Most cities in South Snohomish and North King counties, along with the counties themselves, would reap monetary gain from a plan that will be considered in the upcoming legislative session.
Others, notably Lynnwood, would lose.
The plan would redistribute sales tax receipts for retail items that are delivered – such as large furniture – from the city in which they are purchased to the city where they are delivered.
For example, if an Edmonds resident buys a couch in Lynnwood and has it delivered, the city portion of the sales tax would go into Edmonds’ cash register rather than Lynnwood’s. The change would not apply to items bought and taken home by the purchaser.
The measure is seen as making two positive changes. It would help redistribute wealth to sales-tax poor cities that formerly received extra money from the state, money that was lost in the wake of the 1999 passage of Initiative 695. It also would be a first step to taxing proceeds on sales done over the Internet.
The plan was hatched by a national coalition of state officials studying ways to improve tax systems. A bill passed in the state Legislature last year directed the state Department of Revenue to study the issue and report back to the Legislature in December 2003. The Department of Revenue will introduce the “sourcing” change, as it is called, into the Legislature this year.
Edmonds, which has relatively few businesses that deliver items outside the city limits, would gain an estimated $554,167 per year over its sales tax receipts in 2002, according to figures listed on the web site of the Association of Washington Cities. The figure represents more than 14 percent of the city’s 2002 sales-tax revenue.
Mountlake Terrace would gain more than $395,000, representing more than 36 percent of its budget. Mill Creek would gain more than $295,000, representing about 27 percent.
Lynnwood would lose an estimated $1.2 million per year, according to the web site, representing 9 percent of the city’s 2002 sales-tax revenue.
Everett is the only other Snohomish County city that would lose in the arrangement. In King County, Shoreline would gain a modest amount, while Lake Forest Park and Kenmore would gain considerably.
State Rep. Ruth Kagi, D-Lake Forest Park, said she would support the bill.
“The smaller jurisdictions just really lost significant revenue with the passage of 695,” Kagi said. Initiative 695 repealed most of the state’s motor-vehicle excise tax, or license tab fee, much of which was used to redistribute to cities and counties through a program called sales-tax equalization.
State Rep. Mike Cooper, D-Edmonds, represents the 21st District, which includes Lynnwood and Mukilteo as well as Edmonds. He said that he had received, predictably, an e-mail from Lynnwood Mayor Mike McKinnon asking him to oppose the plan and a comment from Edmonds Mayor Gary Haakenson asking him to support it.
“We have to do something to get back, to some degree, where we were before,” Haakenson said. Edmonds has had to cut several million dollars from its budget and lay off some employees since I-695 and other tax-cutting initiatives went into effect.
McKinnon said a 10 percent reduction in sales-tax revenue – which accounts for about half of Lynnwood’s income – could have a noticable effect on city services.
“Of course that’s going to hurt us and decisions will have to be made – serious decisions,” he said.
Unlike Edmonds, Lynnwood has not had to cut jobs or services, but McKinnon said the city has been operating at a deficit for seven straight years and has been dipping into reserves to balance the books.
McKinnon said the federal government has had a moratorium on Internet taxes for several years, and that the new tax ideas have been floated as a way to be ready for when the moratorium is lifted.
The Internet idea “morphed” into the plan to redistribute the sales taxes on delivered goods within the state, according to McKinnon. He said Lynnwood would take a layered approach to opposing the change. It will contend first that the plan should not be approved at all, and if it is, it should either be modified so only half of the tax is redistributed, or that it should be postponed until Internet taxes are levied so cities such as Lynnwood can make up some of what they would lose, McKinnon said.
Under the 50-50 plan, Lynnwood’s estimated annual loss would drop to $600,000 and Edmonds’ annual gain would drop to $250,000.
Either way, “we’re going to net lose money,” McKinnon said. He said that while Lynnwood enjoys the revenue it gains from retail sales, it has to spend money on roads, traffic control and public safety to accommodate the daily influx of traffic.
Plus, the tax redistribution plan is a disincentive to cities to encourage development of businesses with a larger delivery volume, said Steve Nolen, Lynnwood city administrator. It also can cause confusion for businesses, said city finance director Mike Bailey, and was repealed in Kansas for that reason, according to McKinnon.
Haakenson doesn’t buy the disincentive argument.
“If I’ve got a furniture store that opens in my town, that’s going to give me sales tax we don’t already have” from Edmonds residents shopping there, he said.
“If Lynnwood wants to send their furniture stores to Edmonds, I’ll be happy to take them.”
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