A Property Tax Primer (or Why Prop 1 Opponents Don’t Know What They’re Saying When They Say Property Taxes Are Too High)

One of the most frustrating things about covering property tax measures like Seattle’s Proposition 1 is that most people don’t understand the way property taxes work.

From a budget writer’s perspective, the property tax is the best tax ever, because if done correctly, it almost always brings in exactly the amount of money projected. That’s because, unlike the stupid, stupid sales tax, budget writers don’t actually set a rate and just cross their fingers hoping that the money comes in; they request a specific dollar value—for example, about $95 million a year over nine years for Proposition 1’s “Let’s Move Seattle” transportation levy—and then the county assessor adjusts the property tax rate annually based on current assessed value (subject to statutory limits) in order to generate the requested revenue. If property values rise from year to year, the rate goes down; if property values fall as they did when the real estate bubble went pop, the rate goes up. But if passed, Prop 1 is almost guaranteed to generate that $95 million a year.

Over the long run, nominal property values will almost certainly rise. So while the voters guide projects a tax rate of $0.62 per $1,000 of assessed value in year one, even a relatively modest 5 percent average annual rise in home values would leave the rate at about $0.39 per $1,000 of assessed value by year nine.

But unfortunately for city budget writers, as reliable as the property tax is, it is subject to two very important limitations. The first is known as the “statutory dollar rate limit”: the City of Seattle’s property tax authority is limited to $3.60 per $1,000 of assessed value. That is the maximum theoretical rate the city can levy without voter approval. But thanks to the second limit, known as I-747’s “101 percent limit” (or more accurately: “Tim Eyman’s Revenge”), the city’s actual regular levy authority falls far short of the statutory dollar rate limit.

Under the growth limit factor first enacted in the 1970s, and then punitively reduced to 101 percent under Eyman’s I-747 (and later reinstated by a cowardly legislature after the state supreme court tossed out the initiative), the dollar value of property taxes collected may not exceed 101 percent of the taxes collected in the highest of the three most recent years, plus an allowance for net increased property value in the district resulting from new construction.

Don’t know about you, but my property taxes aren’t so bad.

I know—that’s very complicated. But suffice it to say that thanks to the 101 percent limit, revenues generated from Seattle’s regular levy generally don’t even keep pace with inflation, let alone rising property values. As a result, the actual maximum regular levy rate available to the city council has been steadily falling as I-747’s 101 percent limit has ratcheted down revenue growth.

Fortunately, state law does allow for “lid lifts,”* enabling the city to raise revenues in excess of the 101 percent limit, but within the $3.60 statutory cap, subject to voter approval. That’s what Prop 1 is—a lid lift—as was the expiring “Bridging the Gap” it replaces. When you add up Seattle’s regular levy together with its various lid lifts, Seattle is currently levying a combined rate of just over $2.62 per $1,000 of assessed value. Add on Prop 1’s proposed $0.62 per $1,000 and our combined rate would still come in below the $3.29 per $1,000 we paid as recently as 2013! And our current combined rate of $9.27—city, county, schools, state, everything—is our lowest combined rate in six years.

Compared to the rest of the nation, that’s pretty damn low, ranking Seattle’s effective rate at 38th out the 51 largest cities in each state and the District of Columbia. (Also, we don’t have an income tax. So I suppose yay for our low taxes, if you’re into that sort of thing.)

And it’s not just our property tax rate that’s held relatively flat. According to data compiled by the Seattle Times, the property tax bill on a median Seattle home climbed from $3,214 in 2005 to $4,022 last year—an increase of $808, or 25.1 percent. But inflation increased almost 22 percent over the same period, resulting in a negligible increase of only about a hundred bucks in real dollars.

How is this possible? How could Seattle’s property tax hold steady in both rate and real dollars even in the face of skyrocketing home values and a seemingly endless parade of voter-approved levies?

Well, one reason this sounds so counterintuitive is that while everybody makes a big deal every time we put a new levy on the ballot, nobody sends you as much as postcard when these levies ultimately expire—and voter-approved lid lifts (typically 6 to 9 years) are expiring all the time! For example, sure, “Let’s Move Seattle” would add an additional $275 a year to the property tax bill of the median Seattle homeowner, but only after “Bridging the Gap’s” $130 a year levy expires. That’s not nothing. But it’s not really a $275 increase.

Second—and this is a concept that many folks find difficult to wrap their minds around—your property tax bill doesn’t necessarily rise or fall with your home value. Rather, your property tax bill mostly rises or falls when your home value rises or falls relative to median value. Again, this is the way property taxes work: we levy a dollar amount, not a set rate. Prop 1 is asking for $95 million a year. If Seattle home prices rise 10 percent, Prop 1 still only raises $95 million—we’ll all still collectively pay the same amount, just at a lower rate. However, if your home’s value rises faster than median, while my home’s value rises slower, your share of that $95 million will go up while mine goes down.

Again, I know, it’s all very complicated. But the point is, if you oppose Prop 1’s $930 million “Let’s Move Seattle” transportation levy because you think it’s filled with pork (or filled with the wrong pork), well, I suppose there may be coherent arguments to make against the measure. But if you oppose Prop 1 because we’re “piling one pricey property tax levy on top of another,” then you’re not being honest either to yourself or to your readers.

* There is also the option of rarely-used voter-approved “excess levies,” which get around the statutory cap entirely, but since they are limited to 1 year, they’re not really practical for dealing with anything but an emergency.