Some may lose if I-722 passes

By WARREN CORNWALL

Herald Writer

It’s touted as a tax-cutting plan that will shrink everyone’s property tax bill, where every homeowner will come out a winner.

But there is evidence that while Initiative 722 would be a windfall for many, there could also be losers if it passed: property owners who wind up with higher property taxes.

It’s a seeming contradiction that a measure capping property taxes could cost some taxpayers more.

The scenario, however, is possible according to a number of tax experts. One study recently found as many as 40 percent of residents in Pierce County could wind up paying more.

The initiative "in effect discriminates against people with more slowly growing property values," said Chris Haugen, an economist at the University of Washington’s Evans School of Public Affairs.

However, Tim Eyman, a Mukilteo businessman and sponsor of the initiative, insisted those people have got it wrong.

Homeowners living in neighborhoods with skyrocketing real estate prices would save the most, he said. But people elsewhere would still see a smaller tax bill.

"I would contend that everyone would pay less, no one would pay more," he said.

The puzzle revolves around the complicated interplay of property values and property taxes.

One part of the initiative would cap increases in total property tax collections. The annual limit would be either 2 percent or the inflation rate, whichever is lower. For example, a city that collected $1 million in property taxes in 2001 could collect $1.02 million the next year.

That would limit property taxes, said Paul Guppy, vice president of research for the Washington Institute Foundation, a conservative Seattle think tank that has pushed for property tax reform.

The overall tax reduction could be significant — as much as $380 million during the state’s 2001-2003 fiscal years, according to the state budget office.

The other major part of I-722, however, doesn’t limit overall property taxes. It simply shifts the tax burden among property owners, Guppy said.

That provision limits how much the taxable value of a house can increase from year to year, using the same 2 percent limit. For example, a $180,000 house in a sought-after neighborhood could see its market value climb to $210,000 the next year. Yet, the government could only tax it as if it had increased to $183,600.

This, however, doesn’t control the total taxes a government can collect. It just changes how much it can collect from that particular homeowner.

If the total taxable value of all the property in a city goes up more slowly than the total taxes, the city can make up the difference by raising the tax rate — how much tax they bill for every thousand dollars a property is worth, said the UW’s Haugen.

The result is that people with fast-rising property values will see significant tax savings with I-722, because the taxable value of their homes will be held down, even if the tax rate goes up, Guppy said.

"The person whose house has doubled in value is getting a much bigger tax break than his neighbor across town," Guppy said.

Eyman said the provision would help people hit with ballooning property tax bills as their houses become worth more.

"The highest priority was to make sure their property taxes would never take these skyrocketing jumps from year to year," he said.

For someone with a house slowly increasing in value, however, it could actually mean a higher tax bill, Haugen said.

If a person’s house grows in value only 1 percent a year, they might not benefit from the value cap. But if the tax rate goes up, because the total taxable value of all the houses is held down, that homeowner could wind up with a bigger bill, he said.

That result was borne out by a mathematical model created by The Herald to test the impacts of I-722.

The test suggested that in a taxing district where homes appreciated at widely different rates, the home with the least increase in value could pay more under I-722, while other homeowners could save money. If the homes appreciate at nearly the same rate, they would likely all benefit from I-722.

Haugen said the model was an accurate if simplistic model of how the initiative would work. With the hot real estate market in parts of the Puget Sound, he said the example using widely varying property values better reflected reality.

How many Washington property owners could this really affect?

Roughly 40 percent of Pierce County property owners might have a higher tax bill under 722, according to a recent analysis by staff of the state’s House Finance Committee.

The computer analysis of county tax records found that if the initiative had taken effect in the mid-’90s, 60 percent of landowners would have saved money between 1996 and 1999. A few could have cut their property tax bills in half.

But the remaining 40 percent would have seen their property tax bills go up between 1 percent and 6 percent, according to the study.

Eyman challenged the test results. He pointed to an August report by the Ways and Means Committee in the state’s Democrat-controlled Senate. That report stated individuals would pay less under I-722.

"The thing that I think gives that credibility is one thing — I don’t think I have the Senate Democrats in my back pocket," he said.

Staff on the committee revised the report shortly after Eyman began citing it, weakening the initial statement. A September version states that "most individual taxpayers will pay less."

Scott Noble, King County assessor and lead opponent to the initiative, said the change confirmed his position.

"Whenever you mess with the method of distribution of taxes, you create winners and losers," he said.

Eyman, however, said the change smelled more like an effort to obscure the truth.

Eyman also said that increases in the property tax rate would have required voter approval under Initiative 695, the ballot measure he promoted and voters passed in 1999. The state Supreme Court recently overturned that initiative. Now, Eyman said he would return with another initiative to reinstate the voter approval requirement that could hold down property tax rates.

"722 doesn’t do that," he said. "But 695 did and will with the measure we’re going to do in fall of 2001."

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