I-747 Tossed, R-67 Passed = More Market Downers?

Hmm, this seems like it could be a timely lucky break for state and local governments that have failed to responsibly save any of their recently booming property-tax revenue:

The State Supreme Court today found Initiative 747, the tax-limiting measure passed by voters in 2001, unconstitutional.

The measure, passed by voters in 2001, limited increases in state and local property-tax collections to 1 percent a year, unless voters approved more. When it was argued before the high court last May, the state estimated that in the six years since it passed, the measure blocked an estimated $1.6 billion in property-tax increases.

So now all the local governments that frittered away the recent bubble-produced boom in tax revenue have a way to deal with lower housing values and fewer home sales, which are already beginning to affect the bottom line. Now they can go ahead and lower the valuations, but just hike up the tax rate up to and keep increasing revenue regardless. Delicious!

That’s not even all. They’re already trying to figure out a way to “make up” for all the “lost revenue” of the repressive I-747 years:

Under state law, cities, counties or other local governments can “bank” unused property-taxing authority. Under I-747, for instance, if a government used only 0.5 percent of the 1 percent increase authorized by the law, it could reserve the remainder and use it the next year.

Noble has said it appears local governments could contend they had banked much more — the difference between their actual increases and the rate of inflation — for each of the past five years. In addition to seeking an increase of up to 6 percent next year, they could attempt to raise property-tax collections by that total “banked” amount as well, he has said.

But don’t worry, Christine Gregoire is asking them nicely not to do that.

Gov. Christine Gregoire called on local governments and taxing districts “to assure me that they will not increase property tax levies for their upcoming budgets as a result of the court decision. In addition, I will be asking the Legislature, in January, to work with me to thoughtfully reinstate a property tax cap.

In a statement, Gregoire said Tuesday’s vote on a handful of tax-related measures shows voters are concerned about their tax burden.

“I believe that it is our responsibility to move quickly, recognizing taxpayers’ concerns and reinstating the will of the voters,” she said.

Wow, that’s reassuring, isn’t it? I’m sure her moves have nothing to do with posturing for re-election next year. They’re clearly born out of a genuine concern for home owners.

On the subject of recent changes to state law, a reader sent me the following question:

I would be interested about you blogging on the potential affect of R-67’s passage on the Real Estate market. While I understand it is more of an insurance related issue, I think there is some relationship between insurance and home ownership, and what USAA ended up doing in the Florida market after unfavorable and unsustainable insurance legislation was passed in that state could happen here as well as also have an effect on the market (as we know Florida’s is in turmoil right now).

Who knows, but I certainly can’t see its passage helping the market at all.

For those that haven’t been following the R-67 issue, here’s the pro side, and here’s the con argument. Could the approval of R-67 become yet another drag on the local real estate market? I am by no means a political analyst, and I have spent very little time reading the details of R-67, so I really can’t say. My best guess would be that the effect will be either neutral or negative, but I agree with the reader in that I definitely don’t see R-67 helping the housing market.

Maybe the government can do something about unaffordable housing after all. If we just keep passing legislation that makes home ownership more of a burden, and throwing out laws that would ease the tax burden, we’ll hasten the already-inevitable decline, right?

(Susan Gilmore, Seattle Times, 11.08.2007)
(Susan Gilmore & Eric Pryne, Seattle Times, 11.08.2007)

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

29 comments:

  1. 1
    tacomarenter says:

    R-67 will destroy the state. Just as TABOR did in Colorado until the voters rejected it in 2005. It will mean higher college tuition rates, less money for public schools, and a crumbling transportation system. That is what will bring housing values down faster than anything- bad infrastructure and education systems.

    http://www.perspectives.com/forums/view_topic.php?id=69720&forum_id=5

  2. 2
    redmondjp says:

    We live in interesting times. I bet King Ron was so excited about this that he stayed up all last night figuring out what he will do with all of the increased revenues.

    Do some Google searching on the state of Indiana — they have a major property tax revolt on their hands right now, due to people’s property taxes having been raised an average of 24% IN ONE YEAR (due to the outrage, state legislature has given people tax rebates to limit the increase to an average of 8%).

    Now, the Indiana state legislature is considering passage of an annual 1% property tax increase lid — sound familiar?

    Here’s the link:
    http://www.indystar.com/apps/pbcs.dll/article?AID=/20071109/LOCAL19/711090476/-1/LOCAL17

  3. 3
    alex says:

    Guys, guys… don’t you have any sympathy for the poor guy who just bought a 2000sqft house for 500k ?

  4. 4

    TODAY’S KING COUNTY PROPERTY TAX ON $600K HOMES IS APPROXIMATELY $500/MO

    And with this type of massive “rent size” revenue coming in today for homes bought and paid for; we also need additional school tax increase levies? Remember, this doesn’t include insurance and maintenance costs….

    I know, its all a big tax write off. Not.

    If your home has no mortgage your standard deduction short form will most likely make the yearly tax break on the property tax a likely moot point for you. Ask your tax accountant, he’ll agree with me.

    Ya know, I’d be for massive property taxes funding our public schools if they made this major change:

    Seattle area schools need to hire only bachelor of science degreed teachers for high school students, instead of the almost 100% BA crop out there. That’s why Bill Gates complains about the youth’s math ans science, our schools don’t teach it any more. Bill Gates doesn’t offer to help financially in local math teaching of high school kids at public schools either, he’s too busy building up India and China to worry about Americans.

    I’m all for property tax increases for our school levies, only if we get decent high schools again, like when I was a kid [all my math and science teachers in high school had BS degrees in the 70s].

    As far as the massive bilingual expenditures currently pouring into our Seattle area public schools, these are fine with me too, if we teach math and science right in our high schools first!!!

    I’m all for property tax liens for retired low income, but you notice I said “lien”. Why should the kids that inherit their parent’s $600K home get it without paying the “liened” property tax back in full, like the rest of us home owners?

  5. 5
    Alan says:

    Guys, guys… don’t you have any sympathy for the poor guy who just bought a 2000sqft house for 500k ?

    Not really. I don’t get much sympathy when I say I can’t afford a $500k property. That guy should be earning around $160k a year. It’s hard to feel sorry about that. If he is earning closer to $90k and didn’t budget correctly then I think he is mostly just irresponsible.

  6. 6
    David McManus says:

    Damn…..is she a realtor or a stripper?

    Link

  7. 7
    biliruben says:

    Real it in, Mic. It’s her daughter.

  8. 8
    John says:

    If I have to choose between overpaying for a house (even if it is perfect) during bubble years or sending the kids to really good private schools, I will choose the latter.

  9. 9
    explorer says:

    R-67 should have a neutral effect. This was a no-brainier. WA was one of only 5 states to NOT have this type of right. This gives the State Insurance commish an additional statutory foundation as well.

    Any raising of rates will NOT be due to this passing. They can be raised regardless of what happens. Remember, Insurance companies are not subject to Anti-Trust law, and since they were allowed to go into banking and credit cards, they have been crying all the way to the bank…that they own.

  10. 10
    tacomarenter says:

    Apologizes for ranting about the wrong initative- I meant to say I-960 instead of R-67 will ruin the state infrastructure.

  11. 11
    NostraDamnUs says:

    Tim – I got the perfect mate for you – http://www.nbc.com/Saturday_Night_Live/segments/6565.shtml

    She can make this place roar with excitement!

  12. 12
    DebbieDowner says:

    Hi Tim – you’re cute. Wanna hook up?

  13. 13
    uptown says:

    but I agree with the reader in that I definitely don’t see R-67 helping the housing market.

    Yea, it’s much better for the housing market when homeowners can’t afford to rebuild because the insurance company won’t pay.

    BTW: 45 states have laws like this already.

  14. 14
    rose-colored-ghoulaid says:

    softwareengineer, you’ve got it wrong about Bill Gates. There is no shortage of high-tech workers. There is a shortage of high-tech workers eager to work for $40,000 a year. They can find qualified workers, but it’s cheaper to import them.

  15. 15
    WestSideBilly says:

    Tim, I’m having a hard time understanding how R-67 will have any impact on housing prices.

    I can see I-960 causing the same problems that happened in Colorado under their TABOR. Very few people will ever vote in favor of increasing their own taxes, which is why I don’t really like the west coast’s love affair with doing everything with ballot initiatives. Most ballot initiatives that I’ve seen are counter productive and rarely accomplish their stated goals.

    Just as it did to Colorado, I-960 will make Seattle a more appealing place for businesses to move to, while the people who live here deal with a crumbling infrastructure (worse than it is now).

  16. 16
    explorer says:

    Um, Tim did not ask about I-960, so that is actually off-topic. The first I-960 poster confused it with R-67.

    I will indulge it as far as to say that I-960 is not like the TABOR in CO. It is an advisory vote, and only under certain circumstances. The conditions that it reinforces regarding tax increases were already mostly in existance. The main reason this was needed was to rein-in overuse of emergency clause on special interest bills that were not for emergencies, and under the clause could not be challenged by the WA St. initiative process.

    The sky, nor the infrastructure is going to fall under that.

  17. 17
    redmondjp says:

    Oh WestSideBilly, you crack me up!

    I-960 will do zero, zip, nada, to make businesses want to move to Seattle. If anything, it will have the opposite effect, as our infrastructure crumbles away (as we once again ‘study’ the 520 bridge for the umpteenth time), it makes it more difficult to move materials and goods (and employees) in and out of the area in an efficient and cost-effective manner.

    Boeing has already committed to moving their business out of this area (corporate HQ and half of their previous mfg. jobs already gone), and Microsoft is expanding the fastest in many places and countries besides here.

    And besides, with a starter home being $500K, most workers of a transplanted company can’t afford to live here anyways! Look at where all of the car mfg. plants that have been built over the past 20 years are in this country — in places away from union strongholds WHERE THE COST OF LIVING IS VERY LOW!

  18. 18
    WestSideBilly says:

    Do some Google searching on the state of Indiana — they have a major property tax revolt on their hands right now, due to people’s property taxes having been raised an average of 24% IN ONE YEAR (due to the outrage, state legislature has given people tax rebates to limit the increase to an average of 8%).

    Now, the Indiana state legislature is considering passage of an annual 1% property tax increase lid — sound familiar?

    I’d be careful with how you look at Indiana. Several years ago, they passed a law (a ’98 ballot initiative – if memory serves) that capped increases in property tax rates. The state was bleeding money for schools, so they rewrote the assessment book in ’01 or ’02, which essentially threw out any correlation to what the home was worth on the open market. NW Indiana (Gary, East Chicago, Hammond – Some of the poorest areas of the country) saw their assessed values triple. I talked to a lady who bought a house in Gary for $25,000 and two years later the state assessed it at $80,000 (which put the property taxes outside of her means). She put it on the market for $23,000 and couldn’t sell it because nobody who wanted to live in Gary could afford the property taxes. That’s an extreme example, of course, but it was typical for what happened – rather than typical 0.5-1% rate increases, people were seeing 10-40% assessed value increases, and still are. Of course, the affluent home owners in areas like Carmel often saw their assessed rates drop, since they weren’t getting assessed on the desirable location of their property, merely how big it was. Not terribly surprising in a state like Indiana, but it pissed a LOT of people off.

    It should also be noted Indiana’s solution to pay for a reduction in property taxes (which typically affect those who can afford to own a house in the first place, though not progressive in the traditional sense) is to increase sales tax (which is a strongly regressive tax) from 6% up to 7%. Again, this is typical of Indiana, but not really desirable in my book.

    * I may have some of my years wrong, but the gist of it is correct. I lived there from ’01 until ’06.

  19. 19
    WestSideBilly says:

    redmondjp – I-960 is a statewide initiative. It might help the lower cost parts of the state a bit, but as long as property in the PS region stays expensive, then no it won’t encourage anyone to move to Seattle. I should have stated Washington rather than Seattle.

    One comment – cost of living is NOT driving auto manufacturing moving. Most of Indiana, Ohio, and Michigan is ridiculously cheap to live in, and the auto companies already own more land than they know what to do with. The move is solely to get into right-to-work states so they can pay people $10/hr instead of paying the UAW $25/hr to pay their people, and be able to fire someone for trying to unionize.

  20. 20
    greenthum says:

    The State Supreme Court’s ruling on I-747 guarantees that Dino Rossi will be this state’s next governor in ’08. Rossi has already called on Gregoire to make I-747 law to prevent property taxes from skyrocketing. Will she do it? I doubt it.

    The taxpayers in Washington said “NO” to higher taxes on Tuesday. If the Dems try to raise property taxes retrospectively they will be voted out of office next November.

  21. 21
    george says:

    FACT: Washington ranks in the bottom half for the US for state and local tax revenues as a percentage of personal income.

    If we want to lower the property tax rate here (and I think that would be great) then we need to make up the lost revenue somehow. Like, an income tax.

  22. 22
    50% Off says:

    NO! We need to REDUCE SPENDING! That’s the only way to keep taxes low. Believe me, you’ll hardly notice the reduced spending (except where the politicians TRY to make it hurt…. you know, oh, we’re going to have to cut our fire and police budgets, and the roads too. ) Those are the tricks our gummint uses to make you believe that you NEED to pay more in taxes. Sheesh, with the property taxes alone from this RE Bubble, the state should have far more money to do what it should do with tax income. But no, they NEED more money. If only I could get a hefty raise because I NEED it so bad….

    Back to your regular programming.

  23. 23
    uptown says:

    A quote from the editorial used in the next post…

    “Washington state has one of the most regressive tax/revenue systems in the nation.”

    If the the middle and lower classes are carrying the tax burden, something is wrong. Property taxes do need to be capped, as you will see our Governor push for in the next session.

    Time for the rich to step up to the plate and pay their fair share in this state.

  24. 24
    Alan says:

    Texas does not have income tax but has property taxes in the 2%-3% range. I was amazed that property tax here is so low.

    Higher property taxes will lower sales prices.

  25. 25
    Mark L says:

    Prop 747 was a ill-conceived because of the 1% limit. They should have used 3% or even 4% and it would have still been “fair”. The tax base pays for state/local/county services. The cost of these services go up with inflation – there is no way around it. And we all know real inflation is much higher than the CPI.

    California is financially crippled because of Prop 13 from the late 70’s, which has a 2% cap. I’ve heard that a 3% cap for Prop 13 would have made a world of difference for California. Instead, their schools went from the best in the nation to near the bottom. The massive influx of illegal immigrants would have brought down the schools quite a bit, but CA would have had a fighting chance with a more appropriate cap.

  26. 26
    Mark L says:

    I also would offer that the CA Prop 13 tended to reduce housing market liquidity.

    I am not sure how WA Prop 747 was/is structured versus CA Prop 13 – but as I understood it, some people in affluent SoCal communities in very nice but older homes (in CA, you need only preserve one wall to classify as a remodel what is essentially a teardown and replace) are paying less in property taxes than crappy flophouses in Compton or Watts that changed hands more recently. If you are thinking about trading up or across, you suddenly would have a much larger (i.e. now tied to fair-value) property tax bill.

  27. 27
    EC says:

    I have mixed feelings on this one. I don’t like to pay taxes any more than the rest, so I’m happy enough that the legislature will almost certainly wind up passing the Eyeman initiative in legislative form. It’s good for my pocketbook, anyway. I don’t have any kids and really don’t have to worry about anyone else’s. Hell, why not be selfish, right? Everyone else is.

    On the other hand, grandfathering in people who don’t sell their houses is a real disincentive to “move-up” buyers. Why move when the consequence will be much higher taxes? The smartest thing to do would be to equalize property tax rates before passing that replacement law. It would be marginally good for the real estate situation, but the partisan balance is close enough that the knee-jerk Republicans will prevent that from happening.

    Beyond that, the tax situation in the Pacific Northwest is just plain weird. Oregon won’t have a sales tax, and Washington won’t have an income tax. There are solid arguments for having both of those taxes, but the electorate here persists in its belief that it can have a free lunch. What else can you say about a state that funds two sports stadiums in Seattle while having sub-par schools, a crappy transit system, and roads that are falling apart?

    People get what they pay for, and what they deserve.

  28. 28
    WestSideBilly says:

    Texas does not have income tax but has property taxes in the 2%-3% range. I was amazed that property tax here is so low.

    Texas also has home values significantly below the national average and pay, on average, less than Washington residents do.

  29. 29
    explorer says:

    There is a reason why there an income tax is consistantly disparaged here. The sales taxes are very high, some of the highest in the country. Glad they did not go higher last week.

    There was a poll a few years back about what conditions would make an income tax acceptable in WA St. The answers:

    1. Lower the state sales tax proportionally
    2. Exempt the first 40K in income

    I would say exempt 50K today. The legislature refused to consider either. Until this can be done, there will NEVER be an income tax here. For good reason.

    If the above two conditions were met, both the sale and the income tax would be much more fair and progressive. It would actually INCREASE the progressive tax base, as those who can afford it would pay more. It’s like the old and flawed Federal Flat tax arugment in reverse: you don’t get something for nothing. Lost revenue has to come from somewhere to maintain services, even with reprioritization of spending. What it required to pass, was instituting a Federal Sales Tax to make up for the Flat Tax revenue shortfall. Not surprisingly, the Flat Tax became DOA.

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