The Washington State property tax is one of the most complicated in the nation. This page provides a general overview of property tax levy rates, limitations, and banked capacity for Washington State local governments. For a more comprehensive explanation of the intricacies of the property tax in Washington State, refer to the Department of Revenue’s Property Tax Levies Operations Manual.
Budget-Based Property Tax
Washington State has a budget-based system of property taxation. There are three main components to the property tax:
- Assessed value (AV)
- Levy rate
As part of the budget process, the taxing jurisdiction establishes the amount of property tax revenue needed to fund the budget. That amount needed to fund the budget is called the levy. It is the total amount to be collected from the taxpayers by a taxing district.
By November 30 of each year, the amount of taxes to be levied by taxing districts are certified to the county assessor who computes the levy rate necessary to raise that amount of revenue. The county assessor calculates the levy rate necessary by dividing the total levy amount by the assessed value of taxable property in the district. By law, this number is expressed in terms of a dollar rate per $1,000 of valuation. For example, a rate of $0.00025 is expressed as 25¢ per $1,000 of assessed value. The formula for property tax collections is expressed as:
Levy = Levy Rate x Assessed Value (AV)
Property Tax Limits
The property tax levy is constrained by the overall limits on the regular levy rate and the limit on annual levy increases.
Regular Levy Rate Limits
The Washington State Constitution limits the annual rate of property taxes that may be imposed on an individual parcel of property to 1% of its true and fair value. Since tax rates are stated in terms of dollars per $1,000 of value, the 1% limit is the same as $10 per $1,000 and is often referred to as the $10 limit. Taxes imposed under this limit are termed "regular" levies, while those outside the limit are "excess" or "special" levies.
The following chart shows how the $10 limit is allocated. The aggregate limit for cities, counties and most special districts is $5.90 per $1,000 assessed value.
Special Considerations Relating to Levy Rate Limitations
What if the sum of the levy rates imposed by the various taxing authorities goes over the limit?
It’s complicated. First, there are two limits:
- One is the 1% constitutional limit.
- The other is the $5.90 limit on cities, counties and junior taxing districts.
If either of those limits are exceeded, then the junior taxing district levies involved must be reduced through prorationing. See RCW 84.52.010.
Which levies are lowered in prorationing, by how much and in what order, depends upon whether the $5.90 limit or the 1% limit has been exceeded. The Department of Revenue Property Tax Levies Operations Manual and WAC 458-19-075 include step by step instructions for calculating prorationing. The Department of Revenue has developed Prorationing Worksheets for both the $5.90 Aggregate Limit (REV 64 0097) and the 1% Aggregate Limit (REV 64 0096) to help in making these calculations.
Can a county raise its regular general fund (current expense) levy rate above $1.80?
A county can raise its general fund levy rate up to $2.475 per $1,000 AV, provided the total of the levy rates for the general fund and road fund do not exceed $4.05 per $1,000 AV and the increase in the general fund levy does not result in a reduction in the levy of any other taxing district through prorationing. See RCW 84.52.043.
What if my city has a fireman’s pension fund?
Some cities have a Firemen’s Pension Fund. (If you do not know whether you have one, you probably do not.) Those cities can levy an additional $0.225 per $1,000 assessed valuation, resulting in a maximum levy of $3.60 per $1,000 assessed value. See RCW 41.16.060.
What if my city belongs to a fire and/or library district?
For cities that belong to a fire district and/or a library district, the rules are a little more complicated. Nominally they have a maximum rate of $3.60 per $1,000 assessed value. But, they can never collect that much because the levy of the special districts must be subtracted from that amount (RCW 27.12.390 and 52.04.081). The library district levy has a maximum rate of $0.50 per $1,000 assessed value (RCW 27.12.050) and the fire district levy can be as high as $1.50 (RCW 52.16.130, 52.16.140, and 52.16.160, each provide for a levy of $0.50 per $1,000 assessed value). Therefore, if a city belongs to both a fire district and a library district, and if these districts are currently levying their maximum amount, then the local levy rate can be no higher than $1.60 ($3.60 - 1.50 - 0.50 = $1.60). (Note that the Department of Revenue has determined that if a city has a Firemen’s Pension Fund and is also in a library and/or fire district, its maximum levy rate is $3.825 minus the levy rates of the districts.)
If, for some reason, one (or both) of the special districts is not currently levying the maximum amount, the city’s current levy could be higher. Assume that the fire district is only levying $1.00 per $1,000 assessed value. The maximum city levy rate would be $3.60 - 1.00 - 0.50 = $2.10. But, if the fire district raises its levy rate in the future, then the city must reduce its levy rate by the same amount so that the total is never above $3.60. Such a forced reduction can cause fiscal problems if it is not anticipated. If no one in your city hall knows what rate the special districts are currently levying, your county assessor can help you.
Levy Increase Limit
In addition to the limit on the overall levy rate, there is a 1% limit on the amount an individual taxing district can increase the property tax levy, or the total amount of taxes that will be collected in a given year.
In Washington, property tax increases are not based on the increasing value of properties. They are based on last year’s property tax levy, which is simply the amount of the property taxes that were assessed in the prior year. Each year’s levy may be increased by no more than 1%, unless the public votes for a greater increase or the jurisdiction uses banked capacity. Consult the Washington State Department of Revenue's Resolution/Ordinance Procedures for Increasing Property Tax Revenue for the proper procedures for increasing the property tax levy.
Taxes on new construction, changes in value of state-assessed utility property, and newly annexed property (hereafter referred to as "add-ons") are exempt from the limit factor for taxing districts of any size and may be added to the tax levy that is requested under the limit factor. See RCW 84.55.010 and WAC 458-19-035.
Calculating the Property Tax Levy
The complexity of the property tax means that year to year changes in collected taxes may not be intuitive. Glenn Olson, former Deputy County Administrator of Clark County, developed the below examples of how property tax bills may change based on various factors.
Imagine a county that has only one parcel and one house that is brand new. This property is worth $100,000. As its only property, its value is also the entire assessed value of the county. Suppose further that the levy rate in that county is $2.00. That means this property owner must pay $2.00 for each $1,000 that his or her property is worth. In the first year after its construction, the taxes on that home would be calculated as follows:
Assessed value of the county in thousands ($100) x Levy rate (2.00) = Tax bill and Year 1 levy ($200.00)
The only time taxes are calculated this way is in the first year after a home is built – i.e. for new construction. In every following year it works differently. In year 2 the county may only increase its levy by 1%. So following our example:
Last year's levy ($200) + Additional 1% ($2.00) = Tax bill and Year 2 levy ($202.00)
Even if the value of this county’s one home had increased by $100,000, to $200,000, its tax bill would still be $202.00. No matter how much the assessed value in the county increase, its levy may increase only 1%. So the county adjusts the levy rate to make it fit the new assessed value:
New levy amount ($202.00) ÷ New assessed value in thousands ($200) = New levy rate (1.01)
Any new homes that might be built in year 2 would be taxed at this new levy rate.
To see how increases can be greater than 1%, suppose our imaginary county had started with two new homes, but that each one was worth only $50,000. The assessed value would still total $100,000 in year 1.
With the same $2.00 levy rate, the levy in the first year would still be $200. But instead of one home paying the entire levy, the two equal-value homes would split the levy equally and pay $100 each. In year 2 the levy would still increase by only 1% to $202. And if the value of both homes together increased to $200,000, the levy rate would still drop to 1.01.
But suppose to get to that $200,000 value, one home tripled in value to $150,000 and the other stayed the same at $50,000. Then their respective tax bills would look like this:
|| Home 2
|Home AV in thousands:
||(Total County AV)
|Times the levy rate:
|For a new tax bill of:
||(New Year 2 levy)
The total levy is still $202, but more of it is borne by the home that increased in value and less of it by the home that did not increase. Assessed value only determines a home’s share of the levy. If all home values were to change by the same percentage, then each home’s share of the levy would stay the same and everyone’s taxes would increase by exactly 1%.
The above examples are extremely simple. In reality, one home is usually in several taxing districts that overlap. Voted levies, levy shifts, levy lid lifts may be in effect, or a jurisdiction may be tapping its "banked" capacity. And finally fees for numerous things from improvement districts to utilities may show up on a tax bill. These all affect what looks like our property tax bill. But at the core of our property tax system it is true that taxes may only increase by 1% per year unless local governments (1) tap banked capacity, or (2) seek voter approval through a levy lid lift or excess levy.
What is Banking Levy Capacity?
Some taxing districts have levied less than the maximum amount allowed over the years. RCW 84.55.092 allows these districts to retain the right to use that "banked" capacity at some future date. Thus when comparing a district’s current year levy to their prior levy it may reflect a change of more than 1% if they are using their banked capacity or less than 1% if they don’t feel they need the levy increase. Many districts have never used that capacity even though they could have done so at any time.
Here are two examples:
- Assume that for this year a city had the assessor set a tax rate that resulted in the same levy as last year plus add-ons. (It did not take the allowable 1% increase.) When doing the budget for next year, however, the city realizes that it needs more revenue from the property tax because sales tax receipts have fallen off. RCW 84.55.092 allows the city to ask the assessor to set a tax rate for next year that raises the levy by 1% and then 1% again 1.01 x 1.01 = 1.0201 for a compounded increase of over 2% (assuming that it does not put the city over the statutory levy rate limit.)
- Now, a more complicated case where a city actually lowers its tax rate. Assume that during the current year (2015), a city has experienced a revenue windfall and has more money than it needs to fund the 2016 budget. It could put the excess funds in a contingency fund or a "rainy day" fund, but the city council decides to give the taxpayers a break by lowering the property tax for 2016. During 2016 it receive no revenue windfall and it needs more property tax revenue for the year 2017 budget. RCW 84.55.092 allows it to levy the maximum amount that it could have levied in 2016, plus an additional 1% unless that puts the city over the maximum statutory rate. In 2016 it didn’t use its maximum taxing capacity, but it didn’t lose it because it can "bank" the extra capacity.
How do we bank capacity?
The statutory authority for banking capacity is provided in Chapter 84.55 RCW. The chapter provides procedures for two different classifications that are defined in RCW 84.55.005 as taxing districts with populations less than 10,000 and all others (meaning 10,000 or more in population).
Assuming that you have held your public hearing on revenue sources for the general fund as required by RCW 84.55.120 and the legislative body has determined that they do not need the entire 1% increase as allowed by law, you must adopt an ordinance or resolution specifically stating what if any the increase may be. This must be stated in terms of both dollars and percentage. Even if you are not increasing your property tax levy, you should adopt an ordinance/resolution saying that you are increasing your levy by $0.00 which is a 0% increase, this will bank the unused capacity of your levy.
Below are the most important procedures that jurisdictions must follow. The Department of Revenue provides detailed guidance on procedures related to increasing property tax revenue.
Taxing Districts with Populations Under 10,000
The taxing district must adopt an ordinance or resolution for increasing property tax revenue and levying a percentage increase less than 1% will automatically "bank" capacity. Without the resolution, the district cannot bank excess levying capacity.
Taxing Districts with Populations of 10,000 or More
If the implicit price deflator is greater than 1%, then the procedures are the same as those for populations less than 10,000, If the implicit price deflator is less than 1%, in addition to adopting an ordinance or resolution for increasing property tax revenues, the jurisdiction must also pass an ordinance or resolution making a finding of "future substantial need" (see example 2) in order to bank capacity.
Using Banked Capacity
While jurisdictions may bank capacity for later use, they are still limitations on its use based on the maximum allowable levy, which can be obtained from the assessor. Below is an example of the procedures for using banked capacity.
Assume that the maximum allowed levy amount is $110,000 for the levy you made in 2014 for 2015 and a city only levied $100,000 for 2015. When making a levy for 2016, the assessor will raise the maximum allowable levy by 1% to $111,100 ($110,000 x 1.01) exclusive of add-ons. If the city increases its current levy by 1%, it would be $101,000 ($100,000 x 1.01) plus add-ons, so it has $10,100 of banked capacity.
In this example, the city wants to increase the levy by $7,000. When you write you resolution/ordinance to satisfy the requirement for RCW 84.55.120, you put $7,000 in the blank that gives the dollar amount of the increase over the actual levy from the previous year – 2015 (excluding "add-ons") – representing a percentage increase of 7% ($7,000/100,000). $1,000 of the increase comes from your 1% annual limit. For the other $6,000, you have used banked capacity.
When you complete the levy certification form, you put in $107,000 plus the dollar amount of "add-ons" as the amount of the regular property tax levy in the levy certification form.