‘Loser’ cities dread tax bill

Published 9:00 pm Saturday, December 27, 2003

A new proposal that changes which cities collect sales taxes in the state could take as much as $3 million away from cities such as Everett and Lynnwood and hand it over to Edmonds and Marysville and others like them.

Every city and county in the state will be either a "winner" or a "loser" under the plan, which the Legislature is expected to consider during the new session that begins in January.

The change would be such a financial blow that officials in Lynnwood are considering hiring a lobbyist for the first time to plead the city’s case to lawmakers in Olympia.

"We spend a lot of money … to support retail activity," Lynnwood Mayor Mike McKinnon said. "Now, more than $1 million of our money is going to go away, but we still have to support it all."

The Department of Revenue is putting together a study on the impact the change would have to cities around the state. The study should be complete before the Legislative session starts Jan. 5.

State officials say the change would put the state in line with expected changes at the federal level regarding sales over the Internet.

Under current rules, cities and counties get a share of sales tax charged on purchases made in those cities.

For example, Lynnwood gets sales tax revenue on purchases made at Alderwood Mall. That money is used to provide basic services, such as public safety, parks and roads.

But the change under consideration would give the sales tax revenue to the city where the items are delivered.

That means the sales tax for a couch bought in Lynnwood, but delivered to a home in Edmonds, would now go to Edmonds instead.

Everett and Lynnwood are in the top five cities statewide in terms of losing the most money because they sell more items than residents purchase. Seattle tops the list, losing $2.26 million per year. Everett could lose as much as $1.66 million, while Lynnwood could lose between $1.2 million and $1.7 million, according to estimates from the state Department of Revenue.

Everett last year collected just more than $17 million in sales tax revenues, while Lynnwood took in just more than $14 million.

On the other hand, Edmonds could gain more than a half-million dollars each year, and seven other Snohomish County cities would gain from $78,000 to nearly $400,00 per year. Also, Snohomish County could have more than $3 million of new money in its coffers.

The state Department of Revenue wants to make the change before Congress passes legislation charging sales tax nationwide on items purchased over the Internet. The sales taxes on those items — which in many instances currently aren’t taxed at all — would go to the cities and states where the items are delivered. That is because it’s seen as easier to track where items are delivered than where the items are from.

Lynnwood officials say the change on Internet sales makes sense, but that the state should be able to have its own rules when it comes to items that are bought and delivered in the state.

Lynnwood officials argue that if the sales tax money goes away, there would be no incentive for a city to attract businesses or a huge mall. Add to that, they say, the cities that are getting the sales tax money without housing businesses won’t have any reason to try to attract businesses, either.

"It’s a matter of staying fair to Lynnwood," McKinnon said. "We’ve made the sacrifice, financially and socially, to have more traffic in our city and to have all this public transportation coming through our city."

The state Department of Revenue says it is looking for ways to make up the revenue that cities such as Lynnwood and Everett would lose.

"It won’t necessarily be a hit," said Mike Gowrylow, a spokesman for the state Department of Revenue. "There are ways to make sure the winners don’t win as much, and the losers don’t lose as much."

Lynnwood certainly hopes so, but isn’t counting on anything.

"The numbers keep changing," Lynnwood Finance Manager Michael Bailey said. "And that makes somebody like me nervous."

Everett Mayor Ray Stephanson said he thinks the state should wait until Congress makes a nationwide change.

Stephanson said he isn’t opposed to the in-state changes, but he wants the state to use some of the tens of millions of dollars in tax revenue it would gain to reimburse Everett and other cities that would lose sales tax revenue.

Stephanson said the stores and car dealerships that provide Everett with so much tax revenue have not come without a cost for the city. Everett had to build streets, sidewalks and sewer systems to accommodate the new businesses, and it continues to spend money to provide police and fire protection.

Jim Larson, assistant administrative services director for Edmonds, is looking forward to the half-million-dollar windfall, but said he sympathizes with cities that are going to lose money.

"It makes sense that the people who pay the taxes are the ones who receive the services," Larson said. "We do recognize that this is going to be a hardship for a lot of other cities. We do support the idea that there be some kind of adjustment put in here to help the cities who are losers."

Larson said Edmonds and many other cities suffered tremendously after the Legislature took away the motor-vehicle excise tax, following the passage of I-695. The car tax provided money to cities whose sales tax revenues didn’t meet the statewide average.

"That pot of money went away and … a great many cities in the state were hit pretty hard," Larson said.

For Edmonds, which recently asked its residents to authorize a $1.7 million property tax increase and was rejected, a half-million new dollars is a serious boost.

"If we were looking at this entirely from a selfish perspective, we’d say, ‘Go for it,’ and not worry about consequences," Larson said. "But we are really sensitive to the effect it will have on other cities."

Reporter Victor Balta: 425-339-3455 or vbalta@heraldnet.com.

Here’s a look at who gains and who loses under a proposal that could change how cities and Snohomish County collect sales-tax money on purchases made within the state:

Sno. County:+ $3,079,692

Arlington: + $181,377

Brier: + $95,474

Darrington:- $1,138

Edmonds:+ $554,167

Everett: – $1,664,614

Gold Bar:+ $9,603

Granite Falls:- $53,174

Index:+ $1,088

Lake Stevens:+ $78,011

Lynnwood:- $1,272,798

Marysville:+ $320,531

Mill Creek:+ $295,162

Monroe:- $183,300

M’lake Terrace:+ $395,852

Mukilteo:+ $369,497

Snohomish:- $26,404

Stanwood:+ $15,668

Sultan: + $13,299

Woodway:+ $19,578

Source: Washington State Department of Revenue