includes, but is not necessarily limited to, a new tax, a monetary increase in an existing tax, a tax rate increase, an expansion in the legal definition of a tax base, and an extension of an expiring tax.

"State" is defined in the Initiative as follows:

(5) For purposes of this section, "state" includes, but is not necessarily limited to, the state itself and all its departments and agencies, any city, county, special district, and other political subdivision or governmental instrumentality of or within the state.

Questions and Answers:

1. Question: Would the passage of Initiative 695 reinstate the personal property tax on motor vehicles, and travel trailers and campers?

Answer: The answer to this question is not altogether clear. Resolution of the issue may rest with the Legislature if it chooses to enact substantive or clarifying amendments to the Initiative; or it may lie with the courts as the final authority on matters of statutory interpretation. (Any amendments within two years following enactment of the Initiative would require a two-thirds majority of both houses.) However, the Department believes the more compelling legal argument, as matters now stand, is that the personal property tax on motor vehicles, and travel trailers and campers will be reinstated by operation of law. This is because I-695 (section 3) expressly repeals the two sections of current law that provide a property tax exemption for motor vehicles (RCW 82.44.130) and for travel trailers and campers (RCW 82.50.530). Without these exemptions, and in order to give meaning to all of the tax code, these items of personal property should be treated the same as all other property under existing law. RCW 84.36.005, which is not amended or referred to by I-695, provides that all property is subject to taxation unless it is exempted.

2. Question: Would assessors still be required to put increases in true and fair value on the assessment rolls?

Answer: Yes. An increase in assessed value, by itself, does not necessarily result in an increase in taxes for the taxing district. The levy rate for the taxing district may be reduced to ensure that an increase in value does not result in a tax increase.

3. Question: If a taxing district increases its levy amount in 1999 for collection in 2000, over the 1998 levy amount, and the Initiative passes, will the taxing district be subject to the provisions of I-695 that prohibit a tax increase without voter approval?

Answer: No. The effective date of the Initiative is January 1, 2000 (section 6 of the Initiative). This is the effective date regardless of the Secretary of State's certification of the vote result to the Governor (within 30 days after the election) and the date of the Governor's proclamation declaring the result (RCW 29.62.130). (See also, Estate of Thompson, 103 Wn.2d 292 (1984)). The legislative action by the taxing district imposing the tax increase takes place prior to January 1, 2000. It is true that the meaning of the word "levy" was extended to include the extension of the tax upon the tax rolls in the case of Department of Revenue v. Hoppe, 82 Wn.2d 549 (1973), but extension of the tax on the rolls is merely a ministerial act and not a legislative act. So even though the assessor and treasurer perform ministerial actions with respect to a levy after January 1, 2000 (see RCW 84.52.080(4) and 84.56.010), those actions are not legislative actions intended to require voter approval under the terms of the measure.

4. Question: If a local taxing district has its levy rate lowered (and thus its overall levy amount lowered) due to pro-rationing, would voter approval be necessary in the succeeding year in order to bring the levy amount up to the previous level before the pro-rationing took effect?

Answer: Probably not. The Initiative provides that any tax increase imposed by the state requires voter approval, but it does not say when the tax increase has to occur in order to be subject to its terms. In the absence of any contrary indication, it would appear to mean that only those tax increases imposed by the state that occur after the effective date of the Initiative are prohibited without voter approval. So, for example, if a taxing district levied $50,000 for the 1999 levy for collection in 2000 and then was pro-rated on its levy in year 2000 down to $45,000, the taxing district should be allowed to levy up to $50,000 again in 2001 without voter approval.

5. Question: Can a local taxing district request voter approval of some specific action (tax increase) for more than one year?

Answer: Initiative 695 does not change the law in this regard. Whatever existing law allows would be allowed after passage of the Initiative. RCW 84.55.120 authorizes an ordinance or resolution of a local taxing district's legislative body to increase property tax revenue for a period of two years. This would appear to also allow voter approval under I-695 for a two-year period. Generally speaking, however, because property taxes are levied and collected on an annual basis, it would appear problematic to allow voter approval to exceed two years without some other statutory authority. The wording of any ballot proposal should be carefully considered.

6. Question: Would annexations be affected by I-695?

Answer: The basic levy calculation would be similar to current law in terms of allowing the annexing district to increase its levy by considering the assessed value of the annexed territory. This would not be a "tax increase" restricted by the Initiative, because it would just be shifting the receipt of property taxes from one taxing district to another. Similarly, a taxing district that loses territory would lose the ability to tax that property and would have to reduce its levy based upon the assessed value of the property lost. The taxing district losing territory would not thereafter be allowed to increase its levy above the base established at the time of the loss of territory, without voter approval.

7. Question: Would a taxing district require voter approval to use "banked" levy capacity (under RCW 84.55.092)?

Answer: Probably yes. Even though existing law allows the use of the banked capacity without voter approval, the Initiative appears to conflict with that law to the extent that using the banked capacity would result in a "tax increase," in this case "a monetary increase in an existing tax." In such a case (of conflict), the later enactment controls. The use of the banked levy capacity would require a vote by the legislative authority of the taxing district, and this vote would probably be construed as a "legislative act." Legislative acts that increase taxes are what the Initiative restricts, without voter approval.

8. Question: Does an increase in the amount of a local taxing district's regular levy require voter approval?

Answer: Most likely yes. An increase in the levy amount would more than likely constitute a "tax increase" as defined in the Initiative. It would be a "monetary increase in an existing tax." And this would be so despite the provisions of Referendum 47 that allow increases in the levy amount up to the limit factor (the IPD for taxing districts over 10,000 population). Since any increase in the regular levy of a local taxing district requires a "separate ordinance or resolution . . . specifically authorizing the increase in terms of both dollars and percentage" (RCW 84.55.120), that would be a "tax increase imposed by the state" under the provisions of I-695. So any legislative action by a local taxing district that increased the district's levy by the amount of the IPD, by 106%, or because of a showing of "substantial need," would require voter approval to implement.

9. Question: How would new construction, improvements to property, and increases in the value of state-assessed property be handled under I-695?

Answer: Under current law, RCW 84.55.010, a local taxing district's levy amount is allowed to increase by an amount calculated using these increases in value regardless of the levy limitation contained in that statute, and regardless of whether any legislative action has been taken by a taxing district's legislative body to increase the levy amount. These increases in value are due to actions taken by individual taxpayers, such as building a new house, adding value to an existing lot, and adding value to a state-wide business. These are the property tax equivalent of taxpayers paying additional sales tax because they have purchased more goods. These increases are not directly caused by any governmental action. Therefore, these increases (new construction, etc.) are added to a taxing district's levy amount and are not considered to be a "tax increase imposed by the state." This interpretation allows the provisions of I-695 to be harmonized with existing law.

10. Question: If a taxing district holds an election and receives voter approval for a tax increase, does the legislative authority of the taxing district still have to comply with the provisions of chapter 84.55 RCW that require a resolution?

Answer: The answer to this question varies depending on how the ballot proposition is worded and when the election is held. If the voter approval is essentially a "referendum" on action already taken by the taxing district's legislative authority, then no further ordinance or resolution would be needed. If the voter approval election precedes specific action by the taxing district's legislative authority and the approval is worded generally, then an ordinance or resolution might still be required. Again, careful consideration should be given to the wording of any ballot proposition to the voters.

11. Question: How are taxing district's levy rates affected by I-695?

Answer: In general, if assessed values increase, levy rates should decrease to keep the levy amount constant, and if assessed values decrease, levy rates should increase to allow the levy amount to remain constant. The fact that a levy rate increases, by itself, should not require voter approval, as long as the district's levy amount does not increase. There is no indication that the Initiative itself requires a reduction in taxes (except with respect to MVET); rather, it appears to prohibit tax increases without voter approval. The wording in the Initiative that includes "a tax rate increase" in the definition of a tax increase probably refers, at least in the context of property taxes, to the statutory maximum rate allowed for the various types of taxing districts. The statutory maximum rate cannot be increased without voter approval.