Tax Alternatives for Affordable Housing in San Juan County

A report by the Orcas Research Group

March 4, 2006

Over the next few months, you will be hearing a lot about taxes.  A few individuals in our county have been making a number of misleading claims about taxes, so we thought that we would publish some facts to set the record straight.  We are proposing a half percent increase in the real estate excise tax to be paid primarily (99%) by the buyer.  Is that an unreasonable tax?  Is it fair?  Are there other alternatives?  Are we already paying too much in taxes?  These and other questions are answered below.

 

How do we rank relative to other regions?

If you are not aware of it already, Washington State is a pretty good place to live tax-wise.  For the individual, there is NO personal income tax and NO tax on interest, dividends or capital gains.[1]  According to the Tax Foundation in their summary of all state and local taxes, Washington State ranks 24th in the nation on overall State Tax Burden.[2]  Not surprisingly, with no tax on interest, dividends or capital gains, we have attracted wealthy residents and Washington State ranks 7th in the nation on Federal Tax Burden indicating high personal incomes.  San Juan County, in particular, has one of the highest concentrations of investment income in the United States.  While there are many different taxes in Washington State,[3] the four largest categories of taxes are sales and use (55.6%), business and occupation (18%), property (11.9%), and excise (6.7%).

 

State and Local Sales and Use Taxes

But, you say, we pay sales tax on nearly everything! [4]  Here in San Juan County, we pay a total sales and use tax of 7.7% of which 6.5% goes to the state and 1.2% is a local tax.[5]  In Washington, local jurisdictions are allowed to charge specific sales and use taxes and the 1.2% charged by San Juan County includes an elective 0.5% and then up to an additional 0.5% to meet the needs of local government.[6]  In addition to these, there are several specialized taxes that counties may levy and San Juan County has elected to charge 0.1% for Criminal Justice[7] and 0.1% for Correctional Facilities.[8]  San Juan County is also qualified and has elected to receive 0.08% out of the state portion as a rural county.[9]  Nearly every eligible county including San Juan has elected these options.  There are a few other categories that larger counties can elect to tax such as car rentals[10] or public transportation[11], but these do not apply to us.  You might have noticed that one pays quite a bit more in taxes in King County since they charge an additional 0.5% for their new stadium.[12]  That plus other options places King County highest in the state at 9.3%.[13]  Sixteen states charge more than us with five charging over 10%.[14]

 

While it sometimes seems as if we pay sales and use tax on everything, the Washington tax code is littered with over 500 exclusions, deductions and credits[15] that basically fall into three categories:  1)  Business and Professional (such as consulting, data processing, engineering, legal services and advertising), 2)  Personal or Consumer Services (such as amusement & recreation, cable TV, and beauty/barber shops), and 3)  Finance, Insurance and Real Estate.  It is difficult to generalize, but blue collar services are more likely to pay sales and use tax than white collar services.  Since sales taxes are already considered to be regressive, the exemptions in the Washington tax code tend to make them more so.

 

If we were to elect to increase our sales tax as an alternative to a real estate excise tax to support the Housing Bank, what would it take?  Basically, our annual taxable revenue is between $300M and $350M,[16] nearly the same as the total sales of real estate, so it would take an equivalent 0.5% increase in sales tax to provide the same amount of support for the Housing Bank.  In order to implement it, this tax would have to be approved by the State Legislature and voted on by the citizens of our county.  King County did exactly that to help finance their stadium.  It is highly doubtful that the local business community would support this tax increase.  In addition, it is widely believed that a sales tax increase would unfairly penalize those of low or very low income since purchase of goods and services is a higher percentage of their disposable income.

 

Business and Occupation Taxes

Washington State does not impose an income tax on businesses, making it one of only four states that do not. To compensate, Washington employs the B&O Tax, which taxes gross receipts of a business and is the only state that does so. The B&O tax is the largest business tax, contributing $4.1 billion in the 2003-05 biennium (or 18% of Washington’s general fund revenue) and is the most stable form of revenue for the state.[17]  By comparison, on average in the United States, corporate income taxes contributed 5% to state tax collections in 2003.

 

While most people do not consider this to be a tax on the individual, the costs of this tax are passed on to consumers so it is considered to be regressive.  This is also a very unpopular tax in the business community.  Under the B&O tax, a number of exemptions, deductions and deferrals are permitted, but the primary beneficiaries are research and development activities, agricultural production, and sale or rental of real estate.

 

There are presently extensive efforts to reform Washington’s taxes on business and it is highly improbable that an increase to the B&O tax to support affordable housing might be introduced in today’s political climate.

Property Taxes, San Juan County:

Property taxes are the oldest form of taxation in Washington, predating statehood.  These taxes are the third largest category of taxation, being surpassed by sales and use taxes in the 1970s and by B&O taxes more recently.

 

We have a two tier property tax system in Washington State with both a state property tax and a local property tax.  Even so, in 2002 on average we paid $817 per capita, well below the national average of $968 per capita with 23 states more expensive according to the Tax Foundation.[18]  Based on income, we paid only $28.72 per $1,000 of personal income, below the national average of $30.78 with 28 states more expensive.[19]

 

San Juan County has the lowest property tax rate in the state by far and it has been going down.  In 2004, our average rate was $6.68 per $1,000 of assessed value, a little over half the state-wide average of $12.21.[20]  Local special tax districts in San Juan County differ from this average, from a high of $7.40 for Friday Harbor to a low of $4.30 for Shaw Island.[21]  We pay substantially less than neighboring counties:  $9.39 for Island County (next closest), Skagit at $11.96 and Whatcom at $12.99.[22] 

 

Our per capita rate in San Juan County seems very high and is a misleading measure.   Our population is low, our prices are high and one third of our homes are owned by non residents.[23]  At the same time, based on income, our rate is deceptively low because of our high rate of investment income.  This remains a highly contentious issue without good metrics to resolve the dispute over whether or not our property taxes are too high.  The only thing that is certain is that property taxes by any metric are declining relative to inflation due to the 1% limitation on tax increase.[24]  For example, in San Juan County the 2005 assessment will be $6.13 per $1,000 compared with $6.68 in 2004.

 

San Juan County also provides a generous senior citizen and disabled persons exemption.[25]  Currently, qualified residents whose household income is less than $30,000 are exempt from the special local levies.  When less than $24,000 they are exempt from a portion of the regular levies.

 

Property taxes are limited to $10.00 per $1,000 assessed value overall (excluding ports and public utility districts)[26] and local taxes are limited to $5.90 per $1,000 (with state school, port, public utility and emergency medical services excluded)[27].   So, we might consider local property taxes as an alternative to a real estate excise tax to support affordable housing.  Our County Assessor reports a grand total of $4.58B of taxable valuation in 2004.[28]  In order to raise the same amount of support for the Housing Bank, it would require an increase of $0.33 per $1,000.  Unfortunately, this would put our higher taxed districts like Friday Harbor over the local tax limit.  Even if this were a viable option, the state-wide tax revolt as implemented in Initiative Measure No. 747, approved November 6, 2001, limits overall increases in property taxes to one percent per year.[29]  This is well below the rate of inflation, and is much less than the rate of real estate price inflation. Consequently, it would require a return to the voters for approval of an increase every year to keep pace with the increasing cost of real estate.  Support of the Housing Bank through property taxes is clearly not a practical option.

 

Excise Taxes, San Juan County 

An excise tax is a sales tax levied on the purchase of specific products and services.  Most people are familiar with excise taxes levied on tobacco, alcohol, and other so called “sin taxes.”  While Washington State exempts real estate sales from the general sales tax and from the B&O tax, it does levy a state excise tax as well as optional local excise taxes (although at a rate less than half that for other sales and services).  Unlike normal sales taxes, real estate excise taxes can be levied on the seller or the buyer or both.

 

The excise tax paid by the seller is 1.53% of the gross sale price. ( 1.28% Washington State for K-12 education and public works[30] and 0.25% San Juan County for local capital improvements[31])  If the sale is located within the city limits of Friday Harbor, a local excise tax of 0.5%[32] is collected for the Town of Friday Harbor making the total tax 1.78%.  In addition, the buyer pays 1% of the gross sale price for the conservation land bank in San Juan County.[33]

 

An increase of 0.5% for affordable housing is authorized by the state legislature and is pending approval by the residents of San Juan County.[34]  It will be on a special ballot early in 2006.  Most residents will not pay this tax since two thirds of all sales are to individuals from outside the county.  It is argued that this tax is regressive and will prevent home purchase by those who need it most.  Fortunately, there is already a program in San Juan County to provide down payment assistance to low and very low income families and this can be extended to moderate income families with this tax. 

 

Conclusion

Overall, the taxes that we pay are not excessive compared with the rest of the nation and with many other Washington counties.  The real estate industry, in particular, has benefited from favorable tax laws.  Commissions on sales are exempt from the general sales and use tax and sales of real estate are exempt from both general sales taxes and B&O taxes.  With limited exposure to increases in property tax, real estate investment is very likely to appreciate faster than inflation and experience over the past 10 years indicates that it is likely to appreciate five percent per year or more over inflation. In addition, the absence of income tax and exemption or deferral of certain capital gains taxes makes the investment in real estate especially lucrative.  Overall, real estate has benefited from a very favorable tax climate in the state and appreciation has been high, especially in San Juan County.  Unfortunately, our high rate of appreciation (33.8% since this time last year[35]) has also removed real estate from the reach of many of our working families.

 

Today, we are witnessing a major campaign by the national and state associations of realtors to oppose any excise tax on real estate sales.  In the last election, they brought in over $125,000 to defeat the effort in Clallam County to preserve farm land.[36]  Now, a one million dollar campaign has been launched to defeat a proposed increase in the real estate excise tax paid by the seller at the state level[37].  Fortunately, most of our realtors understand the problem that our working families face in finding decent homes at an affordable price.  While they would understandably prefer that we find some other source of support for the Housing Bank, they recognize that the excise tax is the only practical solution at this time.  We agree.  In San Juan County, the proposed half percent excise tax to be paid primarily by the buyer is the only practical solution at this time.

 

Comments and constructive criticism are welcomed at org@rockisland.com.


[1] Washington State Business and Project Development, Department of Community, Trade & Economic Development, http://www.choosewashington.com/state_data/Taxes.asp

 

[2] State and Local Tax Burdens by State, The Tax Foundation, Washington, DC.  http://www.taxfoundation.org/publications/show/335.html

 

[3] Outline of Major Taxes in Washington State, Washington State Department of Revenue.  http://dor.wa.gov/Docs/Pubs/ExciseTax/FilTaxReturn/MajorTaxes.htm

 

[4] A Revenue Guide for Washington Counties, Municipal Research & Services Center of Washington.  http://www.mrsc.org/Publications/textcntyrev.aspx#salestax

 

[5] Tax Rate Lookup Tool, Washington State Department of Revenue, http://gis.dor.wa.gov/taxratefinder/

 

[6] Washington State Legislature, RCW 82.14.030 Sales and use taxes authorized -- Additional taxes authorized -- Maximum rates. http://www.leg.wa.gov/RCW/index.cfm?section=82.14.030&fuseaction=section

 

[7] Washington State Legislature, RCW 82.14.340 Additional sales and use tax for criminal justice purposes. http://www.leg.wa.gov/RCW/index.cfm?section=82.14.340&fuseaction=section

 

[8] Washington State Legislature, RCW 82.14.350 Sales and use tax for juvenile detention facilities and jails. http://www.leg.wa.gov/RCW/index.cfm?section=82.14.350&fuseaction=section

 

[9] RCW 82.14.370 Sales and use tax for public facilities in rural counties.  http://www.leg.wa.gov/RCW/index.cfm?section=82.14.370&fuseaction=section

 

[10] Washington State Legislature, RCW 82.14.049 Sales and use tax for public sports facilities -- Tax upon retail rental car rentals.  http://www.leg.wa.gov/RCW/index.cfm?section=82.14.049&fuseaction=section

 

[11] Washington State Legislature, RCW 82.14.045 Sales and use taxes for public transportation systems.  http://www.leg.wa.gov/RCW/index.cfm?section=82.14.045&fuseaction=section

 

[12] Washington State Legislature, RCW 82.14.360 Special stadium sales and use taxes.  http://www.leg.wa.gov/RCW/index.cfm?section=82.14.360&fuseaction=section

 

[13] Local Sales/Use Tax Changes, Oct. 1, 2005, Washington State Department of Revenue. http://dor.wa.gov/Docs/forms/ExcsTx/LocSalUseTx/LocalSlsUseFlyer_Quarterly.pdf

 

[14] Comparison of State and Local Retail Sales Taxes, July 2004, Federation of Tax Administrators.     http://www.taxadmin.org/fta/rate/sl_sales.html

 

[15] “Lost Revenue, Lost Opportunities:  Tax Exemptions in Washington State,” April 2004, Economic Opportunity Institute.  http://econop.org/Taxes/TaxExemptionsInWashingtonState.pdf

 

[16] Taxable Retail Sales, San Juan County, Workforce Explorer, Washington State Employment Security Department.  http://www.workforceexplorer.com/cgi/databrowsing/localAreaProQSSelection.asp?menuChoice=localAreaPro

 

[17] “Reforming Washington’s Tax System: Where Do We Go From Here?“  Economic Opportunity Institute, Jan. 2005.  http://econop.org/Taxes/ReformingWATaxSystem2005.pdf

 

[18] State and Local Property Tax Collections, 2002, The Tax Foundation, Washington, DC.  http://www.taxfoundation.org/taxdata/show/251.html

 

[19] ibid.

 

[20] Property Taxes Title 84 RCW, Washington State Department of Revenue. http://dor.wa.gov/docs/reports/2005/Tax_Reference_2005/40property.pdf

 

[21] 2004 Property Tax Statistics, Assessor’s Office, San Juan County Government. 
http://www.co.san-juan.wa.us/assessor/stats.asp

 

[22]Table 24, Property Tax Levy Rates by County, Washington Department of Revenue. http://dor.wa.gov/Docs/Reports/2004/Tax_Statistics_2004/Table24.pdf

 

[23] DP-1. Profile of General Demographic Characteristics, Housing Occupancy, 2000 Census.  http://factfinder.census.gov/bf/_lang=en_vt_name=DEC_2000_SF1_U_DP1_geo_id=05000US53055.html

 

[24] RCW 84.55.0101 Limit factor -- Authorization for taxing district to use one hundred one percent or less -- Ordinance or resolution  http://www.leg.wa.gov/RCW/index.cfm?section=84.55.0101&fuseaction=section

 

[25]Senior Citizen or Disabled Persons Exemption, San Juan County Assessor’s Office,  http://www.co.san-juan.wa.us/assessor/exempt.asp

 

[28] 2004 Property Tax Statistics, Assessor’s Office, San Juan County Government. 
http://www.co.san-juan.wa.us/assessor/stats.asp

 

[29] RCW 84.55.0101 Limit factor -- Authorization for taxing district to use one hundred one percent or less -- Ordinance or resolution  http://www.leg.wa.gov/RCW/index.cfm?section=84.55.0101&fuseaction=section

 

[31] RCW 82.46.010 Tax on sale of real property authorized -- Proceeds dedicated to local capital projects -- Additional tax authorized -- Maximum rates.  http://www.leg.wa.gov/RCW/index.cfm?section=82.46.010&fuseaction=section

 

[32] ibid.

 

[33] RCW 82.46.070 Additional excise tax -- Acquisition and maintenance of conservation areas.  http://www.leg.wa.gov/RCW/index.cfm?section=82.46.070&fuseaction=section

 

[35] Housing Market Snapshot, State of Washington and Counties, Third Quarter 2005, Washington Center for Real Estate Research, Washington State University.  http://www.cbe.wsu.edu/~wcrer/

 

[36] “Real estate industry comes out in force against farmland preservation measure,” Capital Press Agriculture Weekly, Nov 29, 2005. http://www.capitalpress.info/main.asp?SectionID=67&SubSectionID=792&ArticleID=20945&TM=60804.2

 

[37] “NAR Boosts Washington REALTORS Fight for Ownership,” Washington Association of Realtors. http://www.warealtor.com/government/2005leg/announcecc.asp