(The Center Square) – An economist says removing Washington’s 1% property tax cap could help ease projected budget shortfalls at both the state and local levels.
Washington faces a projected budget shortfall of up to $15 billion that has led Democrats to consider progressive tax revenues in order to fill the gap.
Local governments are also feeling the pressure. Seattle, for example, now expects $241.5 million less in general fund revenue through 2026 than previously forecast.
In response, state Democrats are considering a wealth tax on financial assets, as well as expanded capital gains and estate taxes. At the city level, Seattle City Councilmember Alexis Mercedes Rinck says she is exploring new progressive tax options to avoid cuts to programs and staff.
Rinck cited University of Washington Economics Professor Jacob Vigdor for why she is exploring ways to tax high-income residents.
However, Vigdor advises local governments to focus on property taxes in most cases.
“Property is literally nailed down so there’s not a worry that it will walk away if you try to tax it,” Vigdor told The Center Square in an email.
According to Vigdor, Washington’s tax system is regressive due to a lack of an income tax and low property tax rates.
“Among those states without income taxes, some (e.g. Alaska and Wyoming) make a lot of money off of oil and gas royalties. Others (e.g., New Hampshire and Texas) have relatively high property taxes,” Vigdor said. “Property taxes are less progressive than income taxes but not as regressive as the sales tax. We are incredibly dependent on the sales tax.”
Local governments in Washington have been limited to increasing property taxes by 1% every year since 2002. Leaders have called the cap “arbitrary” and have demanded the law be changed in order to shore up needed revenues amid budget woes across the state.
Vigdor explains that average property taxes in King County – the state’s most populated county – run about $6,785, or 0.84% of assessed value.
“If we taxed property at the same rate as Travis County, TX (home to Austin) local governments would have 84% more property tax revenue to work with,” Vigdor said. “The low property tax/no income tax combo is just really rough.”
Democrats in the state Senate were able to advance a revised version of Senate Bill 5798, which would remove the existing 1% cap on property taxes, out of executive session with a do-pass recommendation last week. Whether it advances any further remains to be seen.
If that bill ultimately fails, Vigdor noted that other options local governments can consider include expanding business or payroll taxes, but added that these get more problematic when adopted by a small jurisdiction as the incentive to relocate is stronger.
The plan to raise the cap on property tax rates does seem to be in danger of collapsing. House Bill 2049 originally would have upped the cap on property taxes, but has since been revised to remove the sections on the growth limit. The bill now focuses mainly on education funding and revised guidelines for districts seeking to collect revenue from voter-approved local levies.
As for progressive taxes at a local level, Vigdor believes there is significant concern about businesses moving to other jurisdictions in order to avoid a new tax. But these businesses are not able to do so as easily at a state level.
“It’s a very different conversation to discuss progressive revenue at the state versus city level because a business can relocate and keep its workforce, or a worker can relocate and keep their job,” he said. “Up and moving to Idaho is a different proposition.”
