I thought it would be a pertinent idea to champion the constitutional Tax Increment Financing (TIF) bill that is making its may through the House, given its nationwide relevance and importance in place-making, community revitalization and sustainable redevelopment. Currently this bill is proceeding through as Bill 1967 (2013-2014) after being rejected in its previous format as Bill 1881 (2011-2012). As many are aware, at this point only a watered down version of TIF is available in Washington state, and only Arizona and Washington are bereft of a TIF in their constitutions out of all 50 US states.
My secondary plan was to discuss tax reform in Washington, as I am aware the fact that Washington relies on state sales tax, and has no income tax which unfairly burdens the less wealth – as opposed to a progressive income tax. However tax reform is undoubtedly a broad and very complicated topic hence this would be a discourse rather than any overarching plan to tackle the problem.
On Monday 18th March, together with Yoshi Hirano, I made my way down to Olympia with an appointment to meet with the House Speaker, Frank Chopp of the 43rd Legislative District, or one of his staff. As a representative of the 43rd district Mr Chopp speaks for Fremont, Wallingford, parts of U-District, Madison Park and Capitol Hill. I reside in Fremont and whilst I am not able to be part of the voting constituency (I am an international student), I am aware that Frank has been fairly involved in the affordable housing effort in this city and felt that as House Speaker, Frank would be fairly amenable to new ideas .
Yoshi’s idea was to discuss affordable housing with Frank, whilst I would talk about TIF and if time was available, about the wider issue of tax reform in Washington state.
Whilst not an expert by any means, I have followed quite a few opinions on both sides of the TIF debate. First some fairly in depth background- My understanding of TIF in Washington can be summarized as follows – which is a conglomeration of viewpoints on the state of TIF in Washington :
The actual TIF bill was introduced in WA 1982 as the Community Redevelopment Financing Act. However has faced significant hurdles.
Under traditional TIF: Traditional TIF financing taps increased property taxes generated by private development, and applies those taxes to pay bonds issued to finance the public infrastructure supporting the development. A particular TIF district will be located within various overlapping taxing districts, and the TIF mechanism captures the increased property taxes of all of the overlapping taxing districts. Under the 1982 CRFA Act.
- The public improvement must be located within an urban area.
- The public improvement will encourage private development.
- The public improvement will increase the fair market value of property.
- Private development will be consistent with existing comprehensive land use plans.
- The public improvement has been approved by the legislative authority of the city, town, or county where the improvement will be located.
A UW viewpoint (sources below) gives an example of the types of improvements possible:..(funds) can be applied to affordable housing, public infrastructure, including parks, or to clean up brownfields among other possibili- ties. These funds can only be used within the designated Tax Increment District.
However, KL& Gates the law firm states: Traditional TIF is Not Available in Washington… Traditional TIF financing has been held unconstitutional under Washington law. In Leonard v. Spokane, 127 Wash.2d 194, 897 P.2d 358 (1995), the court held that a 1982 TIF statute violated Article IX, Section 2, of the state constitution, which requires that “the entire revenue derived from the common school fund and the state tax for common schools shall be exclusively applied to the support of the common schools.” The 1982 TIF statute permitted the formation of TIF districts in which incremental property taxes, including the state property tax, could be applied to pay for public infrastructure. The court found the diversion of state property tax to be inconsistent with Article IX, Section 2.
In plain English – TIF is illegal because it violates a constitutional which holds education as a primary part of the state constitution by taking funding away from it.
The Sightline article states: Article IX is the portion of the constitution that determines that the paramount duty of the state is educating children. The conflict arises because Article IX currently requires that a portion of the increased tax revenue generated from the TIF-funded improvements would go to pay for education. In fact, there is a “state school tax,” which is a property tax assessed specifically for the benefit of public education. But in order for TIF to work, the increased revenue would not at first go to the state school tax, but to retiring the TIF-related debt. And Washington courts have consistently held that the state’s paramount duty is more than aspirational, it means that education has to be fully funded.
As a result:
Washington legislature has since authorized “TIF- lite” districts that capture increases in local property taxes. Washington TIF-lite districts must, however, work within the constitutional and statutory constraints on property taxes, including Washington’s statutory 101% limitation on annual increases in property taxes….
Washington taxing districts generally can capture only the full increase in property taxes from new construction and improvements, and must forego the full increase in property taxes resulting from appreciation in property values within the TIF-lite district.
Essentially the conclusion is: Application of the TIF Act is limited in the amount of funding it can provide and the projects it can support because
- Only 75 percent of the incremental increase can be used to repay general obligation bonds
- The City would need to conduct a feasibility study. Estimates indicate that a TIF financing is only viable if $1 million in bond yield at least $35 million in increase in assessed value1
The New Bill 1967 tries to eliminate that by among other things:
- Changing the definition of which areas can apply a TIF – to make it more widely applicable (to non urban areas if they include growth center, a transportation center, or a local center.)
- Not taking the financing from regular property tax applied to the incremental value increase- because this is the non-constitutional part of the 1982 bill. Rather a county or city is authorized to levy a special property tax within the apportionment district. This special property tax is applied to the incremental property value growth in the district after the district has been established (achieves the same purpose)
- Increasing the limit making it subject to its own 1% limit- property taxes are currently subject to the 1% property tax revenue limit, the 1% constitutional limit, and the $5.90 limit for every $1000 of property value (which basically means except for a few special taxes like emergency medical service levies it needs to be max 0.59%) – taken altogether property taxes are pretty much no more than 1% of total value
- 20% of the TIF funding needs to go into community benefit programs of that –at least 50 % must be dedicated to low and moderate- income housing; at least 20% must be dedicated to the conservation of open space; and the remaining 30%
- In a nominated district – 50% of the value of taxable property in the district or 65% of the parcels need to agree.
Roger Valdez’ crosscut article states that: According to the early estimates, amending the state’s Constitution through passage of the CRFA would generate as much as $66 million to service debt over 30 years in a case study of the BelRed station area in the Bellevue neighborhood. That compares to $5.8 million fromLocal Revitalization Financing (LRF), and $1.8 million from Landscape Conservation Local Infrastructure Program (LCLIP) championed by the non-profit Forterra. Traditional TIF similar to Oregon’s would generate about $14.6 million.
I generally agreed with the new 1967 Bill in its definitions and amounts – especially in the way it skirted around the constitutional issue. however i believe that the special property tax rate for TIF is too low! The current maximum rate of 1% and the addition of a max. 1% special property tax on incremental value growth- Would still result in a new combined property tax rate (in incremental) that is too low.
If TIF is so effective, why not raise the TIF tax to more than 2-3% of the incremental value increase? If a property valued at 500,000 increases by 50,000 as a result of putting a transit hub through the area, the cost – the incremental increase in taxes is still only $500 per annum which compared to the gain in value is extremely appealing. A 2-3% increase would result in higher takings of $1000-2000 pa, which has homeowners still better off.
In California, the property tax rate is approx 1.25%, and I believe TIFs are allowed in addition to that. My home state of Victoria, has property taxes of approximately 2.5%. However with that level of taxation comes excellent infrastructure along most transport corridors. Whilst i am not advocating Seattle increases taxes to 2.5%. I believe the rate is too low. I am pro-taxes, from the standpoint that it increases welfare across the board fairly well.
The increase in property taxes can help fund the much needed improvements to mass transit – which most would agree Seattle requires, and also bring back some of the state funding for higher education.
THE MEETING and OUR CONCLUSIONS:
The meeting occured at 1.30pm and lasted approximately 10 minutes. Unfortunately, whilst I had prepared extensively for this meeting, Frank Chopp’s legislative aide, Miranda was not extremely knowledgeable on the topic of Affordable housing or TIF.
This is not to say, she did not have clear ideas. She was extremely helpful in providing myself and Yoshi with the contact details for people who were the main sponsors of our respective bills – especially in the Finance committee within the House. She also spoke fairly candidly in agreement with the need for a state income tax which would help equalize some of the wealth inequality in Seattle, however our discussion of raising TIF taxes to a higher amount would need to wait another day..
Whilst the amount of effort expended in our research vs the amount of actual discussion that occurred was fairly discouraging, we did find it an informative experience. This was especially so from the perspective of us as international students – fairly unfamiliar with the way politics works in the USA.
With the knowledge gained, I am able to more critically view TIF from the government and community perspective.Indeed I hope to significantly increase my knowledge on property taxes, and TIF as it is extremely relevant to me as a future real estate professional and community citizen. I also look forward with significant interest to see the progression of this bill, and how it is applied within Seattle, hoping by all accounts we can avoid the difficulties that TIF has experienced in places like Chicago and California due to partisan politics and vested interests.