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SHB 1406: Understanding the Affordable Housing Sales Tax Credit

SHB 1406: Understanding the Affordable Housing Sales Tax Credit

Editor's note: The deadline to enact this sales tax credit has passed. In January 2021, we updated this post to address the use of revenues for administrative costs.

The 2019 legislative session produced a plethora of bills, but SHB 1406 (codified as RCW 82.14.540) has generated significant buzz as it will provide a new affordable housing revenue stream for those counties, cities, and towns that choose to participate. This sales tax option is actually a credit against the state sales tax rate of 6.5%, so it will not increase the tax rate for consumers. However, cities, towns, and counties have a limited time to take advantage of this option and must act rather quickly if they wish to participate.

It is imperative that cities and counties communicate and coordinate closely to implement this legislation, or else both cities and counties may lose out on some revenues. See the "tax rates for participating cities" and "annual maximum distribution cap" sections below for more information.

In order to understand the foundation of this bill, it’s important to understand what is considered a participating and non-participating city or county. A “participating” city or county is one that chooses to impose the affordable housing sales tax credit provided in SHB 1406 and completes the required steps for adoption within the next 12 months, while a “nonparticipating” city or county is one that chooses not to implement the affordable housing sales tax credit.

In this blog we discuss this complicated piece of legislation and some of the key decisions that eligible local governments will need to make within the next few months.

How Can This Revenue Be Used?

The intent of the legislation is to encourage local government investments in affordable and supportive housing, and as such, the funds will be considered a restricted revenue subject to reporting requirements and audit review for compliance. The use of this sales tax partially depends upon the size of your jurisdiction:  

For counties over 400,000 population and cities over 100,000 population: The funds may only be used for (a) acquiring, rehabilitating, or constructing affordable housing, which may include new units within an existing structure or facilities providing supportive housing services under RCW 71.24.385 (behavioral health organizations); OR (b) operations and maintenance costs of new units of affordable or supportive housing. 

For counties under 400,000 population and cities under 100,000 population: The funds may be used for the same purposes listed above, but they may also be used to provide rental assistance to tenants that are at or below 60% of the median income of the county or city that is imposing the tax.

For any city or county, they may finance loans or grants to nonprofit organization or public housing authorities to carry out the purposes of the bill and may pledge the tax proceeds from SHB 1406 for repayment of bonds in accordance with debt limitations imposed by the state constitution or statute.

Additionally, any participating city or county may enter into an interlocal agreement with other cities, counties, and/or housing authorities to pool and allocate the tax revenues received under SHB 1406 to fulfill the intent of the legislation.

Administrative costs could be an allowed use of the funds, but costs would need to be specifically related to new units of affordable or supportive housing. A city or county would need to clearly show and document through their cost allocation plan that the administrative costs were specifically for affordable and supportive housing and not related to other unallowable purposes.

How Much Revenue Will We Receive?

The answer to this question depends on whether your entity has a “qualifying local tax” (see below), the local economy, and the calculation of the revenue cap included in SHB 1406. Participating jurisdictions will receive revenues for 20 years, and the amount that you receive annually will be equivalent to either 0.0073% or 0.0146% of taxable retail sales in your jurisdiction, up to an annual maximum distribution cap that is based on FY 2019 taxable retail sales.

Tax rates for participating counties

Counties do not need a “qualifying local tax” and will automatically receive the maximum 0.0146% rate within the unincorporated areas, up to the annual maximum distribution cap described later. Within the boundaries of each city or town, you will receive 0.0146%, minus the rate being received by the city/town. Here are the variables:

  • If the city chooses not to participate but the county does participate, the county will receive the full 0.0146% within the city boundaries.
  • If a city elects to participate but does not have a “qualifying local tax” (see below), the city will receive the 0.0073% “half share” and the county will also receive a 0.0073% half share within the city boundaries.
  • If a city elects to participate and imposes a “qualifying local tax” by the deadline, the city will receive the full 0.0146% share and the county will not receive any revenues within the city boundaries.

As the legislation is currently written, if the county elects not to participate, cities located within said county that have not enacted a qualifying local tax will not receive SHB 1406 revenues after the first year.

Tax rates for participating cities

The rate your city receive depends on whether it enacts a local qualifying tax (see below) prior to the deadline of July 27, 2020, as well as whether or not your county participates.

  • For cities that impose a qualifying local tax by the deadline, you will receive the maximum 0.0146% rate, up to the annual maximum distribution cap described below, regardless of whether your county participates.
  • For cities that do not have a qualifying local tax, you will receive the 0.0073% “half share,” up to the annual maximum distribution cap, but only if your county also elects to participate.

If your county declares it will not participate or does not adopt the required resolution of intent by the end of January 2020, you will receive the full 0.0146% through July 27, 2020, but after that you will not receive any further revenues. In discussions with both Association of Washington Cities (AWC) and the Department of Revenue it is believed that this is due to a drafting error in the bill. AWC does not anticipate this scenario but asks that you let them know if your city finds itself in this situation!

Annual maximum distribution cap

SHB 1406 sets a cap on the maximum sales tax revenues to be credited to local government within any state fiscal year (July 1 to June 30). The cap will be calculated based upon the jurisdiction's taxable retail sales during the state’s 2019 fiscal year (July 1, 2018 — June 30, 2019). Just like the state shared revenue cycle, distributions will start July 1, and the state will cease distribution until the beginning of the next fiscal cycle if at any time during the fiscal period your distributions meet the cap.

It is very important that counties adopt the enacting legislation prior to cities and towns, or else the counties may lose out on some revenues. (This applies only to the enabling "legislation" – the order of adoption of the "resolutions of intent" does not matter.) If the county adopts the imposing legislation prior to the city(s) within its boundaries, the county's revenue cap will be calculated based on the total countywide taxable retail sales in FY 2019, including both the unincorporated and incorporated areas of the county. But if any city adopts their enabling ordinance before the county, that city's taxable retail sales will be subtracted from the county's taxable retail sales, resulting in the county's annual maximum distribution cap being reduced for the entire 20-year state tax sharing period. (See section 4(a) of the legislation.)

It’s also important to remember that retail sales can fluctuate from year to year depending upon a number of economic factors, so your revenues being generated from this sales tax credit (particularly in the early years when some jurisdictions might not hit their annual caps) may fluctuate as well.

Revenue Estimates

We have developed a worksheet for your revenue forecasting that was updated on December 16, 2019 with projections for both the 0.0073% and 0.0146% tax credit options. This data comes from DOR's Retail Sales for Cities and Counties. However, these are estimates only, and the actual distribution caps will be calculated by the Department of Revenue.

How Do We Impose This New Tax Option?  

To receive the affordable housing sales tax credit, you must:

  • Pass a resolution of intent by January 27, 2020 that indicates intention to impose the sales tax credit at the maximum capacity by a simple majority vote of the legislative body. This is the single most important step in being able to receive this sales tax credit option. If this deadline is missed, there are no other opportunities to access the tax. Here is a sample resolution of intent that has been prepared by Pacifica Law Group for the Association of Washington Cities (AWC) that will assist you in this process. Also see the sample resolutions at the end of this article.
  • Adopt legislation to authorize by July 27, 2020 to impose the maximum capacity of the affordable sales tax credit. This step must be completed in order to continue to access this sales tax credit whether you decide to impose a qualifying local tax or not. See the examples at the end of this article.

Since the bill explicitly requires both a “resolution of intent,” which must be adopted by January 27, 2020, and “legislation to authorize the maximum capacity of the tax” (an ordinance for most jurisdictions, but for some counties this may be a resolution), which must be adopted by July 27, 2020, it is our recommendation that these documents be adopted separately.

What Is a Qualifying Local Tax?

A “qualifying local tax” (QLT) is a local property or sales tax that a city has imposed, separately from SHB 1406, to address affordable housing or related issues. This provision within the bill only applies to cities and towns, and it allows them to double the sales tax credit. Counties do not need a qualifying local tax to receive the maximum distribution.

The QLT options are:

  • An affordable housing levy (RCW 84.52.105);
  • A sales and use tax for affordable housing (RCW 82.14.530);
  • A levy lid lift (RCW 84.55.050) that is restricted solely to affordable housing; or
  • A mental health and chemical dependency sales tax (RCW 82.14.460), which is only authorized by statute for those cities of at least 30,000 population located within Pierce County.

According to our data, there are currently only seven cities that have implemented at least one of these qualifying local taxes: Bellingham, Ellensburg, Olympia, Port Angeles, Seattle, Tacoma, and Vancouver. (Port Angeles successfully passed an affordable housing sales tax in November 2019 – see the resolution at the end of this article which also provides a good analysis of election timing and costs.)

All of the qualifying local taxes require voter approval with a simple majority vote (with the exception of the mental health and chemical dependency sales tax) and may be presented at any special, primary, or general election. (For more detailed information on any of these qualifying local taxes, refer to our Revenue Guide for Cities and Towns.)

Deciding to present a qualifying local tax before the voters in order to gain the full tax credit will require some timing considerations, as the legislation requires that the qualifying local tax must be “instated” (which DOR is interpreting to mean “approved by voters”) within 12 months of the effective date of SHB 1406. This deadline is July 27, 2020. The deadline for placement on the general election ballot is fast approaching (August 6), and the only other elections before the July 2020 deadline are the special elections in February and April.

When Will We Start to Receive Revenues from SHB 1406?

The Department of Revenue (DOR) typically requires a 75-day notice for sales tax rate changes, but since this is a sales tax credit (not a new sales tax) it will therefore only require a 30-day wait period. The credit will take effect on the first day of the month following the 30-day period (RCW 82.14.055(2)). For example, if you adopt the resolution of intent and then the enabling legislation (ordinance/resolution) during August 2019, the tax will take effect on October 1. The sales tax revenues from October will be remitted by retailers to DOR by the 25th of the following month (November), and you will receive your first distribution of this tax credit on your end-of-month December disbursement from the State Treasurer’s office. Editor's note: In this example, the original article incorrectly stated that the revenues would be distributed at the end of November.

For cities that have a qualifying local tax in place, you will receive the full credit of 0.0146% as soon as you adopt the enacting ordinance. For all other cities and towns that have adopted the enacting ordinance, you will collect a tax credit of 0.0073% until your ballot measure for a qualifying local tax has passed.

This piece of legislation is complex and a bit confusing. We have worked closely with the DOR and the AWC to bring you as much information as possible to assist with your decisions to take the first step in the process — which is to pass a resolution of intent. MRSC is ready to answer any further questions that you may have. Please do not hesitate to send me an email or give me call.

Additional Resources

For cities, the Association of Washington Cities (AWC) has prepared an implementation guide and flowchart to help in your decision-making process.

For counties, the Washington State Association of Counties (WSAC) has prepared an implementation guide and flowchart.

In December 2019, the Department of Commerce published its first annual implementation update describing how the sales tax credit works, which cities and counties have enacted it so far, a summary of the department's role and rulemakings, and next steps.

Sample Resolutions

In addition to the Pacifica Law Group sample resolution of intent provided by AWC, below are a few examples of SHB 1406 resolutions we have come across. This is not a comprehensive list of all the cities and counties that are adopting resolutions. Many of the resolutions that have been adopted use very similar language based on the Pacifica Law Group example, but we will continue to monitor this topic and periodically add distinct or noteworthy examples to this list.



  • East Wenatchee Resolution No. 2019-18 (2019) – Resolution of intent for city under 100,000 population
  • Port Angeles Resolution No. 14-19 (2019) – Submitting 0.1% affordable housing sales tax (RCW 82.14.530) to voters as a qualifying local tax under SHB 1406. Includes analysis of election timing and costs, concluding it is much less expensive to submit a measure at the November 2019 general election (filing deadline: August 6) than at the February or April special election.
  • Tumwater Resolution No. R2019-006 (2019) – Resolution of intent for city under 100,000 population.
  • Vancouver Resolution No. M-4026 (2019) – Resolution of intent for city over 100,000 population. Includes staff report; note that Vancouver qualifies for the maximum 0.0146% because it already has a qualifying local tax.

Sample Adopting Ordinances

We will post selected examples of enacting ordinances that we receive below.

  • Ellensburg Ordinance No. 4836 (2019) – Adopting maximum 0.0146% rate for city under 100,000 population that has a qualifying local tax in place
  • Pacific County Ordinance No. 188 (2019) – Adopting maximum sales tax credit for county under 400,000 population. Ordinance clearly indicates which cities plan to participate; note that "qualifying local taxes" apply only to cities and are not required for counties to receive maximum distribution.
  • Pierce County Ordinance No. 2019-57s (2019) – Adopting maximum sales tax credit for county over 400,000 population.
  • Tukwila Ordinance No. 2613 (2019) – Adopting maximum sales tax tax credit for city under 100,000 population; includes potential for interlocal cooperation with other cities to be determined at a later date.
  • Tumwater Ordinance No. O2019-024 (2019) – Adopting maximum sales tax credit for city under 100,000 population. Effective date is January 1, 2020.

MRSC is a private nonprofit organization serving local governments in Washington State. Eligible government agencies in Washington State may use our free, one-on-one Ask MRSC service to get answers to legal, policy, or financial questions.

Photo of Toni Nelson

About Toni Nelson

Toni worked with many local governments and authored numerous MRSC publications on budgeting, cash basis accounting and reporting, and the application of Washington State B.A.R.S. requirements. During her time at MRSC, she also conducted multiple trainings annually on similar subjects and was consider an expert in small city finance issues. She retired in 2020.