Adequacy of Local Revenues

Don Gutmann and Mary WelshResearch DivisionWashington State Department of Revenue

Washington Tax StructureStudy

February 8, 2002Phoenix Inn, Olympia

Revenue, Expenditures and Tax Capacityfor Cities and Counties

Property Taxes23%

Other Local Taxes4%

Intergovernmental Revenues

23%

Garbage & Sewer 18%

Sales & Use 14%

Rents, Fines, Licenses, Permits

7%

Interest & Other Earnings

11%

County Revenue 2000

Source: BARS

Property and sales taxes provide the majority of county taxrevenue. Garbage and sewer charges pay for utility service.

General Government7%

Natural Resources7%

Law & Justice Services

21%

Capital & Debt Service22%

Utilities10%

Transportation18%

Health & Human Services

12%

Fire & Emergency Services

3%

County Expenditures 2000

Source: BARS

Expenditures on public services other than utilities comprise well overhalf of county expenditures. These services include law and justice,health and human services, transportation and fire and emergencyservices.

Business & Utility Taxes10%

Elect., Water, Sewer, Garbage

38%

Property Taxes12%

Sales & Use 11%

Other Local Taxes3%

Rents, Fines, Licenses, Permits

8%

Interest & Other Earnings

10%

Intergovernmental Revenues

8%

City Revenue 2000

Source: BARS

Property, sales, and local B&O taxes provide most of the city taxrevenues. Utility charges pay for direct service to customers and aportion of capital and debt service.

Source: BARS

Capital & Debt Service27%

Utilities34%

Transportation4%

Health & Human Services

1%

Fire & Emergency Services

7%

Law & Justice Services

13%

Natural Resources10%

General Government4%

City Expenditures 2000

Utilities are the largest portion of city budgets. Public servicessuch as health, human service, law & justice, transportationand fire make up only a quarter of city expenditures.

$4.4

$0.7 $0.0 $1.3

$24.4

$112.5

$45.8$0

$250

$500

$750

$1,000B

asic

&O

ptio

nal

Crim

inal

Just

ice

Cor

rect

iona

lFa

c Rur

alC

ount

ies

Hot

el/M

otel

Tran

sit

Prop

erty

$Mill

ions

Current Capacity

Capacity amounts shown

County Taxing Capacity v. Current TaxMajor County and Transit Taxes

Sales & Use (FY 2001) and Property Tax (CY 2001)

Source: Washington Department of Revenue

There is very little remaining tax capacity for counties.

$64

$203

$4

$2

$18

$0.3$0

$250

$500

$750

Public Utility MunicipalB&O

Basic &Optional S&U

CriminalJustice S&U

Hotel/MotelS&U

Property

$Mill

ions

Current Capacity

Capacity amounts shown

City Taxing Capacity v. Current TaxMajor Municipal Taxes

City B&O and PUT, and Sales & Use (FY 2001), and Property Tax (CY 2001)

Source: Washington Department of Revenue

There is some municipal B&O tax capacity, but this is an unpopulartax particularly east of the mountains.

Questions on Local Government

Do changes in state law impede local abilityto provide core services?

(Advisory Group)

Sales tax reductions since the 1970sreduced local revenues by $600 million.

Local Impact of Major Sales & Use Tax Reductionsby Year of Enactment, 1999-01 Biennium ($000)

Prescription drugs 1974 $69,179Medical devices 1975 15,145 Food products 1977 299,937 Local residential phone service 1983 22,082 Trade-ins 1984 59,083 Rural county plant and M&E 1985 11,983 High technology 1994 21,024 Manufacturing machinery 1995 79,282

Source: Washington Department of Revenue, Tax Exemptions 2000

City, County and Transportation Lossesdue to Repeal of MVET (I-695)

1999-01 Biennium in $Millions

Source: OFM

Cities $181.8Counties 66.6Transit 459.4Public Health 52.4Distressed Area Assistance 18.9

$779.1

Local Levy Losses due to Property taxLevy Limit (I-747)

Source: Washington Department of Revenue

CY 2002 CY 2003 CY 2004

County Current Expense $9,801,000 $20,438,000 $32,611,000County Road $6,682,000 $13,927,000 $22,281,000Cities $19,874,000 $41,274,000 $63,669,000Total City/County $36,357,000 $75,639,000 $118,561,000

Remote Sales Tax Loss

CY 2001 Low end High end Total remoteState impact $138 $148Local impact 40 43 Total State and local $179 $191

CY 2002 Low end High end Total remoteState impact $152 $185Local impact 44 54 Total State and local $196 $239

Including catalogue sales and e-commercelow and high estimates in $millions

Source: Washington Department of Revenue

Questions on Local Government

! Question: Do changes in state law impede localability to provide core services?

! Answer:" Today, there are $1.4 billion dollars less in local biennial

revenues due initiatives, tax reductions, an Internet taxmoratorium, and exemptions.

" Initiative 747 is expected to reduce local revenues by $230million in the next three years. The impacts are cumulative,each year adding to the impact of previous years.

" Tax loss due to remote sales are close to $200 million a year.

Questions on Local Government

Do local revenues keep up with, fall shortof or exceed service needs?

(Advisory Group)

100

200

300

400

500

600

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Taxes Personal Income

Local taxes have grown faster thanpersonal income in the last decade.

1979=100

Source: Census, Government Finances

0

100

200

300

400

500

600

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Property Taxes Personal Income Sales & Gross Receipts

1979=100

Sales and local gross receipts taxes haveoutpaced property taxes.

Source: Census, Government Finances

Breakdown of local sales taxes over time.

($000's)Enactment FY 99-01

Criminal Justice 1990 $177,332Public Facilities 1991 11,816King Co. Food/Drink 1995 29,693Baseball Stadium 1996 13,453Football Stadium 1997 12,613Rural Public Facilities 1998 29,087Zoo/Aquarium 1999 7,269Regional Centers 1999 3,629

County tax base has flattened and share oftotal tax base has decreased.

$0

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

$300,000,000

$350,000,00019

88

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Cities CountiesSource: Department of Revenue

Basic .5% sales/use tax distributions

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Arrests have increased 37% since 1988.

Source: Caseload Forecast Council, Washington Pocket Data Book (OFM)

Total Reported Arrests

0

2,000

4,000

6,000

8,000

10,000

12,000

1994 1995 1996 1997 1998 1999 2000

Average Daily Population Jail Capacity

County jail populations are growing andhave been exceeding capacity.

Source: Washington Association of Sheriffs and Police Chiefs Jail Information Program

0.0

5.0

10.0

15.0

20.0

25.0

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Bill

ions

of M

iles

County Road & City Street Vehicle Miles

Source: Department of Transportation

County and city road miles traveled haveincreased by over 24% since 1988.

0

1,000

2,000

3,000

4,000

5,000

6,000

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

in T

hous

ands

Population is growing more slowly in thelast three years.

Source: Office of Financial Management

Questions on Local Government

! Question: Do local revenues keep up with, fall shortof or exceed service needs?

! Answer:" The county sales tax base has flattened while the city tax base

continues to grow." Local property tax collections have kept pace with personal

income." Local sales taxes have grown faster in the last decade, but new

taxes are used to fund major construction projects and criminaljustice, and not general operation.

" Population growth and other pressures have exacerbated the needfor local operating revenues.

#7 Dedicated Funding Question

Does dedicated funding give policymakersthe flexibility to respond to state and

local shortages? (Competitiveness Council)

#Users fees and charges paid to government#Dedicated taxes

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

$Tho

usan

ds

State and Local Local

Current charges paid to state & localgovernments

Current Charges•Hospitals•Ports•Parks/Recreation•Sewer/Garbage•Higher Ed Tuition

Source: Census, Government Finances

$0

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

$70,000,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Counties Cities

Housing impact fees are increasing rapidlyfor both cities and counties

Source: BARS

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

1993 1994 1995 1996 1997 1998 1999 2000 2001

Dedicated state taxes are growing as ashare of revenues.

State Dedicated Funds As a Percent of All DOR Collections

Source: DOR, Non General Fund Revenues

Dedicated taxes enacted since 1990

" Oil spill tax, 1991 (state)" Syrup tax, 1989 and 1995 (state)" Baseball stadium taxes, 1996 (local)" Football stadium taxes, 1997 (local)" Regional Transit Authority (RTA) taxes, 1997

(local)" Wireless Enhanced 911 tax, 1994 (local)

Questions on Local Government

! Question: Does dedicated funding give policymakersthe flexibility to respond to state & local shortages?

! Answer:" Current charges paid to state and local governments have

doubled in the last decade. These charges pay for highereducation tuition, hospitals, ports and sewer/garbage.

" Counties and cities adopted development impact fees in the 1990'sto fund public facilities to accommodate growth.

" Dedicated state & local taxes in the 1990’s are funding oil spillcleanup, a baseball stadium, a football stadium, and a regionaltransit system.