Inflation has turned Washington state’s property tax cap into a county budget-killer

For two decades, Franklin County — an agricultural community of about 100,000 in south-central Washington — has been the fastest-growing county in the state.

But lately, county leaders have been scrambling to pay their bills. They spent $700,000 in limited federal COVID relief dollars last year simply to try to keep the local judicial system afloat. They’d pulled money from dwindled reserves, raided the road levy fund and put off construction, all to make the budget balance one more year.

And this year? They’ll need to cut another 15% from the general fund.

“We’re out of cash. We don’t have any money left,” said Franklin County Administrator Mike Gonzalez. “That part is a part that keeps me up at night. You’re like, ‘Holy cow, if we really got into a pickle, how are we going to pay for all this?’”

A strategic financial report pegged the problem as deep and structural: “County revenues are simply not growing fast enough to keep up with expenses.”

“If we cannot figure out a way to pay for these costs,” Gonzalez said, “we’re going to be letting criminals out on the street, we are not going to be able to hire corrections officers to staff jails, prosecuting attorneys are going to be nonexistent.”

Counties across Washington, of all sizes, are on the same kind of financial precipice. Many county officials blame the handcuffs that the Legislature has put on property taxes, their most crucial revenue source.

No matter how fast property values increase, state law only lets most local governments increase their property tax revenue from existing properties by 1% without voter-approved ballot measures. Washington’s cap on property taxes is among the strictest in the country.

That restriction has dogged county budgets for decades, but in this moment — as inflation has soared — it’s hammering them harder than ever. The Washington State Auditor’s Office has identified “concerning” or “cautionary” issues with the budgets of 29 of Washington’s 39 counties, and in more than 200 cities or towns.

During last year’s State of the County speech, King County Executive Dow Constantine warned that, because of the property tax cap, they stood to lose health clinics, domestic violence victim resources and even “funding our elections staff needs to protect our democracy.”

“They’ve been holding things together with chewing gum and baling wire for the last few decades,” state Sen. Jamie Pedersen, D-Seattle, said of local county governments. “The ways that they learned to do that just stopped working in a high-inflation environment.”

Yet the state, county leaders say, not only hasn’t been able to pass legislation to fix the problem, it’s made things worse by heaping on new responsibilities with little extra aid.

“The financial system is collapsing, and we in the counties have been left to hold the bag,” Gonzalez said. “We’re collapsing and the state is not doing anything about it but waiting and watching the system implode.”

The booming bust

Washington state’s property tax cap began, as so many headaches for government budget wonks have, with a voter initiative championed by anti-tax activist Tim Eyman.

In 2000, voters passed an Eyman-backed initiative that lowered the cap on property tax revenue increases — then at a maximum of 6% — to 2%. When a coalition of cities and counties filed a lawsuit to overturn that initiative, Eyman decided to play hardball.

“The following year, we said, ‘OK, you dirty dogs. You keep suing us every time we vote for something? You don’t like 2%? How about 1%? We’re gonna cross out the number 2 and replace it with 1,’” Eyman said.

Eyman’s Initiative 747 passed easily. And by 2007, when a lawsuit threw out the 1% cap as well, the cap had become so embedded within voter expectations that the Democratic governor held a special session of the Legislature to immediately reimpose it.

While some states, like Oregon, have property caps limiting increases in individual tax bills, Washington’s cap limits the total revenue the government brings in. All assessments of existing property do is determine how that cost is divided among property taxpayers — how the pie is split up. If your property increases in value faster than your neighbors’, you pay for a bigger slice. But the only way the whole pie can grow faster than 1% a year is through voter-approved levies or new construction, which isn’t limited by the cap.

Derek Young, a former Pierce County councilmember, compares the structure to an anaconda wrapped around the ribcage of local governments. Suffocation happens slowly.

“Each time you take a breath, it squeezes a little more in,” Young said. “Over time, eventually, you’ve got no more room to breathe.”

But now, counties — which rely almost entirely on property and sales tax — can feel their ribs begin to crack. Property values have increased one-and-and-a-half times faster than tax revenues have since the initiative passed.

In 2001, the average taxpayer was paying nearly $1,300 in property taxes for every $100,000 of property value. Today, they’re paying an average of only $850 per $100,000.

Local governments have faced financial challenges before, particularly with the collapse of sales tax revenue during the recession in the wake of the 2008 housing crash. Yet today’s economic climate is nearly the opposite: Housing prices have soared, retail sales have spiked, unemployment is low and the slew of job openings have pushed up wages sharply.

Many local governments initially got a boost to their budgets through federal aid and increased sales tax revenue. Cities, like Seattle, proudly launched a flurry of new spending with that temporary extra revenue, only to find themselves staring into a budget-deficit abyss when the money ran out.

The nation was hit with the biggest burst of inflation since 1981. Retirements from COVID had created a labor shortage. Local governments across the state found themselves in bidding wars, trying to hire police, corrections officers and public defenders away from one another and driving up costs.

Housing values spiked too — increasing rent, increasing homelessness, and increasing how much local governments had to shell out to fund new clinics and shelters.

Pierce County watched its two-year jail costs increase by almost $20 million. Tiny Wahkiakum County, northwest of Vancouver, saw the cost of its auto, facilities and liability insurance nearly double. In Franklin County, fuel costs — pushed even higher by the state’s new carbon penalties — hit the county’s public works budget.

Counties had to start cutting. Pierce eliminated nine vacant corrections officer positions. Thurston ended supervised probation in District Court. King cut the county sheriff’s department’s overtime.

The property tax cap is a big reason why Washington state has had the lowest number of police officers for its population in the nation for over a decade, said Young.

“We already ‘defunded police,’” Young recalled joking with the Legislature. “You did that for us.”

Yet as counties have struggled to keep their budgets above water, local leaders have been increasingly frustrated that the state has pushed so much of the burden of providing services on to local governments.

By 2012, so much of the responsibility for funding schools had been shifted to local school districts to pass levies that the state Supreme Court ruled legislators had violated the state constitution’s “paramount duty” to fund education, eventually fining the Legislature $100,000 a day until they fixed it.

So in 2017, the state simply suspended the 1% limit from the property taxes dedicated to statewide school funding for the next four years. But counties and cities don’t have that option, at least not without a ballot measure.

Voters legalized marijuana more than a decade ago, but the state only gave local governments a trickle of the marijuana tax revenue collected. Meanwhile, for state-mandated areas like public defense, the cost for counties keeps increasing, while the state contribution has remained flat.

A year ago, Gonzalez said, Franklin County was paying entry-level public defender attorneys $85,000. Today, they’re offering $116,500. A 1% hike in property tax revenues in Franklin County, Gonzalez said, barely pays the salary of one.

“We don’t have a single system of social services in the state. We have 39,” Young said. “What do we do for people like in Pierce County, where they’re struggling to raise enough revenue to provide just basic services?”

A modest proposal

Over the last two decades, plenty of Washington state legislators have tried, and failed, to reform the property tax cap. But a high-inflation environment is a particularly perilous time to propose such a bill.

Surrounding states with looser property cap restrictions, like Idaho, Wyoming and Montana, have been scrambling to find ways to reduce taxes to placate furious voters over their rising property taxes.

Nevertheless, Sen. Pedersen took his best shot. His bill this year would have given counties the option of increasing property taxes cap by up to 3% a year.

Despite their lock on the Legislature in Washington state, Democrats were quickly put on the defensive.

Senate Republicans were merciless: They pumped out social media featuring a steady stream of #StopTheGreed hashtags, a video featuring a drawing of a man labeled “government” fist pumping next to a cash-register ringing “ch-ching,” and warnings that the Democrats wanted to “TRIPLE, TRIPLE, TRIPLE” the maximum growth rate of your property taxes.

Republicans pointed to the overall growth of revenue in areas like King County in the last decade — faster than inflation, they said — to argue that budget complaints are overblown.

They held a press conference decrying the proposal as the worst bill of the session, accusing Democrats of being “tone deaf” to the suffering of families, arguing that lifting the cap would inflame the housing shortage and cause rent to increase. In their eyes, the cap helped stop the government from getting too big too fast.

“It should be hard for local government to budget. It should be,” said Sen. Drew MacEwen, R-Shelton. “And I think that’s lost on this Legislature.”

Another politician at the press conference incorrectly claimed that Democrats would raise your property taxes by “300%.” Online, commenters worried that, for example, their $9,000 tax bill was poised to leap to $27,000.

That, as Eyman readily acknowledges, wasn’t true. Yet more than 8,000 people signed up to testify that they were opposed to Pedersen’s bill.

Democrats began to balk. Sen. Emily Randall, D-Bremerton, who had been narrowly reelected in 2022 and is now running for Congress, pulled her support as a co-sponsor from Pedersen’s bill, citing opposition from her constituents.

Even if the bill managed to pass, there was no guarantee it would stick. On social media, Rep. Jim Walsh, R-Aberdeen, had already started filling out the referendum paperwork to let voters repeal the bill. The bill was left to die.

With multiple other voter initiatives threatening to imperil the state’s own new sources of revenue — like the capital gains tax — Democrats were cautious.

“A conversation about property taxes that people don’t really understand in this particular year would likely be an unwelcome distraction,” Pedersen said.

What now?

Eyman always has a simple counter to all the local government complaints that they’re “starving”: Simply pass a local levy.

“‘Oh, we desperately need more money?’ OK, make your case to the people who are going to pay it that you need more money,” Eyman said. “That’s always been there, and that’s always undercut every argument they’ve ever made.”

King County, where three-quarters of voters picked Biden, readily passes taxes, including plenty of levies aiding parks, veterans services and mental health. Include them in the calculation, and the county’s overall spending has largely kept up with inflation. But until new legislation passed this year, state law had banned King County — and only King County — from using levy funding to pay for services in their general fund.

In more conservative areas like Stevens County, where 70% of the voters voted for Trump, however, the problem is more political.

“If I go to the voters and try and convince them that that money is for paying for the assessor, and the treasurers and recording and elections, it’s not going to pass in my area,” Stevens County Commissioner Wes McCart told the Legislature. “At what point do I stop providing services?”

Just one more mandate from the state, some officials worry, could push some counties over the edge. With the Washington State Bar Association proposing case-load standards that could potentially double or triple costs on counties, Gonzalez warned in a recent press release, “this could be what bankrupts smaller counties like ours.”

But Franklin County commissioners haven’t seemed interested in proposing a new property tax levy, Gonzalez said. They haven’t been interested in raising the property cap either.

“I appreciate that our area commissioners are living within the means provided by the taxpayers, even if it makes budgeting more challenging,” Sen. Perry Dozier, R-Waitsburg, wrote in a post last month. “Putting this bill down was the right move, although if the majority respected the will of the voters it never would have been introduced in the first place.”

InvestigateWest (invw.org) is an independent news nonprofit dedicated to investigative journalism in the Pacific Northwest. A Report for America corps member, Daniel Walters covers democracy and extremism across the region. He can be reached at daniel@invw.org.

This article originally appeared on Kitsap Sun: Washington state’s property tax cap pinched by inflation, cut budgets