Using Levy Lid Lifts to Finance Public Salaries and Services
With the COVID-19 pandemic and the Great Resignation, many local governments have found it challenging to attract and retain employees, and several local governments have recently offered hiring and retention bonuses to staff. With inflation surpassing 8%, some unions have negotiated cost of living increases (COLA) as high as 5-8%.
In thinking over the long term about how to fund increased salary and benefit costs, some local governments are wondering if a levy lid lift might be a solution. If a local government is thinking about a levy lid lift, this blog covers several issues to consider, such as type, duration, future fiscal need, and capacity.
What Is a Levy Lid Lift?
Washington’s property tax system is extremely complicated, with multiple overlapping and intersecting limitations affecting local governments.
Taxing districts have a regular property tax levy (dollar amount), which can increase a limited amount each year, subject to limitations on the maximum levy rate per $1,000 assessed valuation (AV). Additionally, the combined rate of most local taxing districts cannot exceed $5.90 per $1,000 AV, and total levy rate for all taxing districts cannot exceed $10.00 per $1,000 AV, with certain exceptions.
The maximum levy rate varies depending on the kind of taxing district. For instance, cities not annexed to a fire or library district generally have a maximum levy rate of $3.375 per $1,000 AV, while the rate can be significantly lower than that for cities that are annexed to fire or library districts. Counties have a general fund levy with a maximum levy rate of $1.80 per $1,000 AV and a road levy fund with a maximum rate of $2.25 per $1,000 AV, although those rates can be altered through a road levy shift if decided by the board of county commissioners. Fire protection districts and regional fire authorities typically have a maximum levy rate of either $1.00 or $1.50 per $1,000 AV, and so on.
The total levy amount collected for a taxing district is also subject to a 101% levy limit, meaning the total dollar amount collected each year may not increase more than 1% (excluding new construction and certain add-ons) from the previous year. The 101% restriction is known as the “levy lid.”
A levy lid lift ballot measure is a mechanism for voters to approve an increase in a taxing district’s total levy by more than the 101% limit (RCW 84.55.050). Although a levy lid lift allows the total levy dollar amount to increase more than 1% over the previous year, it does not allow the levy rate per $1,000 AV to increase above the maximum statutory or constitutional rates. A levy lid lift only requires a simple majority (50% plus one) for approval, and there are no minimum turnout or “validation” requirements.
Single-Year Versus Multi-Year Levy Lid Lifts
Local governments can propose either a single-year or a multi-year levy lid lift.
A single-year levy lid lift raises the levy lid above 101% for one year only and can be used for any lawful government purpose. After this first year, the increased levy dollar amount is used to calculate the 101% levy limit in future years until the levy lid lift expires (unless it is made permanent, as described below). A single-year levy is not required to state a purpose on the ballot measure, but if it does, funds may only be used for that purpose.
A multi-year levy lid lift raises the levy lid every year for up to six consecutive years, can increase by various rates (the “limit factor”) throughout the duration of the levy lid lift, and is required to state a limited purpose in the ballot measure. Most jurisdictions use the full six-year timeframe. The levy dollar amount in the sixth year is then used to calculate the 101% levy limit in future years until the levy lid lift expires (unless it is made permanent, as described below).
Some jurisdictions might set a static limit factor of, say, a 4% or 6% increase each year. Other jurisdictions tie the annual limit factor to an inflation index, such as the Consumer Price Index (CPI), although a jurisdiction should be clear exactly which index, region, and timeframe will be used for the calculation. You should also consider what will happen if the CPI drops below 1% in any given year — and for this reason, some jurisdictions will set an annual limit factor of the CPI percent change or 1%, whichever is greater. Additionally, taxing districts in King County cannot supplant existing funds with a multi-year levy lid lift.
Temporary Versus Permanent Lid Lifts
A temporary levy lid lift bumps the levy up for the number of years specified in the ballot measure, then reverts back to what the levy would have been had the levy lid lift never happened and the jurisdiction only increased it by the 101% limit each year.
In comparison, a permanent levy lid lift never expires. The levy bumps up more than 1% for a specified number of years, but after that it does not revert back. The maximum levy at the end of the levy lid lift period is used to calculate all future 101% levy limitations.
Major Considerations for Choosing the Best Configuration
A jurisdiction must carefully consider its future financial needs, capacity, and external factors when weighing a levy lid lift.
What are your jurisdiction’s future financial needs?
A taxing district should determine what it wants to fund with the levy lid lift and how much is needed, and then compare that to its revenue forecast. After determining the amount needed, will the taxing district reach that amount with a single-year or multi-year levy lid lift? Will the levy lid lift need to be temporary or permanent?
Does your jurisdiction have enough levy capacity?
A taxing district needs to look at its own levy rate as well as the combined local levy rate and total levy rate to help determine how much levy capacity it has. With this information, it can determine how much funding could be raised via a levy lid lift. If a taxing district is already close to its maximum levy rate, it might not be able to raise the funding needed.
For example, if a city not annexed to a library or fire district was already at $3.325 per $1,000 AV, would an additional $0.05 per $1,000 AV bring in enough revenue? A taxing district could also have a good amount of capacity for its own levy, but when looking at the aggregate maximum levy rates ($5.90 or $10.00 per $1,000 AV), there might not be enough capacity to increase its levy to the amount needed.
What are the external factors (e.g., other taxing districts)?
Because levy lid lifts require voter approval, a taxing district should consider factors that might make it difficult to pass a levy lid lift ballot measure. For example, will your jurisdiction be competing with other taxing districts on the same ballot? Have local taxing districts recently passed levy lid lifts, excess levies, or other taxes (which might cause voters to vote down another tax increase)? Are there current economic factors that might impact the decision of voters (i.e., high inflation)? MRSC’s Local Ballot Measure Database can help you research how levy lid lifts across the state have been structured and/or fared at the polls.
How will the issue be framed for voters?
Taxing districts should carefully consider how a levy lid lift ballot measure is presented to the voters. All language should be reviewed by legal counsel and is subject to the wording requirements of RCW 29A.36.071 and RCW 84.55.050. Using broad language may provide for more flexibility in how funds can be spent, but a vague description of how the taxing district will spend the funds may make voters less likely to vote in favor of a levy lid lift, especially if it is competing against other jurisdictions.
This blog only discusses the basics of levy lid lifts and important considerations. If a jurisdiction decides to go out for a levy lid lift, check out MRSC’s Levy Lid Lifts webpage as well as our City Revenue Guide and County Revenue Guide for more in-depth discussion on this topic. Those resources include graphics and comparison tables to help you determine what option might be best for your jurisdiction.
Other resources from Washington State agencies includes the Department of Revenue's Property Tax Levies Operations Manual and the Public Disclosure Commission’s Guidelines for Local Government Agencies in Election Campaigns.
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.