Tax Trends
On this page: State Sales Tax | B&O Manufacturing Rate | Gasoline Tax | Cigarette Tax | State Tax Collection in Washington, 1985-2005 | Washington State Taxes per $1,000 Personal Income | State-Local Tax Burden Compared to U.S. Average, 1977-2008 | Property Tax Explanation
Brief History of State and Local Taxes in Washington State
From its establishment as a territory in 1853 through the Great Depression years of the 1930s, the property tax was the main revenue source for both state and local governments—a reflection of the agrarian nature of the economy at the time. In 1889, Washington achieved statehood, and over the next three decades established other taxes: a 2 percent levy on premiums received by insurance companies (1891), an inheritance tax ranging from 1 to 12 percent (1901); and a 1-cent-per-gallon motor vehicle fuel tax (1921).
In 1932, voters overwhelmingly approved the establishment of a state personal and corporate income tax, which was intended to provide a more-balanced tax system and reduce property taxes. However, the following year the state Supreme Court struck down the income tax, interpreting income as constituting property and therefore implying that a tax on income would be a violation of the state Constitution unless it were applied uniformly. To this day, several attempts since to pass an income tax have failed.
In response to the Supreme Court’s decision, in 1933, the Legislature adopted a temporary gross receipts tax on businesses, as a stop-gap measure to balance the budget. It was the first time the state levied an excise tax on general business activities.
Washington’s heavy reliance on the property tax became problematic in the 1930s because the state’s economy was shifting toward an industrial basis. In addition, many homeowners lost their jobs during the Great Depression and were not able to pay their property taxes. The changing nature of the economy and growing property tax delinquencies ultimately led to a broadening of the state’s tax structure when the Legislature passed the Revenue Act of 1935. General fund revenue now included a retail sales tax, a use tax, a business and occupation tax (replacing the 1933 tax), a public utility tax, a liquor tax and a cigarette tax.
As a result, the state’s main form of taxation moved away from property taxes to excise taxes—that is, taxes on transactions such as the selling price of an item. Excise taxes now account for about 70 percent of all state tax receipts supporting the general fund.
The revenue sources of cities, counties and junior taxing districts are strictly controlled by the Legislature; only specifically authorized taxes can be imposed at the local level. The property tax’s status as the mainstay of local governments has declined as well, thought not to the same extent as state government. In 1970 property taxes accounted for nearly 87 percent of local tax revenues; by 2004, that number had declined to just below 65 percent.
Major Washington State Taxes
1935-Enacted at 2 percent
1941-Increased to 3 percent
1955-Increased to 3.33 percent
1959-Increased to 4 percent
1965-Increased to 4.2 percent
1967-Increased to 4.5 percent
1976-Increased to 4.6 percent
1979-Decreased to 4.5 percent
1981-Increased to 5.5 percent
1982-Decreased to 5.4 percent
1983-Increased to 6.5 percent
1935-Enacted at 0.25 percent
1951-Increased to 0.3 percent
1955-Increased to 0.4 percent
1959-Increased to 0.45 percent
1976-Increased to 0.4664 percent
1979-Decreased to 0.44 percent
1982-Increased to 0.458 percent
1983-Increased to 0.581 percent
1983-Decreased to 0.484 percent
1993-Increased to 0.515 percent
1995-Decreased to 0.506 percent
1997-Decreased to 0.484 percent
1921-Enacted at 1 cent per gallon
1924-Increased to 2 cents
1929-Increased to 3 cents
1931-Increased to 4 cents
1933-Increased to 5 cents
1949-Increased to 6.5 cents
1961-Increased to 7.5 cents
1967-Increased to 9 cents
1977-Increased to 11 cents
1979-Increased to 12 cents
1981-Increased to 13.5 cents
1982-Decreased to 12 cents
1983-Increased to 16 cents
1984-Increased to 18 cents
1990-Increased to 22 cents
1991-Increased to 23 cents
2003-Increased to 28 cents
2005-Increased to 31 cents
2006-Increased to 34 cents
2007-Increased to 36 cents
2008-Increased to 37.5 cents
1935-Enacted at 1 cent per pack
1939-Increased to 2 cents
1949-Increased to 4 cents
1955-Increased to 5 cents
1959-Increased to 6 cents
1961-Increased to 7 cents
1965-Increased to 11 cents
1971-Increased to 16 cents
1981-Increased to 20 cents
1982-Increased to 20.8 cents
1982-Increased to 23 cents
1986-Increased to 31 cents
1989-Increased to 34 cents
1993-Increased to 54 cents
1994-Increased to 56.5 cents
1995-Increased to 81.5 cents
1996-Increased to 82.5 cents
2002-Increased to $1.425
2005-Increased to $2.025
State Tax Collection in Washington
Source: Washington State Department of Revenue. *Local data for fiscal years 2001 and 2003 not compiled by the U.S. Census Bureau.
Washington State Taxes per $1,000 Personal Income
Source: Washington State Department of Revenue. *Local data for fiscal years 2001 and 2003 not compiled by the U.S. Census Bureau.
State-Local Tax Burden Compared to U.S. Average 1977-2008
Source: The Tax Foundation
As Spokane County Assessor, I’ve received a number of inquiries that highlight broad misunderstanding of how our property taxes are determined and where limits apply. The best way I know to explain Washington’s property tax system is with some simple illustrations.
Imagine a little city that consists of four homes, each exactly the same, and each appraised by the Assessor at $100,000. Let’s also say that the annual city budget for our imaginary city is $1000. To raise the amount of the budget, each homeowner must pay $250. Four homes each paying $250 raises $1000. Our property tax system is budget based. We tax enough to raise the amount in the budget. No more.
Let’s say next year’s budget remains at $1000, but the Assessor doubles the assessed value of all the homes to $200,000 each. Not counting the cost of the Assessor recall election, do the taxes on each of the homes change? No. To raise the budgeted amount, each must still pay $250. In this example, the assessed value of each home doubled, but the tax didn’t change.
Now let’s get a bit more realistic and say that the values on the homes change differently. Suppose one home goes from $100,000 to $150,000. Two homes double in value to $200,000 and the last home jumps up to a whopping $250,000! Now what happens to the taxes? Well, the average value of the four homes is still $200,000. So the taxes on the two homes that go to $200,000 are unchanged. They are at the average and they each still pay $250. The lowest valued home sees its tax go down to $187.50, even though the assessed value goes up 50 percent! The home that jumped 150 percent to $250,000 in value sees its property tax go up to $312.50, a 25 percent increase. In the end, we still only raise $1000 total to meet the budget. Interesting right?
But wait. Normally budgets don’t stay the same; they go up, right? Back in 2000, Washington State voters approved Initiative 747. I-747 limited annual budget increases to 1 percent unless voters approve a greater increase. In our imaginary city, the $1000 budget can only increase 1 percent to $1010 the following year unless the voters who live in the city approve a higher increase. While a Superior Court Judge recently ruled I-747 was unconstitutional, I suspect it will be back soon.
Our imaginary city gives simple illustrations of our property tax system. In reality, it’s not so simple. In Spokane County, there are about 202,000 properties (all different from each other), 116 tax code areas, and 57 tax districts. Although each property is in one tax code area, each property is in a number of tax districts because tax districts overlap. For instance, my mother lives in the house next door to mine. We both live in Fire District 10, however, she is in the Cheney School District while I’m in School District 81. The result is that even though we live right next to each other, we are in different tax code areas, and our total tax rates differ. The 57 tax districts inSpokane County are comprised of the county, cities, fire districts, emergency service districts, library, sewer, water, and cemetery districts, resulting in 116 tax code areas. Each tax district has an annual budget. To further complicate taxes, some property that crosses county lines, such as railroad property and telephone lines are assessed by the state. We also assess and tax business personal property. And we process senior and disabled exemptions and farm and agricultural valuation reductions. Spokane County’s property tax system operates just like our imaginary little city, but on a much larger scale and with all these additional factors. Nonetheless, our computer systems allow very accurate calculation of property taxes.
Most taxpayers who call my office think there is a limit on increases to assessed values. Not so. The limit is on the annual budget growth of the tax districts.
I have one more illustration that I think would be useful in our discussion. Let’s look at what happens if someone moves into our little city and builds a new house. If we again say the assessed value of each home is the original $100,000 but add a new home, look what happens to the individual property tax on each home. Five homes supporting the $1000 budget means each home now pays only $200 each. While growth brings more demand for government services, and is likely to push up demand for a greater budget, the initial effect is decreased taxes.
Now let’s discuss appraisals. In assessor jargon, Spokane County is known as an “Annual County”. That means all property is to be adjusted back to fair market value every year. While we reappraise only 1/6th of our county each year, we update the valuation of all property annually. All property is valued based upon the sale of comparable homes. With our real estate market as active as it is, and with home prices moving up so quickly, we have worked hard in the Assessor’s Office to keep up. Many people ask if the real estate market “bubble” bursts and prices begin to decline, will the assessed value decline with it? The answer is yes. We will follow the market. But recall the examples above; we will still raise the amount of the budget. Declining values would not necessarily mean lower taxes.
I hope this discussion helps you understand how our system works. You control your taxes at the ballot box. It is vitally important that our citizens carefully consider all levy issues they are asked to vote upon.
Sincerely,
Ralph Baker, Spokane County Assessor
Source: Spokane County Assessor’s Office.
